Home owners in the US have been walking away from their mortgages in droves, leaving their keys and negative equity in the hands of their lenders. This trend is escalating with no end, as yet, in sight. People have bought the attributes of wealth in mass with little to no money down all on the magic of low rates and borrowed money. But money really is not free and there is a real cost to overspending and under-saving. Millions of people are now discovering that they are actually living a life they cannot afford. Trying to spend our way to prosperity has left nothing under the mattress for those inevitable rainy days.
The national savings rate in Canada has been in a steady downdraft over the past 25 years, from 14% of disposal income in 1980 to about 1% today. In the US, the savings rate plunged from 10% in 1980 to negative savings over the past couple of years. Consumers have more stuff in their homes and garages than ever before. We have afforded it all on the “miracle” of debt. Debt has been our biggest growth industry. Our society is addicted to credit, and this is not just a North American phenomenon.
When people have no personal equity or savings, they have nothing to protect financially, nothing to lose. We are drawn to big risk plays in the hope that somehow we will miraculously score big and win millions overnight. We are attracted to casinos, we buy lottery tickets, and we load up on risk assets at any price with whatever capital we can leverage, beg, or borrow. Desperation makes people non-discriminate. We feel financially behind; we feel we can't afford to be picky. We just jump in. Save more and spend less is not the secret most want to hear. The investment sales world profits on this human weakness, selling expensive—even reckless—products, and raking in billions in the process.
All of these factors have led to millions of risk-seeking, risk-complacent investors who are today too punch-drunk and desperate to think critically at all. They are investing like they have nothing to lose, because—when it comes to savings—they don’t. They have lines of credit, not cash in the bank. They have become confused with what’s to lose.
Patience, respect for hard-saved capital, and objective assessments are the best attributes investors can have. This is a main reason that wise, wealthy investors are prepared and able to take advantage of the masses in panic, time and time again. Great investors keep their money in safe, liquid holdings so that they are ready to strike when great values present themselves. But in order to be ready, investors need to self-analyze, reflect, wake up, and kick the addiction of reckless hope. The banks and investment brokers are not our friends, they are product providers. It is up to us to filter and pick from them as we see fit.
The key to successful investing is to invest like we have something to lose: our life savings, our peace of mind, and our psychological strength, for starters. Critical thought and self-control are key to executing a successful investment strategy.
