Are You Making Money or Building Capital? The Difference Between the Rich and the Poor

May 14, 2016

In this issue:
» This is how rich get wealthier regardless of their spending
» Trade deficit falls to five year lows. Should you celebrate?
» Weekly round up of the markets
» ...and more!
Richa Agarwal, Research analyst
  • Dear Readers,

    In this special edition of The 5 Minute Wrapup we have Anisa Virji, the Managing Editor of Common Sense Living, writing for us on the difference between consuming wealth and investing it - something that differentiates rich from the rest. Below, she shares her thoughts on how rich get wealthier regardless of their spending.

    Happy reading!
    Richa Agrawal


    Anisa Virji

    There once was a simpler world. Remember that world? You work to make money, you spend that money to live. Life was simplicity itself.

    If you made a lot of money, you spend a lot of money. If you made little, you spent little.

    In that world, the rich lived lavish lives. Kings lived in palaces, were decked out in gold and silks, and would give away their necklaces to anyone who pleased them.

    Labourers and farmers ate what they earned, and lived hand-to-mouth in modest hovels.

    That sounds like this world a little bit. What's different now, you ask?

    The configuration of now is a little different...

    Now it is the not-wealthy who spend lavishly - they use their hard-earned money to buy TV's and cars and umpteen things they don't always need. If they don't make enough, they get loans to fulfil their desires.

    We just read a disturbing article called The Urban Poor You Haven't Noticed: Millennials Who're Broke, Hungry, But On Trend, which talks about the choices young people are making that are keeping them in a state of self-imposed poverty. Instead of spending their well-earned money on good old roti-sabzi, they are starving themselves most of the time so they can be seen eating at trendy restaurants or drinking a fancy cup of coffee the rest of the time.

    In a society recently flooded with the new-age need to get ahead, keeping up appearances trumps sensible spending. According to the article:

    • Every newspaper and media house has it in neon lights: how you need to eat, look, and dress to be successful. Where you need to vacay, what you need to smell like, what car you should probably drive. But they don't tell you how to pay for any of it.

    Isn't that what the rich do too? Spend too much to live lavish lives?

    Not exactly. The rich don't just spend their money; they invest it.

    • 'If you buy things you do not need, soon you will have to sell things you need.' - Warren Buffett.

    The rich - the ones who sustain their wealth - see their money as capital, and that's why, in a capitalist world such as ours, the wealthy get wealthier while the poor get poorer.

    • 'The supreme commandment of the rich is "Invest!" The supreme commandment of the rest of us is "Buy!"' - Yuval Noah Harari in Sapiens: The History of Humankind.

    Are you 'consuming' your wealth, or are you 'investing' it? This is the difference between the rich and the rest.

    You, dear readers, are investors, and in that you come out ahead of the crowd. Whether you invest in the stock markets according to the wise analysis of the Equitymaster researchers, or invest in your businesses, your properties, or your children's educations - you are investors.

    You know how to use your wealth as capital.

    But the question remains...

    How do you avoid the temptation of consumerism, invest wisely, and still live well?

    Is that even possible?

    Ah now that is a question we could write a whole book about. And in fact, we have.

    Living Rich tells you how the 'enlightened rich' make their decisions. How they build lavish lives in lovely homes, how they live longer, sleep sounder, eat better, and still grow their wealth everyday... How - while the rest of us seem to have less money every time we spend - the rich seem to get wealthier regardless of their spending.

    The answer lies in not how much they spend - but how they spend.

    You may know people - doctors and lawyers and businesspeople - who make a lot of money. And spend a lot of money.

    When they buy a car, they opt for the most expensive one they can get. When they buy a home, they want the biggest one in the neighbourhood.

    When they go on holiday, it's the Taj or stay home.

    And many go into serious debt to possess these symbols of wealth, becoming stressed-out slaves to the idols they worship.

    Mark Ford calls these people the 'unenlightened rich'...

    Wealth coach Mark Ford has written this book to convince you not to be like them.

    The book will tell you what the 'enlightened rich' know and the rest of us don't about 'happy money'. Whether you have a Rs 600,000 or 6,000,000 annual household budget, this spending rethink alone spend makes the book worth reading...

    Living Rich is about making choices that improve the quality of your life - even if you don't have lots of money. It is about going back to that simpler world.

    You are investing money to get rich...but what are you doing to live rich? If you're willing to think carefully and make a few smart decisions - this book will change your life.

    Editor's Note: Right now, Common Sense Living is giving away hard copies of Living Rich - and it's not available anywhere else in India. Click here to see how you can also get a copy.

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    3:00 Chart of the day

    India's trade deficit has hit a five year low. That's indeed a good news. However, do not celebrate just yet. It's not just a case of exports exceeding imports... but both declining at different rates.

    Fall in oil imports and jewellers' strike leading to lower gold imports led to the sharp decline in overall imports in the year till date. Even the non-oil imports were down 23% YoY, suggesting weak domestic demand. Decline in the commodity prices has been one of the reasons for keeping imports in check. As the commodity prices recover, the import bill is likely to rise.

    As for exports, the situation is worrisome. April was the 17th straight month of decline. Exports comprise a key constituent for GDP growth. With rapid globalization, a lot of Indian companies have expanded presence in export markets. A slowdown in exports is an overhang on companies with a large exposure to export markets. Falling exports is a concern. And it does not get offset by a shrinking trade deficit.

    Trade gap shrinks, but exports remain a concern

    Do you think that falling exports is a significant concern for India Inc. and economic growth? Let us know your comments or share your views in the Equitymaster Club.


    Global Markets continue to remain volatile over the worries of continued slowdown. Crude prices witnessed a surge of around 4% during the week. Oil output from producers outside the Organization of Petroleum Exporting Countries (OPEC) is falling faster than expected, helping the market to rebalance.

    Barring Japan, major Asian markets ended the week on a negative note. The stock markets in China and Hong Kong ended the week lower by 2.9% and 1.9% respectively. China released its trade data during the week. Both exports and imports fell for the month of April. While exports fell 1.8% YoY, imports sank 10.9% YoY during the month. This was the 18th consecutive monthly decline.

    Major markets in the Europe ended the week on a flat note. Everyone is now looking ahead to the Brexit referendum that David Cameron will call on 23 June 2016.

    Back home, BSE Sensex ended the week higher by 1%. The weak industrial data for the month of March dragged down the indices. India's factory output barely grew in March. The Index of Industrial Production (IIP) rose 0.1% in the month of March, against a 2% increase in February.

    The weak growth in factory output was on account of a 0.1% contraction in mining and a 1.2% decline in manufacturing output. However, the electricity generation grew by 11.3%.

    Performance During the Week Ended 13th May, 2016
    Performance During the Week Ended 13th May, 2016

    4:55 Weekend investment mantra

    "Do not save what is left after spending, but spend what is left after saving" - Warren Buffett

    This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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May 14, 2016

Dear wise Equitymasters,

Could you give your wise views on how GST could affect the financials of companies as requested earlier?

Equitymaster requests your view! Post a comment on "Are You Making Money or Building Capital? The Difference Between the Rich and the Poor". Click here!