The Richest Man in Babylon

You never know where you find pearls of wisdom. In the movie, ‘Friends with benefits’, there is an exchange when Tommy (played by Woody Harrelson) meets the new guy in office, Dylan (Justin Timberlake). Tommy walks into Dylan’s office and notices that that there is no door where one used to be. Their exchange goes like this…

Tommy: Oh! By the way, why did you take your door off its lovely hinges?
Dylan: It was dumb, man. Something I saw in a management book.
Tommy: Oh! Right! Right! Like that’s how Warren Buffett got rich. He took doors off of things! Hey, everybody wants a short cut in life. My guide book is very simple. You wanna lose weight? Stop eating, fatty! You wanna make money? Work your ass off, lazy! You wanna be happy? Find someone you like and never let him go. Or her if you’re into that kinda of…creepy shit. (link to clip)

Turns out that, aside from the gorgeous Mila Kunis and the unrealistic world in which she’s a headhunter, the movie had basic life lessons to offer. And those are the kind that seem to work best. This post is about a book that offers just such fundamental lessons about wealth building.

Map-making to investment parables

George Clason was born in Louisiana, Missouri, on Nov 7th, 1874. After serving in the United States army, he founded the Clason Map company of Denver, and published the first road atlas of continental North America. In 1926, for some odd reason, he issued the first of a series of pamphlets on thrift and financial success, using parables set in ancient Babylon to make each of his points. These pamphlets were a hit with millions of readers and the most popular have been combined into the book ‘The Richest Man in Babylon‘, which has since become an investment classic.

Lessons from Babylon

When I first picked up the book, I expected it to be written by scholars from ancient times, their wisdom collated from parchments excavated from archaeological digs, but in the book, the author refers to why he picked Babylon as the setting for his parables on wealth.

Hanging Gardens of Babylon | Source: wikipedia

Not being a history buff, I haven’t fact-checked any of the points made by the author, but will paraphrase his reasons. Babylon was situated beside the Euphrates river, in a flat, arid valley. It did not have rich natural resources of forest or minerals, or was not even located on a natural trade-route, advantages that other dominant cities through history have had. Yet, in history, Babylon stands for wealth and splendour, accumulated through application of man’s ingenuity and determination. For example, to take advantage of the abundant water, engineers diverted water through a complex network of dams and irrigation canals. They were not only the first engineers, but also the first astronomers, mathematicians and also financiers, and possibly, the inventors of money as a means of exchange, of promissory notes and written titles to property.

Before proceeding to the basic lessons on wealth building, he ends his chapter on Babylon with

“Money is governed today by the same laws which controlled it when prosperous men thronged the streets of Babylon, six thousand years ago”

The seven cures for a lean purse

The main character in the story, Bansir, the chariot builder is glumly sitting in his workshop when his childhood friend, Kobbi, the musician arrives and asks him for a loan of two shekels. This pushes Bansir further into gloom as he admits that he doesn’t have two shekels to lend. The two then discuss, how in spite of working hard, all year long, for several years, they still just scrape by and constantly have lean purses.

An epiphany hits them when they realise that while they have toiled all their lives to build staunch chariots and compose delightful music, which they have done successfully, they never sought to build wealth. Figuring that there must be a secret to building wealth, they seek out the counsel of their one-time friend and equal, Arkad, now the richest man in Babylon. Arkad willingly provides to them, the seven cures for a lean purse, all of which, are almost earth-shattering in their obviousness, but, if practiced with diligence over a lifetime, provide the bedrock for building significant wealth.

Here we look at Arkad’s advice and what it means to the young Indian investor starting out in 2015.

Cure #1. A part of all you earn is yours to keep

For each ten coins you put in your purse, spend but nine

Particularly applicable to young graduates who have just got on their first jobs and are earning a modest salary. Rent, eating out, clothes, travel, all of it together seem to take full toll of that monthly salary credit. As a rule, demarcate a portion of that salary as being out of bounds. This number, as the book suggests, shouldn’t be less than 10% of your net income, but can and should ideally be more, even up to 25%, depending on your discipline

Cure #2. Control thy expenditures

What we call ‘necessary expenses’, will always grow to equal our incomes, unless we protest to the contrary

First, take stock of all your monthly expenses. Next, demand hundred percent value from every expense. Those that don’t offer that value, minimise or eliminate. In short, create a budget that tracks your expenses. Do you really need that post-paid phone plan with the additional 10Gb of data where you’re probably only using a fraction? What about the urge to buy junk food on your grocery shopping trips, that you regret the moment you get home? The objective here isn’t to live a monastic life bereft of pleasure but one that is aware of where you spend your money.

Cure #3. Make thy gold multiply

Gold in a purse is gratifying to own and satisfieth a miserly soul but earns nothing…A man’s wealth is not in the coins he carries in his purse, it is the income he buildeth

Put your money to work for you. Any money in your wallet is constantly losing value and even that lying by default in your savings account is losing the battle against inflation. Hence it’s imperative to put your savings into situations where they can generate future income.

A lot of the time, you need to make risks as an investor to make the biggest gains. Other times, you just follow your heart when making an investment. For example, the company MyPillow got a LOT of heat for their founder’s political views so I wanted to show support for the company by investing in their stocks. Unfortunately, as you can see on it is a private company so stocks can’t be traded. Would it have been a wise investment to put money into a company causing so much controversy? No. But sometimes you’ve just got to follow your heart!

Not comfortable with entrusting your savings to anything even mildly risky? No problem, to start with, atleast get into the habit of putting away your savings (remember the 1/10th) into recurring deposits, that atleast doesn’t let your money lounge in your savings account and brings that wonderful force called compounding into play.

Cure #4. Guard thy treasures from loss

The first sound principal of investment is security for thy principal

While that “sure shot 10-bagger” stock you heard about from a friend of a friend might seem too good to miss, consider the probability of losing the principal investment you decide to commit. The video-game like interface of most trading platforms might it all seem like a game, but the amounts invested are very real. Take a realistic view of investment opportunities and the likelihood of success before deciding. It also helps to be self-aware of your propensity towards dealing with risk.

Cure #5. Make of thy dwelling, a profitable investment (maybe not!)

No man’s family can fully enjoy life unless they do have a plot of ground wherein children can play in the clean earth and where the wife may raise not only blossoms but good rich herbs to feed her family

I would caveat this particular cure with a strong “maybe”, or if you live in one of the metros in India, “heck no!” The economics of owning versus renting a home have changed dramatically over the last few decades. The time when this advice was sound, what you paid as rent for a house was comparable or even higher on a tax-adjusted basis than the EMI you would pay. That time has long gone. For instance, today, the monthly EMI on an apartment in Mumbai can be 4 to 5 times the rent you’d pay for it which makes this cure suspect. Take a look at the economics before deciding on this one.

Cure #6. Insure a future income

It behooves a man to make preparations for a suitable income for the days to come, when he is no longer young, and to make preparations for his family should he be no longer with them to comfort and support them

There are two aspects to this advice, mitigating the impact of loss of life on income for dependents and the second is to provide for your own old age. The first is more a risk-management, less an investment decision which can be achieved by taking term insurance which promises an income equalling 8 to 10 times your annual income for a nominal yearly premium. Note the worst thing to do here would be to confuse insurance with investment with one of those sub-optimal endowment policies with “guaranteed” returns

The second involves a long-term view on building wealth, which, if you have followed this site, means investing in equities using a variety of strategies that include regular and passive index investing using ETFs.

Cure #7. Increase thy ability to earn

The more of wisdom we know, the more we may earn. The man who learns more of his craft shall be richly rewarded

Your earning ability isn’t static. It grows over time in your chosen profession as you advance up the ranks. It’s important to keep an eye out for the skills that get more critical and in-demand. In today’s world, it doesn’t require expensive degree certificates to signal upgraded skillsets. Browse and take MOOC (Massively Open Online Courses) offered by the top universities in the world on sites like coursera, edX, udacity in addition to those offered directly by universities.

In addition, one should also keep learning about investing and incorporating it into your investment strategy. Read the basic investment principles, deploy them and use the feedback loop to understand what works for you and refine the process with additional reading on the subject.

And Arkad finishes by saying:

Go thou forth and practice these truths that thou mayest prosper and grow wealthy, as is thy right

Further reading:

The most powerful force in investing

SIP, don’t guzzle investments

The investment strategy that beats the average investor – I

The investment strategy that beats the average investor – II

The richest man in Babylon – flipkart

Buy vs Rent Research Report Mumbai – Artha Yantra

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