The inseparable pair of skills

Dated: 14th July 2019

Morgan Housel reminds us that Investing skills are important, but they have to be paired with personal finance skills to be sustainable.

Housel is surprised how many good investors he knows with terrible personal finance habits. Maybe he shouldn’t – they are completely different skills. The ability to uncover an undervalued investment is not associated with your propensity to avoid lifestyle bloat. The irony is that people who will move mountains to gain a few basis points of return bleed ten times that amount on personal spending that all science says adds little to their net life happiness.

But investing and personal finance rely on each other because few industries are as cyclical as investing and as Charlie Munger says, “The first rule of compounding is to never interrupt it unnecessarily.” Compounding works only to the extent that your lifestyle doesn’t force you to sell investments at inopportune times to fund your lifestyle. Someone earning average but uninterrupted returns may be better off than someone outperforming by 50 basis points a year yet forced to liquidate a portion during every bear market to pay off lenders.

Investment returns have a lot of potentials to make you rich and achieve your goals. But whether a strategy will work, and how long it will work for, and whether markets will cooperate, is always a question. Personal savings and frugality – finance’s conservation and efficiency – are parts of the money equation that are largely in your control and have a 100% chance at being as effective in the future as they are today. So which should you pay more attention to?

This is not about living like a monk, hampered by frugality. It holds true at every level of wealth and spending. Housel concludes that the idea that reducing your needs has the same impact as increasing your income – but the former is more certain and in your control than the latter, so it has a higher expected value – is as true for someone spending Rs15,000 a year as it is someone spending Rs15 lakhs per year.