Why they don’t teach this wealth secret at school

Did you learn anything valuable about money at school?

Money management? Risk? Approaches to investing your hard-earned savings?

I know I didn’t. And unless you were lucky, I’m guessing neither did you. If I’m wrong about that, put me straight on nick@southbankresearch.com.

Don’t you think that’s a bit strange?

Money is such a massive part of life. I don’t mean seeking riches – though that is a part of life for many people. I just mean managing your money. Making good choices. Knowing your options. Coming up with a plan and sticking to it.

It’s something we all need to figure out sooner or later. I remember when I started my first job I met with the pensions adviser for the company plan. His message was pretty stark: I needed £1m in savings by the time I was retired, if I wanted to sustain a decent standard of living.

The best way of doing that? He gave me some advice. It has stuck with me thanks to his strange choice of words. I needed to pursue “suicidally” risky investments. 

That was a bit of an eye opener.

Over time I think I’ve come to understand what he meant. Risk isn’t a bad thing. We’re taught to fear it (perhaps that starts at school). But we shouldn’t. So long as we understand the risks we’re taking, there’s no need to fear risk at all.

In fact, every great investment opportunity involves risk. Sometimes a lot of it. The key part is knowing what that risk is and making sure the potential returns are worth it. Time horizons play a part in that. If you have a 45-year horizon – as I did when meeting that adviser – then your relationship with risk is very different to someone on the brink of retirement.

By the way, more or less every major mistake I see people make with their money comes down to how they perceive risk. They either don’t take enough of it… or they take too much. The worst cases are when people start to consider something a “sure thing” – and invest far too much capital into it. That’s dangerous.

And it gets worse. We’re not taught a lot about money and investing. And most of what we are taught often turns out to be 100% incorrect.

Let me give you an example. What if I told you that there was a unifying force behind many of the world’s greatest investment fortunes – a hidden connection that has created more wealth and prosperity for more people than anything else in the world…

… and yet virtually any economist would tell you it’s a bad thing. A terrible thing, even. Something to be feared and fought off.

It’s true. We’re taught to fear deflation – falling prices – as if it’s the fifth horseman of the apocalypse. Mainstream economic thinking tells you that falling prices destroy wealth. As proof of that, simply listen to the Bank of England, with a little added emphasis from me:

Imagine a world where the price of things kept going down… sounds great, right? This is called ‘deflation’. But it’s not all it’s cracked up to be.

What would you do if you knew the £100 bike you wanted to buy today, was going to be reduced to £90 tomorrow? You would probably wait to buy it for the cheaper price. When prices begin to fall, people expect they will continue to go down. This expectation results in people spending less today, in hope of buying at a cheaper price tomorrow. This is bad for businesses.

If prices fall, businesses are likely to make less profit. Businesses don’t like to see their profits fall, so they will try to do something about it. Let’s go back to that bike you wanted to buy. The owner of the bike shop is now getting £10 less for each bike and so may try to cut costs to make up for this loss.

This is where deflation can negatively affect employees. Business’ biggest cost is usually staff. To reduce staff costs, businesses have two options: to cut wages or staff numbers. In other words, deflation could lead to you losing your job.

If you’re interested, there’s a reason mainstream economists and central bankers push the theory that deflation is bad – because it helps them present its opposite (inflation) as good. Inflation is a central banker’s (and indebted government’s) best friend. It allows you to rob savers of their purchasing power without them realising.

But exploring that idea is beyond the scope of today’s letter.

Instead, let me ask you this.

If deflation is so bad, why have many of the most profitable innovations in history been deflationary? I’ll skip to the end: because falling prices are more often than not the engine of rapid wealth creation. Many of the greatest investors and innovators in history have understood this.

Of course, very few of them were economists. They were entrepreneurs, inventors, visionaries and risk takers – people who were daring enough to challenge conventional thinking.

I’ll offer you three examples of what I mean to prove my point.

Henry Ford’s genius wasn’t engineering. He didn’t invent the car. He found a way to radically reduce the price of one. That was his secret: falling prices.  

Consider… in 1907 a Ford car cost $600. By 1921 it had more than halved, to just $269. As Ford himself put it, “I will build a motor car for the great multitude. It will be so low in price that no man will be unable to own one.” 

Or how about Andrew Carnegie?  

Everyone knows Carnegie built a steel empire that made him the richest man in the world in the 1800s. But very few people understand how a poor Scottish immigrant generated such enormous wealth so rapidly. 

Here’s the answer: Carnegie took advantage of a new industrial technique called the Bessemer process. 

In short, this technique radically reduced the price of steel. Before it, a tonne of steel cost £40. Afterwards it cost just £6.  

Carnegie used this technique to halve the cost of industrial steel in a little under two years. Soon, Carnegie was so wealthy he was able to give away the modern equivalent of $65 billion.  

Fast forward to the modern day. Why are Facebook, Apple, Amazon, Netflix and Google worth more than $4 trillion combined? 

The exact same principle. Thanks to Moore’s Law, the cost of computing power has collapsed by 99.9% since 1971. 

This is the real reason technology companies have created so much wealth. Falling prices are the engine of rapid wealth creation. Drive the price of something down far enough and eventually you’ll hit a “tipping point” that creates an enormous market… and incredible wealth.  

The unifying thread is falling prices. Deflation. The exact thing that economists will tell you is the wealth-destroying force to be feared above all else.

Why do you think that is? Why is it that not only are we taught virtually nothing about money and investing in the early part of our lives – but what we are taught turns out to be not just intuitively wrong… but provably so? I’ll hand the floor over to you to answer that one. Answers to nick@southbankresearch.com.

Until tomorrow,


Nick O’Connor
Publisher, Exponential Investor

Category: Commodities

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