What is The Simple Path to Wealth About

There are few books we have come across that wish we had read sooner simply because acting on the lessons and ideas presented would have yielded far greater financial results than we currently have.

For some people, discovering this book sooner would have saved a lot of time, money and frankly the headache that comes with trying to learn about investing without being scammed or distracted by financial entertainment such as CNBC, Bloomberg or even your favourite reddit channel. I am looking at you WSB.

The Simple Path to Wealth is one of such books and it does deliver on its promise – as far as presenting the idea is concerned. For it to fully deliver, you will need to carry out the steps and check back with us in 20 years time.

The wisdom and essence of the points outlined in The Path to Wealth is timeless from an investing point of view and although the author is not Warren Buffet, or any well know investor, the lessons he shares are derived from his experience of listening to the right experts and going out there and finding out.

Reading through this book, it is easy to think it is too late to get started or to make the most of the stock market. Think of it; there is a difference in attitudes to investing in your 20’s, 30’s and 40’s so not everyone will view the lessons here with the same level of urgency.

The important thing to note is that is never too late to begin to make better financial decisions. A rather obvious point mentioned in this book is that the author wrote it to provide his daughter with guidelines on how to navigate the murky world of investing while avoiding the sharks out there so you do not need to have a high financial IQ to understand what is being taught.

While you may not fully appreciate the value of this book if you feel the time to have made those decisions have come and gone, think about your children, nephew, nieces and other younger family members. Starting them off with the right foundation and the knowledge to build on that foundation is one of the best gifts you can give them.

The lessons are broken down into different sections so we will highlight the main point from each of these sections.

The Dangers of Debt 

There is a simple formula that delivers the message in a way anyone can understand.

Spend less than you earn, invest the surplus and avoid debt.

Debt has the potential to destroy your ability to build wealth and in situations where debt is monetised to build substantial wealth, it has the ability to destroy that wealth if kept unchecked or if the timing is bad. 

A good example of this using debt to invest in real estate or to purchase businesses. Too much debt can be problematic especially if the economic outlook changes or due personal events among other things.

There are stories from the 2008 recession of businesses and wealthy people who lost everything due to having too much debt. The downturn in the economy placed them in a situation where they could not pay their debts.

Collins outlines out a few points that show how debt can affect a person. 

• Your stress levels build up.
• Your life style is diminished.
• Your options become narrow.
• Your debt seems to be the focus of your attention.
• You are enslaved to whatever source of income you have.
• You endure the same type of negative emotions experienced by any addict.

It is not all doom and gloom as he points out ways you can pay off your debt.

Another important point covered in this section is how to think about money.

It is rather convenient to see money based on what you can use it to purchase but it is even more powerful and important to see money in terms of what it can earn for you.

In my own words, monetise your money or have your money work for you multiple times over. The way to accomplish this is by investing and primarily in the Stock market according to the author and based on this experience.

Investing

Investing in the stock market is something that should be taken seriously as part of building wealth. When you invest in the market, you own a piece of that company or several companies which means you also benefit from capital increase of the stock you own and any dividends payouts.

This journey as the writer puts it, is a wild and rocky ride at times because there will be major and minor financial crises however the evidence shows that market pushes through it these hard times and rewards those who are patient.

Along this journey there will be corrections and in some cases recessions just as we have seen in more recent times.

When is the best time to Invest in the market

There is a recession around the corner and any long time investors knows this however it is difficult for many people especially with the limited tools and access to information they have, to accurately predict the trigger for a recession and take steps to mitigate the impact or even benefit from it (Michael Bury and a few friends may be laughing at me right now).

Rather than try to time the market, consider what the market has done over time and understand why it has done that and once you realise that, there is no time such as the present.

That being said, if the ‘present’ happens to be the middle of a market correction or a recession, it makes sense to be extra cautious about jumping right in.

The main takeaway here is that no one can accurately predict what the market will do and since you are in it for the long run, as you should, take advantage of the time you have now.

The market is self cleansing

Using the example from the Path to Wealth, the DJIA (Dow Jones Industrial Average) currently only has one of its original companies and that is General Electric. The other companies have either changed and become something else through merges and acquisitions, or have been dropped from the list completely.

The VTSAX (one of many funds that track the US Market) behaves in similar fashion in the sense that ‘underperforming’ companies will be taken over and will cease to exist or be replaced by new ones and all this is reflected in the VTSAX without any intervention from the investor.

As a passive investor this is good news since you do not need to worry about underperforming companies because they may at some point cease to exist and your Index will reflect that.

This means the best companies win over time and you benefit from that while the worst performing companies drop off without the investors having to take any action.

What it means to own a stock and VTSAX

There are thousands of companies in the US alone and owning the VTSAX allows you to track the performance of over 3,700 companies and the benefits that come with it.

When you own a stock, you own a business that is consists of people working to create value and you benefit from the (financial) value created.

Think about it. People have been spent money educating themselves and in some cases, they have worked many years to be in a position in their company where they can do better than their competition or at least aim to and in a world as competitive as business, you can benefit from all that simply by owning the stock or in this case an Index that tracks multiple companies.

Four reasons why people lose money in the stock market

1: We think we can time the market

This cannot be further from the truth and Jim delves deeper into the thought process of why as humans, we feel it is something we should be able to do since the aim is to buy low and sell high right? Surely everyone should be able to do that!

There are tools and indicators used by sophisticated investors and fund managers yet a significant number of them fail to beat the market.

2: We think we can pick individual stocks

If this were the case many people will be considered in the same light as Warren Buffett, Peter Lynch or Michael F Price. It is difficult to pick winning stocks and do so consistently over a period of time. The investors mentioned above managed to do so over time and yes, at some point they made costly mistakes.

With an Index fund, the aim is not to find the needle in the haystack but to buy the whole haystack.

3: We believe we can pick winning mutual fund managers

Actively managed Stock Mutual Funds are a profitable business as Jim puts it and these are funds where the fund manager determines what stocks are added or removed from the funds to hit a performance target. You can read more on our article on active investing here.

According to the numbers presented in The Path to Wealth, you can see there are more active funds than there are publicly traded stocks in the US. Also about 7% of the funds fail each year and of the ones that succeed, over 90% fail to outperform the market.

4: We focus on the foam

Jim uses the beer analogy to illustrate the foam part and how that is different from the actual beer. CNBC, Bloomberg and other financial outlets are simply entertainment and do not go deep into the fundamentals of investing and this is the foam bit.

Emphasis is placed on the piece of paper that exchanges hand on a daily basis rather than what the business the piece of paper represents. Fundamental analysis is a way to understand what a business is worth among other things.

Summary

The Simple Path to Wealth describes what the author’s experience from investing and studying the market, reveals to be the important lessons and steps you can take to build wealth in the stock market.

No, you will not be a billionaire or rich overnight but you will learn important lessons about yourself, how the market works, what it means to own a stock and how you can take the right steps to realise their benefit.

The points we have covered in this article represent barely half of what the book covers because there are other aspects that are more US specific in terms of the different types of investment buckets such as 401k, Roth IRAs and more lessons than we can cover in one article.

Using Index Funds as a powerful tool to benefit from the market is a foundation in the book and it presents a cost effective way to invest in the market while avoiding any gurus or people that may want to swindle you out of your hard earned money.

Index Funds also work the same way for Bonds so in similar fashion, you can invest in bonds using the VBTLX as an example. Bonds are useful in a portfolio because they provide a hedge against deflation.

Now you have built your portfolio, how much can you withdraw? 4% seems to be about right and the reason is explained further in the book however there is one last thing to remember.

If you can live on 4% of what your investment portfolio produces, you are financially free. Think about it.

The Simple Path to Wealth

The stock market is self cleansing since companies that underperform or become obselete drop off the index while new companies are reflected. Any attempts to time the market or find individual performing stocks are dangerous and the numbers have shown it is impossible for the average investor with the tools available to accurately predict or determine any of these.

Index Funds provide a way to benefit from the performance of these companies without having to carry out much research or deal with the any other associated costs such as transaction fees.

In simple terms, Passive Investing is a low cost way to build wealth and eventually live off some of the dividends produced by the investments.

We highly recommend reading The Path to Wealth and carrying out the steps the author took.