Everyone dreams of success, but what strategies are necessary to achieve it? How about thinking like Bill Gates? He dropped out of college at 19 and founded Microsoft, changing the world. Behind his success were two important philosophies: saving like a pessimist and investing like an optimist.
Saving Like a Pessimist
The Law of Miracles and the Possibility of Disaster
British mathematician John Littlewood created “the Law of Miracles.” According to this law, a miracle happens in someone’s life once a month. This implies the statistical likelihood of extraordinary events. However, the important point here is that disasters can occur as frequently as miracles. Events like a once-in-a-century flood, hurricane, or financial crisis may only have a 1% probability of occurring, but the likelihood of multiple disasters happening simultaneously is much higher.
The Importance of Saving
Therefore, we need to prepare a sufficient cushion for the next banana peel we might slip on, meaning we need to save enough money. It’s crucial to save money with a slightly paranoid attitude, recognizing that our current assumptions can be shattered at any time. This is how you save like a pessimist.
Investing Like an Optimist
The Power of Long-Term Growth
History tells us that long-term progress always triumphs over short-term setbacks. For thousands of years, humanity has solved one problem and moved on to the next. Because progress is cumulative, the long-term trend is always tilted towards growth. The same applies to the economy. As long as more people strive to improve, even just a little, every day, the long-term prospects are favorable for the economy.
The Magic of Compound Interest
Compound interest can be difficult to grasp intuitively. However, when the odds are in your favor, compound interest becomes a powerful force. In blackjack, the casino has only a 0.5% edge, but that small advantage allows the casino to win over time. The same principle applies to the economy. To enjoy the benefits of long-term progress and compound interest, you must endure the inevitable short-term setbacks.
Conclusion
In the end, all good investments are about surviving the chain of inevitable short-term setbacks and disappointments to enjoy the benefits of long-term progress and compound interest. Saving like a pessimist and investing like an optimist is the key to a successful investment strategy. With this strategy, you too can take steps toward success.
Reference: CNBC by Morgan Housel, “A powerful money lesson from Bill Gates: Why you should save like a pessimist, but invest like an optimist”