Surrounding yourself with rich friends is a well-known strategy for making more money.

By spending time with rich friends, the theory goes, you will automatically:

• See having lots of money as normal
• Get over negative money beliefs
• Think positively about growing your finances
• Try harder to improve your lot
• Copy what your rich friends do to get richer

In my 20s, I read through books about making money the way others of my generation popped certain feel-good pills.

And most of those books urged their readers to abandon friends who had a ‘poverty mindset’.

Instead, you should look to have rich friends going places.

It’s true that maverick self-made millionaires such as Richard Branson, Duncan Bannatyne, and Theo Paphitis don’t seem to need peers as role models.

What’s more, the modern networked economy has made it easier than ever for unsociable techno-nerds to make serious money. Just think of all the crypto-millionaires who mined made-up money in their basements.

But for most of us, moving in wealthier circles will raise our expectations – and potentially our bank balances.

Even Warren Buffett’s best friends include fellow billionaires Charlie Munger and Bill Gates.

A rich vein of study

There’s plenty of scientific research to back up this folksy-sounding advice.

To give a recent example, in a major study published in 2022 a team led by Harvard economist Raj Chetty studied the social networks of more than 70 million Facebook users to see if they could correlate their social capital with their financial wealth.

As Business Insider reports, out of three ways of measuring social capital:

…the only one actually linked to upward economic mobility is friendships with people from a higher socioeconomic status.

In fact, if lower-income kids grew up in areas that have the same economic connectedness as higher-income kids’ neighborhoods, their future earnings increase by an average of 20%.

According to Hugh Lauder of the University of Bath, Chetty’s research is a call to ensure schools are well-mixed in terms of socioeconomic background – albeit that’s difficult given how some parts of the country are far richer than others.

The alternative – an educational system where a lot of rich kids are segregated into their own schools – is bad for social mobility. (And for our politics).

One kink I noticed from the New Scientist reporting is that the Harvard team estimated income levels via the proxy data of each Facebook user’s mobile phone model.

More than 15 years as a personal finance blogger makes me wonder – were some of those apparently upwardly-mobile friends of richer people just flashing a fancy handset to keep up appearances?

Presumably the academics eliminated the risk of such social striving from affecting their results.

Big fish, small pond

There’s just one snag with the strategy of having richer friends, especially in childhood.

I’ll illustrate it via a slightly stylized story about an ex-girlfriend.

My ex – let’s call her Catherine – is a talented violin player. From the age of seven, she showed great promise with the instrument. By her early teens she was established as the best bow in town.

Catherine enjoyed being the lead violinist in her school orchestra. But she knew she could push her talent further than her school could take her. Most of her friends might as well as have been banging on saucepans for all they could inspire her.

Catherine’s teacher agreed she was being held back. He arranged for her to go to weekend classes in London at a fairly prestigious music school.

At last she’d be among musicians of her own caliber!

To cut a long story short, they were indeed better than her – and she didn’t like it one bit. No longer was Catherine the biggest fish in a small pond. In fact, by her own estimation she was the worst musician at the new school.

Catherine continued to attend the classes, because she was too ashamed to retreat to her old school colleagues. But she admits that her heart wasn’t in it. When she went to university, she didn’t even bother to join the music society.

Could Catherine have tried harder? Perhaps. Many people respond to competition, but some are too timid. A shy person, Catherine wilted in the light of others.

Yet the fact is she can play beautifully compared to 99% of people who ever pick up a violin.

Rich friends when you need them

If Catherine had never gone to the elite music classes, she’d probably have had a happier childhood. She might still be playing her violin today.

Similarly, you will make more money if you meet rich friends, but you’ll likely feel miserable.

As Financial Accountant magazine reported:

Researchers from Warwick Business School in the UK found that people who earned more than others in their “reference group” – that is, those of the same age, gender, religion or nationality – were more likely to feel happy with their lives.

Warwick professor of behavioural sciences Nick Powdthavee said that people actually care “very little” about the actual figure they earn, but they are concerned with how their income compares to those around them.

“For example, their sense of wellbeing is more likely to be influenced by whether they are fifth or 40th highest-paid person in their workplace, rather than their precise salary,” he explained.

So do you want to be rich or would you rather be happy?

Perhaps the best solution is to decide who your real friends are – as distinct from who is in your wealth creation circle.

Spend quality time with your true friends for a pick-me-up, and hang out with your rich friends when you see your income sliding!

Contrived? Maybe. It’s not easy being rich.

What caught my eye this week.

I know we only recently revisited the meme stock mania of 2021, when I reviewed the Netflix documentary Eat the Rich.

But there’s no better post to flag up today than Alexander Hurst’s epic variation on the theme in the Guardian this week.

The title – How I turned $15,000 into $1.2m during the pandemic – then lost it all – sets the stage.

But there’s more than just ‘loss porn’ to Hurst’s account, as we’re shown how suddenly coming into money warps your thinking:

I stopped searching for 50 sq meter one-bedroom apartments in central Paris and instead started browsing €1.5m lofts with rooftop terraces, or scrolling through Sotheby’s listings in French Polynesia, drooling over a small private island I could buy for $890,000 – as in, I could actually buy it.

It wasn’t hard to rationalize it. After all, my Amherst classmates had grown up going to vacation homes and boarding schools, and were destined to inherit large transfers of property or investment wealth.

I would not; instead, I felt the impending burden of my parents’ underfunded retirement accounts looming.

The piece really spoke to me: Hurst feels like a brother from another mother who went down a rabbit hole I avoided only by being born 20 years earlier.

And it takes guts to admit to such losses – and the truths that lie behind them – in public.

As my co-blogger wrote when he revisited the bursting of the 2021 bubble:

The market mints winners and losers every day.

The tricky bit is that failure is silent, while success is noisy.

Generally that’s true – but this time has been different.

The Reddit traders paraded their successes and failures very publicly throughout their epic bender.

Maybe that’s why this time we’ve been given an account of the morning after.

The first trillion is the hardest

Notes from the meme stock boom are not easy reading for the squeamish, what with all the leverage and the roll call of trading tools like options and shorts – as well as plenty of obscure small cap stocks.

But the truth is you can lose a lot of money just fine with everyday investing into some of the biggest companies in the world.

As Ben Carlson says over at A Wealth of Common Sense this week in recounting the fall from grace of Meta (nee Facebook):

I’m not trying to pour salt in the wound here for people who own these stocks.

This is just a not-so-gentle reminder that stock picking is extremely difficult, even over the long run and even for best-of-breed corporations.

On the way up you kick yourself for not investing in name-brand companies with stellar stock performance.

Then when they inevitably crash you begin to wonder if those gains are ever going to return.

For those who don’t follow the market with a magnifying glass like me and Ben, this chart shows how Meta has left the trillion-dollar market cap club:

Despite being one of the most successful and profitable companies of all-time, Meta has now been beaten by a diversified index fund over the past decade.

For love not money

When I used to write more about my naughty active investing – that stands in such contrast to the Monevator house view and the wise posts of my co-blogger – I was sometimes accused of hypocrisy.

Why was I telling people they should invest in boring index funds, when I do something completely different?

Was I keeping all the good stuff to myself? Did I think I was better than everyone else?

That sort of thing.

Follow that link to learn more about why I’m still a stock-picker and an active trader, for my sins.

But let’s be clear about one thing.

I haven’t increasingly told people over the years that they’ll almost certainly do better with index funds despite my being an active investor.

On the contrary, I know all the market’s capricious whims. The agonies and ecstasies, as Ben puts it.

And I say you’ll almost certainly have a more pleasant life if you invest passively because of my experiences as an active investor!

Enjoy the weekend, and the many great links below.

[continue reading…]

I can’t think of a much trickier in-tray than that facing governor Andrew Bailey at the Bank of England right now.

The institution he runs just hiked UK Bank Rate by 0.75% to 3% in the biggest jump for three decades.

And nobody is very happy about it.

“Too much too soon!”

“Too little too late!”

Everyone could do a better job than Bailey.

Never mind that just a month ago the Bank had to intervene directly in the market to stop a liquidity crisis in gilts cascading into the banking sector.

A mini-crisis manufactured overnight by wonks, that took less than a week to blow up.

And never mind – as many now seem to forget – that less than three years ago we faced a depression had not governments and central banks alike acted to offset the economic hit caused (unavoidably) by Covid and (perhaps over-egged) by repeated lockdowns.

Just look at where this interplay of fiscal stimulus, near-zero interest rates, economic inactivity, Brexit, and the shifting demand for goods and services has put us:

• Consumer price inflation – 8.8% (6.8% above target)
• GDP – minus 0.3% (recessionary)
• Unemployment – 3.5% (the lowest since 1974)
• Average house price £296,000 (an all-time high)
• Average five-year fixed mortgage – 6% (highest for 12 years)
• GBP/USD – $1.12 (down 15% over five years)
• Number of UK chancellors since July 2022 – four (careless!)
• 10-year gilt yield – 3.5% (up 250% since the start of the year)

It’s a cat’s cradle of contradictory indicators – and it could have been worse.

Truss and Kwarteng: gone but not forgotten

In the wake of the Truss and Kwarteng mini-budget show (parental discretion advised) the market briefly expected the Bank of England to have hiked rates by as much as another 2% by now.

That fear saw banks scrambling to raise their mortgage rates, if not pull their products altogether.

Thankfully the decapitation of the Truss regime saw new chancellor Jeremy Hunt undo a lot of that damage. Rishi Sunak as prime minister has further soothed frayed nerves.

It now feels like a bad dream. We still got the same 0.75% interest rate rise that we expected before Liz Truss had ever said she’d never resign for the first time.

Except that like in some horror movie where the relieved victim wakes up from a nightmare only to discover their cat impaled on a candlestick in the living room, those higher mortgage rates have yet to drop back to where they were.

Partly as a result, some pundits now forecast house price falls of 10-15%.

And if you think that’s not so bad – overdue if anything – then be careful what you wish for.

So long and thanks for all the cheques

Because just as one does not simply walk into Mordor, one does not simply repeatedly hike rates, play musical chairs with prime ministers, and ding the housing market without consequences.

Sure enough, the Bank of England has got even gloomier about the economy.

It already thinks a recession is underway. And its chart now suggests the pain will last for two years:

Source: BoE

The good news is the Bank’s central projection is for a shallow recession, albeit an overlong one.

The better-but-not-exactly-news-news is that – contrary to what many people now protest – if the Bank and politicians hadn’t acted in 2020, then that plunge in GDP (orange line) would have taken far longer to bounce back.

In other words, the pain we’ll suffer soon is to pay for what we avoided back then.

The Bank of England governor under fire

For me, inflation continues to be the truly perplexing puzzle.

Some left-leaning rabble-rousers economists pitch the BoE as raising rates simply to mete out justice:

If your mortgage is £100,000 that Bank of England have just signalled they want to take at least £750 a year out of your annual income to punish you for inflation. How does that make you feel? And do you agree that inflation was all your fault in the first place?

— Richard Murphy (@RichardJMurphy) November 3, 2022

According to this fellow, Andrew Bailey actively wants to put millions out of work.

Obviously I don’t see it that way. Because I am a grown-up.

Nevertheless there is something perverse-seeming about raising rates even in the same breath as you forecast a two-year recession.

And I find the issue even more vexing because I’m seemingly one of the last people who still believes (perhaps being biased, having predicted it) that it was mostly the economic disruption caused by the pandemic and repeated lockdowns1 – rather than solely excessive monetary and fiscal stimulus – that’s behind most of this inflation.

But whatever the origin story, at least inflation is forecast to start falling sharply, and soon:

Source: BoE

With a fair wind and/or a bit of luck (peace in Ukraine, say) the inflation shock could be abating by the middle of next year.

More likely we’ll need to wait until early 2024.

Another chunky crumb of comfort is that the Bank of England baked a 5.25% terminal rate for rates into its macro projections.

But that 5.25% was informed by our brief dalliance with Trussonomics, and it shouldn’t come to that.

The peak in rates now is expected to be 4.75%.

So bad it’s almost good

Nevertheless on these figures as published, the Bank of England expects unemployment to climb above 6% by 2025.

Which will be miserable for anyone who loses their jobs – especially if house prices do start to fall sharply.

Indeed it’s not hard to see the potential for a fresh ‘doom loop’ where forced selling meets negative equity to make a bad situation even worse.

Think early 1990s, only with social media.

All of which is also what makes investing especially tricky at the moment, incidentally.

I’ve been getting more bullish for a while, partly because I had judged that market expectations for US rates were peaking.

But this isn’t a sunshine and roses view. Rather it’s because I think rising mortgage rates in the US have already done enough to throw that nation’s housing market into a funk.

It’s a similar story in the UK – albeit more Monty Pythonesque thanks to our political backdrop.

For me it’s a reason to avoid entirely abandoning those hated growth stocks, and to be wary of overloading on the cyclical value-style shares that have done so well since the end of 2021.

My hunch is the worst of the valuation compression is behind the growth companies, while at the same time the economic outlook is deteriorating for cheaper but less exceptional firms.

As for passive investors, no reason not to keep on trucking of course.

At least your bonds will be increasingly throwing off useful income.

Bailout Bailey?

As recently as December 2021, Central Banks didn’t think inflation would get so high, nor that they would have to raise interest rates by very much.

Low and slow was the forecast back then.

I can understand why central bankers feel they have to act tough now, given how wrong they were. But I also think a sharp pivot is increasingly more likely than not, as the cumulative effect of all this tightening adds up.

Personally, I see stagflation threatening to turn into mild deflation as becoming more of a risk than runaway inflation.

But it doesn’t have to end so bleakly either way. We could yet muddle through.

As anyone who saw the Lord of the Rings knows, it turned out you could simply walk into Mordor.

So perhaps Andrew Bailey similarly can raise interest rates, slow the economy, and then pull us up out of the descent before we dive into a really deep decline.

But I’d rather him than me.

1. And latterly war, which I didn’t foresee! [↩]