Why Investing Hypes Never Work
Posted by Frugal on September 13th, 2006
Do you know why the most widely accepted method of generating/earning more money or investing success will never work? If you understand that being rich is relative, then the reason should be a little obvious.
The following numbers are only for illustration. Assume that someone found a method of generating wealth that really works, or some investing software, rules, or stock symbols that can generate a lot of return like 25% every year. When 1% of the population participates in such activities, it may work very well. When 10% of the population participates, it may still work okay. When more than 50% of the population participates in it, I can tell you for sure that most likely it will not work anymore. Why am I so sure? Because if 50% of the population becomes millionaires, then a million dollar at such time will no longer represent the same relative money as before. Being rich is a relative term. Or better yet, relative to the purchasing power. When 50% of the population are all millionaires, how much do you think a nice meal at high end restaurant would cost? Since one in two waiters will probably be a millionaire in such scenario, he or she most likely will not work in the same job. Less low-wage labor equals wage inflation. And since lots of people have a lot of money, they may start buying all kinds of luxury goods. A luxury car will not cost the same money as before for sure. People will compete to get luxury cars. Less goods, more money, equals inflation again. When there are more people having more money, while at the same time, the Earth is still as big as before, and the amount of goods & services does not increase, it simply means that things will cost more.
Now, if you know that 50% of population investing in real estate, do you think that all these people doing the same thing will all become rich? Let’s forget about individual differences in the execution and quantities of their investing activities for a second. Let’s assume the participants of such activities have about the same money to begin with. If 50% of population all doing the same thing trying to become rich, getting 100% or 200% return on their investment, among all of them, relatively speaking, will not have too much differences in what they own. Since being rich is relative, and when relatively speaking in terms of asset classes, these participants all have the same thing. For certain, they cannot be all rich. Because if they’re all rich, then it will break the definition of being rich as being having relatively more money than other.
This is true for all investing activities. Whether it’s the next hottest IPO, or the next greatest Microsoft. Once enough people buys into it, regardless of whether it was working before or not, the method of generating wealth will simply stop working. If you put this in the context of Efficient Market Hypothesis, any temporary market inefficiency that can be exploited will be exploited very soon as to render such investing method to be no longer useful.
If you assume that money distribution is like a Gaussian bell-shape curve, most people are in the middle, while a few have a lot of money, and a few have very little money. Whenever the participants engage in certain money-related activities, the hidden force of the Market is to redistribute the money back to the same shape of Gaussian curve. So for certain as explained above, if too many people doing the same thing, then the result of such activities will most likely give you a mediocre result: not too good, nor not too bad, just below average (almost like index investing these days). With a below average result, the Market can be best to re-shape the money distribution curve back to Gaussian again. By the same token, if you are doing what no one is doing at all, probably there can be two kinds of results: either very good return, or very bad return for your activities. Make sure that when you’re doing something special, you’re doing the right thing for yourself. The special guy is usually the smart guy or the stupid guy, and seldom the average guy.
Unfortunately, the cruel truth is that not everyone or many people can become rich in money. Because part of the required definition for being rich (in money) is that there are only a few, and not many.
P.S. Let me give you a slight hint to become rich. When you are young and you can afford bigger loss, try to do something that not everyone may do, but select carefully from the million of special things that you can do. Taking a chance with careful selection of task may give you an outsized return.
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September 13th, 2006 at 5:56 pm
Do not worry about “rich”. It’s just a word. Ask 1000 people and you get 1100 answers. Get organzied and get a plan. Decide what you think rich means and what values go with it and then begin the journey. I may be rich……in another person’s mind but not in my own. Also, I amy be rich but not wealthy….
September 13th, 2006 at 7:06 pm
Definition of Being Wealthy…
What is the definition of being wealthy? I looked up this word at several places. Here is what I found:
Marked by abundance, from http://www.dictionary.com
An individual who is wealthy or rich is someone who has accumulated substantial wealth relative to ot…
September 13th, 2006 at 7:07 pm
Larry,
You have an excellent point about the difference between rich & wealthy. I have a post on definition of being wealthy. Please check it out when you can. I did not want to mention that post because I was afraid to confuse people on an already very complicate argument that I’m trying to make in this post.
I’ve done a trackback above. Or you can just click on the link.
September 13th, 2006 at 9:11 pm
I live in Scottsdale, AZ, the Beverly Hills of the Southwest. There are two types of wealthy people here: The ones with money and the ones without. I’ll let you figure out what that means
September 13th, 2006 at 10:32 pm
I certainly think that being wealthy is much better & important than being rich with just money,
. Not sure if you read my post on definition of being wealthy.
September 14th, 2006 at 6:41 am
I read your definition. It’s an instructive discussion. As a society we grow up wanting to become “wealthy”, sometimes at any cost. Immigrants from all over the world have been drawn here for the opportunity to be wealthy, if not for them then for their children.
But, people simply are not prepared for when it happens. They have had no formal training and usually blow it. But, more interesting is the fact that on their path to wealth they really dislike the way rich people act and live. Could it be jealousy? Yup. They may be looking at the wrong role models of the wealthy. In fact, most wealthy people who are humble about their wealth will never let you know the have it. I want to be somewhere in the middle of those two extremes.
September 14th, 2006 at 7:32 am
Larry,
You have such good insights again. Truly you have a lot of wisdom and practical knowledge to be shared. Love your blog at Millionaire Now, and your comments here.
I definitely feel the slight or hidden jealousy here at my blog all the time. The materially rich people like you usually are friendly and commend my efforts at my blog. And then the males who are closer to my status (if there is any) or my age are less forgiving sometimes. All the while, I don’t mean any harm to them, but simply want to provide my humble, and hopefully useful readings to them.
I am beginning to think that having this name for my blog is a mistake. I am really a simple minded person. Money to me is important, but it’s just money. It’s got nothing to do with me as a person. So I never thought about what others may think about me as a person when I started this blog using this name. I think I get more rejections than approvals from bloggers and readers when I’m using this blog name. A little too bad.
September 14th, 2006 at 8:17 am
Repeat after me: “money is important and it is also the “scorecard” for success in a capitalistic economy. How you handle it is another matter”.
I have no problem with your blog name at all. Moreover, I am the type that hopes everyone reaches their financial goals. And, I felt that way as a broker at Lehman Brothers (San Francisco) when I was doing just fine in a very competitive office. I really wished well for others.
And, om my blog (and in articles or radio appearances)I do not care what others think of me. I care (teach) people how to think of themselves.
Free yourself of the burden of how you appear to the world.
September 14th, 2006 at 10:35 am
Million thanks for your encouragement, Larry. Normally I don’t really care how others think about me. On this blog, it has been a little more testing on me. Since the readers are from all over the world, and there are always people smarter and more knowledgeable than I am, I’m subjected to a higher than normal scrutiny on all of my writing. And what makes the matter worse is that I don’t have much time to write quality articles (due to my family) for the blog. While I’m doing really my best of the best, occasionally it is discouraging to get hit by a more negative comment.
In any case, I just try to stay awake between my job, family, blogging, and a dirty diaper at 6am everyday from my small baby,
.
September 15th, 2006 at 8:18 am
Interesting conversation
Yup, I agree with the bit about those trying to achieve materialistic success being jealous of those who are already successful. I think it stems partly from jealousy, and mainly because they wish they were already successful without such painful effort.
I write a blog with advice and self-help kind of articles, and I think part of the reason why many people don’t seek advice is similar to the reason why many people don’t like to admit that they are trying to get wealthy, and are jealous of the people who are already wealthy: they wish it were effortless, and feel ashamed that they have to try. It’s like, you can write a book about how to make friends, but people will be ashamed to buy it because they wish they were naturally friendly.
Sorry to go off on a slight tangent here.
And frugal, I can certainly empathise with you job-blog-family stress, I’m going through something similar too. I just wish I could make more time to write…
September 15th, 2006 at 8:29 am
Shuchetana,
Thanks for your encouraging words. I really appreciate it.
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