A place where I organise the chaos of my mind

Author: Onyekachi Anyanwu

Poverty Is Necessary 2- Wealth and environment

Our wealth as individuals is intricately tied to our environment. The sooner we realize this, the better for us. In our last instalment, we established that humans do “default to the truth” with an anecdotal account of the Bernie Madoff scandal.

If you are reading this, it is either you are a HENRY (High Earners Not Rich Yet) or on the way to becoming one. If you are not or don’t aspire to be one, it could be that your “village people are calling you”. Wealth is built intentionally and progressively, you must start from somewhere. Our earlier assumption as it relates to income categorization still stands (earners of 2 to 10 million naira per annum are classified as HENRYs).

There are so many ways to build wealth; the first is through the principle of compound interest-arguably one of the most powerful but underrated tools for building wealth. Ceteris Paribus, if you save religiously and consistently over a period of time and you could build wealth. For example, let’s say you save 5,000 naira every month at 5% per annum for 20 years. This would amount to N1,983,957.24, that’s quite a lot of money if you ask me- that’s the mystery of compound interest. Simple, but yet very powerful and true. Compound interest doesn’t only apply to wealth but knowledge and competence as well.

The second way to build wealth would be “leverage”. We must learn to optimise our leverage. Peter Thiel in “Zero to One” wrote about the power of “network effects”, mostly applied to businesses but I believe it can be applied to our personal lives.

Network effects simply refer to the impact that the number of users of a platform has on the value created for each user. How does this apply to our individual lives? Our value quotient grows the more people can perceive our value thereby attracting more people to our perceived value. This determines how much we get paid to render a service or our assumed worth in the eyes of the public.

The chief locus for wealth creation as earlier stated is mostly environmental. The limiting factors in our environment can drown the noblest of dreams but with every ineffectual system comes an opportunity. Identify, maximise and optimise your leverage, everybody has one. The inefficiencies that inherently exist in our market structure is an opportunity. I am a firm believer of “beauty in chaos”.

Finally, access to information and the speed of execution. My years working in one of our nation’s apex banks has made me realize information is powerful, most importantly, the right information. As a result of currency risk, HNIs (High Networth Individuals) and UNHIs (Ultra High Networth Individuals) for years have been saving a portion of their income in dollar-denominated bonds even before it became a fad. Today, with the recession on the horizons, most already have economic buffers.

There is nothing new on the face of the earth. Investment vehicles over the centuries have evolved but the basic tenets of money-making remain the same. Create and identify value, then sell that value. Poverty might be necessary if we fail to realize how the world works. Money flows to where the value is. Financial education like all other forms of education must be studied and related to our lived reality.

We can’t explain away our inadequacies to lack of comprehensive due diligence or limited financial education. At least if you are putting away money, do the hard work, find out how the investment vehicle operates and why the investment requires your funds. Invest in value, not hype. Always follow the money.

Don’t make poverty a necessary evil in your life.

Poverty Is Necessary – Part 1

In “Talking To Strangers”, Malcolm Gladwell wrote about our tendency to “default to the truth.” Humans have a proclivity to believe the best in outcomes even when facts say otherwise. The facts are glaring but we fail to admit them. Our tendency to default to truth might be as a result of limited financial education or maybe nothing more than sentimental reasons, but we sure do default to the truth.

Harry Markopolos in the financial thriller “No one would listen” wrote extensively about Bernard Madoff, the Wall Street financial Czar responsible for the 50 billion dollars Ponzi scheme. Let’s take a deep dive into the Madoff story. Madoff was a man many would regard as ” the prince of Wall Street” in his heydays. He served on the board of some of Wall Street important industry associations, moved within the monied circles of New York. He was imperious, reclusive and charming, one who could do no wrong.

His Hedge fund; Bernard Madoff Investment Securities LCC continually beat the NASDAQ industrial average for years leading many Corporates, Foreign banks, High Networth Individuals(HNI), charities to invest in the fund. Madoff’s hedge fund was alleged to have about 4,800 clients with an estimated value at 64.5 billion dollars.

If you are like me, you must be thinking, how did he pull off such a heist? Unlike other Ponzi schemes, this lasted for over twenty years. Wall Street firms employ some of the smartest people on the face of the earth, how did this escape their attention. One of the firms that invested in Madoff’s fund was Renaissance Technology. RenTec, as it is fondly called, was founded in 1982 by James Simon’s, an award-winning mathematician. As of June 2019, they had 110 billion dollars Asset Under Management (AUM)

RenTec has a large retinue of individuals with PhDs in mathematics, finance and economics from ivy league universities. You can’t argue about their brilliance and sophistication, but how did they miss this? The answer lies in our tendency to “default to the truth” in the face of glaring facts. RenTec trusted the system above basic facts.

In Kalu Aja words, “Ponzi Schemes are like musical chairs, when the music stops, don’t be the investors without a chair.” What does the above quote remind you of? Our present-day cryptocurrency referral and forex scams. They guarantee investors high-interest rates for their investment. It is important to state clearly, cryptocurrency trading for all intents and purpose is not a scam but any scheme or platform that guarantees a fixed rate for an instrument that is hugely subject to volatility is a scam.

Poverty is necessary is an attempt to understand Investors behaviour in a third world country like ours. Why do seemingly highly educated folks fall for the sophisticated shenanigans of Ponzi Scheme merchants? If Rentech with its sophistication fell, why won’t you? Could it be the allure of massive gains? I think so. What would constitute as due diligence in investigating the authenticity of investment vehicle?

Shaun Tully at Fortune Magazine nearly 20 years ago coined the term “HENRYs “(High Earners Not Rich Yet). HENRYs are Millenials who earn between 100,000 to 250,000 dollars per annum. That’s supposedly high given out current reality as a country. For the sake of this piece, I will adjust the parameter to relate to our reality. An honest assumption would be folks who earn between 2 to 10 million naira per annum.

Are You An Investor Or A Gambler? The Story Of Isaac Newton

“I can calculate the motions of the heavenly bodies, but not the madness of the people.” – Isaac Newton.

If you are an investor without a strategy you are probably a gambler living in denial. Even the greats suffer losses, in the game of investment, a loss is inevitable. Strategy is king, perfect information, if it exists, is the difference between gains and losses. Investment can sometimes be the winner takes all.

If you have never heard of Isaac Newton (I am assuming you had basic high school education), it could be that you were half awake through your science classes or you have been under a rock for the past 500 years. I doubt the latter but the former is quite believable. Isaac Newton is probably one of the greatest analytical minds that have ever existed, his postulations and theories redefined science and formed the core of modern physics.

For someone with a keen eye for numbers and complex calculations, who would have thought he would be reckless with his investment decisions. Newton was no ordinary investor, he was the greatest mind of his time, how could he make what I term a “novice mistake”? News flash, he sure did. Man’s folly is not modern.

Isaac Newton experienced great losses in the stock market crash of the 1720s, today’s equivalent of millions of dollars in losses. To be candid, the market has no respect for anyone, absolutely no one, not even a man whose contemporaries regard as the greatest mind of his era.

Newton’s story was told by Thomas Levinson in his upcoming release “Money for Nothing”. According to Levinson, Newton in every regard was a cautious investor. Newton had a considerable amount of shares in South Sea Company- a mercantile firm whose trade interest span goods and slaves. His holdings were estimated to be worth around £13,000, today’s equivalent of £2 million.

South Sea Company backed by a well bribed British Parliament devised a scheme to convert debt holdings to equities. This was a scheme developed to prop up the value of their share price- financial gymnastics is not new. From a modest £100 a share in Jan 1720- Newton bought his shares at this price, to £325 per share by April, by May, SSC shares were trading as high as £487 per share. In Levinson’s words, “the boom delivered seemingly limitless wealth”. Are we sure the year 2020 is not 1720 in disguise?

Newton at first resisted the urge to sell, holding on to his shares. Like most investors, he finally gave in and sold his holdings for prices ranging from £400 to £500 per share. He pocketed a good sum in return, estimated to be about £20,000, a 200 year equivalent of his annual salary. As Newton was selling his shareholdings, so also was the price of SSC shares rising- market forces were driving the price, as demand was on the rise. By June, SSC shares were trading as high as £770 per share. Should Newton have waited?

Newton, like most investors, will be licking their wounds for selling too soon. Why did I sell it so soon? Will be a constant theme in his thoughts. He decided he wanted back in the game. By August, he started by buying SSC shares paying as high as £700 to £1,000 per share. Remember he bought first at £100 per share, sold at £400 to £500, netting a profit of £300 to £400 per share. Now he is buying back at £700 to £1000.

Would this decision come back to bite him? It definitely did. From a high of £700 to £1000 per share, by October 1st, SSC shares were trading at a low of £290- this decline wiped out the entire gain since the upward trajectory started. By November, it was trading for £200. Newton losses were catastrophic. He lost an equivalent of £20,000, if not even more.

If Newton, the greatest thinker of his era could make a catastrophic mistake, who says you and me are not susceptible. In Levinson’s words, “Newton had a simple explanation for his lapse. At the crucial moment, he’d lost his mind. Or rather, others around him had lost theirs”. Money can make you lose your mind you know.

The market has no place for emotionalism. The thrill of the moment got to Newton, I believe, or how best can you explain away how a man who made a profit initially from buying low and selling high, to wanting back and finally losing all. First, he must be an investor without a strategy or he was just overly greedy or maybe both were at work. If this had happened to a Nigerian man, we can point to his “village people”.

Newton’s mistake is still happening, more so at an alarming rate. 300 years have passed and investors’ behaviours haven’t changed a bit. Sophisticated finance models possessing predictive capacity never seen before are employed nowadays but the trend remains the same. Let’s hope 2020 isn’t reminiscent of the 2008 market crashes.

Are we gamblers or investors? Gamblers often tend towards what economist call the “gambler’s fallacy”. According to Investopedia: “Gambler’s Fallacy occurs when an individual erroneously believes that a certain random event is less likely or more likely, given a previous event or a series of events”

Flipping a coin 5 times and a head appears 5 times doesn’t mean at the sixth time a head or tail will appear. Each event is independent of the previous event. To make a decision based on previous outcomes for truly independent events is folly. The stock market is a perfect example.

This is where the complexity of investment lies, there are no rules cast in stone. We must understand that the market is cyclical: boom, bubble and burst. Understand market timing and always have a playbook.

Harry Markopolos, the acclaimed whistleblower of the Madoff scandal, once opined that any investment vehicle that can’t be explained in simple terms is probably not worth your time and money.

Nobel physicist Albert Einstein famously said; “God does not place dice”. If you would permit me to add a caveat, but humans do.

Strategy is king
Information is key
Hype is a red flag
Timing is important

© 2025 David Alade

Theme by Anders NorénUp ↑