Chapter 25 - How to Be Rich
Today’s Chapter is based on the book “How to Be Rich” by J. Paul Getty.
Buy it on Amazon here:
https://www.amazon.com/How-Be-Rich-Paul-Getty/dp/0515087378
Here’s what I have learned from the book:
Millionaire Mentality
“Whether you think you can, or you think you can’t - you’re right.”
— Henry Ford
J. Paul Getty was once considered one of the richest men in the United States. In his book “How to Be Rich”, he shared many secrets that he considers necessaries for one to become rich. To him, there are various factors that may lead an individual to become a millionaire, such as luck, knowledge and hard work. However, more importantly, Getty believes that, almost without exception, there is only one way to make a great deal of money and that is to run its own business. As Naval Ravikant would say, “You are not going to get rich renting out your time. You must own equity, a piece of the business to gain your financial freedom.”
By consequence, above all, Getty believes that the most important quality to become rich is to have what he calls “The Millionaire Mentality”. He defines it as ”that vitally aware state of mind which harnesses all of an individual’s skills and intelligence to the tasks and goals of his business.” As such, considering that a company can only survive as long as it makes profit, J. Paul Getty believes that any businessmen or business executives that wishes to be successful needs to be consistently looking for ways to reduce costs and increase efficiency, production, quality and sales so that the company he owns or works for can operate at a profit.
“Like it or not, there is a thing that can be called The Millionaire Mentality. There is a frame of mind which puts an individual a long way ahead on the road to success in business, whether it be in his own or as an executive. In short, The Millionaire Mentality is one which is always and above all cost-conscious and profit-minded.”
— J. Paul Getty
Being thrifty is an essential habit for any individuals wishing to run a successful business. As a matter of fact, Getty explains that a man with “Millionaire Mentality” understands that he must do all that is possible for the good of the company. As such, a man with “Millionaire Mentality” is aware that the healthier the company, the better its profit picture and the more the shareholders and employees will benefit.
“Once he has started a business, an individual who is naturally thrifty will have an infinitely greater chance for success than another of equal ability who does not possess this quality. The habitually thrifty person will be able to immediately recognize opportunities for lowering overhead and production costs and in present-day, highly competitive markets even minor savings can mean a great deal and even represent the difference between a net profit and a net loss.”
— J. Paul Getty
“The man with a Millionaire Mentality is not a penny pincher and money-grubber. If he is an executive, he watches costs and tries to reduce them-and strives to increase production and sales and thus profits-in every way he can because he has the interests of the company, its shareholders and employees at heart.”
— J. Paul Getty
Furthermore, Getty believes that it is wrong to believe that one must think big and spend big money to make money. In fact, he mentions that it is much more important for the man with the “Millionaire Mentality” to be able to think small rather than to think big in the sense that he can still run a successful business by paying attention to the smallest of details and by reducing costs in his own business. This reminds me of the concept of “Dream Small, Win Big” that we have learned from Kazuo Inamori, who believes that success can be achieved through making small but steady progress.
“But there's one thing I want them to understand: great achievements are born from steady effort on a road traveled one step at a time. Without that, big dreams, no matter how vividly imagined, remain nothing more than dreams.”
— Kazuo Inamori
Finally, Getty believes that an individual that wants to achieve real and lasting success in business must be a contrarian. The man with “Millionaire Mentality” must not only be able to think and act independently, he must be “a creative artist rather than merely an artisan of business.“ He believes that a successful businessman is a rebel who is never satisfied and creates success and wealth by consistently seeking new and better ways of doing things.
“The men who will make their marks in commerce, industry and finance are the ones with freewheeling imaginations and strong, highly individualistic personalities. Such men may not care whether their hair is crewcut or in a pompadour, and they may prefer chess to golf-but they will see and seize the opportunities around them. Their minds unfettered by the stultifying mystiques of organization-man conformity, they will be the ones to devise new concepts by means of which production and sales may be increased. They will develop new products and cut costs to increase profits and build their own fortunes. These economic free-thinkers are the individuals who create new businesses and revitalize and expand old ones. They rely on their own judgment rather than on surveys, studies and committee meetings. They refer to no manuals of procedural rules, for they know that every business situation is different from the next and that no thousand volumes could ever contain enough rules to cover all contingencies.”
— J. Paul Getty
This truly reminds me of this famous iconic quote from Steve Jobs:
"Here's to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They're not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can't do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do."
— Steve Jobs
How to be an Executive
“The key for us, number one, has always been hiring very smart people.”
— Bill Gates
As we have learned from various of other entrepreneurs such as Steve Jobs, Isadore Sharp and Sam Zell, an important factor in running a successful business is to surround yourself with great people. As such, J. Paul Getty explains that it is primordial for the success of the business to be able to identify and hire good executives. Here are five qualities that it takes for one to be considered a good executive in the eyes of Getty:
Example is the best means to instruct or inspire others. The man who shows them as well as tells them is the one who gets the most from his surbordinates.
A good executive accepts full responsibility for the actions of the people under him. If called before his superiors because something has gone wrong in his department or office, he accepts full personal blame, for the fault is his for having exercised poor supervision.
The best leader never asks anyone under him to do anything he is unable or unwilling to do himself.
The man in charge must be fair but firm with his subordinates, showing concern for their needs and doing all he can to meet their reasonable requests. He treats his juniors with patience, understanding and respect and backs them to the hilt. On the other hand, he does not pamper them, and always bears in mind that familiarity breeds contempt.
There is one seemingly small-but actually very important-point that all executives should remember. Praise should always be given in public, criticism should always be delivered in private. Employees who have done a good job should be told so in front of their fellows; this raises morale all around. Employees who have done something wrong should be told so in private: otherwise, they will be humiliated and morale will drop.
Firstly, this concept of having executives setting a good example to their subordinates reminds me of the inverted management concept from Bernie Marcus and Arthur Blank from The Home Depot. As a matter of fact, they would encourage senior executives to work in the stores along the sales associates to understand what was happening on the sales floor. And more importantly, they insisted that senior executives do not ask an associate to do anything they wouldn’t do themselves.
“If an associate picked something up off the floor, it was because we did it first. We set the example. Few people ever felt that they were working for somebody. Hopefully, it was more like they were working with somebody. Everything was hand in hand.”
— Bernie Marcus & Arthur Blank
Secondly, the idea of praising in public and criticizing in private reminds me of Warren Buffet’s concept of “Praise by Name, Criticize by Categories”. As a matter of fact, a quality that is essential in personnel management is the ability to communicate and to motivate staff. And there is nothing more depressing for a staff’s morale than to be humiliated publicly. On a same line of thought, Getty believes that the ability to communicate properly is critical as misinterpretations can be costly. As we have learned from Lee Kuan Yew, “to be a leader, you must be able to communicate your feelings and move the other fellow.”
Finally, you will notice that having a formal education is not listed out as one of the qualities that Getty looks for in a good executive. In fact, Getty mentions that “although a good, solid formal education is usually a great help to a man who wants to be a good executive, I don’t believe that it is always essential.” This principle reminds me of Alan Greenberg who enjoyed hiring people with PSD degrees — poor, smart and a deep desire to become rich — over MBA degrees candidates.
“Our first desire is to promote from within. If somebody with an MBA degree applies for a job, we will certainly not hold it against them, but we are really looking for people with PSD degrees. They built this firm and there are plenty around because our competition seems to be restricting themselves to MBA’s. If we are smart, we will end up with the future Cy Lewises, Gus Levys and Bunny Laskers. These men made their mark with a high school degree and a PSD. PSD stands for poor, smart and a deep desire to become rich.”
— Alan Greenberg
Facts Not Opinions
“Everything we hear is an opinion, not a fact. Everything we see is a perceptive, not the truth.”
— Marcus Aurelius
In the normal course of business, every executives will make mistakes in their career. However, the thing that separate the good ones from the bad ones is the ability to avoid repeating mistakes. As such, Getty believes that a successful businessman must be able to learn from mistakes. As he once said, “for the businessman, the true test of his mettle comes at the time when he is faced with adversity.” According to him, the most common mistake that seems to be recurring among executives is the ineptitude to separate opinions from facts while making decisions. This leads to executives to make business decisions with bad information which can be fatal.
“The first of these is the failure-or the inability to distinguish between what is fact and what is opinion. Though it may be carefully considered and based on fact, opinion nonetheless remains opinion-and it is very seldom infallible. Opinion is never better than the information on which it is based, the qualifications of the person voicing it and his ability to correctly interpret the information at his disposal.” — J. Paul Getty
“The mistake lies in accepting and following other people's advice blindly, in accepting their opinions without first determining if they are backed up by facts. This is one of the first lessons young businessmen and executives should learn―or they will find themselves being taught it the hard way!” — J. Paul Getty
As such, Getty explains that a businessman must assemble all the available pertinent facts and study them himself before making any deals. While it is okay to take the opinions of others into consideration, it is primordial to understand that these opinions, while based on facts, are not flawless. On the same line of thought, the intelligent business understands that even if he weights in all of the known facts and factors, there will always be some risks involved due to the unforeseeable elements or due to randomness. As such, a good executive must also be able to separate mistakes from bad luck.
“The shrewd businessman weighs all the known and, to his knowledge, possible factors in a given situation. He tries to allow for all the variables, but he is well aware that he cannot think of nor insure against every contingency. He accepts the idea that there is always a possibility that some completely unforeseen element or development will turn up to alter or even wreck his plans. He is, however, secure in the knowledge that he has done everything within his power to tip the odds for success in his own favor.”
— J. Paul Getty
“The businessman who is able to calculate his risks-and then is willing to take them-has his battle for success ninetenths won. The remaining one-tenth is the unknown variable, the unpredictable factor that puts the zest and excitement into the game. Without that "x" factor, business would be hopelessly dull, routine and uninteresting.”
— J. Paul Getty
By consequence, Getty firmly believe that one of the most valuable asset of a businessman is his ability to study and weight all the factors in a given situation and to determine when the odds are in his favor or not. And, when the odds are in one’s favor, you gotta bet big! As Charlie Munger would say, “The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.”
How to Invest
“In the short run, the market is a voting machine but in the long run it is a weighing machine.”
— Benjamin Graham
As mentioned previously, Getty believed that you must own equity to become rich. Outside of running your own business, investing is also a great way of owning equity of great companies. As Warren Buffett once mentioned, “if you own stocks as an investment—just like you’d own an apartment, house or a farm—look at them as a business.” However, Getty also understood that making a lot of money through the stock market cannot be done overnight and must be done through patience and sound decisions rather than through reckless buying and selling.
“The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator.”
— J. Paul Getty
As such, Getty explains that most seasoned investors are able to make a fortune through investing by buying shares of great companies at a distress price as a result of the emotionally inspired selling wave. As Warren Buffett would say, “the stock market is a device for transferring money from the impatient to the patient.” This reminds me of an important lesson provided by Benjamin Graham in his book “The Intelligent Investor.” Graham, in his book, compares the stock market to an imaginary investor called “Mr. Market” who is driven by his emotions such as panic and euphoria.
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
— Warren Buffett
The morale of the story is that to become a successful investor, you must know as much as possible about the company in which you are investing. It is only through this knowledge that you can have the conviction to hold onto a stock when it is going through the natural dips, slumps, recessions and even depressions of the stock market. However, as Getty mentions, “assuming that a stock and the company behind it are sound, an investor can hardly lose if he buys shares at the bottom and holds them until the inevitable upward cycle gets well under way.”
“Another valuable investment secret is that the owners of sound securities should never panic and unload their holdings when prices skid. Countless individuals have panicked during slumps, selling out when their stocks fell a few points, only to find that before long the prices were once more rising.”
— J. Paul Getty
As such, Getty recommends investors to ask the following questions before putting any money in buying the stocks of a company:
What is the company's history: Is it a solid and reputable firm, and does it have able, efficient and seasoned management?
Is the company producing or dealing in goods or services for which there will be a continuing demand in the foreseeable future?
Is the company in a field that is not dangerously overcrowded, and is it in a good competitive position?
Are company policies and operations farsighted and aggressive without calling for unjustified and dangerous overexpansion?
Will the corporate balance sheet stand up under the close scrutiny of a critical and impartial auditor?
Does the corporation have a satisfactory earnings record?
Have reasonable dividends been paid regularly to stockholders? If dividend payments were missed, were there good and sufficient reasons?
Is the company well within safe limits insofar as both long- and short-term borrowing are concerned?
Has the price of the stock moved up and down over the past few years without violently wide and apparently inexplicable fluctuations?
Does the per-share value of the company's net realizable assets exceed the stock exchange value of a common stock share at the time the investor contemplates buying?
Beyond the Book
Read "How to Get Rich" by Naval Ravikant
Watch "The Crazy Ones - A Steve Jobs Final Speech"
Read "The Iconic Think Different Apple Commercial Narrated by Steve Jobs" by Farnam Street
Watch "Warren Buffett Explains Benjamin Graham's "Mr. Market""