Tag Archives: Rich

Your Perpetual Money Machine won't start?

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AJC has written his first article on US News magazine’s ‘alpha consumer’ web-site. It’s all about what US News calls Recession 2.0 … check out the article here then PLEASE leave a comment on the US News site!!!

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Your Perpetual Money Machine won’t start?

… then it probably just needs a little oil and a good kick!

I am, of course, talking about the Perpetual Money Machine that I covered in a series of posts last month. But, Caprica, who lives in Australia asks:

But not all perpetual motion machines are that seamless. If you want to invest in cash flow positive properties here in Australia, either you are buying into regional areas that are subject to seasonal trends or you become a slum lord. Furthermore, the boom on “cash flow positive” properties and the high interest rates here in Australia has meant that the cash flow positive opportunities have all but dried up.

Similarly, a Berkshire Hathaway portfolio can easily loose large chunks of value during declining markets (sub prime for example).

Is there a such a thing as perpetual motion machine (short of having more than 7 million in the bank earning interest) that means that I don’t need to deal with difficult tenants or worry about every jitter in the market?

Caprica is right, of course … not all Perpetual Money Machines are ‘seamless’, run entirely smoothly, or even start without a ‘kick’ in the right place!

But, start – and run – they will, if you do it just right …

You see, there is one ingredient that you need, Caprica, regardless of where you live: time.

Any reasonable property can become cashflow positive if you allow time for the rents to build up such that you ‘overtake’ the costs … in our analogy, it takes time for the ‘capacitors’ to build up enough ‘charge’ to kick-start our Perpetual Money Machine.

It helps if you can buy when the market is off its highs; it helps even more if you can lock in interest rates when they are still relatively low; it helps if you can put in your research and buy a property that will rent reasonably well and appreciate over time (but, we aren’t looking for ‘home runs’ in either category, here).

Similarly, stocks may go up/down, you just need to keep pumping money in (i.e. buying more stocks) until you have a buffer (excess of stocks) that will allow you to ride the waves and sell down a little at a time to live off (after you ‘retire’).

Equally, it helps if you have the fortitude to ignore the waves entirely -better yet, be contrarian – knowing that the inevitable ‘upwards correction’ will come ‘eventually’.

The Perpetual Money Machine will work anywhere, anytime … you just need to give it time to warm up properly 🙂

Can you diversify a business?

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I’ve just loaded 3 new videos into the Vault (click on this link, or check the VodPod Widget on the right hand side of this page for the latest) …

Now for today’s post …

Now listen up!

You want to keep working that job forever? Stop reading today’s post! If you’re determined to stay poor forever, you deserve the extra 2.5 minute break 🙂

You want to work your job AND invest in real-estate? Well, keep reading, because SOME of what I’m about to say, applies to RE, too.

But, if you want to blaze the business path … hang about, because Dustbusterz has a GREAT question for you:

Tell me here ,if I am wrong in my assessment. I believe diversifying(i.e. buying or starting many businesses) is better than having all your money tied into just 1 business.
Currently, we own about 5 small businesses, which bring in small amounts of cash. Our intent here is that we will build these businesses up gradually over a set time frame , and at the same time, continue to buy or build more businesses to add to our income stream.
By having these several businesses, we somewhat mitigate future problems if say,1 of these operations should suddenly be stricken with cancer and we are unable to restructure and save it.
So having 10 smaller businesses (1 goes bankrupt or gets sold) it is less of a drain on your income stream as having all your cash in only 1 or 2 bigger businesses.

As I said to Dustbusterz, there are some great reasons TO enter into multiple businesses and some equally great reasons NOT to …

… but, I have to admit, diversification was never on my list … until now )

First, let’s look at why you might want to buy/start just one business:

– You can concentrate on it ( THE reason not to ‘diversify’)

– One business can become many through territory expansion, franchising, joint ventures, etc.

– A bigger business can be more atractive to the people who will pay you more (say, 6 years’ profits) than the typical ‘small business purchaser’ (who might only pay 3 to 5 years’ profits); these uber-purchasers include: e.g. the private equity firms, large corporations, IPO, etc.

Now, let look at how you may end up with multiple small businesses:

– The businesses are related in some way (this is how I ended up with a portfolio of businesses)

– The first business that you buy or start doesn’t have enough potential so you open up another on the side and … it just keeps rolling from there

– You are in the business of ‘flipping businesses’ … really!

Before I continue, let’s take a break to satisfy the real-estate guys:

With real-estate you can own one property or multiple … across a single location or many. It matters not, so long as you put good management in place.

And, if you decide that you are going to be in the business of flipping RE – well, then you have no choice but to be hands on with multiple properties … you just have to hope that it all holds together!

Not so with businesses; the management requirements in small business – indeed, any business – are relatively HUGE (certainly, when compared with the management stresses in real-estate). This usually points to having one business that you grow and grow, slowly and carefully adding management layers underneath you.

I believe that by diversifying, you are exponentially INCREASING management risk (hence, failure) … which may or may not offset the potential diversification ‘benefits’.

But, it can be done … as I said before, I managed it.

And so has Brad Sugarswho is a bit of a legend where I come from … I recall going to a free ‘business seminar’ and being surprised by the speaker: a lanky kid in his 20’s in a slick business suit. And, he’s gone from there to found a well-regarded multi-national business coaching company.

Brad spoke about how he would buy small businesses, often with ‘no money down’ and fix their basic money and management problems, and then sell them off. Brad often didn’t even work in the businesses himself, so I guess that you would say that he’s to ‘random’ small businesses as Ray Kroc was to McDonalds.

I particularly loved this technique that Brad shared:

1. Buy a business for as close to zero dollars as possible (this IS possible … just offering to take on the lease payments – as a take it or leave it ‘final offer’ – is often enough),

2. Install a manager

3. Help the manager build the business up

4. Sell the business to the manager (after all, they have seen how quickly it has grown!)

5. Repeat!

Personally – like RE flipping – this is a ‘business’ (that buys/sells businesses), not an investment. It’s not the kind of business that I like, because there’s no HUGE upside; although, if you can scale upwards of 50 such transactions … 😉

The FDIC might insure up to $50 Million of your deposits!

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If you’ve ever thought about starting your own online business but didn’t know where to start, check out my latest post on I’m About To Find Out If You Can Make Money Online!!

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Everybody (by now, I hope) knows that the FDIC will insure up to $250,000 of your deposits (recently increased from $100,000 in order to instill confidence in the American banking system), provided they are with an approved bank (most reputable banks are) in the event of a bank failure.

There are some questions as to how quickly you will get your money back … but, at least you know your principal is (relatively) safe, thanks to the FDIC.

But, the $250,000 limit is a real bitch – or, one day will be (!) – for our readers, but JT steps in to save the day:

I found this while looking for information on interest rates for bank accounts with multi-million dollars, and protection for those types of accounts. Like many I knew about the 100k FDIC coverage for normal bank accounts, but I was curious if I had more how could I protect it if I had it in an account. This is what I found,

There is something called CDARS which allows multi-million dollar FDIC protection. CDARS = Certificate of Deposit Account Registry Service. From what I gather it uses it’s network power kind of like a clearinghouse to place large deposits with other FDIC insured banks to give multi-million dollar accounts supposed risk free FDIC protection up to 50 million. It’s a CD, so I believe there is a 2 year min, I could be wrong. Again, I read this rather quickly, and I say I believe, and what I gathered during my explanation. So bottom line is, read it for yourself. LOL I did a search on CDARS, and multi-million dollar FDIC and it popped up with a lot of links.

I saw this question started reading, and though the info I found belonged here. I’m not a banker, or a finance person I was just curious. So for anyone who just happens to have an extra 50 mil stuffed in a mattress some place it looks like there maybe a way to protect that money! LOL

JT is right, there is at least one ‘clearing house’ that (for an appropriate fee, of course) takes care of opening accounts in you name across as many banks as necessary to break your deposits up into lots of no more than $250k each … effectively FDIC-insuring up to $50 million  … legally!

But, you probably do not need to go through all of this … did you know that you can actually FDIC-Insure (and, this happens automatically, provided that you comply with the regulations) as much as $1.75 million in a single bank, without resorting to any third parties or paying any extra fees?

You simply open up different types of accounts: a deposit account for $250k in your name; another one for $250k in your name; a third one – this time a joint account (i.e. in both names) also for $250k; a fourth for your ROTH, and so on – and, it’s all legal!

But, there is a limit (about $700,000 will max out most people) …. then you just go and repeat at a second bank 😉

Now, not only does the FDIC allow this – they actually promote it in their own brochure (this brochure hasn’t yet been updated to allow for the increase from $100k to $250k per account name/type):

Basic Insurance Amount Is $100,000

The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage — your deposits are fully insured.

Coverage Over $100,000

The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.

You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.

Common Ownership Categories

The most common ownership categories are:

Single Accounts

These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.

Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.

Certain Retirement Accounts

These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:

  • Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
  • Section 457 deferred compensation plan accounts (whether self-directed or not)
  • Self-directed defined contribution plan accounts
  • Self-directed Keogh plan (or H.R. 10 plan) accounts

All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.

Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

Note: For information about FDIC insurance coverage for a type of retirement plan not listed above, refer to the FDIC resources on the back of this brochure.

Joint Accounts

These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.

If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner’s shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple’s joint accounts.

Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person’s share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.

Account Holders Ownership Share Amount Insured Amount Uninsured
John $ 110,000 $ 100,000 $ 10,000
Mary $ 110,000 $ 100,000 $ 10,000
Total $ 220,000 $ 200,000 $ 20,000

Note: Jointly owned qualifying trust accounts are not included in this ownership category.

Revocable Trust Accounts

These are deposits held in either payable-on-death (POD) accounts or living trust accounts.

Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank’s signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner’s death.

Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.

Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC’s insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.

Deposit insurance coverage for revocable trust accounts is based on each owner’s trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:

  • The beneficiary is the owner’s spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
  • The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
  • For POD accounts, each beneficiary must be identified by name in the bank’s account records.

If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner’s other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner’s share as his or her single account.

Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.

Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.

Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0

These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).

When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:

  • Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father’s POD account naming two sons as equal beneficiaries is insured to $200,000 only — $100,000 for the interest of each qualifying beneficiary.
  • Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner’s POD accounts with the living trust accounts that name the same beneficiaries at the same bank.

    • All you need to do, is be prepared to handle a few different accounts … doesn’t seem that difficult to get the peace of mind that you need when banks start failing …. apparently, there’s more to fail, yet.

    You can calculate your insurance coverage using the FDIC’s online Electronic Deposit Insurance Estimator at:  http://www2.fdic.gov/edie

    How do you manage real estate risks?

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    My most recent post – of a long series – on 401k’s v real-estate (which is a dumb comparison: like comparing the container with the drink that you might put into it … when, what we are really trying to compare is Mutual Funds v Real-Estate) sparked a long series of detailed comments about the risks and rewards of real-estate …

    … I encourage you to read that post and the associated comments here. The discussion culminated in a great series of comments/questions by Jeff who also asked:

    I agree, the “technical risks” need be manageable. But, how much does the management of these risks (infusion of cash when necessary) reduce your return?
    For instance, do you keep a safety net for possible negative cash flows (high-yield savings account, CD)? Do you then bundle the two investments (investment property return plus safety net return) to determine the actual return of the investment property?
    Do you pull cash out-of-pocket to cover short falls? Since you don’t receive any additional growth from this new cash and the new cash is added to your capital investment amount, it drastically reduces your present and future return from the investment.
    Do you borrow more money to cover the cash flows? Since this borrowed money provides no additional return it puts you in severe negative leverage situation. Further, that loan has to be paid back with future cash flows from the investment property that you were expecting to give you the return your initially expected–for lack of a better term–compounding the damage of the negative cash flow.
    Do you use a cash flows from another property to cover the short falls? This seems to be the best solution for the property receiving the infusion of cash, but to what extent doe sit reduce the return of the other investment property–by reinvesting its cash flows in an investment that provides no additional return? Put differently, it is a loss of opportunity to invest those cash flows in something that will bring additional return–rather than saving your RE investment from foreclosure.

    When you experience short falls in RE investing, which one of these options is best? What did you do when you experienced cash short falls, and why? …and what effect did/does it have on your annualized return?

    As I said, great questions, but the first comment that I would make (actually, did make) is:

    I would caution you to remember the phrase: “paralysis by analysis” … in a practical sense, once I satisfy myself that (a) a certain type of investment is within my skill/interest level, AND (b) is LIKELY to meet my investment targets, AND (c) I can cover the risks – usually through a ‘reserve’ which may or may not be sitting in a shoebox with the word ‘RESERVE’ etched in the side, then … shoot … I’ll close my eyes and just go for it!

    In other words, if you are going to be a success in real-estate investing – indeed, any endeavor where you expect to achieve more than the average person expects/can achieve – then you need to have a bias for action.

    Often, we have to proceed in a world of imperfect information …

    … magically, once we jump in a lot of these types of questions just seem to fall away!

    But, to try and answer Jeff’s question:

    Technically, YES the ‘reserve’ is part of the investment and lowers the returns e.g. if you are earning 20% on the investment and only 4% on the CD’s sitting in ‘reserve’ then obviously the actual return lies somewhere between the two.

    BUT pulling ‘free cashflow’ out of one property to help service another, doesn’t actually reduce the return of the first … but, the amount of cash that you put IN to the second property affects ITS return.

    But, at the end of the day, it’s the COMBINATION of all of these returns that counts: will you, or will you not make your Number, or whatever target you set?

    The only real benefit of analyzing the return on each individual investment once you have made it is if you then intend to do something about it e.g. trade it for something better …

    … a forced flight away from stocks!

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    If you’ve ever thought about starting your own online business but didn’t know where to start, check out my latest post on I’m About To Find Out If You Can Make Money Online!!

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    I wrote a post a while ago about the Myth of Diversification – just another piece of financial ‘wisdom’ almost designed to keep you form retiring early / retiring rich …

    Yet, despite the current melt-down that should prove that there is no real safety in diversification, the principles remain as mainstream as this comment from Francis illustrates:

    That’s the idea behind diversification and re-balancing. If you invest in multiple things and periodically adjust the balance between them you are forced to buy low and sell high.

    It really doesn’t take a genius to make a few million if you can just buy low and sell high …

    … but, it takes genius to know when to buy low and when to sell high!

    Who knows where ‘high’ and ‘low’ really sit: they are relative, which serves (partially) to explain why market timing doesn’t work!

    As the Dalbar Study shows:  mere mortals should not be in the business of trading stocks / timing the market; people who attempt this reduce their returns from 11.9% to only 3.9% … !!

    No, we are simply investing for the long term, that’s why I asked Francis:

    I agree with the “buy low” part … but, why “sell high”? Warren Buffett got rich by not selling his winners … he holds on to them.

    Quite rightly Francis responded by pointing out that we aren’t Warren Buffett, saying:

    Another reason to sell is that there are bubbles where the valuation of particular resources is out of whack. Wouldn’t it be a good idea to sell off at some amount before the peak of the bubble then repurchase after the crash? If you could reliably time the market you would sell it all at the peak and buy at the trough. I don’t have a crystal ball and I’m terrible at market timing. I’ve accepted rebalancing as a reasonable compromise.

    As for Warren I know his favorite holding period is forever, but he is buying individual companies and is really good at valuing companies. He avoided the internet bubble like the plague, but I suspect that if he had stocks that became wildly valued he would sell them off.

    But, if we really aren’t Warren Buffett, how do we KNOW when “the valuation of particular resources is out of whack”? Well, according to Francis, that’s when ‘rebalancing’ comes into play …

    But, how does re-balancing provide a ‘reasonable compromise’ to the fact that we are all (WB aside) “terrible at market timing”:

    Let’s say that you have $100,000 invested: 50% of your money invested in stocks and 50% invested in bonds.

    Let’s then say that stocks ‘devalue’ by 50% overnight (a huge market crash) … in the case of an Index Fund, this could simply be a cyclic response to the market that has occurred many times in history.

    Suddenly, your portfolio has shrunk by $25,000, so now you have $25,000 worth of stocks at post-crash prices and $50,000 worth of bonds (their price/value hasn’t shifted in this hypothetical crash). That is, you have 33% in stocks and 67% in bonds … so what do you do?

    Well, you buy $25,000 more stocks … or, do you sell $25,000 of bonds?

    The reality is that most people don’t have the $25,000 in ‘loose change’ to rebalance by topping up their portfolio, so they shift money FROM bonds INTO stocks.

    Yippee … except, what happens when stocks recover and/or bonds dip?

    In that case, you’d be taking yourself OUT of the stock market (a 9.2% – 11.9% annualized return, depending on who/how is doing the measuring) into the Bond market (a 4% annualized return?) …

    … a forced flight away from stocks!

    Would Warren Buffet do this?

    Heck no! Warren Buffett doesn’t worry about market dips; he knows the market always recovers, as long as the underlying businesses keep making money. In fact, he looks at market dips as a buying opportunity (didn’t he load up on Kraft, while we were all bailing out of the market).

    He identifies quality when he buys (bet he didn’t own any Enron), but, he recommends that you buy a little piece of all of America’s finest companies (a.k.a. an Index Fund, so even if you do happen to buy Enron, it’s only a tiny sliver of what you own), if you don’t know how to do what he does.

    Warren doesn’t ‘rebalance’ his portfolio into cash (no dividends even, because cash/bonds doesn’t produce as high a return as his investments can) … and, he certainly buys more when the market dips and NEVER sells.

    Here’s what to do:

    If stocks are the asset class that you like and if you think that the stock market (as represented by an Index Fund or one or a few individual stocks, if you prefer) represents acceptable value:

    1. Buy stocks … as many as you can afford; and,

    2. Keep buying whenever you can afford more; and,

    3. When the market dips, it’s ‘on sale’ … buy even more; and,

    4. Never sell.

    That’s it … now you are Warren Buffett.

    A random walk in the financial park …

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    I’ve looked high and low and I’ve finally found it!

    ‘It’ is the source document for all of the commentators who have (rightly) suggested that Index Funds outperform actively managed Mutual Funds.

    And, it is produced by Standard & Poors who publish the major Indices themselves:

    The Standard & Poor’s Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry.

    And, here are their most recent findings (they are in the process of rebuilding their databases for 2008):

    Indices continue to exceed a majority of active funds. Over the past three years (and five years), the S&P 500 has beaten 65.7%   (72.2%) of large-cap funds, the S&P MidCap 400 has outperformed 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap 600 has outpaced 80.2% (77.7%) of small-cap funds.

    The solution is simple: don’t buy any of the funds in the bottom 65.7% 🙂

    Great! But how?

    Well, Mutual Funds are rated by Morningstar as 5-Star (best performance) to 1-Star (worst performance) so, we should simply buy 5-Star funds, right?

    Wrong … because Morningstar – even though it is the best / most highly regarded of all the Mutual Fund ratings services – is only based upon past performance, which is NO guide to how any rated fund will perform in the future as this independent research review found:

    They find, for example, that five-star US equity funds significantly outperform one-star funds only 37.5% of the time; at the same time, these same funds significantly outperform three star-funds 18.75% of the time. It is clear then that—compared to a random walk–Morningstar’s ratings system offers no added value in terms of predicting mutual fund returns.

    If the best can’t do it, do you think you can?

    And, do you want to leave your financial future to a ‘random walk’ in the financial park?!

    So, why do funds tend to fall short of the ‘market’?

    Well, partly because of a tendency to trade stocks too much (the fund managers like to ‘look busy’) and partly because of fees … Mutual Funds tend to fall short of the market by the amount of the fees that they charge!

    The ‘small moral’ of the story: invest in the Indices …

    … find a low cost Index Fund that will do the job; by as much of it as you want and hold it for the long term.

    Of course, the ‘large moral’ of the story is: who the hell is content with 11.9% maximum long-term stock market index returns, anyway 😉

    Who are 'the rich', really?

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    “The rich are different from you and me.” — F. Scott Fitzgerald

    “Yes, they have more money.” — Ernest Hemingway

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    I received a pretty strong reaction from some readers to a post – largely tongue in cheek – that had a ‘social moral’ …

    … that ‘rich people’ are actually just ‘people’ who happen to have a few more zeros in their bank account.

    For a start, let’s look at how they got there: inheritance; marriage; luck; hard work [AJC: although, ‘marriage’ could also be included in this last one 🙂 ]

    It’s a stretch then to say that ‘The Rich’ can be genetically or socially any different to the ‘The Not Rich’: what are the common traits required for each of the above methods? None obvious to me …

    So, if anybody can get rich, why should ‘The Rich’ be any better or worse on any human scale (e.g. being socially responsible; giving to charity; etc; etc) than anybody else?

    On the other hand, they may have the means to display their characteristics more obviously – for better or worse 😉

    But, let’s not generalize, let’s turn to Prof. Thomas J. Stanley, former professor of marketing at Georgia State University (author of The Millionaire Next Door and The Millionaire Mind); I found a summary of the latter book by noted economist Prof. Mark Skousen who says:

    Here are the results of his (Prof. Stanley’s] survey of over 1,000 super-millionaires (people who earn $1,000,000 a year or more):

    • They live far below their means, and have little or no debt. Most pay off their credit cards every month; 40% have no home mortgage at all.
    • Millionaires are frugal; they prepare shopping lists, resole their shoes, and save a lot of money; but they are not misers; they live balanced lives.
    • 97% are homeowners; they tend to live in fine homes in older neighborhoods. (Only 27% have ever built their “dreamhome.”)
    • 92% are married; only 2% are currently divorced. Millionaire couples have less than one-third the divorce rate of non-millionaire couples. The typical couple in the millionaire group has been married for 28 years, and has three children. Nearly 50% of the wives of the super-rich do not work outside the home.
    • Most are one-generation millionaires who became wealthy as business owners or executives; most did not inherit their wealth.
    • Almost all are well educated; 90% are college graduates, and 52% hold advanced degrees; however, few graduated top of their class — most were “B” students. They learned two lessons from college: discipline and tenacity.
    • Most live balanced lives; they are not workaholics; 93% listed socialiazing with family members as their #1 activity; 45% play golf. (Stanley didn’t survey whether they were avid book readers — too bad.)
    • 52% attend church at least once a month; 37% consider themselves very religious.
    • They share five basic ingredients to success: integrity, discipline, social skills, a supportive spouse, and hard work.
    • They contribute heavily to charity, church and community activities (64%).
    • Their #1 worry: taxes! Their average annual federal tax bill: $300,000. The top 1/10 of 1% of U.S. income earners pays 14.7% of all income taxes collected!
    • “Not one millionaire had anything nice to say about gambling.” Okay, but his survey also showed that 33% played the lottery at least once during the year!

    Thus, we see how the super upper-income families of this nation are not the ones contributing to crime, welfare, divorce, child abuse, and a spendthrift society. But they are playing a lot of taxes and making a lot of contributions to solve these social problems.

    But one still wonders, why are any of the ‘Rich = Bad’ believers reading a blog titled:  How to Make $7 Million in 7 years?

    To cap off the week …

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    I can’t think of a better way to cap off a week’s commentary on the current financial meltdown than to 100% plagiarize this letter to the New York Times – it’s by none other than Warren Buffett …

    … so, read carefully as to what a conservative guy who has almost 100% of his PERSONAL assets in nice, safe government bonds is doing right now.

    [AJC: I was going to highlight the critical sections for you, but it’s ALL critical, so if you just want to give it your usual 27 second scan, that’s your problem 😉 ]

    October 17, 2008
    OP-ED CONTRIBUTOR

    Buy American. I Am.
    By     WARREN E. BUFFETT

    Omaha
    THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

    So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

    Why?

    A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

    Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

    A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

    Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

    You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

    Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

    Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

    I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities. [Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company]

    ’nuff said 🙂

    Making Money 301? Hold on to your horses ….

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    Part 3 of a 3 part series on weathering the current financial storm …

    By now you know that when we have made our Number, our #1 objective is to hold on to our money!

    We do that by a combination of wise spending and savings habits (learned way back in Making Money 101, and practiced almost to the point of stupidity in Making Money 201) and very sound investing strategies.

    Firstly, though, what do you do if you have just had the wind kicked out of your 401k’s sails by the sudden crash?

    Well, it really shouldn’t be an issue, because the chances are that you planned for an annual stock market return of something like 11% – 12% over 20 years and you overachieved dramatically for most of it … but, rather than increasing your spending based upon your unexpected ‘good fortune’ you realized that all good things must come to an end and you gritted your teeth expecting a reversal to bring you back to earth.

    In fact, if you were really smart, you set yourself 10 or 20 year ‘targets’ and when you achieved those, you started preparing for Making Money 301 early and sold down your excess stocks and/or real-estate (i.e. the equity in excess of your ‘target’) and moved it into cash, bonds, or far more boring commercial real-estate investments (using minimal, if any, borrowings).

    Now you are retired (well, you at least aren’t counting on any outside income), but you have been battered and bruised a little by the current ‘meltdown’ so your buffer isn’t as large as it was a few months ago, but you are still OK.

    [AJC: I’m speaking from personal experience, now]

    Remember, your Rule of 20 strategy was designed to deliver 5% of your ‘nest egg’ to live off each year, leaving another 5% to be reinvested to keep pace with an expected 5% average inflation … in other words, produce an indefinite stream of annual income that grows with inflation.

    The problem is 5% + 5% = 10% AFTER TAX, so we NEED a 12% to 15% compounded annual growth rate to make all of this work …

    … and, the current crash has probably temporarily wiped out most of any buffer that we had managed to retire with i.e. any money that you managed to salt away in excess of expectations … who said that EXACTLY Your Number was going to fall into your lap EXACTLY on Your date?!

    What to do, given that there are signs of a prolonged flattening of the market?

    Here are a some advanced strategies, sensible in ANY market for Making Money 301, but particularly now:

    1. Do NOT keep your money in CASH (other than a 2 year Emergency Fund) – if you have no buffer, then every year you earn ONLY 5% on your CD’s is a year that you are really LOSING 5% of the remaining value of your ‘nest egg’ to inflation!

    Equally, do not keep it in a cash-equivalent (e.g. bonds – with the exception noted below) OR in stocks or Index Funds: you need a min. 5% return – indexed for inflation) UNLESS there are stocks that you understand/love that pay a 5% dividend and you are 100% certain that dividends won’t be cut in the coming recession.

    2. Purchase commercial property for 100% cash or very low LVR (Loan-to-Valuation ratios), such that the net rents each year provide EXACTLY the annual income $$$ amount that you are looking for + 25% ‘buffer’ (for vacancies, repairs/maintenance/etc.). If you are worried by commercial, residential (or a mixture) is OK.

    You can spend the entire rent (except for the buffer) as it will:

    a. Keep up with inflation, because you will have a CPI ‘ratchet clause’ in your lease, if you rent well, and

    b. Your capital (represented by the property itself) will also at least increase with inflation, if you buy well.

    3. Buy a select group of ‘blue chip’ stocks that you love/understand (etc., etc.) on low historic P/E’s and write Covered Calls against them; this works well in a flat-to-slightly-growing market, so the current volatility may need to settle into a more extended period of gloom-with-some-slight-hope before you can execute properly … but, now’s a great time to start (very!) small and experiment!

    4. Be boring: buy TIPS (Inflation protected Treasury Bonds), but only if you applied the Rule of 40 instead of the Rule of 20 … these currently only produce about 2.5% TAXABLE annual income (except if your Number is so small that ROTH IRA’s – or similar – will do the job for you).

    Only buy the TIPS using 95% of your ‘nest egg’; retain 5% of your cash (over-and-above that emergency fund – although, holding TIPS means that you can probably cut this back, as well) … use it to start buying Calls against the market (pick an ETF that tracks the S&P 500) or, against 4 or 5 individual stocks if you are more daring.

    While you’re waiting for the market to stabilize a little, now’s a good time to start slow and practice: after each major pull back, buy a Call and see if you can make a gain on the upswing (set a profit target and sell when your reach it … wait for the next ‘pull back’ and try again).

    5. Buy a Fixed Annuity – costs suck, but if you can’t do 2. or 3., what’s really left for you besides TIPS or this?

    And, if it (in fact, any of these strategies) produces your required Annual Income Number (the annuity MUST be indexed for inflation) who cares? But, remember to spread your risks over a few insurers (remember AIG?) … you don’t want them to go down holding your cash (keep in mind that even if the insurer crashes, your underlying investments should still be safe and be handed back to you … at least, that’s how the story goes)!

    So, for any rich readers out there sweating my posts (you know, like the doctors who watch ER just to point out all the faults: “Oh, what a bunch of BS … he’d never spline the clavicle with a Humphreys 458!”):

    What’s worked for you in past ‘bear markets’? What do you think will work for you in this one?