What is Wealth?
On the Concept of Wealth, The Story of Abraham Wald and World War II Bombers, Reading Recommendation and What I'm Doing
Welcome to the fifth edition of the ‘Read. Learn. Enjoy.’ letter.
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Wealth: A Concept of Abundance
Wealth is often equated with money and assets. This essay outlines the concept of Wealth and dives deeper into Financial Wealth.
Most people have their life goal as being wealthy. They devote a significant portion of life to the achievement of this goal.
What is wealth?
Wealth refers to “an abundance of valuable possessions or property,” or “a plentiful supply of a particular desirable thing.”
We equate wealth with money or, more specifically, assets – physical or financial. However, wealth refers to the state of abundance of desirable things.
There four types of wealth or desirable things.
If you desire to be wealthy, do you know which types of wealth you desire?
If desire financial wealth, are you aware of the distinction between an asset and wealth?
Survivorship: A Tale of Missing Data
A postcard on survivorship bias that influences our decisions every day.
The Story of Abraham Wald and World War II Bombers
Here’s a picture of an bomber in World War II. The red dots indicate areas where the bomber was hit by enemy fire during its mission. The question:
Where would you add more armour to strengthen this bomber?
The answer:
US military's conclusion was that the most-hit areas (red dots) of the plane needed additional armour.
However, Abraham Wald, a statistician, examined the damage to aircraft that returned from missions and recommended adding armour to areas that showed the least damage. This contradicted US military’s conclusions.
Abraham Wald had taken survivorship bias into his calculations.
Wald noted that the military only considered the aircraft that had survived their missions. Bombers that had been shot down and lost were unavailable for assessment.
The holes in the returning aircraft represented areas where a bomber could take damage and still return home safely.
Wald proposed reinforcing areas where the returning aircraft were not hit, since those were the areas (cockpit, engines) that, if hit, would cause the plane to be lost.
Survivorship Bias
Survivorship bias is the error of focusing only on things that made it past some selection process and overlooking those that did not, usually because of lack of data or visibility.
This can lead to incorrect decisions.
Find Out What You Don’t See
When making decisions, don’t look only at what you can see.
Find out the entire set of things that followed the same path but didn’t make it.
Investing and Finance
Unsuccessful investments or funds are excluded from performance reports because they were sold or merged and so no longer exist. Only the successful surviving funds are used for sales pitches.
Another example is the use of a current index membership rather than using the actual constituent changes over time to report performance of investing in the index.
[Note: I am not trying to discourage investing in Index fund that give you market returns. Earning market returns is a pretty good result for small investors without finance skills and often for investors with finance skills too!]
Steve Jobs, Bill Gates, and Mark Zuckerberg dropped out of college.
If I drop out I will also become a billionaire. Where are the stories other college dropouts who later couldn’t find jobs because they didn’t finish college. In the US, like elsewhere, 90 percent plus of successful business people have college degrees.
Reading biographies of successful people only shows that some people through their ability but mostly by chance ended up where they are. Where are the biographies of the vast majority of those who had average success and leading a normal life? We need more biographies to learn from failures.
Focusing on exceptions.
Often businesses focus energy on unhappy customers, instead of finding what makes happy customers happy and investing precious resources so continue keeping them happy.
News is a business built on exceptions. The things that account for less than one percent of everything that happens. The scandals and accidents but not the mundane day to day life of normal, happy people.
Beware of History
History is an highlights reel.
History is not a blow by blow accounts of everything that happened but only the highlights chosen by those who survived and won.
Ted Talk: How Survivorship Bias Skews Our Perception
This talk covers the World War II bomber example in more detail.
(Duration: 17 minutes)
Reading Recommendation
The Richest Man in Babylon by George S. Clason
This book, published in 1926, is considered as a guide to financial understanding for ‘lean purses.’
The book covers relevant aspects of personal finance in a the form of little stories.
A few takeaways that I found useful.
On paying yourself first
I found the road to wealth when I decided that a part of all I earned was mine to keep.
And so will you.
A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn. It can be as much more as you can afford.
Pay yourself first.
On wealth
Wealth, like a tree, grows from a tiny seed.
The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow.
And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.
On growing wealth
Wealth grows wherever men exert energy.
You can read my review and summary of the book here.
Book Reviews and Summaries
You can read 40+ book reviews and book summaries on my blog.
Three popular reviews and summaries:
Poems for the Soul by Sanober Khan – Yes. My review of the first full poetry book I have ever read is also the most popular one!
The Zurich Axioms by Max Gunther – A book that challenges conventional wisdom about investing, money and risk.
Freedom from the Known by J Krishnamurti – A book about freeing yourself from the past and the known.
More to come.
What I’m Doing
What I’m doing now and what’s coming up next.
NOW
Reading 📖
Financial Freedom by Grant Sabatier
Continuing to read this book that has been on my “to read” list for long.
Thinking 🤔
On Mistakes and Failures
Shoot.
Source: Visualize Value on Twitter
On Investment Strategy
“Eat ‘em, drink ‘em, smoke ‘em, go to the doctor, and look good when you get there.”
Source: Twitter
Writing ✍️
In addition to this edition of the letter:
Edited the title essay of this letter: Wealth: A Concept of Abundance.
NEXT
A hint of what’s coming up in the next few editions.
Book Review and Summary of How to Fail at Almost Everything and Still Win Big by Scott Adams.
Book Review and Summary of Financial Freedom by Grant Sabatier.
Thank you for reading till the end.
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Until next week,
- Satyajit
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