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Thursday 1 January 2015

Investing In Our Children

Live Long and Prosper

Statistically, a child born today is more likely to reach 100 than someone who is already 96 years old. And this is happening at a time when government resources are increasingly stretched and retirement ages are creeping upwards, when the populations of the developed nations are aging and the borders are increasingly closed to younger people from poorer countries.

As parents the one thing we can do for our children, to prepare them for this dystopian future, is give them the skills they need to survive and, hopefully, prosper. And chief of those skills, in a world dominated by the ideology we call capitalism, is a proper understanding of how to manage money: because the alternative is that money will manage them.


Predictions are notoriously difficult to get right, especially ones about the future, but the trends towards people living longer and getting less government support seem fairly secure – although, of course, if there’s less government support for the aged they may not live as long on average. Nonetheless, it seems reasonable to suggest that as long as our children have access to the latest medical advances then they may live longer and healthier lives than we will. Personally I think that this seems like a desirable outcome.

Unfortunately as government finances come under the strain of aging populations it’s entirely likely that access to the latest treatments will be rationed, and that retirement ages will continue to creep upwards. This latter trend is both positive and negative: for most of us, however much we protest, work is a positive thing as Mihály Csíkszentmihályi's research into flow has revealed: it gives us purpose, meaning and social interaction; all of which are beneficial to our health. However, as we age we become more vulnerable to stress and uncertainty, and working longer because we have no choice, rather than as a preferred life option, can be damaging.


An aging, working population is a reversion to a historical norm: retirement ages and state pensions are relatively new inventions, introduced at a time when most workers died before they ever reached them (see The End of the Age of Retirement).  But for us, raised on an expectation of a long and happy retirement this doesn’t seem such a great option. And, at the very least, it would be good to have a choice in the matter.

It’s a sad fact that in the US and the UK most people who are born poor will die poor and those who are born rich will die rich: social mobility is a fiction, peddled by people who have an interest in maintaining the status quo – after all, if you can become rich yourself you don’t want to rock the boat (see Repellent; The Magical Law of Attraction). But besides the possibility of inheriting wealth our children will have depend on their own skills, either in the workplace or in the financial markets.

Success in the workplace is often about luck; about being in the right place at the right time and grasping the opportunities that present themselves. It’s a Darwinian environment in which a successful career can be arbitrarily terminated for reasons outside a person’s control: however fulfilling work may be it is not a guarantee of a long, healthy or wealthy life.

The Gift of Marshmallows

In fact, in our capitalistic world the closest thing we have to a genuinely democratic and socialist mechanism for redistributing wealth is the financial market. But, of course, this is a game that’s rigged in favor of the incumbents, the large institutions and the super-rich investors who cruise around like sharks on a hidden reef. However, if you’re quick and nimble and you understand the rules of the game even a very average small investor can make a very decent turn over decades. And if we want to guarantee our children the best chance of coming out on top in the game of life ensuring that they understand those rules is the very best gift we can ever offer them.

Yet even here we’re not all born equal. Walter Mischel's famous marshmallow test revealed that even at a very young age self-control is a predictor of future health and wealth: some people are better able to delay gratification and plan for the future (see The Secret of A Healthy, Wealthy Life). The root of this probably lies in both nature and nurture. Nature makes some of us less driven by immediate satisfaction and nurture suggests that the fact that rich people tend to bring up rich people is not purely about inherited wealth, but is also about education and social networks.

Protect and Serve

For most of us it's those latter two points that are critical for the future of our children. Even if we can't – or won't – pass on a lot of money to our children we can invest in their education and help them develop a range of interests and contacts. Perhaps the most important investing lesson is to show them that if they can control their urges to seek immediate satisfaction then they will reap greater benefits than their peers – and that, of course, can (and should) be taught way before they ever start learning about markets.

Sadly most financial education doesn't work, and the reason for that is grounded in the psychology of the markets – the kind of stuff I write here about (see Freedom of Financial Choice is a Myth). Paradoxically behavior that in the real world is sensible and safe is exactly the opposite in markets and this is not something that you can easily teach – it’s something people need to find out for themselves. So it’s important that we give our children the opportunity to explore these ideas for themselves in a protected environment before we ever let them out into the real, shark-infested waters of the financial markets.


Someone who is equipped with a reasonable amount of self-control and future planning ability and who has a modicum of knowledge about the way financial markets work is, in the world we live in, already has an edge when it comes to future financial success. If they can add to that edge either the ability to think analytically or the ability to foster and maintain a broad social network (in the traditional, rather than the internet sense) – or even better, both – then they have the skills required to succeed in the open oceans of the investment world.

Because the great thing about markets is that if you’re sensible and you can avoid the big mistakes you can, over extended periods of time, make very decent returns. And these skills tend to improve with age and with practice – it’s no coincidence that many of the world’s greatest investors are to be found still successfully plying their skills in their seventies and eighties. Let’s face it, investing is not the most physically demanding of occupations – you’re unlikely to wear your body out trading stocks, no matter how often you do it.

The Future Edge

And this is why, I think, that successful people tend to beget successful people. Of course the opportunities that we can offer our children if we are wealthy and well connected give them a better chance in life than the offspring of poorer and less engaged parents.  But this isn’t the whole story – if we demonstrate and practice self-control to them, if we take every opportunity to expand their skills and social circle and if we give them even a modicum of understanding about the issues and opportunities offered by financial markets we have already set them head and shoulders above their peers. 

And in a Darwinian world a small advantage is often all someone needs to find their own niche, and a small edge can be levered into a long and fruitful life. And if we don’t want that for our children, what’s the point?


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1 comment:

  1. Buffett had a quote to the effect that people either 'get' the idea of value investing within 5 minutes, or they never will. I thought it was silly when I read it, but to my surprise it turned out to be true --- some highly intelligent people I know just don't emotionally grasp the idea of investing, no matter how I try to convey it.

    I ask them "suppose you want milk, so you buy a cow... and then a month later you learn that your neighbors are buying cows for less than you did. Have you lost money? Would you sell the cow?"

    And they say none, of course, and so long as they got a decent deal they'd be happy with the milk, and why would you sell the cow, anyway, didn't you want milk?

    But these same people are unable to invest --- they are paralyzed with fear that stocks might go down. And no matter how I try, I can't get them to think about it like the cow and its milk, where it wouldn't even occur to them to check the 'price of their cow' every day!

    And then there's other people who just get it right away. Its like there's a 'click' and they realize that investing isn't like gambling in a casino --- its more like buying a cow.

    This personality difference is much more essential to investing success than any special analytical skill (And I know people who don't 'get' it that are computer programmers, and even one who's an accountant!)

    So your article made me wonder when and how these personality differences arise?