“If you want to beat the S&P 500, start thinking of the index as a filter and not a benchmark. It’s the starting line; not the finish line.” Andrew D. Ellis, Founder, ThinkingLonger, LLC
I am an admirer of those who write for Making of a Millionaire (MOAM) and those who read it. We all share a certain ambition for financial autonomy, and I value the advice and comments that we generously give to each other.
I think that it is worthwhile to stop for a moment and consider what we really mean when we talk about being a millionaire. That term is really a stand-in for so many ideas: discipline, restraint, focus, entrepreneurialism, resilience, strength, and independence, to name just a few. But, if we are really being honest with each other, we need to add another concept to our discussions: black swans. Most of us know what black swan events are, but we need to think about them in the context of the advice and processes that are presented in this publication.
Investopedia defines a black swan event as
". . . an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight."
For example, some of us may think of the COVID 19 pandemic as a black swan event, but it isn’t. In 2016, there was a White House office, the sole purpose of which was to respond to pandemics. The next administration chose to dismantle it. We could argue (pointlessly) about that decision but not the underlying reality: pandemics do happen, they have happened before, and they will happen again. The timing may be unpredictable but not the reality of the occurrence.
In our own lives, we can and should assume that black swan events will happen on a smaller, more personal scale: illness, disabilities, accidents, deaths, frauds, divorce, settlements, losses — the list is endless. While we cannot predict when they will happen, we all know that some unforeseen event will happen to each of us — even if we act as if it will not. (In fact, the entire insurance industry is predicated on the idea that everything is predictable at the aggregate (if not at the individual) level — ergo, the notion of insurable pools of risk.)
Now, let’s return to the idea of being a millionaire. At some level, perhaps unstated is the shared desire that we want to be impervious to the occurrence of black swan events in our lives. And, if that is our goal, then having a three-month cash reserve, a travel fund, a side hustle (or two), a retirement fund, a cheaper apartment, and a second-hand car is not going to help. Such resources are likely to be swept away by the tsunami of our personal black swan events.
So, let me offer some suggestions as to how one might approach the accumulation of capital to bolster our defenses against black swan events.
1. Recognize that every day you are in the business of maximizing your value to you. THAT IS YOUR BUSINESS, NO MATTER WHAT YOU ACTUALLY DO.
2. Given your skill set, find an employer that is going to pay you the absolute greatest amount for the skills that you have over the shortest period of time.
3. Improve your skill set so that your employer NEEDS to pay you more to keep you; otherwise, leave for a better paying job.
4. Your first job as an employee is to continuously look for a better job.
5. Your second job as an employee is to maximize the quantum of skills that you can acquire doing that job and freely take with you when you leave. Acquiring knowledge that belongs to someone else is good for your employer; it isn’t good for you.
6. Your third job is to shift catastrophic risk to insurance companies. They can afford it; you can’t.
7. Maximize the number of people you meet who do not work for your employer. Make an effort — every day. These people become YOUR network, and your network belongs to you.
8. Start your own business (on your own or with a few carefully selected partners) when your reliable client/customer base generates at least 40% of the revenue you credibly created for your highest-paying employer. (Your employer will never, ever pay you this percentage, so you should be “ahead” by the end of your first year.)
9. Repeat 2–7 regularly (and always reassess #8 — the merits of your own business) until your passive income from accumulated capital (and perhaps your easy to perform “side hustles”) matches your highest possible income as an employee or business owner.
10. Don’t spend what you can invest. If you are not confident that you can beat the return of the S&P 500 (on a net after-tax basis), don’t make the investment.
But wait, aren’t there other priorities to consider? Quality of life? Family time? Physical and mental health? Reduced stress? Social contribution? All of these priorities represent choices that may reduce your income — or not. That’s for you to decide. But, every choice comes with a price, and inevitable black swan events can be extraordinarily expensive. If you’re not willing to see the possibility of them, then you can’t deal with them when they occur.
In hindsight, I could have used a mentor to guide me. That’s why I like MOAM; there is a lot of wisdom in these posts, and I’m happy to be part of this community of sharers.