5 Laws of Gold: Reality as it is, not as we want it to be
The author is not a financial advisor or formally qualified in financial matters.
This article is the fifth 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.
Never invest in an idea you can’t illustrate with a crayon.
Peter Lynch
5 Laws of Gold: Reality as it is, not as we want it to be
Gold flees the [person] who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to [their] own inexperience and romantic desires to invest.
I wrote about paying yourself first, then I wrote about how to become wealthy your money must work hard for you. Third, I explored the value of seeking wisdom from those who are wealthy already and, fourthly I asked you to seek wisdom from domain experts in industries you would seek to invest in.
The final law of gold is, arguably, the most difficult to follow because it requires you to separate your emotions from an otherwise objective pursuit. To set aside your ego and think with your head and your own reasoned choices.
When we remove ego, we’re left with what is real. What replaces ego is humility, yes — but rock-hard humility and confidence. Whereas ego is artificial, this type of confidence can hold weight. Ego is stolen. Confidence is earned. Ego is self-anointed, its swagger is artifice. One is girding yourself, the other gaslighting. It’s the difference between potent and poisonous.
Ryan Holliday, Ego is the Enemy
The fifth law of gold has three distinct parts to it, all of which centre on emotional, or reactive decision making. Benjamin Graham, author of The Intelligent Investor, called the stock market ‘Mr Market’, as it often behaved like it were in the throws of ecstasy, spending lavishly on all those around them, or as a Scroogian miser, full of fear and paranoia. ‘Mr Market’ was often emotional and irrational in it’s behaviour as the Wall Street traders would react to anything and everything.
‘impossible earnings’
The first sound principle of investment is security for thy principal. Is it wise to be intrigued by larger earnings when thy principal may be lost? I say not.
George S Clason, The Richest Man in Babylon
If I were to have bought 1 bitcoin in June of 2013 it would have cost roughly $13.30USD. At the time I gawked and thought ‘how can this be a currency? I can’t even buy a loaf of bread with it.’
Now let’s, just for the sake of argument, assume I didn’t lose my bitcoin wallet code somewhere, and let’s assume I didn’t get excited and sell in December of 2013 for ~$914USD. If I kept that single bitcoin until the peak of November 1st, 2021 I could have sold my one Bitcoin for $60,955USD.
Given I’m writing a series on becoming wealthy and investment — you may think I’m kicking myself for not riding this rocket ship to the moon. I’m not, and here’s why: I still cannot buy a loaf of bread with this currency, and the currency itself is not a ‘productive asset’.
A productive asset is one which creates value on top of its principal. Warren Buffett often uses the example of a farm: you would own the land as well as the crops or produce that the farm makes — the asset (farm) has produced value on top of itself (crops).
If I had bought 1 bitcoin, after a decade I would still only have 1 bitcoin. Today, I could spend ~$19,488 to buy 1 bitcoin and I could hope that it would increase in value and sell it to someone else, who then may sell to someone else until someone, eventually, looses. If I bought 1 bitcoin today, in another decade I would have 1 bitcoin. I would not have a guaranteed buyer. I could be the person on the end of the sales chain who loses their principal.
You don’t need to look far for a story on someone who got in too deep on crypto and lost it all. One such story is on Sean Russel (via Nine Finance), a UK man who turned $120,000 AUD into $704,000 in a month. The price collapsed and in a desperate attempt to mitigate their losses, Russel put his money into other cryptocurrencies to a net return of –4%. Never mind the stress and the mental toll that Russel would have had to pay just to try and preserve most of their principal.
There are those who claim to predict the crypto curves, that they know when the prices will peak and trough, when to sell and to buy. These people are charlatans.
‘tricksters and schemers’
“A small return, and a safe one is far more desirable than risk.”
George S Clason, The Richest Man in Babylon
In January of 2022, a class-action lawsuit was filed against Kim Kardashian and Floyd Mayweather for their promotion of cryptocurrency EthereumMax; a cryptocurrency which the two had been promoting; Kardashian via her Instagram, Mayweather as part of promoting his fights. While being paid to advertise a product is not in its self amoral, the problem is that those pulling the strings of the promotion sold out of EthereumMax when it peaked; crashing to –97% of it’s value.
“…humans in the throws of great emotions”, says Clason, “are not safe risks for the money lender.” What you need to understand is that when it comes to cryptocurrencies it is an emotional decision to invest your life savings as Russel did, or as those who bought a crypto because Kim Kardashian and Floyd Mayweather were promoting it. This is why I look to those like Benjamin Graham for investment advice. They use logic and reason when investing in a business or enterprise, rather than simply hoping that their investments will rise in value, and some sucker will come along to buy my position.
‘romantic desires’
‘But Nick,’ you may ask, ‘wouldn’t it have been so amazing if you had bought into bitcoin in 2013, and sold out to make over 400000% return on investment?’
‘Of course’, I would say, ‘but this is with the benefit of hindsight. At the time, there were no guarantees that I could have sold out and made such a remarkable return. Further, there is no guarantee of security of my principal, nor is there any additional value produced by this asset. I just have to hope that someone is willing to pay more than me for it.’
Marcus Aurelius says in his Meditations: “Don’t join in mourning or ecstasy”. He was telling himself to not be sucked in by the emotions of the mob, or in this case the romantic desires of instant wealth based purely on emotions and nothing more. Those who seek to get rich quick would have better luck at the casino than in an asset market — be it cryptocurrency, stocks, bonds or any other asset you care to invest your hard-earned money.
Wealth is a power. With wealth, many things are possible.
George S Clason, The Richest Man in Babylon
Throughout this article I have expressed my opinion on cryptocurrency as an investment, namely that it is not an investment by Benjamin Graham’s definition. It is, rather, speculation. This is the crux of Clason’s 5th law of gold: actually invest your money: do not speculate or gamble with it.
Stocks are a literal piece of a business which pay dividends; bonds are you owning a piece of government or corporate debt where they pay you interest over the life of the bond. Farms grow crops, factories produce materials, a bakery produces bread. These are potential investments to what Graham calls the ‘intelligent investor’.
The 5th Law of Gold asks you to operate in reality as it is, not as we would like it to be. Graham’s The Intelligent Investor focuses on the past and current performance of potential investments rather than the more speculative ‘growth’ stocks. Invest in an asset because it has inherent value, rather than something which might go up in price.
Clason’s The Richest Man in Babylon is nearly a century old and the lessons contained in its pages are timeless. The technology will advance, the markets will peak (bull) and trough (bear), but the core Laws of Gold will be applicable in another century and be just as relevant.