This post from Morgan Housel provides me a good introduction to discuss a thought I have in my mind since a while. I started trading and investing quite early, at least early for an Italian in the ’90s: very few that took the university path cut ties with their family and had a real salary before their late 20s; imagine my shock when I learned that lads in UK can have a stable, defined job AFTER a degree when they are 22 years old. Italy was another world (and in some aspects still is). During my university years I was putting aside to trade every euro I could get from random jobs, but when I finally got a real salary…I stopped.
Now I am trying to understand why.
It is incredible how many books you can read about traders and their strategies without understanding the power of compounding. I was putting in the hard work, learning how to trade and generate alpha and completely disregarded the comfortable, passive way to ride the beta.
For me there was only my way or no way: it was actively trading or nothing. I had zero confidence in external managers…and for good reasons. I was aware since really early that other active managers do not out perform, it is really hard to find the one that do and fees have to be kept as close to zero as possible. I was a very early believer in ETFs, because they gave me the possibility to access asset classes that were not tradable before; again, I was in Italy, not the US, 99% of the mutual fund universe was unreachable to me. Unfortunately the advent of robo-advisor was years ahead and I did not think that I could create a simple 60/40 portfolio along my trading account.
So once I reached a reasonable balance for my trading account, I simply stopped putting money into it. I wanted that account to grow via trading profit but at the same time I did not want to risk too much money given that my results were far from remarkable.
Another reason was the me now vs future me: I hate cooking and I was living alone, 100€ represented a couple (and more) of dinner out with my friends while they were a trivial amount for my projected future salaries. Why saving now when I could easily reach the same total amount of savings years down the line when my salary grew? The big mistake was that I was comparing 100€ now vs 100€ later, not 100€ compounded for 10 years at a 7% return…which makes them closer to 200€.
I never reached the George Best point were I was squandering my money and honestly those memories will always stay with me. The issue of living in an excel spreadsheet is that no one will give you back your 20s or 30s; there are simply things that you cannot do anymore later in life, either because your body is not the same or because you will look like…yes, like one of those guys. But I could have definitely optimised more my spending.
Does everything I was thinking back then make sense? Fuck no. This is the power of writing down your plan. It forces you to think what you want to do, instead of having bits and pieces floating around. It is easier to find incongruities when you write your plan; and it also makes you accountable because it is there: memories fades, things change in your mind. And our brain is not built to grasp the power of compounding, we can visualise linear growth but not exponential.
They say that the first 100k in savings are the hardest and I agree. This is the reason why starting as early as possible gives you a bigger advantage than the simple amount you put aside. More importantly, it puts you on the right track, on the right mindset.
Yesterday Tim Ferriss re-posted on his podcast the interview to Mr Money Mustache; only recently I found out about the cult so I gave it a go (naming Tim is like a show off here, I listened to max 5 episodes of his podcast). While on it, I realised I have one of my closest friends who embraced years ago some of the F.I.R.E. dogmas without even knowing it. If he opened a blog about that instead of fantasy football, he would be probably rich by now…
Anyway, as soon as he started working he saved aggressively; he bikes or walks whenever he can (he owns an old small car because, well simply you cannot live without one if you live in Italy outside of Milan), he optimises every spending. Is he retired by now? No. Fucking. Close.
Despite the FIRE propaganda, if you have a shitty salary is really hard to put aside a meaningful amount in a relatively short period of time. But the crucial error he made, the aspect on which he has control on, is that he never compounded his savings. This not 100% his fault: financial literature is not taught anywhere, it is easier to get exposed to the story of a financial scam than to the positive experience of a serial saver. He built a serious distrust towards the banking system, to the point that he bought crypto before buying any traditional asset. There have been so many scandals involving Italian banks that I cannot blame him…should definitely blame myself that I was never able to convince him to invest the right way (but we are almost there, better late than never).
What I am reading now:
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