It's easier to make money from your money than your work

In the second part of our serialisation of ANDREW CRAIG’s book How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely, Andrew explains that, although few people realise it, it has never been easier for ordinary people to invest and find success in the stock market.

Andrew has worked in the City of London for over 20 years; and in 2011, he founded plainenglishfinance.co.uk, a personal finance website that aims to help people to improve their finances.

Most people do not have confidence in their abilities, when it comes to investing their own money.

Be honest, did you spend more time researching the purchase of your last car (or pizza delivery or pair of jeans for that matter) than you have ever spent learning the best way to look after your money or reading a solid “how to invest” book? Do your eyes glaze over when you hear words like bond, equity and commodity?

If you answered “yes” to the above questions, don’t worry. You are in good company. In my experience, this is true of the vast majority of people. Crazy as it might sound, this includes many financial advisers and people who work in financial services, for reasons we will examine shortly.

This is a huge shame given that the number-one secret of nearly all truly wealthy people throughout history is that they do understand money and how they can make more from it.

Over time, it is actually far easier, quicker and less hassle to have your money (capital) make you money than it is to make money from your work (labour). Whether we like it or not, we live in a capitalist era. One of the fundamental truths of capitalism is that capital makes a great deal more money than labour; it should be pretty obvious to you that people who own businesses tend to make far more money than people who work for them. This is truer today than at any other time in history, primarily because capital is more mobile than ever before. recent figures show that capital’s share of the world’s overall wealth relative to labour is the highest it has ever been – something that was the subject of one of the most famous books on economics of the last few decades, Thomas Piketty’s Capital in the Twenty-First Century. This is one of the reasons why the rich who own businesses are richer than ever, relative to people who work for those businesses.

The great news — and what so few people realise — is that the stock market and other forms of investment are fundamentally just fantastic innovations that enable anyone to become a business owner, almost no matter how little money they have to start with. In addition, it has never been easier to invest, thanks to inexpensive and powerful online tools that have emerged in the last decade or so.

The fact that making money from money is ultimately easier than making money from work is entirely logical when you consider that you only have a limited number of hours in which to work. On the other hand, your money ‘never sleeps’, as the old saying is quite right in telling us. Money will also breed like rabbits if you know what you’re doing. Even multimillionaire actors, businesspeople and rock stars have often made vastly more money from their money than from their performance fees, salaries or record sales.

It is not an exaggeration to say that virtually every very wealthy person in history has accrued far more money from their investments than from being paid for their work. It is also worth noting that they have invariably spent far less time making money from their money than they have pursuing their career or passion. Once your money starts making you money, you will find yourself with the freedom to do anything you want — whether you get paid for your time or not. To become rich, you need to get into this mindset.

The fact that most people do not understand this is a tragedy and the main reason so many of the population struggle financially. Because they have never studied it, most people have unfortunate, incorrect and limiting beliefs about how money works: ‘the stock market is a casino’; ‘investment is risky’; ‘cash is safe’. All three of these statements are inherently untrue in one way or another, a fact that is often well understood by the rich. (I would add that the dictum ‘money is the root of all evil’ is a similarly unhelpful statement — and one which has caused a great deal of misery for people who believe it to be true, in my own view.)

You might find it hard to believe, but “you can’t go wrong with bricks and mortar” is also a dangerous statement. Many people throughout history, including in the past few years, have gone horribly wrong with bricks and mortar, and many more will do so in the future. We will look at this in more detail in Chapter 5. It is also fair to say that cash is nowhere near as safe as you might think, given what is happening in terms of real inflation these days.

The reason many people have come to believe the stock market is a casino is simply that most people know nothing at all or incredibly little about it. Amazingly, this includes many of the people investing in it.

I have lost count of the number of people I have met over the years who buy and sell shares without understanding almost any of the things that you should know before investing in the stock market. This is why “average” investment performance numbers are of no use to you and you should ignore them. A top sprinter who can run the 100 metres in under ten seconds doesn’t care that the ‘average’ adult human can run it in tens of seconds. The fact that there are large numbers of slow people bringing down the mathematical average has no impact at all on the professional athlete’s ability to run at his or her speed. We forget this logic when we decide that investment is difficult because the “average” return is only x per cent. This number includes a vast number of people who have no clue what they are doing.