Charles Darwin and his theory of evolution revolutionized the scientific understanding of nature and biology. But because evolution is among the most counter-intuitive ideas in science, its public acceptance has been limited.
There are many intelligent and educated people who still do not fully understand or believe it. And more who may accept it as a scientific truth but have not adopted evolution into their mental toolkit, and do not apply it to their perception of reality each and every day.
Here are 4 ways Darwinian thinking can help you understand money, finance and markets, and help you build and protect your wealth:
1. Consider the stock market a biosphere of public corporations that live, evolve and die like plants and animals
The national financial folk wisdom of 1955 was, “As General Motors goes, so goes the nation.” Bankruptcy for GM was not only unimaginable, it would assuredly bring the nation down with it.
Yet as we all know GM did indeed go bankrupt in 2009, wiping out common shareholders. And the nation not only survived, our GDP has since nearly septupled, soaring from $2.8 trillion in 1955 to $18 trillion last year.
Folk wisdom and common sense can be myopic, and perceive only the present-day reality projected upon the future. Why else should we be shocked by aging celebrities? Or when venerable corporations cease to outperform, and upstarts such as the FANG gang (Facebook, Amazon, Netflix, Google) take center stage.
“If current trends continue” always sounds prescient. But current trends never continue indefinitely in organic systems where birth, growth, death and evolution rule. The “widows’ and orphans’ stocks” of the 1950s, the stocks that would always be there, cannot always be there.
Corporations, like people, routinely grow, age and die. So how do you deal with it? Like evolution, you adapt. To a Darwinian thinker the true widows’ and orphans’ “stock” is a diversified index fund that will endure and grow, even as its components ripen, wither, fade, merge, are replaced and even die.
2. View every living thing, every financial entity, as primarily interested in its own survival, prosperity, expansion or reproduction
Long before Darwin, Adam Smith wisely wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Here’s the short version, courtesy of Warren Buffett: “Never ask the barber if you need a haircut.”
When buying stocks, insurance, or any other service, financial or otherwise, always remember the self-interest of the broker and the seller. A surgeon performs surgery. A lawyer bills every hour. A stockbroker lives on commissions.
A commissioned stockbroker who is reluctant to execute your order to buy shares of Berkshire Hathaway (full disclosure, I buy them, own them and have never sold them) knows you are statistically less likely to sell Berkshire than most other holdings; the money that purchases shares of Berkshire may likely never yield commissions or fees for any broker ever again.
3. Understand that deception and fraud are key survival tactics in biology and finance
A cat deceptively raises its hackles to inflate its size and intimidate enemies and predators. Other animals use mimicry, camouflage, surprise, and even feign injury or death to survive or devour prey.
Consider the Bible, which introduces the power of deception in human life: the serpent deceives Eve, Cain kills Abel and seems to deceive God. Believe it as literal truth or accept it as parable, Bible stories bespeak an essential truth about the centrality of deception in the biosphere.
So why should we expect to escape deception in the high stakes world of finance? While financial professionals provide customers with needed services, self-interest — conscious or not — may lead them to recommend managed mutual funds, closed-end funds, annuities, or complex insurance policies which provide large fees and commissions but may not serve the best interests of the client.
A broker recommending purchases to a client is not held to the fiduciary standard — to act solely in the interests of the client — but only a “suitability” standard, which leaves plenty of room to aggressively sell financial products that are lucrative for the seller, but not the buyer.
4. Realize that our instinct to trust our fellow creatures represents an eternal vulnerability in financial transactions
Humans are social animals, and humanity is a team sport. We are congenial and credulous by nature, which was necessary for the tribal life we evolved from, and is necessary still for sustaining the communal and national life in which we now live, work and prosper.
The counter-trend, so evident in wartime but also present in our workaday world — in media, markets, finance, government and even, courtship and family life — is manipulation and betrayed trust. Think of “fake news.” Think of the indicted politician, the con artist, the criminal, the sociopath.
But the Machiavellian betrayal of trust can be adaptive even in successful professionals, entrepreneurs, sales, courtship, marriage and family. A small child caught misbehaving by his father has a stock answer: “Mommy said I could.”
So how can we protect ourselves from our own congenital credulousness when approaching financial markets? Read, study and listen to credible sources that have a long track record of honesty and integrity.
If there were a Mt. Rushmore of investing I would nominate these three wise men: John C. (Jack) Bogle, Warren E. Buffett and Charles T. (Charlie) Munger. They have each long honored their investors as partners and friends and have grown their wealth alongside them.
(Editor’s Note: The following article is a guest post by superstar entrepreneur and tech investor Jonathan Schultz.)
We all know that hard work and dedication are keys to success. The more you’re willing to sacrifice and go the extra mile, the greater your chances are of reaching your personal goals and passions.
While there’s no denying that hard work does play a major role in reaching success, surrounding yourself with the right people will always help. We’ve all heard the saying, “it’s not what you know, but who you know” … In my career, whenever I push myself to be around the positive thinkers and go-getters, it’s always up-leveled me and gave me more confidence to in turn fulfill my own dreams and ambitions.
Finding your network through all the different stages of your life and career is not only helpful in progressing your career, but it also creates amazing relationships and opportunities.
So, what type of people should you be surrounding yourself with?
THE PUZZLE PIECES
Find the network that is your perfect complement —the people that have the skills and abilities you strive for. Not only will this give you more confidence, it will help you learn the skills and abilities you may be lacking.
THE POSITIVE PEOPLE
Who doesn’t want to be around someone who’s happy and optimistic? Even though that doesn’t have to be all the time.
Surrounding yourself with positive and grateful people can have an incredible impact on your life, making you feel happier and more confident. Also, positive people are more likely to encourage you to take smart risks or move up the business ladder.
Dreamers and innovators are the people pushing society forward. They are the people interested in coming up with new and improved ways to solve problems and achieve success. Regardless of what field they’re working in, it’s never a bad idea to have a few outside-the-box thinkers in your social circle to help you look at things from a different perspective.
THE ANSWER SEEKERS
Just like innovators, people who constantly ask questions are the reason why we challenge old ways and come up with new ideas. When you’re surrounded by people who constantly ask questions, you’re more likely to come across the answers that you never knew you needed.
Ultimately, the people you keep in your inner circle can influence you in a number of different ways, including how you approach problems or whether you’re motivated to achieve greater things or not. Of course, this isn’t to say that everyone around you needs to be someone who’s working those extra-long hours to get to the next phase in life.
However, when you have a few business-minded people in your life, you’re more likely to inherit some of their drive, benefit from their knowledge, and even network in some of the same circles. For that reason, it’s always important to make friends who have the same goals and aspirations as yourself. It might just help you get to the top quicker.
Jonathan Schultz is an entrepreneur, real estate tech investor and influencer. He’s the co-founder of Onyx Equities, a leading private equity real estate firm, and has been voted one of the most powerful people in real estate. Follow Jon’s blog here.
Believe it or not, becoming a millionaire doesn’t take much capital. It mainly a mindset shift as it pertains to money.
In order to unpack how to do just that, we spoke to financial expert, journalist and author Kara Stevens from TheFrugalFeminista.com.
In this Q&A, we discuss money management, the emotional aspect of money, and why you must heal your relationship with it first before you can learn to have more of it.
Let’s just talk about it out the gate. What’s the biggest money challenge you see in the people you work with?
I see so many things when it comes to money challenges—from fear of looking at bills to avoiding having important yet difficult conversations with their family members about money. I’d say the underlying challenge is an ambivalent relationship at best and a harmful relationship at worst with money.
We walk around usually unaware of our thoughts about money so our decisions are on autopilot and unexamined. This becomes a problem when you have goals of wealth but your actions and thoughts work in opposition to those goals.
You mentioned “financial dysfunction” and bad money habits being passed down from generation to generation. What are some that you see and how do you break them? (feel free to incorporate own experiences here)
Some of the habits that I see include living beyond one’s means and using credit cards and payday loans to subsidize lifestyles.
That’s a tricky one.
I also see the other side. People who hoard money in fear of being poor and who ironically keep their money in a low-yield savings account that will eventually erode its purchasing power.
Or inflation, which literally eats your money alive. So how do you break the money dysfunction?
Breaking free of money dysfunction begins with awareness. You have to acknowledge that you have a problem and commit to change. Even when there are setbacks.
I think the next step is seeking help whether through reading and educating yourself if you’re a self-starter or seeking support from a professional or a mentor that can guide you through your goals and offer feedback and accountability.
And finally, I think creating simple plans and goals that can be easily achieved and tracked helps you stay committed and motivated to improve your relationship with money.
You talk about “the link between self-worth and net worth.” What do you mean by that?
Usually when people hear that, they think I mean that more money makes you better or feel better. That’s not what I mean. When I say there’s a link between self-worth and net worth with respect to how we treat money. In other words, when you realize that you are enough, so you don’t have to overspend anymore or hoard money because you’ve reached a level of financial security.
Almost like being at peace with who you are financially?
Yes. How you manage your money—meaning what decisions you make around spending, saving, giving, and investing. This message is specifically those of us with money management issues and not income issues. Money management is for those of us that have enough to meet our needs, but our spending decisions keep us from making progress in our finances.
In other words, building wealth.
Right. Income issues and issues around generating wealth stem from structural inequalities. For instance, gender-based pay gap, race-based pay gap, predatory lending and so on. There is definitely an overlap when the discussion is that they don’t have enough income to manage.
I think people mostly need to heal their past financial trauma from childhood, across the board. Whether you lived in poverty or privilege, there may have been beliefs passed down to you that make it hard for you to overcome financial self-sabotage.
This comes in so many forms from buying the cheapest foods because you don’t want to spend the extra money, to believing that the opposite sex is your best financial plan.
Healing can happen in a short period of time—like 28 days—when there are actionable steps and accountability. The book offers the space to engage in deep metacognition—meaning thinking about your thinking—while simultaneously offering bite-sized and tangible action steps.
What’s the biggest piece of money advice you can give someone who’s starting from scratch and doesn’t know where to go?
I think the first place to begin is to take inventory of your money mindset. Assess and examine your thoughts and subsequent decisions that stem from that train of thinking.
In doing so, you’ll be able to cultivate financial self-awareness which you’ll need to replace those thoughts and actions with ones that align with your financial goals.
So one of the secrets to real estate investment is a little-known trick (outside real estate) known as the “1031 exchange,” allowing you to defer all your capital gains taxes on your recent real estate score.
“Surprisingly, many investors are not aware of this,” EVP of Madison 1031 Michael Brady told me back in 2015.
(This is when I first got introduced to it.)
“Even real estate lawyers are asking us about it,” he said.
These exchanges are named after section §1031 of the Internal Revenue Code. By taking advantage of this loophole, investors can reap big breaks on appreciated real estate assets.
“Astute investors use 1031 exchanges to diversify their portfolios, exchanging one high priced property for several smaller properties,” Brady told me, “or investing their money in regions where bargains are easier to find.”
Use of these exchanges has been increasing among professional real estate buyers. According to an early 2014 report (yes, it’s old) by universal REIT authority NAREIT, the overall 1031 exchange activity level among REITs was up.
In fact, one REIT back then did around $85 billion in 1031 transactions. Mind you, that’s a professional real estate operator that knows every trick in the book.
How they do it…
Here’s how the 1031 works in practice:
You sell a property at a profit. Within 45 days, you find one or more replacement properties — worth the same or more — that you want to defer the money to.
From there, the taxes from the profits made from the first property can be “deferred” and used for your next real estate deal.
Internet influencer Grant Cardone breaks it down here. According to himself, he says he’s never “paid any taxes.” (With the 1031, that is.)
Here’s the cool thing: This process can be repeated as much as you want, as many times as you want, until you either die, or decide you don’t want to invest anymore.
So there you have it, you too could avoid paying taxes, billionaire-style!