What is the main advantage of being wealthy?

Simple. Some of your ancestors have understood the role of ‘n’ in the  compounding formula. They also know the virtues of sitting tight in one place and not affecting the compounding process.

Let me explain. Those people I know who were there in the markets much much before the year 2000 reacted to the 2003-7 boom much better – and to the 2008 fall too.

So when one such person buys Hindalco at say Rs. 100, he knows that Aluminium is a commodity, that Eid Parry cannot be a bad buy at 129, that when demonetisation is announced, Asian Paints is a good buy because it will bounce back.

The real wealthy do not sell their shares because ‘markets are falling’ – they exit to buy another asset. This gives them an awesome ability to sit tight during recessions, commodity cycles, etc. without batting an eye lid. Now imagine a less wealthy person whose fund manager is Social Media, and MSM. He/she get carried away by the news of the day, suddenly have emergencies, etc and access the funds in the shares portfolio/ mutual fund portfolio at an amazingly wrong time.

Another reason why the Rich get Richer is that they have a greater risk taking ability. Risk taking means not panicking when others are panicking, and the ability to sit tight for a longer period. Since they started earlier and have been holding shares for a longer period of time, they now get a larger part of the nation’s wealth. And the same story continues.

A higher risk taking ability means higher risk deals are offered to them – and they have the ability to take such deals. The poorer people do not have the ability to lose capital. As people with more money, they may be able to access better advice compared to the people at the lower levels. Also the wealthier people realize that 10 years is long term, but since they need the money only in 30 years, they can keep the earning, spending, investing – can and should be kept separate.