Wednesday, December 19, 2012

Nick - Additive and Multiplicative Forces

When I started playing Animal Crossing, I would fish vigorously until my inventory was full, run to the store, and repeat until I was able to pay off my first loan. Such is the way that Animal Crossing is played: make money, spend money, get things.

I got pretty good at catching fish. I figured out where I should go fish to make the most money in the least amount of time. I knew what fish were profitable, and sometimes even what time of day I should fish to earn the most money.

It got to the point where I knew a ballpark estimate of how long I would need to play in order to reach my next financial benchmark. And as you might guess, it gets pretty tiring to look and see that it will only take four more hours of catching fish until something happens.

So I started looking for other ways to make money, and I happened upon an old lady who sells turnips, which can be bought in bulk and then sold for a different price that fluctuates day-to-day. Pretty soon I was playing the game way less (because I didn't need to fish as much) and instead checking the prices every day on the turnips I had bought with my sizable fish-fortune. And I was making way more money than I made while fishing.

All this to say that I've been thinking about finances and investment recently, probably because I'm paying rent and using my bank account a lot more often nowadays. We see my Animal Crossing experience mirrored in the real world: people add to their money until they have enough to multiply it.

Retirement plans and whatnot work because money is put in over time, and then it accrues interest. With the magic of compound interest, money set aside for retirement grows pretty substantially.

We see the same principle happening with billionaire investors. They never start poor and make their fortune in investing; they start with money and then they multiply it, and their gains become more significant as they accrue more capital to invest.

I would love to see some research into how investment education and knowledge correlates with wealth.