Some Perspective on Financial Literacy
To my partners,
I think by examining some key topics and discussing my own personal thoughts, I can provide some actionable insight or at least provide different perspectives to help optimize your financial literacy. While I'm excited to share my opinion, I recognize everyone's finances are unique. If you've discovered a strategy that differs from mine, but yields success for you, I wholeheartedly applaud your progress! My goal with this post is to provide valuable information, not to dictate a one-size-fits-all approach.
I want to be transparent with you from the outset; no matter what the experts, financial advisors, analysts, economists, politicians, or even I say, the perfect “allocation strategy” does not exist. In all aspects of our lives, we base our decisions on what we think probably will happen, and in turn we base that to a great degree on what usually happened in the past. Regardless of whether you’re managing your savings, investments, career, or future goals, one constant remains: the inherent unpredictability of the future. While it is impossible to forecast the future with absolute certainty, I firmly believe in utilizing available data and facts to inform a rational, well-reasoned strategy that offers a high probability of success. (this should sound very similar to my investment approach) While I won't attempt at recommending any tailored allocation strategies, I will provide key insights that I believe anyone can apply in their own daily life.
Income: Now, more than ever, people have the ability to not only invest but also track their investments at any time. While it's a remarkable achievement that a significant portion of the global population now has access to the possibility of attaining financial wealth, I believe this newfound accessibility has also fostered unrealistic expectations among the masses. The widespread availability of financial opportunities has created a narrative that achieving wealth is not only possible but also easily obtainable for everyone in markets. The ultimate truth is that maximizing your ability to earn income early on is equally important as building an investment portfolio. It appears more people are enamored by their 401ks, Roth IRAs, brokerage accounts, cryptocurrencies, tax deductions, AI, and whatever new product Wall Street is pushing than maximizing their talents, skills, and marketability in their respective career fields. To be clear, I am not against people asking questions, showing interest, learning, or even applying those topics to their personal finances. I am just highlighting that it's crucial to maintain a clear perspective on what truly drives wealth accumulation. For the average American, building wealth is often more closely tied to increasing earnings potential. The top 10% of households control over 1/3 of the wealth in the US. Approximately 18% of certain high-earning professions (Finance/Banking, Technology, Law, Medicine, Real Estate, etc) account for roughly 42% of the income earned by that top 10%. To illustrate an example: if the top 10% comprised of 15 million people, then just 2.7 million of those people earned 42% of all the total wealth by being in a high-paying job! Funding your 401k, Roth IRA, and brokerage account with as many dollars is what's crucial. Earning so much taxable income that you are put into a position to have to think about deductions is what's important. Your income is the initial ignition that sets the stage for explosive financial growth, transforming your investment landscape and opening doors to new opportunities. To some degree you have control over maximizing your income:
By mastering the art of communicating complex ideas to diverse audiences, you distinguish yourself from peers and demonstrate a unique blend of competence, intelligence, and strategic thinking. This exceptional skill set demands recognition, and your supervisors should be compelled to acknowledge your value.
By taking ownership of mundane tasks, showcasing your work ethic, and leading with intention, you send a powerful signal to your organization: you're a dedicated, results-driven professional who expects to be valued accordingly. Your proactive approach indirectly demands compensation that reflects your contributions.
By investing in your technical skills, asking insightful questions, and demonstrating a thirst for knowledge, you create a compelling case for why you deserve to be compensated at a higher level. This proactive approach not only unlocks new opportunities but also signals to your organization that you're a person who expects to be valued accordingly.
In a world where opportunities often favor the prepared, being exceptional in your field is the ultimate game-changer. When you're the go-to expert – whether as a lawyer, doctor, engineer, police officer, or any other profession – you indirectly demand higher compensation, greater recognition, and more significant opportunities. In the end, the world is unlikely to consistently favor those who are less competent over those who excel.
To propel your income upward and secure the career goals you desire, it's vital to leverage your strengths and exploit your competitive advantages. The average person will likely not achieve above average financial returns, therefore reliance on what you bring to the competitive workforce is crucial now more than ever. I would urge you to avoid being in a position where you are of high average age possessing relatively non-transferable skills.
Time: Often overlooked is the idea of starting early. I believe and have observed that a great indicator for whether you’ll execute on a successful financial future is how soon you begin investing. Occasionally, I enjoy doing thought experiments that visually express the power of compounding over extended periods of time. Here’s a compelling one: if someone had invested $1 in the US Stock Market in 1900 how much money would they have 120 years later. Take a guess. That $1 would be worth roughly $19,900,000 (give or take a couple million). Of course indexing was not common practice and popularized until the 1970s so this achievement would have been quite difficult (aside from living 120 years) and the commonly cited 9.5% long-term return for the US Stock Market, for this particular time frame, is highly unlikely to remain that high in the foreseeable future. The point is the power of setting a long term time horizon and allowing compound interest to work for you, not against. Please note: to achieve the $19 million you did not have to be an exceptional stock picking analyst. You simply had to be patient. Additionally, I know, $19 million! Sign me up. But remember what you would have had to endure throughout that 120 year duration: World Wars, a Great Depression, multiple recessions, massive market fluctuations, financial panics, pandemics, civil rights, environmental disasters, terrorist attacks; these are just a handful of examples. Not to mention the stark differences in standard of living – education, food, technology, entertainment, healthcare, travel – impacts on our lives that are commonly overlooked by Americans today who benefit greatly from the advancements of the 21st century. The longer the time horizon, the higher probability you will be tested in financial markets. While starting early is absolutely crucial, staying committed is ultimately what makes you rich. Charlie Munger has a great quote that directly applies, “The big money is not in the buying and selling, it’s in the waiting.” Altogether, I encourage you to start early. But you need to know that the road ahead is difficult without arming yourself with enough financial literacy, wisdom, and understanding of markets to stay the course.
History: While I hold no expectations for others to delve into the history of financial markets with the same energy and enthusiasm as me, I firmly believe I have become far better of an investor, saver, and lifelong learner than I otherwise would have been, if I did not utilize history as a guide to what can go wrong in business. The benefit has certainly outweighed the detriment as it pertains to understanding psychology of investing, manias, panics, crashes, and speculation, historically common, throughout the history of financial markets. This is why I recommend it to you. Since the start of the current century, we have been lucky (or unlucky) to participate in two major “bubbles” – Dot Com and the Housing Market. I reserve discussion on the coronavirus pandemic and the events that followed in markets for another memo – though I certainly classify the event as a speculative mania. While fresh in our minds of the horrors of greed, speculation, and overconfidence, the two bubbles since the start of the century are certainly not the only significant examples investors should be made aware of. I recommend learning about The Dutch Tulip Mania (1636-37), The South Sea Bubble (1720), The Panic of 1907, The Wall Street Crash of 1929, and The Nifty Fifty stocks (1960s).
While all of those bubbles are massively important to learn about, I hold a special place in my curious heart for The Panic of 1907. Crucially, John Pierpont Morgan (JP Morgan Chase might ring a bell) was instrumental in restoring confidence in the entire financial system after a failed attempt to corner the market on copper stocks led to a chain reaction of bank failures. During this time period, there was no Central Bank in the US, making it incredibly difficult for banks to respond to financial crises or runs on the bank (when a large amount of depositors ask for their money back at the same time.) Morgan was pivotal in convening meetings with leading bankers and financiers to pool funds to bail out struggling banks. Utilizing his own funds as a prominent banker, he provided liquidity to a failing financial system and brokered deals that would ensure damaged banks would not go belly-up. His efforts and actions paved the way for the establishment of the Federal Reserve System in 1913 – highlighting the need for a Central Bank to regulate the financial system through injections of monetary liquidity. I can go on and on about the key factors within this one example but my takeaways surround the birth of major regulation, oversight, and transparency over financial institutions. Additionally, how mass speculation and manipulation in copper stocks had far-reaching effects, and how the actions of one man forever changed how Americans utilize financial institutions.
I am always captivated by the actions of prominent individuals wielding significant power and fortune. How did George Washington – the indispensable man, the hero of the Revolution, and first leader of the US – make such a bold decision to voluntarily relinquish power after two terms? After all, Americans at the time urged him to continue leading, yet his commitment to rejecting tyranny and concentration of power would shape the future of American history – demonstrating that the US was a nation of laws, not men. In doing so, Washington set a standard for future generations of American leaders, a standard upheld to this day. It is in these extraordinary moments of selflessness that I find the true measure of leadership. Some actions are not merely admirable; they are essential to the health and vitality of any organization or society.
By leading with transparency, principle, and rationality, history has shown that leadership is not about personal aggrandizement or pursuit of power, but by serving a higher purpose and leaving a lasting legacy. If I can create a culture, manage, and operate Time Horizon LP similar to the profound qualities evident in Morgan and Washington, you should be confident in the long-term financial success of the company and your investment with the fund.
I hope these topics serve as a catalyst for continued growth in your financial literacy journey. The complexities of business and personal finance are perpetually evolving and to navigate the world effectively it is crucial to keep learning. Thanks for reading.
Kyle Delmendo
Founder, General Partner, CIO