When I detailed my Wealthy Formula used to build my wealth (read it here), I shared that you need to build wealth wisely.
Why do I add the word wisely in there?
If you do not acquire wisdom along the way in your wealth building journey, chances are you cannot build sustainable wealth.
You may encounter a common problem: You read some books or go to a course, and they teach you how to invest through a particular wealth building method.
You dive head first into it and then the result was not what you hoped for.
In some situations you end up losing a lot of money, which is what we called tuition fees.
Acquiring the preliminary HOW-TO is necessary but is not the be all end all.
You need to distill what you have learn to find a blend of wisdom that will enable you to build sustainable wealth.
The Framework to think acquire Wisdom
I came up with this framework to help you visualize on a high level, how to relate wisdom with the rest of the pieces of data you get in daily interactions when it comes to building wealth.
You may confuse facts and knowledge as something similar to wisdom. They are not the same.
Think of it this way. Wisdom is harder than knowledge to acquire, and knowledge is harder than facts to acquire.
The harder they are to acquire the more valuable they are.
You gain facts by being a willing receiver of information.
Here is why you need to know Facts. You want to find out:
- what are the steps to take in a particular wealth building method
- what are the benefits
- what are the pitfalls and how do you protect yourself from them
- how complex are they
- what are the past success and failure rates
- what are the points that makes the most impact
Without facts, you do not know where to start, or that you will make mistakes, lose wealth, but most of all learn all the wrong lessons from the experience.
Facts can be view as individual pieces of information, that, when look individually are correct.
When they are put together, they may lead you to a different outcome.
How do you gain facts?
Ways to gather these facts can be in the form of:
- Reading a blog post or a post on wealth building on Facebook
- Asking someone who is competent in wealth building how to do it
- Reading a book on a particular wealth building method
- Watch and listen to some wealth building media
- Going for a wealth building course
Through these various methods , you gain the facts to perform different things:
- How to set up a brokerage account and start buying and selling shares
- What is a stop-loss and how it roughly works
- Exchange Traded Funds are Low Cost Solution
- There are 10 ways you can boost your take home cash flow
- The law of compounding means you have an advantage if you start early
With the facts that you have learnt, you would need to
- track your progress how well or bad you are doing
- gather data points specific to your wealth building methods
While the facts provide you with the blueprint or direction to do it, the data provides the feedback.
It tells you whether you are doing well or not, and whether you are deficient, in that case you might need to learn more things.
Its good to note that data do not just come from you but also from experts in your wealth building field who have done the hard work in collating these data and what they mean.
You would also need actual applicable information in your way of building wealth:
- The last prevailing rents and sale price of property in the prospective region
- Latest stocks that have been increasing their dividend payouts in the last 5 years
- The actual cost of rentals and price of machines required for a cafe business
Having facts, without the data, is like trying to fly a plane without its sensors. You know how to fly the plane, but you need to make adjustments, you need to factor in actual conditions. Without these, you are likely to crash and burn.
Now that you know Facts and Data, you know the blueprints and the behavior of what happens when you and others follow the blue print.
Distilling these together would be knowledge.
Knowledge is valuable and where many experts try to sell them to you because some of them work. (And some of them do not, but we may be able to tell at this stage whether these methods work or not!)
When you marry facts and data you get knowledge as this:
- Value based investing works. Be able to value business and buy what is worth $1 at $0.50. There might be some that fails eventually so you want to be diversified. There are evidence of success in the past
- Momentum works. Trend traders have been shown through numerous case studies that systematic trading by following strict rules have generate volatile but good results independent of the direction of the market
- Low cost portfolio investing has a positive bias over time. Cost matters immensely in investing and minimizing costs and following the market have shown to have positive expected returns over time
- The formula to earning more, spending less and building wealth wisely is translated in different ways by different experts but ultimately works at a very high level
While facts might be piece of the blueprint, knowledge is what tells you what works and what are the parameters that you need to work within and what other data and facts you need to obtain to be competent in building wealth.
The difference between WISDOM and KNOWLEDGE
While both wisdom and knowledge looks similar but there is a slight difference.
For me knowledge is what you gathered from sources with data and facts.
They tell you
- in this situations you should do this and that
- when A happens, B and C will happen, but D will not happen
- to be successful in something you need to do well in this 5 things
- to carry out something, this is the list of steps
- do be careful and make sure you do not do this 10 things
- in the past, things are like this and this, according to the data
Wisdom, on the other hand, is when you take these information, reflect upon whether they make sense, or sound, apply them in real life situations, and come to a good conclusion.
Folks can look at it that knowledge is when you apply these things blindly or as follows, and wisdom is when you add your own positive slant to how things are done:
Some examples of Wisdom are:
- Momentum Trading would work but based on my temperament I might not be competent in managing the behavioral aspects when the system is conflicted with what the human is seeing. Can I trust the system?
- Margin of safety is some concept that should exist in all wealth building methods, but they mean very different things in each wealth building method, be it properties, momentum trading, Graham style investing, Fisher style investing
- Risk is something that many failed to understood and failed to translate into their investing plan. It also incorporates into different stages of the market cycles and correlated with the behavior of the market. When market is in a bull market, there are unknown risk that we may not think of, and known risk that due to our incompetence we failed to see. During crisis, those risks that we failed to see, or not known would be shown to us, and the survivors are more safe then we think they are
When it comes to where a person fall within a competency meter, the folks with knowledge is closer to that of an informed investor, while wisdom is closer to that of a competent wealth builder.
To gain wisdom, you first need knowledge, and to gain knowledge you need to first gain facts and data.
Applying what you learn in real life
Whether you have knowledge, wisdom or non of those, without application, it doesn’t amount to much.
If reading a few books, going for some courses would make you money, there will be much more people worth much more than they currently am.
Only through putting what you learn in practice, collecting your valuable experiences as data, reflecting on your results would you gain more wisdom.
Wisdom is the combination of knowledge and learning through application.
If you want to be effective in building wealth, you have to acquire the wisdom. It is paramount that you understand this framework because it can be very simple, but it is not going to be easy.
It is like being a manager at work. You cannot say being extremely good at one aspect makes you a competent manager. There are just other aspects that you have to be good at.
If you are diligent in gathering your data, but no facts, you do not know what to do with the data you gather. If you have the facts but no data, you are blindly applying to build wealth without feedback.
If you do not reflect after you embark on your wealth building method, you will make the same mistakes again, or not find out why things are not working well for you, or be overconfident about how you build wealth and failed to see the flaw in your method.
Do you think being wise is required to build wealth effectively? Do you look at it differently?
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Sunday 26th of July 2015
A few weeks back I was trying to teach my 8 year old daughter the difference between Knowledge & wisdom. I failed as I was not clear enough for her. May be next time I will succeed.
Thanks for sharing
Monday 27th of July 2015
Hi Mr Singh,
Your daughter is privileged to have you teaching her this difference. It is not easy to grasp unless with some examples i felt.
Sunday 26th of July 2015
I do fully agree with you that knowledge without wisdom is not sufficient to build and sustain wealth.
For me wisdom is knowing what to do next, skills is knowing how to do it and virtue is doing it. Way too often we know what to do, but we hesitate by pondering too much about the 'what ifs'. The conditions will never be perfect! That's a fact of life.
Wisdom needs action.
From my own experience once I had made the decision to take more responsibility for my finances, money stopped being a source of frustration and actually began to flow more freely into my life.
I just had to become serious about money before it could become serious about me.
Sunday 26th of July 2015
Thanks for sharing your views. I guess much of wisdom is translated to actual battle experience, if not we are just textbook generals.
And you brought up the point of getting financial wisdom, that what used to be a concern might still is, but you are dealing with it better .