Michael Hanson
Business in Review

The Richest Man in Babylon

By, 05/04/2010

Running low on Shekels? Wish you could afford that nice goatskin your wife's been asking for? Are you covetous of the new model mule—the one with 0.5 horsepower? Do you desire your cup to runneth over with libations? What about that designer robe of fine cloths that caught your eye in the bazaar last week? Tired of the same old salted meats and dry grains when you could be enjoying the rare spices of the world? Then have I got a book for you!

One of the longest running and bestselling investing books of all-time, The Richest Man in Babylon is attributed to George S. Clason, but there were probably many authors. The book first popped up in the mid 1920s as a series of short anecdotes widely circulated by financial institutions, and was eventually compiled and released as a book. It's a series of allegories set in ancient Babylon meant to convey the "timeless" wisdom of finance.

Timeless, maybe, but in some ways it feels dated—stuff like IRAs, 401Ks, savings accounts, and the general notion of investment as a venue for retirement is hugely popular today…probably at least a little because of this book's longevity and popularity. All this is certainly in the public consciousness by now (of course, whether folks heed the advice or not is another matter entirely).

What I like is the spirit it conveys—equating financial prudence with wisdom and teaching that achieving wealth is often a matter of personal responsibility. In today's world, where populist anger equates wealth almost exclusively with greed, we could use a reminder that riches for most folks are the result of a lifetime of work ethic, discipline, and prudence. As such, it's a great book for budding graduates and other young adults who need such lessons.

But it's hammy. The characters speak like a cross between Hamlet and Yoda, and often descend into aphorism, banal platitudes, and a sort of prophetic righteousness that will elicit more than a few chuckles. In its own way, this feature contributes to the fun of the book more than it detracts. For instance, the "Seven Cures for a Lean Purse" feature great one-liners like, "Start thy purse to fattening," "Make of thy dwelling a profitable investment," and "Guard thy treasure from loss." Even a perpetual sourpuss has to smile a little at these.

For some reason, ever since the King James Bible folks seem to think all cultures before about 1800 AD spoke the King's English (A favorite quote: "Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field"). I guess the lofty language gives the sheen of wisdom. There's always been the fantasy that "ancient" means wise. But none of these folks spoke this way in ancient Babylonia. Barely anyone could read or write. Yes, languages of antiquity were fairly well developed, but on balance were rough and far less sophisticated than much of what we have today. (Language is a technology too, and differing dialects have differing usefulness, particularly in fields requiring exactitude like the sciences and finance. But I digress.)

As allegories go, Babylon is fairly entertaining and drives its points home. But generally allegory is used to nuance and juxtapose lessons so as to broaden and deepen the teaching. I'm not sure there's a lot of nuance in this book: save, be frugal but enjoy your life, and invest in things that generate income—we hear these dictums over and again.

Importantly, the story and its ancient setting actually obfuscate some of the finer points of today's investing landscape. For instance, I doubt your average Babylonian citizen particularly had a long enough time horizon to see the benefit of compounding interest. Sure, some lived long and grew fat with years, but when you're looking at an average lifespan of well below 50, and the occasional plague or famine, well, that starts to alter your long-term plans. Also, what's magic about 10% as an appropriate savings rate? Why not 15% or 5%? There's no discussion of such things, or of other basics like diversification (probably because diversification as a formal finance theory was still decades away in the 1920s). But not putting all your shekels in one clay wine jar is really important for novice investors to know.

Another example is gold. "The Five Laws of Gold," which comprises a large chunk of the book, is sometimes misleading. I think what's really meant here is "the five laws of money", or capital. This seems like quibbling, but it's an important distinction because much of this book is about how to generate future income. Well, gold is not a productive asset—it's just a thing, a commodity. You have to do stuff with it to get income, that is, to create value. That's different than owning a stock, for instance, which is ownership in a share of an enterprise that exists to create value.

You can have a lot of fun with Babylon. Where Warren Buffett would say something boring like, "I only invest in businesses I understand", here you'll get, "Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those who are skilled in its keep." But I'd advise sticking with a modern dialect when discussing your investments with your advisor, lest you end up with a portfolio denominated in goatskins.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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