Although blogs and newspapers alike have oft posthumously placed a familiar quotation pertaining to compound interest — it being the most powerful force in the universe or man’s greatest invention — in the mouth of Albert Einstein, there is no evidence he ever said such a thing. He might have; the sentiment matches what seems to be this particular genius’s sense of humor.
Whether he said these words or something similar is relevant only to purists who say serious journalists shouldn’t attribute quotes willy-nilly to emphasize their importance. It doesn’t change the fact that compound interest should be on the mind of anyone looking to build wealth over time.
Albert Einstein was arguably one of the most brilliant thinkers in the twentieth century. His contributions to physics are well documented. Although being a genius in one genre doesn’t guarantee illumination is all other areas of thought, observers can adapt Einstein’s philosophies of life and his personality traits into better approaches to money management and life in general. Einstein might have more to offer today’s thinking saver than just compound interest.
Albert Einstein was a bit of a rebel. He didn’t like the militaristic nature of his schools, where pupils were not encouraged to ask questions, and learning was effected through rote memorization. The young Einstein had no interest in this type of training to blindly worship authority. He believed that humans were given brains so they could do much more than trust received knowledge unquestioningly.
Skepticism is just as important today. Authority figures, like professors who lecture without open discussion and politicians, don’t always deserve to be trusted. And from a consumer perspective, we have to resist the temptation to consider salespeople authority figures or experts. Salespeople can cleverly disguise themselves as advisers, and skepticism helps protect people from making poor financial decisions.
Einstein’s skepticism and desire to avoid conforming prevented him from getting deeply involved in politics for most of his life. Regarding politics, he said, admitting there is at least one aspect of life beyond his ken, “How an intelligent man can subscribe to a party I find a complete mystery.”
Non-conformity also helps in investing. There’s often a trend to follow the herd — to buy stocks when it seems like everyone is buying and to sell stocks when it seems like everyone else is selling. Being a non-conformist, investing against the grain, can help investors buy low and sell high. That’s the only way to be profitable in the stock market.
Disdain for cult of personality
The danger of turning to Albert Einstein for insight into how to live one’s life is that it’s putting him on a pedestal. Based on my reading of his life, mainly from his biography written by Walter Isaacson, he probably would not like to be looked at as a role model. That isn’t to say he didn’t like attention, as he grew accustomed to the fame he achieved after his theory of special relativity grew in popularity and acceptance. But when he first saw his fifteen minutes, he lamented:
The cult of individual personalities is always, in my view, unjustified… It strikes me as unfair, and even in had taste, to select a few for boundless admiration, attributing superhuman powers of mind and character to them…
It seems Einstein would not be too happy with the way people revere the most popular financial gurus. Fans of gurus will continue to stand up for their heroes despite displays of lack of character and lack of sense. Fans are invested in their heroes; to admit their guru isn’t perfect is to admit they wasted time, money, and energy. A superfan perceives an attack on Robert Kioysaki’s business practices or a criticism of his sales techniques as an attack on the man and his following. A criticism of Dave Ramsey’s approach to financial advice is dismissed without consideration; after all, he’s the successful author.
I believe that while Einstein would appreciate the success of popular seminar leaders, radio show hosts, and authors, he wouldn’t think highly of those who follow advice without every questioning the concepts on which their philosophies are founded or their intentions.
Value of cognitive skills
“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”
Einstein didn’t learn about special relativity in school. His breakthrough in the understanding of the physical universe came from his ability to imagine how the world might work, and then ask himself questions and solve problems to determine which theories could be tested. For the most part, he let other scientists worry about the testing part, giving himself room for his thoughts to consider the world in ways no one had considered it previously.
Despite his initial problems with the regimented style of school, Einstein strongly valued the cognitive skills he gained from his later studies. He cited a good college education with providing the type of cognitive skills that allows people to think for themselves and imagine possibilities that have never been imagined. “The value of a college education is not the learning of many facts but the training of the mind to think,” Einstein was quoted in the New York Times in 1921.
For Einstein, advanced education is not job training, but training to perform at high levels in any situation, job or otherwise. This agrees with my view on education, with its worth being measured in more than just financial return on investment. Would Einstein feel the same way now, with a college education costing several multiples more than it did in his time, even after taking inflation into account? He clearly sees the importance of cognitive ability and education for growing human capital, which has a positive effect on options for long-term wealth.
Share with the world
Moving to the United States and becoming a citizen of the country was important to Einstein. He saw this nation as a place of freedom and tolerance. He loved the idea that he and others could question authority without fear of reprisal. Einstein also enjoyed the lack of a class system as was prevalent throughout Europe. America provided the opportunity for any individual to succeed.
At the same time, Einstein recognized his moral obligation, and that of his fellow human beings, to contribute to the world around him. Because the individual had so much freedom to build wealth, he also had the responsibility to live in such a way that all of humanity would benefit. Einstein often put his own selfish desires aside when he had the opportunity to encourage human progress. He offered this advice to his relatives: “Use for yourself little, but give to other much.”
With this philosophy, Einstein would have embraced frugality. Despite his world travels and, especially later in his life, his ability to command top salaries and fees, he maintained modest living environments. I can’t find any information on Einstein’s approach to charitable giving, but it’s clear that he cared about the world, and he was passionate about some causes, particularly later in his life, and there is a strong chance he supported these causes with the money he collected from his work over the years.
Capitalism can be destructive to society
There is no question that Einstein enjoyed the personal freedom to succeed in the United States afforded by the country’s capitalist underpinnings. He was prescient, or perhaps just observant, when he noted that “unrestrained capitalism produced great disparities of wealth, cycles of boom and depression, and festering levels of unemployment.” In 1949, when Einstein wrote this opinion piece, he could have been describing the most recent global recession, which, as the media won’t let us forget, feature record levels of unemployment and increased disparities of wealth.
Albert Einstein definitely leaned towards the socialist end of the economic spectrum, but he always emphasized the important of individual freedom, democracy, and personal liberty. He was not a fan of communism in Russia, nor was he a supporter of German fascism or nationalism. The United States was politically the best environment for him, particularly with his belief that art and science relied on the availability and encouragement of individualism.
From an economic perspective, he seems to have thought there was danger in allowing capitalism to rule completely free from restraint, and he did not like the way that wealthy individuals could use their contributions to sway the direction of political parties.
What we can appreciate from Einstein’s philosophy is that society is as important as the individual, and individuals, particularly those who are successful, can help society to a greater extent without sacrificing their success. Also, regulations free from corruption help guide capitalism so that opportunities are available for more citizens.
This economic philosophy doesn’t have a direct relationship with money management, but I thought it was interesting to note. Because of individual freedom, cherished by Einstein, we are able to build wealth for ourselves. In some countries, if our parents were poor servants, we’d be poor servants, too, without any economic mobility. We wouldn’t be able to build wealth.
Being thankful for these opportunities is certainly one reason not to throw it away by making bad decisions with money. It may be difficult, but financial independence is within reach for anyone who wants it although there can be unavoidable external situations making it more difficult or impossible for some. But for at least those reading Consumerism Commentary, there should be enough opportunity to move towards financial independence.
Do you agree or disagree with any of Albert Einstein’s philosophies? Are you aware of any other traits of his that might be relevant to money management?
Photo: Library of Congress
Einstein: His Life and Universe, by Walter Isaacson
Updated December 7, 2012 and originally published December 4, 2012.