Financial Freedom: How to Create Wealth and Hold on to It". This is the work of a German author, Mr. Rainer Zitelmann.
The rich have more wealth than ordinary people because they think differently from the general public about financial management. Next, I will take about 20 minutes to summarize this book for all of you.
When we talk about investing, many people always think of stocks first. But in 2012, a German student interviewed 472 rich people with assets of $3 million or more. The figures he received showed that only 11 of them became wealthy from stock trading. Through this research, it was shown that there is a big difference between the rich and the poor, both in terms of thinking and wealth management.
The rich use many different special methods to accumulate, circulate, and manage their cash flow. In this book, the differences between the rich and the poor are clearly analyzed. For instance, ordinary people like to sit in the stock market, waiting for opportunities to buy and sell based on what others are doing. But the thinking of the rich is completely different. They prefer to find projects that provide regular cash flow and use that cash for other work to generate continuous income, living the life they want.
In this book, I will summarize three main points. The first key point tells us that if you think financial freedom is about having an overwhelmingly large income, then you will never become financially free. The second point tells us that if you want to become rich, you must know how to make your money generate more value, but to do so, you must avoid five mistakes. And the last key point tells us about five special characteristics of the rich.
Let's look at the first key point which raises the question: why is having a lot of money not considered being rich? Because the author believes that money leaves us with great momentum. If we don't know how to manage that money, no matter how much we have, we will eventually spend it all one day. Let's listen to a real example. In 2001, a man named David Lee Edwards won a lottery jackpot of 27 million US dollars. After receiving this huge amount of money, he used it to buy cars, villas, an airplane, as well as many other valuable assets, and he even got the idea to use drugs. In the first year after winning the lottery, he had already spent 12 million dollars. Before long, he had spent all the money, and the bank also repossessed his assets. He became poorer than before he won the lottery. Over time, he became distressed and regretful until he died. Cases like his are not few. It's not just ordinary people; even famous people often encounter this, like the famous singer and movie star Whitney Houston, who died in 2012 owing more than 4 million dollars.
Experience has shown that most of the time when people receive a lot of wealth in a short period without going through work or business earned from their own sweat and blood, such as in the case of winning the lottery, their lives generally become worse than before they won. Because they often fall into a deep pit of thought and cannot recover, as they believe that having a lot of money can make them worry-free and live comfortably.
The author has a simple exercise for everyone. He thinks, if a person does nothing at all, just waits to take money from the bank to live and eat daily, how much money would they need to save in the bank to receive a regular interest income? This regular interest income, in the context of Germany, is equivalent to over $30,000. The answer is that one needs to deposit $800,000 in the bank. This is based on the highest interest rate from the bank and does not even account for the annual inflation rate. Today, $1 can buy one coconut. In 20 years, $2 might not be able to buy one coconut. This exercise confirms that even if you have one million, 10 million, or 20 million dollars, if you have no financial knowledge, in the end, you will inevitably spend all that money. Money leaves you faster than you think; I believe you know that too.
When an ordinary person suddenly gets money, they start increasing their spending without thinking about investing. If they do invest, they don't have clear goals. Let's take another example from this book. In 2001, an Austrian warehouse employee found over $800,000. At that time, an insurance company consultant approached him and said he could invest that money for him, guaranteeing a profit of up to 200% within a year. That man withdrew $500,000 of his money and gave it to that consultant to invest on his behalf. Who knew that the consultant had no expertise at all. Not only did he not make a profit, but he also caused the man to lose everything and go into debt for over $100,000 more. There are many people who think like this man. They believe that bank employees and financial advisors can manage their finances for them. But the author believes those people are just bank employees, and their job is to help find savings for the bank, simply fulfilling their role. It's very difficult to have them worry on our behalf, to think for us about our money. Therefore, if you give your money to someone else to invest on your behalf, it can reduce the success rate of the investment. It's possible they might make wrong decisions that cause you to lose money.
As for the rich, they are not like ordinary people. When they have money, they don't rush to use it to buy the things they want. Nor do they easily give their money to others to invest on their behalf. They manage it themselves, make decisions themselves, learn to invest themselves to increase the value of their assets, in order to live the life they want. In the mind of a rich person, they know one thing for sure: the amount of money is not important; what's important is what that money is used for. This is also another difference between the rich and ordinary people.
Let's look at the second key point: if you want to become rich, you must avoid five misconceptions. The first mistake is something you have all heard often: "Don't put all your eggs in one basket." These are the words of the stock market god, Warren Buffett. This phrase means that we should not put all the money we have in just one place. You must know how to divide it among different places. For example, invest it in the stocks of different companies or invest in real estate in many places. This saying aligns with the statement of an economist, Mr. Harry Markowitz, which was made back in the late 1950s. This theory says that if we know how to allocate our finances, investing in different areas at a reasonable proportion, it can minimize investment risk. And the less correlated those investments are, the lower the risk. This statement is reasonable, and many people agree with it. But when it comes to many rich people, perhaps they don't agree with this view. The author, on the contrary, states that this kind of diversified investment hinders the growth of money's value. He explained that investing a little here and a little there does indeed help us avoid many risks. It means it just helps us make the fewest wrong decisions, but it doesn't make our money grow much.
Fifteen years ago, the author invested in a property in Berlin, the capital of Germany. Later, he earned double-digit profits every year. If at that time he had taken on many projects, putting a little here and a little there, he probably wouldn't have had such good results as he does now. So if we don't diversify our investments like this, how do we know which project is good and worth investing in? The most important information in investing is understanding the market you are in. But often, the information received from the market is not necessarily accurate. Even if you have correct, reliable information, you might still make the wrong judgment. For example, the government announces that COVID has arrived, and the unemployment rate has increased. Some people think this is bad news because an increase in unemployment causes the economy to decline. The stock market also goes down. But some others see it as good news because they observe that when many people are unemployed, the bank will lower interest rates, which could push stock prices up. All buying and selling transactions in the stock market can happen because two groups of people see things differently. That's why some sell and others buy. However, in the end, there will surely be losers and winners. And if you understand the market well and analyze it correctly, you will certainly have a higher percentage of winning.
The second mistake: Many people believe that when the market is volatile and uncertain, it always indicates high risk. This is also what the aforementioned economist stated. Regarding this issue, another economist named Michael Keppler explained that, for example, in the stock market, there's a company's stock. In the first month, it increases by 10%. The second month, it increases by 5%, and the third month, it increases by 15%. At the same time, another company's stock decreases by 15% every month. According to the theory above, the first company's stock is indeed volatile, but it consistently increases, just by smaller or larger amounts. In total over these three months, it has increased by up to 32.8%. As for the second company, the stock price is indeed stable, but it consistently declines. In these three months, it has fallen by up to 38.6%. This example proves that a volatile market, going up and down irregularly, does not necessarily mean there is high risk.
The third mistake: Most people prefer to invest in their home country because they believe that investing abroad has high risks. According to a 2014 survey, over 60% of successful real estate investors in Germany invested in domestic projects. Only 1.4% were projects in the Asia-Pacific region. Even though the investment conditions in the Asia-Pacific region were better and more favorable than in Germany, investors did not dare to invest outside the region. What they worried about was losing on foreign soil. They worried that they didn't understand the market, the lifestyle, and the economic situation outside the region. But according to the data in this book, this misconception that domestic investment has low risk is incorrect. And it has caused losses between 1.48% and 9.79%. And the longer the period, the higher these loss figures become. The reason behind this misconception, I think you probably understand as well. Born here, lived here for decades, one surely understands one's own country better than others. On the other hand, they think, "I love my country. I invest in my country to help my country's economy grow, to create more jobs for my people. What's wrong with that?" It's not wrong; it's everyone's choice. This book just wants to point out that to profit from a successful investment, you need to make a wise and comprehensive decision.
Mistake number four: always using past data to estimate the future. This perspective is called "looking in the rear-view mirror." It's like looking in a car's rear-view mirror. You only know what you have passed. We forget that what we need to do is look at the road ahead, prepare to cope with and adapt to what will happen.
The final mistake of some investors is thinking they are smarter than others. A 2012 report showed that 70% of independent investors believed their level of understanding was higher than others. But their investment income was not very good. And generally, this kind of optimism actually leads them to failure. An experiment was once conducted in a gambling circle. Before the dice are shaken, players like to bet a lot of money. But after the dice have been shaken, players are less inclined to bet large amounts. Why is that? Because they feel that before the dice are shaken, they can influence the outcome. But after the dice have been shaken, the result is already out. They can no longer influence the outcome, so they don't dare to bet large amounts anymore. This kind of scenario happens everywhere. People always think they are smarter or luckier than others. Similarly, investors also think they are more certain or luckier than others. They mistakenly believe they have a high success rate when investing. The author states that when buying and selling stocks, 95% of stock traders rely on systems and technology to evaluate when to buy and when to sell. An ordinary person, no matter how smart, finds it very difficult to compare with this huge data system. Therefore, to avoid making wrong decisions, the author brings up a theory called "Ulysses." This theory comes from an ancient Greek story where a character named Ulysses was sailing past a small island and encountered a beautiful female demon (Siren). She had a beautiful, captivating voice. And this female demon always used her sharp, melodious singing voice to lure those who passed by. To control himself and not forgetfully head towards danger, Ulysses tied himself to the mast of the boat he was on. By doing this, no matter how captivating the demon's voice was, he could not unconsciously move towards danger. Thus, the Ulysses theory wants us to learn to control ourselves when something comes to captivate our hearts. For example, when a company's stock rises sharply, everyone starts selling. Will you decide like the majority or not? What if that stock drops sharply and everyone has sold out? How long will you hold on to it? If you can control yourself, not sway with the wind and worry with the waves, and make a decision through clear and comprehensive consideration, I am confident that you will probably have a better chance of winning than others.
Reaching this point, let's briefly review the second key point in this book. If you want your wealth to grow, you should avoid five mistakes. Mistake number one: avoid scattered investments. This is contrary to the view that says, "Don't put all your eggs in one basket." Mistake number two: Don't think that a rapidly changing market is a sign of high risk. Mistake number three: Don't think that investing abroad or outside your region has a higher risk than investing domestically. Mistake number four: Don't look in the rear-view mirror. Don't rely on old, past data to influence your future estimations. And the fifth mistake is, in investing, don't be too overly confident in yourself. Don't think you are smarter or luckier than others.
Coming to the final key point, let's look at the five special characteristics of the rich. What makes them so special and different from ordinary people? First, they have a rich mindset. According to a joint study between Swiss banks and the famous company PricewaterhouseCoopers, or PWC for short, it was confirmed that the wealth of most billionaires around the world did not come from inheritance passed down through generations. Instead, it came from their own search and direct investment. So what kind of thinking does a rich mindset entail? It is open-minded thinking, accepting everything, and daring to face risks. Ordinary people are very afraid of failure. They think if they lose, they will lose something, and can they bear it? But in the thinking of the rich, they think, "If you don't try, how will you know how deep the water is?" No matter how long you stand by the water, you can't know its depth. What they believe in is their ability and a mentality that understands that even if they fall into the water, they still know how to swim back to shore.
The second special point: doing business with caution. Many people mix up the words "danger" and "risk." This is also a mistake. Just now we said that to succeed in business, one must dare to face risks. It means preparing, learning, trying, experimenting, and reducing the risk to a minimum level before you can start. And if you want to do business, but right now you are employed, the author's advice is you should not quit your job just yet. You should work while starting your business. If you fail, you still have a job. Warren Buffett once invested in buying a furniture company. The first day he walked into that company, he asked the founder, "How much is this company?" That founder said, "This company is worth 40 million dollars." The next day, Warren Buffett had someone bring a check for 40 million dollars to the company owner. The company owner was very surprised, and he asked back, "You didn't even ask to see the financial report. I said 40 million, so it's 40 million, right?" Warren Buffett said, "That price is reasonable. The most important thing is honesty." "I think if you weren't honest, you couldn't have made the company this big." Honesty is an indispensable quality of the rich. This is the third special characteristic of the rich. If you are not honest, your ability and determination will lead your business to failure instead.
The fourth special point is frugality. Everyone might think that the rich are big spenders because they live in excellent conditions. But in reality, they don't like to spend recklessly and uselessly. They might take old shoes to be repaired and wear them again. Perhaps the monthly internet bill is too expensive; they might switch to a company with a cheaper price. They are very frugal with their expenses, and they also pay close attention to allocating the money they have to make even more money.
The fifth special point: knowing how to set clear financial goals. If I say my goal is to earn one million dollars, is this goal too excessive? It's not too excessive. When you set a big goal, it's easy to achieve because you won't see the small obstacles. When you take the first step towards a financial goal, you must be clear in your mind about what you want and why you want it. The author provides another suggestion: write down your financial goal for the next 10 years on paper, then break it down into smaller annual goals and try to achieve them. Most people expect too much of what they can do in one year, but they underestimate what they can achieve in 10 years. Most great things in life can be achieved within these 10 years. If you set a goal for yourself to earn one million dollars in 10 years, that doesn't mean earning $100,000 every year. But perhaps in the first year, you earn a little, and as time goes on, your income will increase accordingly. So, you can set goals that are appropriate for your abilities and actual situation. Your financial situation now reflects your current level of thinking. If you cannot change your thinking and you still don't dare to dream, don't dare to set big goals, then you will never find financial freedom.
Finally, let's briefly summarize the main content of this book. First key message: What does it mean to be rich? If you think being rich means having a large income, then you will never be financially free. Only when you know how to make your existing assets grow in value and create more assets continuously will you not spend it all and truly achieve financial freedom. The second key point raises the five mistakes that prevent you from becoming rich, which most people often misunderstand. Mistake number one: investing scattered, putting all your eggs in one basket. Mistake number two: thinking that a volatile market is always risky. Mistake number three: thinking that investing abroad or overseas has high risks, being afraid of losing on foreign soil, and not daring to invest abroad. Mistake number four: being busy looking in the rear-view mirror. Meaning, estimating the future based on past figures. And the final mistake: thinking you are smarter or luckier than ordinary people. The last key point in this book raised five special characteristics of the rich. First, they have a rich mindset. Second, they do business with caution. Third, they have honesty. Fourth, they are frugal. And the final special point is they dare to set enormous financial goals.