“It’s like they tell you it’s your fault you’re poor”, “Now they want to cut us off coffee too, they’re not a bit ashamed…” “So if I cut two coffees, I’ll become a tycoon?”, “And if I stop to breathe, what will I be?”

These and many other comments (sometimes inappropriate for minors) have gathered on social media in recent years a popular “investment strategy” theory, which claims that if you cut a coffee a day and invest the money you save, preferably in the Stock Market, you can become rich.

A recent publication of the newspaper “Kathimerini” (“How one less coffee a day ‘builds’ capital”) caused a lively discussion on the subject. In fact, this specific publication was extremely realistic, as it adapts the “coffee theory” to lower incomes and does not speak of high wealth as a result of savings, but of a capital of 15,000 euros, something like the traditional “one-off”, a an amount secured even by a low-risk investment in Greek government bonds.

The “miracle” of compound interest

With a short search on Greek social media we find at least 3-4 influencers referring to the “coffee theory”. Which, of course, is neither new nor Greek-inspired. In the US the theory has fanatical friends, but also critics. Recently, the New Yorker observed with characteristic east coast humor: “If you save a coffee a day, you can buy your dream home within in just 300 years…”

Not even this pun reflects the reality, of course. Because the essence of this strategy is not to forget in the “piggy bank” the money we have saved from coffee, but to invest it properly, so that they take advantage of the “effect of compound interest”.

That is, that at the end of an agreed period, not only the capital is compounded, but also the interest, later the interest on the interest and so on, with the result that the initial capital, after successive compounding, shows an exponential increase. Einstein is said to have characterized compound interest as the “eighth wonder” of the world.

Unfortunately, many Greeks during the crisis were forced to experience “bad interest”, i.e. the phenomenon of a debt that they could not service rising to unimaginable heights. The point is to take advantage of the “good compound interest” and increase your capital to the maximum extent possible.

In Germany, one of the devotees of this strategy is the investment consultant Bodo Schaeffer, with a rich literature and a regular presence on YouTube. His theory in a nutshell: Even if he earns little money, a 23-year-old can save five euros a day from small expenses, which if he invests in the Stock Market with a constant return of 10% per year, by the time he is 65 he will have accumulated capital over one million.

There is no guaranteed performance

Is it that simple? A repeated experiment brings the same repeated result only ceteris paribus, as scientists say, i.e. if all the (other) data of the experiment remain unchanged. Therefore, the interested party must not only have the ability to save 150 euros per month for life, but also find a stable return that will yields 10% per year – and this for 45 years.

The bet seems difficult. Not impossible, perhaps, because a look at the performance of foreign stock markets over the last 50 years proves that indeed returns range from 7-10% per year, on average. But there are the following problems: First, not all of us have a 50-year time horizon. Second, high return implies high risk. Third, past returns they do not guarantee future returns.

That there will be returns in the future is certain. But we don’t know where exactly. Anyone who claims otherwise is doing so for their own, rather selfish reasons. However, according to the international literature, permanent returns of around 10% are presumed to be achieved only by specialized and well-paid family offices, which undertake the management large family estates (for example in Switzerland the minimum limit is said to be around 150 million francs).

The value of saving

All this is not to say that the “coffee theory” is absurd or useless. It is extremely useful, if we see it in its true dimensions. First of all, “coffee” is a symbolic wording. Because many times it is “coffee and a second coffee and a cheese pie and an orange juice and a pack of cigarettes and a taxi and a magazine…”. If we record the total small expenses of the day, we will probably find somewhere, at least a small, margin to save a little money.

But the greatest value of the “coffee theory” is that it highlights the importance of saving. We don’t mean saving for a specific purpose (for a car, for repairs, for the next vacation). We mean saving done for saving and ultimately leads to investment.

Whatever the “coffee theory”, the “golden rule of 50-30-20” or other popular theories of financial management and savings say, the fact is that in Greece the savings rate is negative last 15 years and consistently the lowest among all OECD member states. Why is that? Let’s not rush to answer that “memoranda are to blame”. But that’s another discussion…