Money Lessons From Warren Buffett’s 2021 Letter To Shareholders

Money Lessons From Warren Buffett’s 2021 Letter To Shareholders

In his latest annual letter to shareholders, Warren Buffett, CEO of Berkshire Hathaway, wants you, the investor, to understand Berkshire Hathaway, the company he has steered since 1965. As in past years, I anxiously await Warren’s annual letter (he writes his letter as if he is addressing you personally, so hence my liberal use of “Warren”)  to learn or refresh my knowledge with his numerous golden nuggets.

Here is Warren Buffett’s letter that is a review of 2019

My Thoughts At First Glance

There aren’t any huge surprises though Buffett admitted to an error in overpaying for Precision Castparts in 2016. One of the best sections was his tribute to the founders of companies he purchased that show “success stories abound throughout America” as entrepreneurs without capital but with a strong work ethic. Look for “Mrs. B”  as a highlight that I embraced.

The letter is disappointing for what Buffett omitted. He mentions COVID-19 only once, alluding to it when he commented on the furniture company’s temporary closing. Yet, the pandemic destroyed small businesses and caused significant unemployment.

Another topic Buffett should be upfront about was the lack of making any acquisitions and his poor timing of selling stakes in banks and airlines during 2020. Buffett did talk about repurchasing more Berkshire Hathaway shares which may contribute to higher earnings with lower outstanding share count.

Labor Of Love

I read the letters and search for Warren Buffett money lessons, a task I enjoy since graduate school for business. It is my labor of love. My goal is to share his wisdom with others, notably with my college students and, of course, my readers. It is an exercise of enjoyable reading for American history buffs and those who are in finance.  

Buffett letters to Berkshire Hathaway shareholders go back to 1965 and chronicle the growth and challenges of the company’s businesses. I always uncover Warren Buffett’s money lessons as I did in the current letter on investing, diversification, overspending, debt reduction, entrepreneurism, ethics, and more.

Many of Buffett’s iconic quotes come from these letters filled with honesty, integrity, sardonic humor, and corniness when it comes to America. He and Vice Chairman Charlie Munger share their intellect, and at ages 90 and 97, respectively, it is no small feat. Longevity may just be one of the benefits of being a longtime Berkshire shareholder, as Buffett shares in this letter. 

The Letter At A Glance

There aren’t any huge surprises though Buffett admitted to an error in overpaying for Precision Castparts in 2016. One of the best sections was his tribute to the founders of companies he purchased that show “success stories abound throughout America” as entrepreneurs without capital but with a strong work ethic. Look for “Mrs. B”  as a highlight that I embraced. 

The letter is disappointing for what Buffett omitted. He mentions COVID-19 only once, alluding to it when he commented on the furniture company’s temporary closing. Yet, the pandemic destroyed small businesses and caused significant unemployment which remains high.

Another topic Buffett should be upfront about his lack of making any acquisitions, even after the market downturn. He also divested his bank or airline holdings in 2020, presumably due to COVID-19, but he didn’t explain his actions in the letter. 

Buffett Remained On The Sidelines

Most importantly, why was he uncharacteristically quiet in 2020?

If investors were hoping the 2020 letter would fill in some of the gaps in understanding Buffett’s uncharacteristic silence much of last year, they are going to be disappointed. What was going on that Warren Buffett did not take advantage of the dramatic stock market downturn in March 2020 to buy bargain stocks? 

He often is a voice of calm and reason when markets are extremely volatile. Typically, Buffett uses this scenario as an opportunity to pick up some bargains, either by purchasing equity stakes or making acquisitions. He remains healthy, and the letter does not cause us to worry about him, at least as far as being a 90-year-old man.

Uncovering Money Lessons From Warren Buffett’s Letter To Shareholders


Misses And Mistakes

Warren Buffett addressed the company’s two primary goals: increasing earnings and acquiring large and favorably situated businesses. Management met neither goal. However, they repurchased 5% of Berkshire Hathaway’s shares, which reduces the share count, raising EPS potential. 

Admits To An Error On Overspending

The Precision Castparts acquisition made in 2016 has not lived up to its profit potential. Berkshire took an $11 billion write-down. Buffett’s mistake of overpaying for this asset took him only four years to acknowledge compared to his 20-year famed struggle with the textile business he inherited at Berkshire. That is a big step in the right direction to acknowledge a mistake, Warren!

Berkshire Is A Conglomerate

Buffett describes Berkshire as a conglomerate,” but only in part.”  It differs from the prototype of “aspiring conglomerateurs” who will buy up for mediocre businesses.  Many conglomerates overpay for companies with overvalued stock. Tools to foster overvaluation involve “promotional techniques and ‘imaginative’ accounting maneuvers that were, at best, deceptive and sometimes crossed the line into fraud.”

“Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts, and investment bankers, but whose creations ended up as business junkyards.” I knew several candidates professionally he may have in mind.

Buffett is not a fan of Wall Street, particularly in this letter, as we discuss later.

Controlled and Non-Controlled Businesses 

Berkshire Hathaway is a holding company with controlled and non-controlled businesses. Their controlled businesses are typically those they own at least a 50% interest in and manage operations. Berkshire owns equity stakes or holdings of marketable stocks in non-controlled businesses they do not operate. 

 Buffett and Munger view Berkshire’s holdings of marketable stocks as a collection of businesses. These holdings had a year-end market value of over $281 billion in 16 company equity stakes, up from its $108.6 billion costs. For GAAP purposes, Berkshire can only book the dividend income from these companies, not their marketable (but unrealized) gains.

Four Family Jewels

#1 Property And Casualty Operations And Its Insurance “Float”

Berkshire’s insurance companies are its valuable businesses. They have unique characteristics that allow them to enjoy  $138 billion of insurance “float.” Like other insurers, premiums paid by customers can be invested in securities when customers pay premiums for policies and the time they make insurance claims that are liquidated.

The float is money that doesn’t belong to Berkshire and will go to intended parties in the future. It is free money in the meantime for investments.

Unlike its competitors, Berkshire follows an equity-heavy investment strategy not feasible for most of its insurer competitors with regulatory and credit-rating restrictions.

Instead, these competitors invest their premium proceeds in bonds that have to generate low-interest income from the likes of 10-year US Treasury bonds, yielding 0.93% at the end of 2020. Buffett worries that some insurers and bond investors may turn to increase their returns by buying more risky loans, which are “not the answer to inadequate interest rates.” It is hard to find income in a low-interest environment without adding risk as we discuss here.

However, the 10-year yields rose to 1.54% in late February 2021, above the year-end rate. 

Berkshire’s #2 And #3 Most Valuable Assets

Buffett’s points to the company’s second and third most valuable assets that appear to be a tie, and frankly, seems surprising.  The tie in Berkshire Hathaway’s most valuable assets is between Berkshire’s 100% ownership of BNSF, America’s largest railroad based on freight volume, and its 5.4% interest in Apple.

A 5.4% Interest In Apple, Helped By Share Buybacks

Roughly 42% of the marketable gain comes from its now 5.4% in Apple due to share buybacks.  Berkshire began investing in Apple in 2016 and mid-2018, representing an initial 5.2% stake, and realizing regular dividends of $775 million annually. They had an $11 billion gain from selling a small portion of their stake.

Through the math of Apple’s share buybacks and Berkshire’s repurchases, Buffett told investors that they “own a full 10% more of Apple’s assets and future earnings” than they did in July 2018. Q to Buffett Does he think that Wall Street analysts give proper credit to this non-controlled interest in their price targets in Berkshire.

 BSNF – Its Railroad Business

Tied with the Apple interest is its 100% ownership of BNSF, acquired in early 2010. It has been operating since 1850. It has required substantial investments since Berkshire’s purchase.  BNSF paid significant dividends of $41.8 billion in total to Berkshire after it fulfills its business commitments and maintains a $2 billion cash balance, reflecting a conservative policy.

Railroads are a fascinating industry for any Americana history buff. Their challenges are well documented from their early start and are in a more mature stage.

#4 Jewel – Berkshire Hathaway Energy

Berkshire’s fourth family jewel is Berkshire Hathaway Energy (BHE), owned for 21 years. Unlike BNSF and most electric utilities, it pays no dividends to Berkshire. BHE is amid a long-term $18 billion project to rework and expand a substantial portion of its outdated electricity grid throughout the West. The project began in 2006 with a  2030 competition date. This project is complex and essential to be able to deliver clean energy.

Berkshire Hathaway Ranked #1 As Largest Owner Fixed Assets

Berkshire is the largest owner of American-based property, plant, and equipment with fixed assets of $154 billion, followed by AT&T, at $127 billion. That Berkshire fact alone means it is an asset-heavy company that invests a lot of capital, not necessarily generating the best-earning results or even a good investment.

As most business college students learn in school, good returns can come from companies with minimal assets in high-margin businesses that have expanding topline growth. Simply being asset-heavy is not a reflection of a beauty contest.

Underperformance In Berkshire Shares

Indeed, Berkshire’s stock performance in 2020 was poor, up 2.4% compared to the 18.4% terrific climb for the S&P 500. Relative stock performance in 2019 was also weak, with 21% underperformance.

Investors would have done better with a passively managed Vanguard S&P 500 index fund paying an expense ratio of 0.14%. That means an investor would be paying about $14 fee annually for a $10,000 investment in the fund. Actively managed funds have higher expense ratios of 1% or higher, costing a $100 management fee for a $10,000 investment.

American Prosperity Fuels Business Creation And Entrepreneurship

Despite his age, Buffett is still playing for the long term with high confidence in Berkshire’s businesses, management, and employees. He is proud of his extensive property and casualty business and his smaller companies. They remain treasures within the Berkshire family, and he shared their beginnings as business creations by individuals that are American success stories.

One reason Warren Buffett may have less of need for Wall Street bankers is that he does his research, making purchases for Berkshire, even on a handshake after getting to know the founders and its business potential.

Berkshire’s Gems:

  • See’s Candy, a West Coast company acquired in 1972. Mary See began the business a century ago, reinventing age-old candy with new recipes such as Buffett’s favorite peanut brittle.
  • GEICO (Washington D.C.) began as an auto insurance company by the Goodwins in 1936. It became Buffett’s first love when he bought shares in 1951 as a Columbia Business student, purchasing GEICO for Berkshire in 1996.
  • National Indemnity (Omaha) began in 1940 by the Ringwalts to compete against well-funded giant insurers. It was purchased in 1967 and is Berkshire’s largest business.
  • Tennessee-based Clayton Homes and Pilot Travel Centers (38% interest but 80% in 2023) were each begun by young men, continued by their sons under Berkshire’s umbrella.

A Young Immigrant’s Story Seems Familiar

“One question I always ask myself in appraising a business is how I would like, assuming I had ample cash and skilled personnel, to compete with it. I’d rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don’t even dream about, and they then pass on to their customers much of the savings.”

Warren Buffett, from Wikipedia

Buffett continued to buy Omaha businesses. Among those was the Nebraska Furniture Mart (NFM), with an enchanting story told in Buffett’s letter. The founder of NFM was Rose Blumkin (Mrs. B), who arrived in Seattle in 1915 as a Russian emigrant, unable to speak or read English. She settled in Omaha and used her $ 2,500 savings to start a furniture store in 1936.

By 1946, her business stalled, and she was down to $50. Louie, her only son, rejoined the store after four years in the Army. He earned a Purple Heart, having fought at Normandy on Omaha Beach on D-Day and sustained injuries in the Battle of the Bulge. He joined his mom, renewing the business, and by 1983, their business worth $60 million.

Buffett purchased the furniture business, leaving the Blumkins to manage the place. Mrs. Blumkin worked every day until she was 103, and Buffett wrote, “…a ridiculously premature retirement age as judged by Charlie and me.” The business still run by the third and fourth generation of the Blumkin’s and now has the three largest home furnishings stores in the US today.

 Immigrant Stories Are America

Their story reminds me of my own mother’s immigrant story. She became a thriving retail owner after coming to America as a Holocaust survivor with $5 in her pocket. My husband’s account tells me of his two great grandmothers’ export-import and furrier businesses. Each story is unique but has parallels of strong immigrant women, who came to the US with little money, didn’t speak English, were primary breadwinners in their families, and loved America.

Buffett’s post-script to the Blumkin story could be my family’s or the many immigrants that landed in this country. When Mrs. Blumkin’s large family gathered for holiday meals, she always asked that they sing before eating. That song was Irving Berlin’s “God Bless America.” I promised you corniness!

Buffett And Munger’s  “Special Kinship” With Individual Investors

In business ethics, stakeholders of a company have interests in the outcome of the decisions made. Typical stakeholders are the board of directors, management, employees, customers, lenders, and stockholders.

The BH directors want the company to delight the customers, develop and reward the company’s 360,000 employees, called associates of the company. It is up to the board to determine dividends, strategic direction, CEO selection, acquisitions, or divestitures to act in the corporation’s best interests and its owners.

The owners are the stakeholders that most matter in the letter written by Warren Buffett and to whom he most directs his comments. 

Owner Constituents:

  1. Warren Buffett’s Berkshire shares ownership will eventually be annually distributed to various philanthropies as part of his estate plan
  2. Passive investing is a fund strategy that tracks a weighted index such as S&P 500 index funds.
  3. Actively investing refers to a portfolio management strategy where portfolio managers make investments. Both active and passive investing are institutional investors who may either have a long-term focus or use computers employing algorithms to trade with a short-term mentality.
  4. Individual investors are investors whose purchases are of smaller volume than institutional investors. They may buy Berkshire shares for long-term investment or use Berkshire shares as a source of funds. 
  5. Warren Buffett’s special kinship for the individual investor comes from his early roots as a money manager through partnerships. He and his family invested in the partnership with these individual investors of million-plus investors who line up with Berkshire’s philosophy favored by him and Charlie Munger. They are more likely to have long-term perspectives. 

Original partners were longstanding holders of Berkshire shares, many of whom are descendants of the original partners. They share a commonality with Buffett by being old-fashioned long-term investors who trust the management to do the right thing.

Stepping Down To Retire? Nope

“Could it be that Berkshire ownership fosters longevity?”

Warren Buffett

Would it surprise you that there were no announcements of Warren Buffett or Charlie Munger stepping down and moving over for Vice Chairmen Ajit Jain and Greg Abel? Me neither. In their 90’s, they remain energetic and love their jobs.

Instead, Buffett spoke of Pilot Travel Center founder “Big Jim” Haslam, who recently authored a book at age 90.

Buffett pointed to the earliest investors–a group of Omaha doctors who formed a partnership. One of those veterans just turned  100 years old, and he and all the doctors kept their original Berkshire shares they received from the partnership.

Wall Street And Speculators

Throughout the years of writing letters, Buffett and Munger together have shown there is no love lost for Wall Street, notably the investment bankers, analysts, and those of that ilk. As a former analyst, I take no offense, recognizing the culture of working on “The Street”  is often difficult to maneuver.

This letter was no exception. I thought there was more than the usual Buffett bite in this read. We use his quotes when he refers to Wall Street.

On conglomerates, Buffett refers to the overvaluation of an overvalued conglomerates’ stock to make acquisitions, he says, “Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.”

After his tribute to individual investors, Buffett refers to the tens of millions of other investors and speculators who have “a wide variety of equity choice to fit their tastes.” (His emphasis). According to Buffett, these investors will find CEOs, market gurus, price targets, managed earnings,  “stories,”  and “technicians” who will “instruct them as to what some wiggles on a chart portend for a stock’s move.”

The Monkey And Its Dartboard

Buffett believes many of these investors will do well, saying:

“Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing of all the S&P 500, will–over time–enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original selections.”

His italicizing of “over time” reminds investors of the need for having a long-term perspective, something that may be lost in the world of computer algorithms and day trading.

Buffett’s Book Recommendation

Warren Buffett is well known to be an avid reader and shares many recommendations. In his letter, he recommends “Common Stocks And Uncommon Profits” written by Philip A. Fisher in 1958.

In the book, Fisher analogizes running a public company to managing a restaurant. He said, “If you are seeking diners, you can attract clientele featuring either hamburger served with a Coke or a French cuisine accompanied with exotic wines. But you must not capriciously switch from one to another.” You and your business’s message to potential customers must be consistent with what they find when going to your premises

Inflation Wasn’t Addressed In This Letter

Not surprisingly, Buffett did not comment on inflation as our economy is not yet near full employment. However, Buffett did comment in his 1980 letter when the inflation rate was 13.5%, giving us a glimpse into his thoughts on high inflation in the late 1970s and early 1980s:

“High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners.

“This ‘hurdle rate’ the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners – has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.”

Our recent post on Inflation And How To Protect Yourself From Its Effects

Final Thoughts

I learn from Warren Buffett’s letters to Berkshire Hathaway’s shareholders. The letters contain golden nuggets of money and life lessons. That doesn’t mean Buffett is beyond criticism, especially in his account of  2020 where omissions did not address many questions I would have for him. Becky Quick of CNBC in her standard interviews of Warren Buffett will ask the questions I raised in this article.

May 1st in the Berkshire shareholder meeting, and for the first time will be held in Los Angeles instead of Omaha. Buffett and Munger will be answering questions.

Thank you for reading! If you found any value in this post, please visit The Cents of Money for more articles like this. Why not become a subscriber so you can get our free weekly newsletter! Love to see you there!











Understanding Inflation And How To Protect Yourself From Its Effects

Understanding Inflation And How To Protect Yourself From Its Effects

We almost always have some inflation, meaning wages and prices increase which helps job creation and economic growth. The absence of inflation is deflation, which means declining prices and could cause or worsen a recession as businesses lay off workers.

For years, we have had low inflation with relatively stable pricing, largely due to the Federal Reserve’s efforts.  However, the low inflation levels could change as our economy rebounds from the pandemic. To find higher rates, you have to go back to 1990 when inflation was 6.1%. Double-digit inflation was more common in the 1970s, with its peak at 13.3% in 1979.

The Federal Reserve’s Monetary Policy’s Actions

The Federal Reserve has dual goals: maintaining relative pricing stability and sustainable economic growth with full employment. In the Great Recession and in March 2020, due to the pandemic-related economic downturn, the Fed steered towards accommodative monetary action to drop their fed funds rates to the lowest levels of zero-to 0.025% to stimulate the economy. 

Chair Powell and the Fed intend to keep interest rates low through 2022 and have said they would be more tolerant of inflation rates that exceeded their 2% target. There is a reasonable possibility that we will see higher inflation soon.

Will The Fed Stick With Their Accommodative Policy?

Despite their intentions to stay with an accommodate policy, the Fed’s policy mandate is to adjust their stance to changing information. The 10-year Treasury note’s yield has been rising and could signal higher inflation expectations. The Fed has tools to combat high inflation such as raising interest rates. 

It is not clear if the Fed will change gears but we can prepare ourselves. Should inflation increase to moderate levels above 2%, there are ways to protect ourselves from the potential erosion of our money. Moderate inflation may provide some benefits. You need some level of inflation to promote more spending.

Reasons Why We May See Higher Inflation

  • The Fed intends to remain accommodative for a while, with lower rates and liquidity.
  •  A potential $1.9 trillion fiscal support for those businesses and households in need is on the table.
  • The number of people getting vaccinated is rising, which may help boost the economy.
  • We are saving more with the latest US personal savings rate remaining high at 13.7%, about twice the rate seen in 2019.
  • Credit card balances at the end of 2020 reflect the largest yearly decline since 1999, reflects consumer spending is down.

These factors, if combined, may unleash consumer spending to kick up our economy and contribute to higher inflation. Offsetting these factors is high unemployment levels staying stubbornly high and may keep inflation low for now.

With low inflation, it has been difficult for anyone to earn any income in a low-yielding environment without taking on more investment risk. For investors with 60/40 retirement portfolios investing in stocks and bonds, respectively, some have shifted more significant proportion into stocks.

Investors will need to seek assets that are at least keeping pace with rising inflation. Holding cash in savings and checking accounts are suitable for liquidity purposes.  However, their safety feature will diminish as their values erode with rising inflation.  Later on, we have a list of investments that can protect you during a higher inflationary environment.

What Is Inflation And How Does It Affect Your Buying Power?

The definition of inflation is a steady rise in the general level of prices of goods and services. For example,  a gallon of milk cost $1.57 in 1975 rising to $2.20 in 1985 as a result of high inflation in the 1970s to early 1980s. It now costs $3.61 in 2021. The changes in prices are due to inflation, not scarcity. 

As a result of inflation, your purchasing power, the amount of goods and services that one’s income will buy, goes down. When prices rise, purchasing power declines, usually falling by the reciprocal amount of the price increase. Your paycheck may stay flat or go up more slowly, leaving you with less money. Union members may be an exception as they receive a cost of living wages as part of their contract.  

Calculating of Inflation

The US Bureau of Labor Statistics calculates inflation monthly using the consumer price index (CPI). The CPI is the best measurement of changes in prices of all goods and services purchased for consumption in urban households. This index tracks a market basket of food, transportation, housing, health care, and entertainment, broken down into over 400 subcategories bought by end-users.

The CPI is a cost of living index with a starting reference point from 1982-1984 as the base period of 100. The CPI for January 2021 was 261 reported on February 10, 2021, the cost of living would have risen 161% since the base period [(261-100)/100= 1.61 of 161%]. If car prices rose 15% over the past five years, you may be paying $34,500 for a car that had cost $30,000 ($30,000 x 1.15%).

Economists tend to look at sequential (quarter-quarter) or year-to-year changes in the CPI. The most recent sequential rise in January increased by 0.3%, and up 1.4% since a year ago. These price increases confirm the low inflation we have had since the Great Recession began in 2007.

The Purchase Pricing Index, or PPI, is similar to the CPI but measures wholesale prices from raw material through the production stages. When PPI rises, the higher costs often are passed on to consumers.

Low inflation has stymied returns from the low inflation environment from low-risk income-based investment portfolios as we discussed here..

What Contributes To Inflation?

There are various factors that may influence inflation.

Higher Demand

Demand-pull inflation occurs when total demand for goods and services in an economy outpaces supply. In the early 1970s, a strong economy caused oil prices to rise and pushed up inflation to 12% in 1974. Strong consumer demand for goods and services could result in higher spending leading to higher inflation.

Increase In Production Costs

A different way of rising prices than demand-pull can come from increases in production costs without higher demand is known as cost-push inflation. Higher production costs can come through increased wages, raw materials, depletion of natural resources, droughts, or higher taxes. Businesses are not always able to pass these higher costs onto consumers.

There have been conflicting views on whether raising the federal minimum wage to $15 per hour would cause inflation. One side of the argument points to wage hikes which have been slow to come for many employees, and therefore, increases are overdue. Wage growth often leads to a more robust economy.

However, the pandemic-related recession has caused high unemployment that has crippled many small businesses. Many believe that we should have an improved economy and higher employment before raising wages.

Natural Disaster Shortages 

Prices can rise when shortages in goods and services associated with natural disasters such as severe weather conditions, droughts, floods, fires, or avian flu. These disasters impact manufacturing plants, businesses, and residential areas. These unpredictable events may put temporary or long-term pressures on the production of goods, causing inflation due to scarcity.

In 2010, British Petroleum’s oil spill was the largest marine disaster in the Gulf of Mexico, causing higher gas and seafood prices. This area accounted for one-third of all seafood consumed in the US. About 40% of the Gulf waters needed to be closed to commercial and recreational fishing due to the spill.

Government Overspending

The US budget deficit has been rising from already high levels since the pandemic to counter the economic downturn. A government budget deficit occurs when expenses outpace revenues, not unlike the household budget.

Multiple fiscal stimulus packages related to hardships caused by the pandemic have been essential to provide funds to businesses and unemployed workers. This boost to government spending has required the US Treasury to raise capital and increase money creation by printing money. Both US Treasury and the Federal Reserve have increased money supply to increase liquidity and keep the financial markets calm, but a higher money supply typically leads to higher inflation.

Higher Prices From Higher Demand Post-Pandemic 

Many businesses lost revenues during the pandemic because of social distancing needs. As more people are vaccinated, our economy may rebound from strong demand in travel, entertainment, dining out, and going about life more normally. We may see some prices go up with increased demand and pressure to recoup lost revenues.

Different Kinds of Inflation

The various forms of inflation that are most worrisome are stagflation, deflation, and hyperinflation.


Deflation is when there is an overall decrease in the cost of the economy’s goods and services. When price declines are minimal, consumers may spend more. When deflation is more pronounced, we may demand less, expecting more price declines. Businesses, anticipating lower spending, will cut production to prevent swelling inventories, and layoffs may result.

This deflationary scenario is considered the opposite of inflation and its evil twin. The Federal Reserve uses a 2% inflation target as part of its monetary policy, preferring low inflation to deflation. Deflation can send an economy into a recession or a worse downturn, causing layoffs.


Stagflation refers to a stagnant economy reflected in high unemployment and high inflation simultaneously. This problematic situation, spurred by an oil shock, lasted from the early 1970s into the early 1980s and was challenging to resolve. 


Hyperinflation has not been around for a while. The closest the US experienced hyperinflation was during the Civil War, and I think that is where everyone wants to see it, that is, in history. Between 1921 and 1923, the Weimar Republic, Germany’s government, experienced hyperinflation rising over 300%!

Relationship Between Inflation And Interest Rates

Inflation and interest rates are not the same thing, but they relate to each other. There is a tendency for interest rates and inflation to have an inverse relationship. When interest rates are low, it stimulates economic activity, and inflation rises. But, when interest rates are high, consumers slow spending, the economy slows, and inflation declines. It takes time for the economic changes to take place.  

Investing For Protection From Inflation

As an investor, you should have a better understanding of inflation so that you can protect yourself from its effects. Some investments keep better pace with rising inflation than others. Real or physical assets often appreciate at or faster than inflation, and can provide better returns for investors. It is helpful when investing to understand the economy as we discuss here.

Money Market Securities

Cash and cash-equivalent securities make poor investments in a low-yielding environment. However, when inflation rises, the annual percentage yield (APY) will increase. Seniors have been clamoring for 5% CD yields which do not currently exist. Should inflation rise to higher levels, having cash to investing in money market accounts that are FDIC-insured will be a desirable place.

Build CD Ladders

The six-month CD rate hit a high of over 17% in March 1980 when inflation was 14.8%. I don’t think anyone wants to see inflation reach those levels or expects inflation of that magnitude. However, you can build a CD ladder to take advantage of rising APYs offered by the banks and credit unions.

You can start with short-term periods such as three or six-month CDs as inflation rises, lengthening their maturities as high inflation stabilizes, locking in nice returns. CDs are a less risky way to earn higher returns, especially if inflation is over 5%.

TIPS And Other inflation-indexed Bonds

Currently, bonds at fixed rates do not yield meaningful returns. However, bonds with variable rates are worthwhile investments in rising inflationary environments.

Treasury Inflation-Protected Securities, or TIPS, are issued and backed by the full faith of the US Government. They are considered the safest security, most liquid,  and rated AAA for the highest quality. Holders receive interest income twice per year at a fixed rate. These securities are an excellent way to diversify your portfolio for the least risk among other inflation hedges.

As inflation-protected securities, TIPs provide investors with a guaranteed real rate of return. The principal of TIPS increases with inflation and decreases with deflation measured by the CPI. At maturity, you are either paid the adjusted or original principal, whichever is greater. Like all Treasury securities, TIPs are exempt from state and local taxes.

Municipal Inflation-Linked Bonds

 Like TIPS, investors can buy municipal (munis) inflation-linked securities that track CPI and adjust the bond’s principal. These securities can keep pace with inflation better than a municipal bond without this feature.

Compared to TIPS, munis do not have backing from the federal government, are less liquid, and its ratings vary by municipality.  Funding purposes are to build roads, schools, airports, or infrastructure projects. To offset its higher risks, holders of muni bonds are tax-exempt from federal income taxes.

Corporate Inflation-Linked Bonds

Corporate bonds may have inflation-linked features, similar to the other bonds, adjusting to the CPI changes to better pace with higher prices. These securities tend to have higher risks that vary by the quality of the corporation. These bonds are less liquid than Treasury securities (every investment is!) and don’t have any tax-exemption benefits for their holders like Treasuries or municipal securities.

Variable-rate bonds have floating interest rates for coupon payments. Municipal and corporate bonds may have this variable feature that is adjusted to the current money market rate for their interest rate.


Gold is an inflation hedge and offers diversification for any investment portfolio. As a physical asset, gold is in limited supply. Central banks own gold in their portfolios as part of their foreign exchange reserves.

Gold prices were up 25% in 2020, among the best-performing assets. You can buy gold in its physical form as bars or coins. Typically, gold doesn’t pay dividends. However, some gold mining stocks pay dividends (e.g., Newmont and Barrick) individually,  as gold miner ETFs or SPDR Gold Shares or GLD, the bullion is in a fund.

Silver is an inflation hedge with a lower price point, attractive for retail investors.


Commodities are not just pork bellies. As an inflation hedge, it is a broad group with many different products you earn and store. There are three main categories:

  •  Agriculture commodities include food, meat, timber, and cotton.
  • Energy has crude oil and its refined products.
  • Metals categories are largely precious metals and industrial metals.

As the price of the commodity rises, the product that contains the commodity will likely rise. When aluminum or steel prices rise, manufacturers may pass on the higher costs to consumers.

Real Estate Investment Trust or REITs

Real estate property makes excellent investments when inflation rises, but it may require work to maintain. A REIT is a company that owns and operates income-producing real estate. There are many different REITs for equity, retail mortgage, health care or hospitals, and data storage, providing diversification for any portfolio.

They generate stable income from above-average dividend yields. That’s because REITs are required to distribute at least 90% of their taxable income to shareholders annually.

Common Stocks

Stocks, as an asset class, have historically provided returns that beat inflation. They are a sturdy investment for the 60/40 investment portfolio, with inflation-indexed bonds likely to do better when there is higher inflation.

Certain sectors may perform better than others. Energy stocks, much like the commodity itself, are often inflation hedges. Financial stocks earn better income margins on loans in times of inflation, and healthcare insurers have performed better when higher inflation appears.

We already mentioned REITs and gold stocks as a worthy area to invest in if inflation rises. Let’s add Dividend Aristocrat companies for inflation protection. They are represented by stocks that raise their dividends consistently for at least 25 consecutive years. There are different stocks in various sectors and are available as ETFs.

Another way to invest in stocks is to buy the S&P 500 index as a fund or ETF for inflation protection and diversification. If you choose to purchase stocks individually or as a sector, you may want to avoid utilities, consumer discretionary stocks, or companies with debt-laden balance sheets, like United Rentals.

Final Thoughts

Many are suggesting that higher inflation is on the horizon over the next few years. That may be as we haven’t had meaningful inflation since 1991. Higher inflation, so long as we don’t have stagflation or hyperinflation, is manageable. There are several investments that are attractive as inflation hedges for protection.

Thank you for reading! Share any comments or feedback, we would love to hear from you. Please share this post with others if you found something of value, and come join us at The Cents of Money!



7 Deadly Sins Of Investing And How To Avoid Them

7 Deadly Sins Of Investing And How To Avoid Them

In Seven, the neo-noir thriller, detectives David Mills and William Somerset (played by Brad Pitt and Morgan Freeman) track down a serial killer who uses the seven deadly sins as a motif in his murders. Investing may not be as lethal as a serial murderer. Here, we discuss the seven deadly sins of investing,  how they may impact our stock performance through destructive mistakes, and how we can avoid them.

What Is Investing?

Investing is a way to potentially grow the amount of money you have. The goal of making investments is to buy financial securities and hopefully sell them at a higher price in the future than what you initially paid. A saver can become an investor by giving your money a chance to work for you.

Investing is the best path to achieve wealth but it’s not a straight road. Unlike saving, investing involve some risks that could cause you to lose money.  You need to understand these hazards so you may be able to mitigate them. Investors purchase stocks and bonds with long term goals, unlike traders who have short term plans.

We can lose money when investing leads to emotional behavior or bad habits. Start investing as early as you can so you can earn money on top of the money you already earned, called compounding returns. Stay focused and purposeful so you can avoid behavioral biases which often play a detrimental role. Using financial discipline when investing can help you to achieve success

The seven deadly sins passed down from the Catholic Church of the Middle Ages may cause investors to perform poorly as modern examples for each deadly sin. The seven deadly sins are lust, gluttony, greed, sloth, wrath, envy, and pride.

1. Lust

When thinking of this deadly sin, I can’t help thinking about Jordan Belfort, better known as The Wolf of Wall Street. Belfort, or what we see of him, nearly defines every deadly sin. For that reason, he and the movie based on his memoir is pure entertainment and instructive for those who lust after sex and money.

As the first deadly sin, lust is a strong craving or intense longing such as sexual desire. It can also mean hunger for money. From an investor’s point of view, falling in love with your investments can be hazardous. Heavily favoring one stock may result in too much concentration risk in your portfolio.

Overexposure To One Stock Poses Concentration Risk

Take the example of Gur Huberman’s “Familiarity Breeds Investment” study in 2001, which involves ATT’s (“Ma Bell”)1984 breakup. When ATT split into the 7 Baby Bells, its shareholders received equal amounts in each new company.

Huberman found investors tended to retain a disproportionate amount of shares in their local Bell company. These individual investors held as much as $10K-$20K of a single stock, a higher concentration than the typical stock holding in a US household’s net worth.

Overexposure to one stock poses more significant risks to your portfolio that can sneak on you from slowing fundamentals. Investing in the company you work for is common for many people. However, if you have substantial ownership of shares where you work for and in your investment and retirement accounts, you have too many eggs in one basket. Instead, you need to diversify your portfolio with different stocks, industries, and asset classes.

2. Gluttony

Gluttony is the overconsumption of eating and drinking. We have all been there, gorging ourselves over an excellent meal, and feel our regrets afterward. Dante refers to this sin as “excessive love of pleasure.” We may be engaging in gluttony by overindulging our funds into less liquid investments without leaving a cash balance to buy stocks in a correction or pay off debt.

The recent excessive trading of GameStop shares by retail traders to shake up Wall Street seemed to be foolhardy, if not reckless. Sending that stock into the stratosphere caught everyone’s attention before coming back to earth but may have been costly.

Diversification, Asset Allocation, and Rebalancing

Alternatively, some people hoard their cash in a savings account, which generates little interest income, especially in this low rate environment. Investors need to be careful in allocating money into investments and having funds for emergencies, debt pay-offs, and retirement.

The antidote to gluttony is purposefully investing with strategies that embrace diversification, asset allocation, and periodic rebalancing.

3. Greed

“My name is Jordan Belfort. The year I turned 26, I made 49 million dollars, which really pissed me off because it was three million a week.”

The Wolf of Wall Street

“Greed is good…Greed, in all its forms, greed for life, for money, for love, knowledge, has marked the upward surge in mankind and greed.”

Gordon Gekko, Wall Street, the movie

Greed is not good, but it is very prevalent in the world of investing. The Wall Street (“the Street”) culture is all-consuming. It breeds greed and the need to make more than the person next to you. Not everyone working on the Street is greedy, or a criminal but temptations are there as they are everywhere.

The definition of greed as a sin is an intense and selfish desire for something of value, referring to wealth, material possessions, power, or food. Trendy investments are often collective greed that may become long term losers. Stock manias reflect “irrational exuberance,” a phrase used by then-Federal Reserve Chair Alan Greenspan when he commented on stock’s higher asset values than fundamentals warrant.

Bubble manias of the past–Dutch tulips, South Sea, Japan’s real estate and stocks, dot-coms, housing– should provide historical context to fear and greed in today’s markets. We hear about overbought markets but justify our purchases in SPACs, bitcoin, Tesla, Nio, so we aren’t left out of some of the apparent winners.

Lock-In Some Profits

How can we better deal with our greed, so we don’t become a casualty of fickle markets? No one gets hurt taking some profits off the table. I sell a small percentage of my gains regularly, usually, after a stock rises 20%-25%. This way, I may avoid my winners blowing up, an experience I have in my past.

Recognizing the need to be rational when investing is essential. It means doing your research, or if you feel you don’t have the time, are too emotional, or don’t have the inclination, you may be better off finding a financial professional to advise you in your best interests.

Take heed from another respected investor, Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” There is a Fear and Greed Index (FGI) that measures investor sentiment for those opposing emotions daily, weekly, monthly, and annually. Too much fear can send stocks down, while greed indication may push stocks up.

4. Sloth

Why do they have to pick on this cute animal known for moving slowly and spending most of its time upside down in trees? As a deadly sin, sloth translates to an absence of interest or not exerting oneself physically or mentally. Said another way, it is the avoidance of hard work and perseverance, or simply laziness.

We can usually spot sloths who are lazy about physical exercise. However, investing requires cognition or understanding of what you are doing with your money. 

Laziness can hurt you when you are jumping into stocks without rhyme or reason. A slothful investor may under-invest or spend too little time reviewing one’s portfolio. Investing is not a “set it and forget it” activity. Investors may mistake the buy and hold strategy as akin to that. The buy and hold strategy means that you have a long-term perspective, but you need to adjust your portfolio for new or changing information.

Be Aware of Biases At Work

Making investments requires research. Even if you are planning to use a financial advisor, research is necessary. You still need to find a person or team that works to understand your financial goals to work with you on your financial plan.

Slothful people may be prone to procrastinate over making decisions. The status quo bias occurs when someone may be resistant to change. The endowment effect is similar, but it occurs when someone places a higher value on what they already have. Shortly after my parents passed away,  I inherited stocks, such as ATT and IBM, conservative names appropriate for their portfolio but not necessarily mine. Yet, I held on to their stock picks as an example of an emotional bond that was irrational.

How To Avoid A Slothful Nature?

If you intend to monitor your portfolio, recognize the need to be proactive in having diversification, taking some profits, and making adjustments as warranted based on changing company fundamentals. There are many different kinds of low-cost index funds that have other purposes of fitting your investment strategies. For example, you may look at target-date index funds that may appropriately adjust holdings based on your age.


You can automate your paycheck by allocating a certain amount or percentage to go into retirement savings, so you don’t have to remember to contribute to this account regularly. It is essential to use your paycheck to make it easy to make investments, save money, and pay bills.

Consider talking to a financial planner to help you with your financial goals and make investments for you.

5. Wrath

“Heeere’s Johnny!”

Jack Torrance, off-season caretaker in The Shining

There are many images of wrath, but Jack Nicholson’s character comes to mind. Wrath is defined as uncontrolled feelings of anger, rage, vengeful, and even hatred. Jim Cramer’s very rational rant in 2007 (and transcript) as the financial crisis was unfolding, but the Fed Chair was not yet cutting the fed funds rate or adding liquidity to the markets.

When the stock market becomes volatile as it did during 2007-2009 and in March 2020, we have wrathful states that pose dangers for any investor. We become angry at bad decisions for keeping stocks too long or selling them too fast as many jumped to do as the stocks sold off in March in the shortest bear market in memory.

GameStop As An Example of Irrational Buying

Retail traders who may lack experience may seek greater risk than they can handle and make irrational buying decisions.  We saw some recklessness as buyers were bidding GameStop shares up to crazy prices beyond their poor fundamentals.

It seemed as though traders were trying to punish short-sellers such as hedge funds by engaging in combat. Stories of young investors who took out costly loans to buy shares at exorbitant prices are heartbreaking. We wrote a letter to young investors you can read here.

Studies suggest that anger may increase our risk-taking. Don’t be reckless and engage in using leverage like margin trading.

Avoid anger and other emotions when making investments. The market doesn’t hold grudges, know how to be vindictive, or have a memory from day-to-day.  Investors need to make adjustments for changing circumstances.

Learn From Mistakes And Use Discipline

Learn from your mistakes to not sell as the market is plummeting unless you need liquidity. Stay rational by not impulsively trading or investing. Give yourself some discipline by selling a losing stock after it drops 7%-8% to avoid a more significant loss. Consider taking some profits off the table to lock in those gains.

6. Envy

Have you ever felt envious? Of course, you have. Envy is a feeling of resentful longing often brought on by someone else’s possessions, better standing, or luck. Envy often leads to conspicuous consumption to match those around them at work or in the neighborhood. The phrase “keeping up with the Jones” may mean buying a new car or a boat to fit in with other people around you.

Investing circles may envy those who are “killing in the market” when they share their wins in the most trendy stocks or funds. What they may not be telling you is about the mistakes they have made in the past. At one time, people envied Bernie Madoff’s clients for above-average returns, and we know how that movie ended.

Herd Mentality Bias

Merrill Lynch may still refer to its financial advisors as its “thundering herd,” but following or copying the herd is a negative sentiment. In behavioral finance, herd mentality bias refers to the investors’ tendency to follow what other investors are doing in the market.

Think of dot-coms, GameStop, or popular acronyms for groups of stocks such as “FAANG,” standing for Facebook, Amazon, Apple, Netflix, and Google, before it changed its name to Alphabet.

It is not always the wrong move for individual investors to buy rising stocks that reflect heavy trading volume. Sometimes that is a healthy indicator of institutional buying, and it is painful to go against the smart money crowd. However, it will financially hurt when large investors start shedding stocks in their portfolios.

Don’t Chase Hot IPOs

Individual investors, who typically do not have access to new issues, often seek the hot IPOs after pricing in the primary market. The average first-day pop in the post-IPO stock is 20%, but hot names have shot up 80%-100% or more. Six months later, many of these stocks have fallen below their IPO price as the aura on these stocks is gone, a casualty to weaker fundamentals than expected.

Instead of being envious, learn about investing, risks, and develop strategies that work for you. Remember that Madoff’s returns were fictitious. It is in our nature to compare ourselves with others. However, you cannot be sure that you are looking at anyone’s full picture. Don’t waste your energy on envy.

7. Pride

“Details of your incompetence do not interest me.”

Miranda Priestly, The Devil Wears Prada

Pride or extreme pride is hubris, a Greek cousin to pride. Hubris means self-confidence, arrogance, and corrupt selfishness. One who has hubris irrationally believes they are better, superior and has excessive admiration of their self-image. Having this kind of pride is a self-destructive vice, especially harmful when you are an investor.

It is hard to work for someone like Meryl Streep’s Miranda Priestly, who always desires to be right. As an investor, the need to be right can hurt your ability to make money.

You may hold on to a losing stock and an unrealized loss rather than admit you are wrong. The justification for holding on to the stock is that it is only a loss on paper until you sell it. However, a 10% unrealized loss can widen if fundamentals warrant it. Loss aversion bias is the tendency to prefer avoiding losses to acquiring gains.

Overconfidence Bias

Another bias is overconfidence, which means having an egotistical belief in your investing acumen. It is challenging to perform better than the market averages, but those who are overconfident tend to operate with the false comfort they can perform well.

Instead, having a fear of being wrong in many investing situations can help you stay on your toes. The best investors avoid overconfidence and consider worst-case scenarios as medicine to remain aware of downsides in the market. They recognize that there is much that you cannot control about the market.

Avoiding The 7 Deadly Sins With These Investing Rules

To recap some of the ways you can avoid the investing pitfalls associated with the seven deadly sins:

Avoid concentration risk by diversifying your portfolio and do asset rebalancing.

Be aware of the emotions and behavioral biases that impact our decisions.

Don’t dump stocks during times of market turbulence.

Buying hot IPOs post-pricing is not a good idea, as there will be a better time and price to do so. 

No one gets hurt taking profits off the table to lock in gains.

Don’t engage in reckless strategies such as short-selling or using leverage to buy stocks.

Use automation to move money more quickly from your paycheck to contribute to your savings, retirement, and investment.


Final Thoughts

When investing, you may have run into the seven deadly sins that can impact your performance. Counter each sin, often wrapped in emotion or biases, with purposeful investing to avoid common mistakes.

Thank you for reading! If you found some value in this article, please share it with others. Consider joining The Cents of Money community by subscribing and getting our weekly newsletter.




Money Isn’t Everything! These Values Matter

Money Isn’t Everything! These Values Matter

According to my grandmother, “Poor or rich, money is good to have.” We need money to pay our living expenses and support who and what we care about most. Raising a family or taking care of our parents requires funds for health care, education, and the opportunity to enjoy the beauty of life. It can help us make a difference in the lives of others through giving.

Without money to pay our bills or invest, we may fall short of achieving our life’s goals and having financial security, independence, and freedom.

Money Isn’t Everything!

Money isn’t everything. It has its limitations. Obsession over money and wealth is unhealthy, mainly when it controls your life. It may prevent us from ever being satisfied with our life by continually needing to compare ourselves to others. Money matters because it is the tool we need in the absence of bartering. However, many things are more valuable and can help us achieve our full potential. Focus on those values that make you content. Review the values listed on Maslow’s hierarchy of needs. Self-actualization is the pinnacle of our self-fulfillment needs.

As individuals, we each have our list of personal values that give meaning to our lives. These values shape our personality, behavior, and attitudes. How often do we reflect on those traits that make us who we are? It is an excellent exercise to do to make sure you are going in the right direction. Since we serve as role models for our children, we need to be sure we send the signals we want them to see. They are worthy of us doing a check on our values and beliefs, which make us tick.

What We Value, Besides Money


1. Time Is A Precious Resource

Time is money, but it is so much more. If there is inequality in money and wealth, we have the same limited time. You can’t borrow or lend time at any cost. Anyone who loses family and friends knows the tragedy of time running out.

You can’t buy time unless you can pay someone to do a task for you, which may temporarily free you to do other things. But you can’t buy time in a permanent sense, no matter how much money you have.

Time is our most precious resource. As such, spend your time with people you most enjoy being with or doing what you most desire. Don’t waste your time; use it in productive ways.  Think in terms of daily accomplishments and whether you have achieved what you wanted to do. Like money, invest your time meaningfully. Find ways how to improve your time management skills here.

2. Manage Your Energy Wisely

Somewhat related to time is how we manage our energy. Energy affects our physical, mental, emotional, and spiritual well-being. We all have limits to what our mind and body can do. What is personal energy or power? It is the amount of effort or strength you are willing to devote to people, things, or challenges in your life.

There are people in our lives who are delightful. We get a good boost from spending our time and energy with them. Other people may deplete our energy through negative behavior or attitudes. In this challenging year, the pandemic has weighed on our lives by making it difficult to see our friends and families. We may have saved time and energy by working remotely, but we lost the uplift from seeing people in the office. Indeed, driving to work may give us the power of the bridge, separating our home from our jobs.

3. Your Health Is Our Vital Asset

We can’t take our health–physical, mental, and emotional-for granted. Yet, we often do this by not taking as good care of our body and mind as we can.  What is your health worth? Like time, it is priceless and precious. Eating healthy, daily exercising, and getting a good night’s sleep shouldn’t be hard to do. They are good habits to incorporate into your mindset. Even short daily movements have helped me loosen up considerably.

Recently, I complained to a friend about being more stressed about more things lately. He recommended several meditation sessions to try out. A few of the sessions were particularly helpful, so I work on those. Changing up your routine with good habits can be stimulating. 

I look forward to reading at night, playing music that fits my mood, and understanding my emotions better.

4. Family,  Friends, And Community

“First be a person who needs people. People who need people are the luckiest people in the world.”

Bob Merrill, lyricist Sung by Barbra Streisand

We need our family and friends for their love, affection, companionship, and to validate us. I come from a tiny family where friends were family and family were friends. The pandemic experience has required us to social distance for safety reasons. However, we have grown tired of this pandemic and staying apart from people we love. Human beings just don’t enjoy isolation. We thrive when we are with other people who are essential in our lives. They contribute to our sense of belonging, comfort, and self-worth and add to our lives’ meaning.

Community And Colleagues

Apart from family and friends, it is your community and your neighbors. Community is where you live and your colleagues at work. Work and community are spheres where you may meet new friends. We recently moved from a big city to a small town. We changed communities just before the pandemic is the ideal time for you to meet new friends. Our kids are fortunate to have met and formed relationships with good friends when they were at school. Those relationships have carried over to online and social media.

5. The Right Life Partner

Choosing the right partner you want to spend your life with is easier said than done. Only after years together can you look back and say you are fortunate to find someone to be with until you are old and gray. When you are in your 20s, how do you know if you both have the same interests, intellect, and standards?

You don’t. However, by loving one another and finding someone with who you can connect easily, learn from, trust, respect, and grow, you have the making of the right life partner.

My Life Partner

Speaking of myself, Craig and I connected instantly in what feels like a lifetime ago. We have similar interests, enjoy each other’s company. Challenges are in every relationship but knowing how to deal with each of them matters. Craig has always been my incredible support, and we both learn from each other when we have different interests or opinions. I feel lucky that we have built a tremendous enduring bond that has remained strong through the high demands of having active teens and two dogs.

6. The Virtues of Work

“Choose a job you enjoy doing, and you will never have to work a day in your life.”

Mark Twain

It has been my great fortune to find meaningful work most of my career. Every individual should explore what kind of work they most enjoy doing. For some, it is working with their hands to craft a tangible product. Many feel rewarded by helping others, while a significant number prefer making lots of money to afford a luxury lifestyle. To each, their own goals and road to success.

I have always found challenging work to be enterprising and energizing. Working has allowed me to grow my knowledge and skills outside of my home. With so many people unemployed these days, I feel blessed to have a job that will enable me to teach remotely. The virtues of working are plentiful. Work adds meaningful dimensions to your life besides compensation. I have learned new skills, expanding my knowledge, cultivating my career and reputation. Read more on the virtues of work here. 

7. Love of Learning

“Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young.”

Henry Ford

By being a lifelong learner, you can look at the world with fresh eyes. Learning can be formal, informal, or casual. You don’t have to learn in the classroom to pick up knowledge. Most of our education comes from outside of an academic setting. Picking up new information or realizing an original thought can give new highs and optimism. Whether you are learning for a career, hobby, or personal growth, never stop learning. There are only benefits to be found in lifelong learning.

Keep your brain healthy by find activities you enjoy and challenge yourself. There are so many resources and ways to learn. I have overcome some of my anxiety by improving how to cook, updating my tech skills, working on crossword puzzles, writing better, reading books I may have shied away from, and more. Chess is one of those games that I have genuinely wanted to learn how to play.

The Queen’s Gambit

I was fascinated by watching The Queen’s Gambit recently. Netflix’s series is a story of an orphan, Beth Harmon, who aspires to play chess in the male-oriented competitive world of the 1950s and 1960s. I played chess (poorly) with anyone who would play with me (only my brother) when I was in grade school. However, I would watch these intense chess players while strolling through Washington Square Park in New York City. It was so cool! Playing chess may have eluded me, but it has always sparked my interest in learning.

8. Protect Your Reputation

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Warren Buffett

Buffett’s quote on reputation is priceless. Your reputation is your brand, whether it is for a business or you. I cannot understate the importance of how you are regarded by your social circles, at work, and in your family. Reputation is your character and quality as judged by people. It forms the basis of respect and the currency of your worth. Cultivate traits like honesty, integrity, honor, and strong morals that should be in the workplace and your life. Manage your online presence for the quality of your character you are conveying.

The ruin of your reputation usually comes more quickly and efficiently than its establishment. It can be due to a lapse of ethical conduct or doing something legally questionable. Don’t post on social media without considering potential negative ramifications.

Rule of Thumb For Questionable Posts

If you are unsure, use the rule of thumb for questionable posts. That means first considering what others–friends, family, colleagues, your current or future employers–may think.

Words, photos, videos, or anything that are reflections of you and your values may last in cyberspace for all time. Protect your reputation carefully but not at all costs, which may make it harder to restore. Even now, you may already have some questionable items that may cause harm to you in the future. For example, you may want to pull that drinking contest you won with a trophy filled with bourbon, even if it is a relic of your past.

9. Experiences Over Possessions

Having experiences top buying things most of the time for me. Unique experiences tend to be more memorable and pleasurable. Traveling by camel in the desert, ziplining, and whitewater rafting bring tremendous rushes to our adrenaline. 

Studies have shown experiences bring people more happiness than do possessions. In their 2014 study, psychologists Matthew A. Killingsworth and Thomas Gilovich found it wasn’t just the experiential purchases (money spent on doing) that provided more joy than material possessions (money spent on having). The joy of waiting in line for the experience gave participants enduring pleasure as well as consumption. Millennials are known for their preference for spending on experiences, but boomers also favored experiences in this study. 

In a 2018 study with the Center For Generational Kinetics, Expedia found 74% of Americans prioritize experiences over products. Travel tops the list of experiences that make us happy the most. Of course, these results were before the pandemic when we were able to take trips. As a result of the pandemic, experiential purchases such as traveling, concerts, and movies, have declined. No doubt, the experience economy and sharing it with others has suffered as well.

10. Find Your Passions

Passion is a powerful emotion defined as a strong feeling of enthusiasm or excitement about doing something. Your passionate interests maybe those areas of topics, skills, or activities that excite you. Being passionate is often beyond a mere interest in something and can be an internal energy source. Like experiences, you are more engaged and engrossed in the activity or learning more about it.

Finding your passion in your job or career can motivate you to improve your performance. You don’t need to work in a position that directly aligns with your interests, but there could be an overlap between your work and other activities. Being excited about interests outside of work has its benefits. It allows you to develop new skills, meet new people, and expand your personal growth in a more balanced way.

For many years, I collected coins as a hobby, starting with Indian Head pennies, which led to my interest in the history of Native Americans, which I still am engrossed in today. Later, my husband and I became serious collectors of 18th Century American furniture and art, learning about American history.   I am always fascinated to know what passions other people have in their lives.

11. Gratitude and Empathy

“He who receives a benefit with gratitude repays the first installment on his debt.”


Expressing our thanks to all those we love and appreciate can help us live better lives—both the givers and the receivers of our gratitude experience many advantages. Our happiness rises, we feel healthier, stress declines, and it helps us cope with a range of negative emotions. Gratitude is our moral barometer and, when genuinely given, boosts our energy. Expressing gratitude is good for our finances as well.

Gratitude has been studied extensively in the past two decades. As such, gratitude is a “gateway’ to other positive emotions– joy, pride, motivation, and wonder.

A Shared Role In Our Brain

Gratitude is on par with empathy. Empathy, a relatively new term, is defined as the ability to understand and share another’s feelings. Having the ability to understand and share the feelings of another is empathetic. Scientists have linked gratitude and empathy because there is an exact role played by each in the medial prefrontal cortex  (MPFC) part of the brain. That part of the brain helps people set and achieve goals and contributes to a wide area of functions.

Feeling grateful and empathic are enduring values that produce benefits for the giver and receiver.

12. Financial Security

Sooner or later, I wanted to get back to money as the value we share with those mentioned earlier. Achieving financial security provides peace of mind when your income can cover your expenses; after having saved for emergencies and your retirement. Financial security requires adopting good habits that can support your lifestyle while you work toward financial goals. Becoming financially secure means not worrying about credit card debt because you pay your bills in full and will not pay interest charges. 

The importance of feeling financially secure allows you to have flexibility and freedom to control your life. Financial security means different things for different people. For me, it means working at a job for less pay but feels more rewarding when teaching college students. I feel fulfilled at the prospect of sharing what I know with others. Being able to schedule my time better helps me to face the needs of my family better.

Final Thoughts

Money isn’t everything, but it matters when you don’t have enough to pay your bills. Besides money, there is much to value in our life. We should protect, honor, cherish and nurture these values for giving meaning to our lives.

Thank you for reading! If you found this of interest, please share it with others. Consider subscribing to The Cents of Money and receive our weekly newsletter.







A Letter To Young Investors On This Market Frenzy

A Letter To Young Investors On This Market Frenzy

Dear Young  Investors,

This stock market has been fascinating, exciting, and mesmerizing, but I fear a trainwreck is coming. When GameStop’s stock value rises to $34 billion from nearly $279 million a year ago, and its fundamentals are still weak, this move is not rational. I want you to understand why and I have tips to share to minimize risk. There appears to be no reason for this stock to climb as it had. None of the analysts or the company management are signaling a positive change.  

 Market frenzy is not new, but the Reddit forum, Wall StreetBets, and its influential power are a way of making recommendations. This new tactic may pose significant risks, not just to the hedge funds but to the marketplace itself. Already we have seen fallout such as Melvin Capital. This hedge fund lost 53% from its short-selling in January. They are a professional firm that should understand the perils of short selling.

My sympathy and concern lie with the young and inexperienced investors. They may lose their motivation to invest for lack of trust in the financial markets. I applaud the higher participation of young retail investors and hope for their investing success. We explain what is happening and provide helpful investing rules and tips to minimize risk later on in this letter.

Higher Retail Participation

 I have a gray hair or two, but in my experience, I have not run across the message board and retail traders recommending aggressive purchasing several out-of-favor stocks (GameStop, Koss, AMC, American Airlines) to the moon. Social media’s influence on the financial markets, specifically Reddit WallStreetBets, and now the more than six million members, powered several stocks–Bed Bath & Beyond, Koss, GameStop, AMC–to extraordinary heights as these companies’ fundamentals remain poor.

The Reddit forum peppers its board with new Wall Street lingo. Terms like “yoloed a stock” translates to  “you only live once.” It means that you should make a significant investment in that stock. For more on traditional Wall Street jargon, you can read our post here.

Who would have thought we would see such volatility in Gamestop and other stocks as retail traders rage against hedge funds in positions of the longs against the shorts, the traditional vs. new breed in this David vs. Goliath saga. I am sure some institutional investors are riding this horse alongside the retail traders. 

Is there stock manipulation in this activity? Stock manipulation occurs when there is artificial inflation or deflation of security prices for personal gain.  I don’t know that anyone would be surprised if that is happening. I am sure the SEC, and its eventual head, Gary Gensler, are watching closely. 

How Will This Market Frenzy End?

Who or what is responsible for the market frenzy, and how will it get back to normal, if ever? We have seen this story with different stock names before, and we will see it again. It will be a learning experience. There will be books to explain it with hindsight and at least one movie to entertain and educate us. “Wolf of Wall Street” will pale next to this new story.

I will try to explain what is happening and make sense of it, although it is a moving picture. I will always encourage you to understand the stock market, its risks, and how to reduce them. You need to invest responsibly. Investing remains the best path to wealth.

In recent years, the industry changes have seen new entrants like Robinhood enabling young and inexperienced retail investors to access the financial markets. Is Robinhood the villain or the victim? They have had to raise substantial capital to facilitate activity.

Increased retail participation is a good thing, but investors need to understand the market risks and use financial discipline. 

As an investor and an ex-Wall Streeter (I was an equity analyst at Drexel Burnham and UBS), I have seen my share of events (e.g., Long Term Capital, dotcoms, WorldCom, and subprime mortgages) that caused extreme market volatility. Financial markets are regularly subject to volatility, but the (GameStop) frenzy seems quite different and more extreme. People always get financially hurt, sometimes devastating so and this time will not be an exception.


The astronomical rise to an irrational high of $483 (thus far) in GameStop (GME) in January 2020 was surprising given its rational $4.21 stock due to its poor fundamentals. Comparisons to Blockbuster in the then-emerging Netflix era are apt. GameStop, brick & mortar retail business selling video games and consoles during COVID, is not a recipe for success. My teen son downloads his games now. GameStop was once our favorite destination, but that was years ago.

A year ago, the shares traded at $4.21 per share with a $279 million market cap. With its fundamentals declining, GameStop has been a target for short-sellers, notably by hedge funds. Reddit forum has driven stocks to record levels initiating short squeezes (explained below) on institutional investors. Quotes from WallStreetBets are helpful to understand the movement to affect stock prices. 

This frenzy is more significant than the GameStop action, which has spread like a contagion to several other stocks, including AMC, Bed Bath & Beyond, American Airlines. Stock and options traders, many Robinhood customers, have collectively used their influence via WallStreetBets, a Reddit forum, to support GME’s price.

Since the start of 2021, GME has been hugely volatile, going up 600%. According to S3 Partners, short-sellers have lost $5.05 billion, resulting from short squeezes. Let me explain these terms, so you can better understand short-selling and short squeezes.

Short Selling And Short Squeezes

Traditionally, when you buy a stock, you hope the stock up above your purchase price, and you have a profit. Short-selling is a bet that the stock will decline, and you will buy the shares by borrowing the shares, speculating you can buy them at a lower price in the future. It is an advanced strategy and should be done only by experienced traders who will hedge with call options.

A short squeeze occurs when a stock, like GME, rises sharply, forcing short-sellers, who expected GME to fall, to have to buy shares to minimize their losses. If many traders are doing the same thing, it places upward pressure on the stock price.

Hedge funds heavily shorted GME. Its short interest was $5.51 billion, up from $276 million a year ago. The percentage of GameStop’s float (e.g., regular shares available to trade) sold short was 139.57%! That is an obscene number. The GME situation is ongoing, pinning the WallStreetBets traders against hedge fund companies or David against Goliath (the hedge fund companies). The facts are not fully known.

Even My Daughter Gave Me Advice

What was scary for me was a conversation I had with my daughter, Alex, this week. Alex is bright, a terrific student, but she doesn’t know much about the stock market or care. She surprised me when she asked if I owned any shares of GME or any of the pumped-up stocks. When I assured her that I didn’t, as she turned from me as if I were a loser, she said, “But, Mom, you could have made so much money!!!!” I love making money, but I do try to limit my risks.

So, this letter is also for my kids, Tyler and Alex, my college students, and of course, my readers!.

How Did We Get Here?


The Democratization of The Stock Market

More retail investor participation in the financial markets did not happen overnight. The household distribution of US stock ownership has been unequal for a long time. 

According to US Census, in 1952, only 4.2% of the US population owned common stock. A 2020 Gallup Poll reported that 55% of Americans hold stocks, but the ownership is mostly the wealthy. Based on net worth, the top 1% own the vast majority of stock market value at 88.1% as of 4Q2019.

In early 2020, with market downturn associated with coronavirus, many young first-time investors signed up for new accounts at online brokers, traditional and Robinhood. That trend of increased young investor participation will hopefully continue unless the GameStop phenomenon ends badly.

Reduced Barriers To Entry

There have been reduced barriers to entry driven by deregulation, technology, reduced cost, and increasing competition. Competition emerged first in the brokerage industry with discount brokers and online brokers.

Robo Advisors

The rise of smartphones drove investors to innovative and disruptive digital services. Robo-advisors such as Robinhood are investment management companies that use computer-generated algorithms and potentially human-based advisory services to develop a stock portfolio. Their products are stocks, funds, options, gold, cryptocurrencies, all available at zero commissions, lower management fees, and no-to-low minimum requirements.

They serve young and first-time investors with easier access to low-cost investing via trading apps on an equal playing field. These fintech companies have fully digital platforms with easy to use interfaces, sophisticated trading tools, and research resources.


With at least 13 million customers, Robinhood is among the largest online investment platforms for stocks, options, and cryptocurrency trading. They don’t require their customers to have a minimum of money in their amount, so they cater to all people, not just the wealthy.

Robinhood attracts scrutiny from the SEC, Congress, and the public. They have increased their educational resources for beginning traders and investors. It is not clear how effective that will be in reducing risks associated with speculative trading.

Their average customer is in their mid-20s, with significant Millennial representation. Due to the madness occurring in the markets, Robinhood has restricted transactions in several stocks to closing positions only and raised their margin requirements as of this writing. CEOs Vlad Tenev and Baiju Bhatt asserted that many of their customers use Buy and Hold strategies with a long-term perspective.

Are Young Investors Taking On Too Much Risk?

Retail investor participation has grown in recent years. Many people began investing during the lockdown as sports, entertainment, and gambling establishments closed.

As a college professor, I encourage my students to begin investing in the market through the Stock Market Game. Some already have Robinhood accounts and are trading stocks, options, and cryptocurrencies. Investing in stocks, which typically generate higher returns than bonds, is the best path to achieving wealth. Higher returns come with higher risks that you need to understand to mitigate those risks.

8 Tips For Young Investors


1. Get Your Finances In Order First

Never invest money in the market you can’t afford to lose. Before investing, make sure you can keep your lights on by paying the utility bills. Your finances should be sufficient to cover your necessary living costs for a reasonable time. Don’t use your rent money to trade or invest. Instead, set some emergency money aside.  

2. Can You Explain Your Strategies?

Don’t take wanton or reckless risks by engaging in strategies you don’t understand. I know people have FOMO (fear of missing out) when they see their friends make a ton of money by adding many risks. Learn through YouTube Channels and resources available to you to understand the downsides in any stock trading or investing.

If you bought X stock, could you explain its fundamentals and why it is attractive at current valuations to a friend or colleague? I am talking about a 30-second pitch, but it is good practice to know why you are investing.

3. Don’t Use Leverage Through Margin Buying

Buying or trading stocks on margin is a significant risky move. When buying shares in a company, you may use some of your own money and borrow the rest from your broker.  People use margin buying to make higher profits through the added leverage. By paying only a small portion of the total amount, investors amplify their purchasing power. However, it doesn’t always work in your favor.

Essentially, you are borrowing money or using leverage to pay for your investment. Margin calls are an extension of credit, with your securities acting as collateral. Typically, you can borrow up to 50% of your intended investment, and your broker has a 30% margin requirement, although it can vary.

A Margin Requirement Example

Mary will borrow $25,000, buying  $50,000 of stock ABC. Under normal circumstances, If ABC drops 30% to $35,000=($50,000 x .30). Mary’s equity is now  $10,000 = (35,000-25,000 borrowed). Her broker’s margin maintenance requirement of 30% rears its head, meaning Mary needs to have $10,500 in her account= (35,000 x .30), requiring her to add $500= ($10,500-$10,000) for the margin call. 

The risks you may face are largely out of your control. When the market becomes volatile, brokers may raise margin requirements to as high as 100%.  A few brokers, including Robinhood and Interactive Brokers, raised margin requirements to 100% on specific volatile stocks like GameStop and Bed Bath & Beyond. You either can satisfy their requirement or sell the shares. If your stock has plummeted, and you don’t have the liquidity to meet the margin call, you must sell the shares.  

4. Short-Selling Is Complicated

For experienced traders and investors, short-selling has its merits, but there is no place for inexperienced traders or investors. A stock’s value may decrease for many reasons, including lower revenues and profits, product failures, or increased competition. Short-selling has been in the press, especially related to GameStop, which has a very high short interest and brought out a swarm of retail traders who have sent GameStop in the opposite of where the short-sellers want it to go. Watching the market volatility reminds me of the dangers of short-selling and margin buying strategies.

A short sale of a stock involves selling a stock you don’t own. Therefore, you have to borrow the shares to sell them on the market, speculating that the share price will decline. The short seller must replace the shares at a later date. As you borrow the stock for the short sale, this trade requires margin, but it requires a higher amount because there is no collateral, as we discussed.

The Fed requires all short sale accounts to have 150% of the implementation’s short sale value. This percentage is a minimum, but the broker can adjust the requirements upward.

An Example of A Short Sale

Let’s say you believe GM is overvalued at its current price of $35. You’ve done research (hopefully!) and found out the company will generate lower revenues than the consensus believes due to potential product recalls. You call your broker and arrange to borrow 100 shares of GM at $35, or $3,500 selling price, and the broker sells those shares.

A few months later, GM shares drop to $27, so you instruct your broker to purchase 100 shares at that lower price, or $2,700. These latter shares are given to the brokerage firm to repay the borrowed stock.  You pocket $800, or the difference between $3,500 and $2,700.

A Short Squeeze

This example is simple and straightforward. Imagine a transaction with GME and shorting 10,000 shares at $5 per share, or $50,000, expecting GME to go to $3 per share. Instead, GME shoots up to $300 per share, and days later, it is worth $3 million. There have been instances of short selling disasters. For example, when a company gets a higher buyout which lifts its shares. The GME situation is different for the messaging boards and how the traders collectively pushed up several companies’ stocks.

Use Call Options

Short selling is not for the faint of heart. You can limit your risks by using call options to hedge against a possible rise in the stock. Without an option, you are opening yourself up to unlimited losses. Targeted hedge funds (e.g., Melvin Capital) lost billions on GameStop, and they have experience. What makes young traders believe that they can handle these risks?

I have not engaged in short selling, which would mean I would want a stock to go down. However, some short-sellers provide valuable insights by uncovering stocks that may be overvalued or fraudulent. Short-seller Jim Chanos haunted the shares of Enron in 2001 by uncovering Enron’s accounting scandal.

Day Trade Is Challenging

The stresses of day trading are very high. Traders rapidly buy and sell stocks throughout the day, hoping to make more profits than losses. Unfortunately, many make more losses at first. They tend to borrow money, buy money on margins, and requires access to capital.

There is a low chance of success in earning an income as a day trader, yet it is a challenge to do this only on a part-time basis. It may sound exciting as you can do it from your home, but there are costly technology needs and a good stomach to handle the pressures. Swing trading is an alternative that has some similarities to day trading but is usually is done over a more extended period and not your full-time job.

When the market gets volatile, don’t bail by selling all your stocks. 2020 was an extraordinary year for many reasons. It was a year in which the stock market proved its resilience.

From its February peak to  March 23rd bottom, stocks dropped nearly 34%. However, the S&P 500 index resulted in a 16% gain for the year and a 44% gain for the NASDAQ. Imagine if you sold your shares on March 23rd?  Many people did sell, learning a lesson about holding on to stocks during market volatility.

5. Buy And Hold Strategy

I am not a short-seller and don’t use leverage or day trade for fear of taking on too much risk. I have made some poor choices through the years, such as selling stocks too early, being too greedy, not having enough patience, or buying a stock I didn’t understand. My investment strategy is more deliberate buying and holding onto fundamentally strong stocks for the long term.

This strategy has some advantages like compounding, lower capital gain tax rates, and waiting out the turbulence and dips, or buying more stock for dollar-cost averaging to reduce my basis. Compounding is an excellent tool to grow your wealth in retirement and taxable accounts exponentially. That said, you do need to use financial discipline. 

6. Take Some Money Off The Table – Don’t Be Greedy

It is a good idea to sell some stock to lock in a 20%-25% gain. I have learned the hard way, watching my stocks climb as if going up were inevitable, losing money in dotcoms and elsewhere. The old Wall Street saying remains close by with these words, ” Bulls make money, bears make money, pigs get slaughtered.” If you have some big gains from GameStop, you probably want to lock that in even if you will pay the higher tax rate.

On the other hand, if a stock is not working as you thought, it may be time to admit a mistake. Consider limiting your losses by selling the stock after it is down 8%. You want to revisit its fundamentals as something may have changed for the worse.  It hurts a lot when you see a bigger loss in a stock you still own. Often, cognitive biases, such as loss aversion, prevents us from giving up on one of our losers.

7. Diversification Minimizes Risk

Concentration in one stock is risky. What if you yoloed, and put a significant amount of your money in GameStop, and it suddenly dropped precipitously. It did that when Robinhood restricted GME and other stocks but removed the restriction when they received criticism. If not GameStop, it could be another stock name that becomes angel but then loses its wings.

Diversify your portfolio is a way to minimize risk. I buy stocks outright, but I remain diversified by buying index funds and ETFs. As you build your wealth, you should make sure you have diversified with other assets, including money markets, bonds, real estate, and gold. 

8. Don’t Gamble Or Speculate Without Some Knowledge

Investing in the markets is a way to use your earned money to make more money than you lose. Don’t gamble your hard-earned dollars on anonymous tips or speculate without trying to understand its risks and rewards.

As I wrap up this letter, I believe you can find success in investing and find ways to make it fun and rewarding. Don’t get sucked into strategies that won’t benefit your finances. As you make more money, you can use your generational influence to make societal changes through work and charity. You don’t have to make money to do good in the world. Don’t get discouraged when you lose money. Make that a learning experience.

Final Thoughts

The unusual market activity prompted by social media-driven calls to buy stocks to counter heavily shorted stocks borrowed by institutional investors is dangerous. It serves as a reminder that investing is never a sure bet. There is a generational opportunity for young people to participate in the financial markets.

I hope that they are rational investors that use common sense and discipline to stave off potential losses. It will be a shame if these investors are vulnerable to losses and are mistrustful of the financial markets as some of these traders engage in possible revenge strategies.

Thank you for reading! If you found value in this article, visit us at The Cents of Money for other such reads.






How To Grow Your Potential For Financial Success

How To Grow Your Potential For Financial Success

“It doesn’t matter how many times you fail, you only have to be right once.”

Mark Cuban


What Are Your Chances Of Reaching Success?

100%! (If you want it!)

Growing up, I heard snippets like “do the best you can,” “apply yourself,” “be productive,” and “accomplish things daily.” Sounds so easy.  If I follow this advice, I will be successful. But, successful at what? Ah, that was the hard part! You need to define your own goals in your field, finances, and life. Make sure they are reasonable and achievable.

You Don’t Have Mark Cuban’s Wealth To Be Successful

Being rich is not necessarily a sign of success. Understand what you want in life. Set and align your goals with a plan to achieve specific results. If you plan to reduce or eliminate credit card debt or student loans, getting to a lower balance is quite an accomplishment, and then set your sights on a zero balance. Once you have a lower debt balance, take steps toward your future by establishing your retirement savings plan.

My college students feel great when they are able to get better grades in the hopes they will be able to complete their degree and get a good job. Today, I often guide my college students in picking the “best” majors, careers, and how to succeed at work. Rather than share my successes, I enlighten them by sharing my failures. Failure is a likely outcome of taking risks but worth a try. People at the top of their fields have often failed many times before achieving financial success. We need to learn from our mistakes.

Related Post: What Every College Grad Should Know

How To Grow Your Potential For Success:


Take Risks Early In Life And In Your Career

When you are young, take risks that will add to your portfolio. Step out of your comfort zone. What is easiest is not necessarily a good choice. Seek challenges to expose yourself to different environments. In the early stages of your career, build character, skills, and experience. That matters more than how many “A’s” you had on your transcript.

Employers will ask you about the greatest risks you have taken. How did it work out? Working hard is simply the minimum. They want to know how you dealt with challenges and failure. Failure is acceptable if you learned from it. Those experiences provide valuable benefits. There are no linear courses to success but learn how to deal with obstacles.

Don’t Feel Locked Into One Major And Career If Not Suitable

Many successful people have changed career paths. I was a liberal art major. It was a safe choice for someone who was 16 years old at the time. I didn’t explore any other areas of study until I went for an MBA several years later. Even then, I chose an accounting major, but I added finance and investments to my studies. My business career went through some modifications. Then I became an equity analyst at an investment bank, which I enjoyed for many years.

Pursuing one field shouldn’t stop you from exploring peripheral or different areas. Michael Jordan was among the greatest scorers in NBA history, winning a record ten scoring titles and averaging 30.1 points per game. Then, at age 30, he retired and pivoted to professional baseball. He signed with Chicago White Sox’s minor league system for a short time.

Could Jordan have succeeded as a professional baseball player? Many experts believe he was promising and had the potential to remain, but he returned to the NBA a year later. We will never know. At least he challenged himself by making a career move.

Love What You Do

It is easier to work hard and find success if you enjoy what you do for your career. Steve Jobs said, “The only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” Finding purpose and meaning in your job increases motivation, engagement, and self-worth.

According to a Gallup Poll in March 2016, only 34% of the US workforce were engaged at work. Be committed to your work or consider changing jobs you may be happier doing. It is hard to be successful if you are spending so many hours of your week not engrossed in your work.

“Building A Cathedral”

There is an old parable about three bricklayers. It dates back to the great fire of 1666 that leveled London. Asked what they were doing, the first bricklayer said, “I’m putting one brick on top of the other,” the second bricklayer replied, “I’m building a wall,” and the third bricklayer smiled and added, “I’m building a cathedral, a House of God.” That bricklayer had found his calling.

Find meaning in your job and career. Valuing how you spend your time provides satisfaction. Successful people often tell others that they felt most happy when making contributions to society, whether in medicine, technological developments, entertainment, raising capital, teaching, crafting glass, wood or leather.

My mom told me a story about when she worked in a shoe factory. Having just arrived in America, she sat next to a woman who had sat at virtually the same sewing machine for 40 years. This woman was engaged as she put the sole, toe straps, lining, and other materials on the shoes with outright pride. Her job gave her meaning, just like Anthony Mancinelli, the world’s oldest barber at 108 years. I have spoken of Mancinelli in the past as someone who enjoyed cutting hair for decades. Spend your time working on what will make you happy.

 The Evolving Workplace As An Opportunity For New Employees

Changing workplaces is happening far more rapidly than ever before. Those days of staying at the job for 40 years seems prehistoric now. The work environment is different as well. Thanks to digital technology, robots may eliminate some jobs, while other areas are emerging in digital marketing, artificial intelligence, software architects, and robotic engineering. These emerging areas may create more jobs and be a good opportunity for tech savvy Gen Zers entering the workforce now.

Employability is a moving target. You need to stay fresh and up-to-date in your field. Keep abreast of upcoming developments in your company and industry. Make yourself invaluable by accepting challenges in your department or a neighboring one. Seize every opportunity that adds skills, knowledge, and recognition of your abilities.

Embrace Learning New Skills

Adopting new skillsets will make you more valuable. Business leaders point to growing needs in their companies that remain unfilled because they can’t find the right candidates for specific skillsets. They refer to soft skills–interpersonal communication, initiative, problem-solving, critical thinking, collaboration with others in an organization.

Developing soft skills in school and at work makes you an attractive candidate. With the rapidly changing landscape, employers recognize that prospective hires may lack the experience needed. Therefore, they are seeking potential over performance. Adapting some of these skills is a massive opportunity for young people in college, those newly entering the workforce, or people willing to adopt new skills.

 Business leaders are seeking young people with soft skills to serve in their companies. It has become clear that companies are more open to looking for personal and academic characteristics with less experience than they had been in the past. The workplace needs to change to fit the macroenvironment that is digital, connected, and global.

In Deloitte’s 2016 Global Human Capital Trends report, 92% of those surveyed said reinventing the organization is a top priority. Digital technologies are disrupting business models. Companies need to be embrace innovation, greater diversity, a learning culture, and upgrade skills. Those positioned to fill these growing needs will be successful. Flaunt your strengths such as being multilingual, understanding diverse cultures, working well collaboratively, or understanding data analytics.

Age Is Not A Limiting Factor To Finding Success

Young and old, success can be rewarding. At age thirteen, Alina Morse is CEO and founder of Zollipops, a candy company with sales in the millions. The idea of lollipops started as an idea when Alina was seven years old. Alina’s early success is a far more unusual example than the press would have us to believe. Yes, in specific careers like sports, people peak at young ages due to physical limitations.

On the other hand, many have become highly successful later in life and perhaps not even in their planned careers. Stan Lee created Marvel Comics at age 39 years. Vera Wang entered the fashion industry at age 40 after failing to make the Olympic figure skating team she had targeted.

Age should not be a limit to success. How about John B. Goodenough? At age 97, he won the Nobel Prize in Chemistry and is its oldest recipient. He still works, developing new polymers in his lab. Upon winning, he said, “Don’t retire too early,”

Enjoy The Sweet Smell of Success

Sometimes we work so hard and stress about the next stage of our career. We may feel guilty, having just earned a big bonus or promotion that your co-worker hoped to get. Concerns that we won’t get that chance again worry us. How may we further preserve a good reputation that we forget to come up for air?  We don’t even stop to realize that we are in that sweet spot of success. If you are at the pinnacle of achievements, learn to enjoy that moment and sustain it. Money and success can make us happy.

I have heard authors say they wished that their first hit novel came later in life. Young actors who get early recognition in the form of an award find it hard getting another. You can find one-hit wonders in many fields, not just in music. This refers to those who achieve mainstream popularity for one piece of work and gain momentary success.

Sometimes your brief success comes so early that you didn’t have time to be mature. Avoid the arrogance that may come with your achievements. Sustain your success by recognizing those who helped you and that you were fortunate. Keep up with learning in your field, evolving technology, and changes in demand. Keep a long term view and be patient.

Behavioral Science: Perseverance, Resilience, And Grit

Generally, success doesn’t just appear out of the blue. You need to work at improving your skills and nurture your abilities over long periods of time. Behavioral scientists pointed to certain factors such as perseverance, resilience and grit that lead to successful accomplishments.

Growth Mindset

Carol S. Dweck, Professor of Psychology at Stanford University, has researched the mindset psychological trait. She points out that people who believe they can develop skills through hard work are far more likely to be successful than those who don’t. They have a “growth mindset” and benefit from being “can do’s” and are often reliably great employees.

Practice Makes Perfect

Work hard and persevere despite setbacks. Endurance is reflected by those who strive to increase their abilities, who optimize performance through intense practice over the years, whether practicing an instrument or experimenting in a lab. In a 1993 study, K Anders Ericsson, a behavioral scientist, found that certain factors, such as prolonged efforts of practice propel people to reach high levels of performance.

Success usually doesn’t happen without the occurrence of failures. Achieving success usually happens to those that are more resilient. They can bounce back from disappointments or failures. The trick is knowing how to dust yourself off and move on.

Grit= Passion + Perseverance

Angela Lee Duckworth, a behavioral scientist expert, published Grit: Power of Passion and Perseverance. The definition of grit is the tendency to sustain interest and effort towards long term goals. Grit is associated with self-control and deferring short term gratification.

Delaying gratification was the basis of The Marshmallow Test, conducted by psychologist Walter Mischel at Stanford University in the 1960s. He studied children offering them a choice between one small reward given immediately or two rewards if they waited a short period. The reward was either a marshmallow or a pretzel stick and up to the child’s pick. Those willing to delay gratification correlated to success.

In follow-up studies decades later, Mischel found correlations between delayed gratification and competence and higher SAT scores.

Having Money Is Not Necessarily A Sign Of Success

Ayn Rand famously said, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” There are countless ways of having money– earning, investing, inheriting, and winning–and losing it. Examples of poor money management, bad investments, and squandering fortunes are plentiful. They are often what derails our achievements.

Signs of success are everywhere. Most importantly, it is how you measure it and over what time frame. What did you accomplish today, this year, or in life? What did you set out to do? 

There are many ways to succeed and feel satisfaction. You can feel success by publishing a book, finishing a project, paying down debt, cleaning out your garage, raising good children, or even winning the Nobel Prize at age 97 years.


Final Thoughts

Your potential for success is a matter of pursuit. While luck often plays a role in achieving success, you have some control in realizing your potential. Leverage your advantages, take risks and learn new skills. Don’t play safe just to avoid making mistakes.  Find and enjoy your sweet spot of success in your field, finances, and life.

To sustain success, use sound money management as your financial engine. Sometimes we derail our achievements by overspending, delaying retirement savings, and not recognizing the importance of investing for the long term.

Put a sound financial plan in place to properly handle raises and bonuses when you realize success at work. See our post on avoiding lifestyle inflation. Spend within your means, save for retirement, and make investments, and use debt sparingly. These are all ways to stay on the path to a comfortable life. It is a good idea to measure financial success to see where you stand.

Related post: Reaching Your Goals With Better Money Habits

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