“A stitch in time saves nine” said a tailor down the road.
I am very sure a lot of us would have wondered “How does a stitch save nine? Why nine?”.For people like me who didn’t grow up loving English (weird), the phrase wouldn’t have been given a lot of thought. However, I actually gave it a thought today and thanks to “Google”our reliable companion, I can authoritatively tell what it means. Simply put, it means “why don’t you do what you have to do now and stop procrastinating”. Okay, English teachers, review my script and tell me how close I got.
How does this relate to investing? Hmmmmm...Wait for it.
The humble years I've spent diving into the world of finance, swallowing every bit of knowledge I can chew as spinach to succeed in what I now love so much, has taught me that one’s ability to accumulate substantial wealth - the end result of consistently making meaningful investment returns - depends on one’s ability and willingness to take on risk. As the father of modern portfolio theory; Harry Markowitz, said “the higher the risk the higher the return”. Hence, the very aggressive risk takers will definitely become wealthier than their fellow peers at a future date over a certain time horizon, all else being equal.
An individual’s ability and willingness to take on risk is dependent on a lot of personal and economic variables which includes but is not limited to; source of wealth, measure of wealth, stage of life etc. I'd like that we concentrate on just these three variables and see how it is that a lot of us might end up not attaining the level of wealth we desire.
Let’s not dwell on sources of wealth because it’s as clear as it can be. Our ability and willingness to take risk and become as wealthy as we desire depends on our source of wealth; be it the 9-5 guy working in an Oil company; the investment banker who works 24/7 or the easy going entrepreneur looking forward to the next day to make a profit. Howwealthy we can be depends on the amount of money we earn. Therefore, we can definitely say a man that has three sources of income is wealthier than the other with just one. However, the flipside to investing is that, it’s not the quantity of wealth that determines one’s ability and willingness to take risk but the way and manner we perceive our wealth. This is in the sense that one might earn a lot but still feel or actually be broke.
Let’s put this into perspective, Mr A has three sources of income and earns a total some of NGN 1,000,000 monthly but spends NGN 800,000 out of it before the next month’s receipt date while Mr B earns NGN 400,000 monthly and spends NGN 100,000 only. Without a reasonable doubt, Mr A is the baller, the guy we all want to be like (I definitelywant to be like him, who wouldn’t). Based on sources of wealth being our factor to defining one’s ability and willingness to take risk, Mr A is just the guy we looking for. But do a simple math; on a monthly, Mr B has NGN 100,000 more to invest and make himself wealthier than Mr A at future date over a certain time horizon. So who is the baller now?J
The question then is; who would you rather be? Mr A; who lives for the moment (YOLO) and forgets what the future holds or Mr B; who lives moderately and creates the avenue to become wealthier in the future. Why don’t we act now by increasing our ability and willingness to take risks and subsequently increase our propensity to become wealthier? It’s never too late - the time is always right to do the right thing. Don’t procrastinate.
Ahmed O. Banu.