Seven steps to wealth – the example of Paul Navone

Ok, hang on. This can't be the whole story.

He's 78, and he's never made more than $11/hr, and he's worth "millions" despite having just given a million dollars away - so call his worth $5M. So let's do some back-of-the-envelope calculations.

Assume he started working at 18, and he's made $11/hr the entire time since 1948 (yes, it's absurd) - in that whole time, he's made less than $1.5M. If we assume, instead, that he started at a more typical 1948 income, which grew linearly to the current $11/hr figure, then he made about half of that. And he certainly lost something like 20% to taxes.

So, if he saved every single penny he ever earned, he'd have something on the order of half a million. He's described as living somewhat frugally - never denying himself anything, but not living lavishly. So we might reasonably say he managed to preserve as much as 10% of his income for investing. He'd have to steadily make about a 7% rate of return to have about $5M today.

Now, 7% isn't an outrageous amount, but it puts him pretty close to the average of the prime lending rates over that time.

Here's the thing - investing always involves risk. So outcomes are always probabilistic. As a result, when you look at an investor who's made money, and attribute it entirely to his own "discipline", or "skill", you're creating what's called a "survivorship bias". And the book mentioned, The Millionaire Next Door appears to be just rife with it. (Though, to be honest, I've not actually read it - just the cover blurbs and skimmed a bit.)

If you have a million of these "disciplined" investors, all investing independently, but "safely", doing the kinds of things recommended by the "experts", then there's still going to be some fraction of them that go broke and another fraction that get lucky and hit windfalls - and neither outcome has much to do with any "skill" on the part of the investors.

Navone has been fairly lucky in his investments. Good on him - but that doesn't mean we should emulate him. He's almost 80, and he's sitting on millions. But he eats at McDonalds and wears second-hand clothes. He's never been married.

What the whole story misses is that money, itself, isn't worth anything. Money is a way of measuring what other things are worth. So Navone doesn't actually have anything. If he dies tomorrow, what will all that "disciplined" saving and investing have gotten him? Nothing.