In honor of the brand new year, I've created a personal roadmap for 2011, listing several health, financial, family, and travel goals I want to achieve this year. One of those goals is to give back and help others more. With that in mind, I've decided to publish my brief list of what I think everyone should know -- but might not.
There is no stock analysis below, but I believe that persistently and consistently following these simple guidelines and rules will undoubtedly make you rich. In my experience, these simple lessons aren't learned in high school, or even at Harvard, Princeton, or MIT.
Here are the lessons every Fool should know and hold dear. I hope they'll save you from you saying "woulda, coulda, shoulda" 20 years from now.
Simple rules, life lessons
As a parent of three inquisitive and fun-loving little beings, I think it's important that they begin to learn and understand these lessons, even at an early age. I hope that they will become self-sufficient and also earn the freedom to chase their dreams someday.
1. Spend less than you make
I could say it many different ways. "Be a net saver." "Avoid high-interest debt." All the points are the same. Everyone needs to learn as soon as possible that it's extremely important to save and invest some of your earnings. Unfortunately, you can't turn to our country, your friends, or institutions of higher learning to get this lesson. Those latter institutions teach us to live beyond our means, by requiring us to borrow heavily to grace their hallowed halls of learning. Is it any wonder that our federal government does the same?
Instead, here are three ways to impart this lesson to those you love:
- Match savings. Each year on their birthdays, we match our children's savings. Currently, that match rate sits at 100%. So each time, during the year when they want to purchase that cool radio-controlled car, or fancy new doll that actually wets itself, they realize that it costs them double. A dollar saved today is worth two dollars on their birthday. It makes them think twice about impulsive purchases.
- Make them earn part. If a dependant loved one wants something, encourage them to go get it, and match what they do. If your sixteen-year-old wants a car, tell them you'll pay half once they've earned and saved up the first half of the price.
- Buy a smaller home. The biggest purchase most people make is their home. Most people were tricked into thinking their home was an investment, and bought way more house than they could afford. To make sure you don't end up "house poor," consider these guidelines:
- Don't buy a house unless you plan to live there for at least seven years.
- Don't spend more than three times your gross household income on a home.
- Don't pay more than 200 times the monthly rent of a comparable house. If you can get it for 150 times, even better.
2. You are your own best investment
These days, many people ask, "What can I do to protect myself from possible inflation?" The short and quick answer: Be great at what you do. If you're the best builder, accountant, mechanic, engineer, teacher, or dentist in town, you'll do just fine. The key here is to become a lifelong learner. Two ways to instill this in your kids:
- Read about and research stuff you love. It could be trucks or toads, video games or televisions. My 8-year-old daughter just taught me that hares have longer legs and ears that rabbits, and she was excited to learn it. The best way to light a fire is to actually experience and learn about things that kids are interested in. The best gift you can give someone is the love of learning. That curiosity can lay the foundation to a world-class education.
- Learn to love math. The most difficult problems tend to be multidisciplinary, and they typically aren't solved quickly. It's more important for younger children to emphasize spending 30 minutes on a single problem than doing 30 easy problems in 30 minutes. Of course, there's value in repetition as well, but we've created a society of instant-gratification-seekers. Math teaches us to be patient, organize our thoughts, and think logically. For those folks who have been conditioned to not like math, I recommend John Paulos's great book Innumeracy.
3. Build a self-reflective portfolio
We don't come predisposed to be great investors. We have all kinds of psychological baggage that prevents us from earning great returns. In short, we form conclusions prematurely, and we're overconfident in our own abilities, prone to action in times of stress and fear, and often unable to correctly recall past behavior -- let alone learn from our mistakes.
To counteract these flaws, here are my simple rules to guide your investment decisions:
- Be patient. Don't buy any stock spontaneously. Wait at least one month before making a purchase. Only buy one-third of what a full position would be. This allows you to average into great businesses. It also nullifies your emotional impulses.
- Be committed. Hold every stock you buy for at least two years before you sell. This commitment will likely cause you to carefully consider and research each purchase, instead of buying that hot cocktail-party tip you got from Uncle Les.
- Portfolio DNA. I should know something about you when I look at your portfolio. A great place to start looking for investments is to analyze where you choose to spend your discretionary dollars.
4. Find something you love doing, and master it
A common adage holds that it takes four hours a day, seven days a week, for 10 years to become great at something, to achieve mastery at it -- and that assumes you actually spend those hours wisely, get feedback, and track your performance. If you're doing something you don't love, you're swimming against the tide. Find something you care about and do it. Work for the best, and don't settle for anything less. If you want to be an advertising executive, go to New York City and work on Madison Avenue. Work for free if you have to. The most important part is that you surround yourself with those who are great at what you want to become great at. As they say, it's hard to soar like an eagle when you hang with a bunch of turkeys.
5. Invest in experiences, not stuff
As Fools, our goal shouldn't be to die with the biggest pile of money. Life is precious, and we want to live it, and live it well. That doesn't mean having the biggest house or the fastest car. He who dies with the most toys doesn't win -- he who dies with the most meaningful experiences does. The shine and feel of that brand new De Lorean diminishes with age. However, that once-in-a-lifetime African safari and your memories of it will get sweeter with age.
Time is much more valuable than money. Don't delude yourself into thinking that you're working an extra 10 hours for your family. No matter how young your loved ones are, they intuitively know that time is more valuable than money. Where you spend your time, it tells them what you value. An hour spent reading, playing tag, or going to the park is not only costless -- it's priceless.
One final piece of advice from a master
Charlie Munger is famous for many quotes. Here's one of my favorites: "The best way to get what you want, is to deserve what you want." By following the steps above, you'll be well down the path of deserving whatever it is that you want to achieve in 2011 ... and beyond.
So what are you waiting for? Go get it! And if you find this advice at all valuable, pass it along, tweet it, link to it on Facebook, and share it with those who you believe will benefit from it. And please, add your own list of simple rules and life lessons in the comments below.