5 Laws of Gold: Ask questions

The author is not a financial advisor or formally qualified in financial matters.

This article is the fourth in a series of articles on the ‘5 Laws of Gold’ based on George S Clasons’ The Richest Man in Babylon. If you would like to learn more, please consider picking up copies of any of the books mentioned in this article from your local library or independent bookstore.

Better a little caution than a great regret.

George S Clason

5 Laws of Gold: Ask questions

Gold slippeth away from the [person] who invests it in businesses or purposes with which [they] are not familiar or which are not approved by those skilled in [their] keep.

Previously I told you of the first law of gold: that you pay yourself first from your wages and no less than 10% to be set aside for investment. The second law, that of compound interest and making your money work for you. Thirdly, the law of wisdom: that like any profession or undertaking you would need to learn from others who have been successful in becoming rich.

The fourth law of gold is about knowing what to invest in and why.

Time & money

Henry David Thoreau, American philosopher, naturalist and poet once said that “the price of anything is the amount of life you exchange for it.” This sentiment pairs nicely with the old aphorism ‘time is money’ to which George S Clason in his classic The Richest Man in Babylon whole heartedly agrees.

“If you have not acquired more than a bare existence in the years since we were youths,” says Arkad, the titular ‘richest man in Babylon’, to his old schoolboy friends, “it is because you either have failed to learn the laws that govern the building of wealth, or you do not observe them.”

When his friends responded that they simply ‘did not have the time’ to learn, “As for time,” says Arkad, “all [people] have it in abundance.”

Arkad continues: “You, each of you, have let slip by sufficient time to have made yourselves wealthy.”

As I highlighted in a previous article, the ASX has returned an average of 9.29% per year over the last decade. This means, that if one were to have learned how money worked and begun the steady, sure process of dollar-cost averaging every month into ‘between 8 and 20’ mutual funds (EFTs) with $80.50 per month, you would have roughly $69,137, today.

There’s a famous Chinese proverb for this: “the best time to plant a tree was 20 years ago, the second best time is now.” Unfortunately, my Delorean is at the mechanics so I can’t go back in time 10, 20, 30 years ago to start this process, so I guess I better start now. So where do I begin?

Find humility before it finds you

[Gold] is easy to lend. If lent unwisely then it is difficult to get back. The wise lender wishes not the risk of the undertaking but the guarantee of safe repayment.

Algamish, the mentor of Arkad, had instructed his pupil to seek opportunities for his ‘coins to multiply’. That is, Algamish knew that the only way that one can become wealthy is for their money to work for them. Arkad went looking for an opportunity to invest his 2 months’ salary he had saved, and came upon the blacksmith’s apprentice. The apprentice was heading to a foreign land with their master as part of a trade envoy and they were confident they could buy ‘precious stones cheaply’ in foreign markets and bring them home to sell, splitting the profits with Arkad.

Arkad leapt at this opportunity and sent his hard-earned savings off with his new business partner to secure precious stones to sell. Months later, the apprentice returned. The apprentice greeted Arkad with a forlorn expression on his face. It turns out, the apprentice did not know the first thing about precious stones and the sellers took advantage of his naiveté. The apprentice brought home with them only some coloured glass pebbles which were worthless.

Another year had to pass before Arkad could save his losses up again, this time he had saved 3 months wages and found an opportunity with the apprentice again. The apprentice was to go on another trade envoy with his master, this time he proposed that they trade in copper ingots. Arkad, never the fool twice, mused on the idea and rather than turn the apprentice away and become bitter about his initial losses, Arkad did something different.

Arkad spoke with the apprentices’ master about copper. Blacksmiths work in copper regularly, and he confirmed that the foreign market was indeed known for their high-quality copper and relatively low prices. Warming to the idea, but still not convinced, Arkad went to the local merchants guild and enquired after copper. Arkad learned that several large orders of copper had been made by the palace and as such the available copper to the cities artisans and builders was becoming scarce.

Learning this, Arkad returned to the apprentice and the master blacksmith and invested with them both, rather than just the apprentice. Months passed, and the blacksmiths’ returned home with a giant haul of copper which the master blacksmith and Arkad easily sold to the palace for a generous return.

Understanding too that the cities artisans were still on short supply for copper, Arkad used a portion of his profits to invest in a trade caravan to bring copper to artisans of Babylon.

It’s not what you know, it’s who you know

The investment of money in securities is unique among business operations in that it is almost always based on some degree of advice from others.

Benjamin Graham, The Intelligent Investor.

There’s a rather interesting footnote in Grahams, The Intelligent Investor, which outlines that in a 2002 survey of Wall Street analysts, 17% got advice from friends or their spouse, 16% got advice from a broker, 10% from financial periodicals and 8% from the internet.

Now, this data is over 20 years old (I know — scary how time flies), but the story it tells me is that the analysts, experts in their field, ask others for advice. Most notably, even in 2002, 17% got advice from friends or family on where to put their money. Why this number interests me so much is that I am willing to bet that most of an analyst’s friends and family are not analysts themselves. They would be working in other industries, in other vocations and they would have that domain expertise that Arkad found in the master blacksmith.

If I were to invest in an agricultural business, one of the first things I would do is call my brother and ask him about how the barley season is shaping up, or how full their silo is. If I were to invest in an enterprise software company, I would call up my good friend who just so happens to work for an enterprise software company to gauge his opinion of both the company I’m interested in as well as learn a bit more on his industry.

Lets take a look at the ASX 10 (as of 25/07/22)

• BHP (Oil & gas, mining)
• CommBank (banking)
• CSL (pharmaceuticals)
• NAB (banking)
• Westpac (banking)
• Macquarie group (banking, financial services)
• ANZ (banking)
• Woodside (energy)
• Fortescue Metals (materiels)
• Wesfarmers (consumer goods)

Not to say that you should invest in any of these — in fact, all 10 of them fail the Graham Number test — but let’s say you were to invest in any of these. I think it is safe to say that you, dear reader, would know someone who works in banking, pharmaceuticals, energy, mining, or consumer goods (think: retail). If you don’t, then ask your friends or family if they do.

Those people may have an insight into the business itself, or at the very least the industry. You may not have as much luck as Arkad with the master blacksmith, but it’s worth doing some leg work yourself so you don’t also lose 2 months wages on some colourful glass.

Like Clason said at the start of this article: “Better a little caution than a great regret.”