Alchemy works!

Bill is a reader from Malaysia; he read my post on diversification and sent me the following e-mail:

I came across this article which is from Australia

The gist of this article really go in line with your premise of focus vs diversification.

Having said that, the author also espouses that one needs to focus oneself in getting the first one million then only talk about diversifying in other wealth building strategies. Similarly, in my country, we always believe that as long as having earned the first bucket of golds, more buckets would come.

I believe that the above might be a generalised notion, may I ask, in your scenario, did you make the adequate money from your finance company first, then only embarked on the other wealth building activities?

Firstly, to answer Bill’s excellent question: no, I didn’t wait for my finance company to make ‘adequate money’ before venturing into real-estate; these were concurrent strategies … I used the cashflow from my business to help finance the real-estate (i.e. building up cash for a deposit; then using business profits to help cover the mortgage and other costs of holding the real-estate where the rent was insufficient).

But, this is not a question of diversification …

… this is a question of using ACTIVE income to fund PASSIVE investments. This is ALWAYS a good idea!

It is like alchemy: turning a serviceable but somewhat worthless substance into something exceedingly valuable: alchemists believed that they could come up with a ‘formula’ to turn lead into gold … in the current market, wouldn’t that be wonderful?!

Similarly, ‘financial alchemy’ seeks to turn serviceable but somewhat worthless income from your job or business – ‘worthless’ because you can suddenly lose your job/business – into something far more enduring: passive assets (e.g. stocks; bonds; real-estate; gold; etc.).

This is not the same as diversifying … diversifying would be then buying more than one class of passive asset in an attempt to reduce risk. See the difference?

And, as the Australian article correctly points out: wealthy people got that way by concentrating on the one thing that they do best …

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5 thoughts on “Alchemy works!

  1. Another stunning article which pretty much sums up my view of building wealth as well.

  2. Thanks for mentioning my question. Base on what you have said, esp. “I used the cashflow from my business to help finance the real-estate”, may I suppose that from the begining of your wealth building journey, you have already earmarked real estate investment as your primary means of generating the first bucket of gold?

  3. @ Chiko – Welcome!

    @ Ryan – Love the choice of words .. I’ll keep this comment pinned up on my fridge 🙂

    @ Bill – Each to their own; I kind’a fell into the real-estate schtick … in fact, my accountant pushed me to buy my first commercial (office) investment – I was scared but did it anyway. Netted me close to $1 Mill. over 5 years so I’m glad he did!

  4. Pingback: a ‘leverage’ » Blog Archive » Forex trading price action support on a currency trading software

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