Which would make you feel richer?

Last week I asked my readers what would make them feel richer: more income? Or, more net worth?

This was prompted by a Twitter Trail (my term for a thread on Twitter) that started with this:

@NoDebtPlan articulates the classic fallacy: income makes you feel richer because it can be turned into net worth.

But, that is illusory: if your net worth is invested wisely, it’s pretty hard to lose all of it.

On the other hand, ask the millions of people who are ‘down-sized’, get injured, relocated, become under-skilled, out-voted and so on just how easy it is to lose your entire income … and, as soon as your income stops, you begin to feel very poor indeed 🙁

Of course, what’s the use of net worth if not to create income?

So, while it is certainly true that income can create net worth … that’s the beginning of the chain, not the end.

The whole point of net worth is to (a) live in / drive in / enjoy and (b) to create an alternate (passive) source of income so that you can eventually stop work, should you so choose (or be forced into).

Now I’m not talking from some book that I read: I created my $7 million in 7 years simply by exchanging income (from my business) into assets (income-producing real-estate and stocks) … and, you should do the same:

Remember that Rule of 75% … without it you, too, will always be a slave to earning an income 😉

The meaning of success …

If you’re a new reader, you’ll pretty quickly find out that I only write when I think that I have something useful to say …

So, the best thing to do is scan this post and if it’s interesting, subscribe by e-mail / RSS and I’ll pop a quick e-mail into your in-box if the urge to write does strike.

Today, I am inspired by a post written by moneycrush about success:

“Big goals take time, which means it can be especially hard to stick to them when they require both time and sacrifice.”

Here, moneycrush equates success with “reaching your goals”. giving an example of getting your house paid off.

So, this got me thinking about the nature of success:

On the surface, I am successful.

Certainly my friends and family talk to me – and, of me – in those terms.

Now, they don’t necessarily know my net worth (after all, that’s why I write here under a nom de plume), but they do know that I sold three businesses in three countries … so, they can connect the dots.

They don’t realize that, by their measure of success = money, I was already ‘successful’ well before  before I sold my businesses, and well before those businesses even made any serious money.

Because I was quietly doing what I advise my readers to do: take your income and use it to buy income-producing assets instead of spending it. What my family and friends don’t realize is that’s how I made I made $7 million in 7 years, starting with $30k in debt.

In any event, I still don’t consider myself successful.

That doesn’t mean that I’m one of those guys who chases ever bigger and bigger financial wins …

It just means that I measure success differently:

To me, success is when I am living my Life’s Purpose. And, money is just one of the enablers.

In 1998, I discovered my Life’s Purpose; it was simply to “always be traveling mentally, physically, and spiritually”.

Now, that means nothing to you … so, let me translate that into some practical incarnations of that Purpose:

– Travel … a lot. This takes time and money.

And, comfortably. For me, this means about $50k a year of business class travel. I’m about to experiment with a roll-up mattress on the business class ‘lie flat’ seats; if that doesn’t work, I’ll need to ‘upgrade’ to first class because lack of sleep on the long-haul flights from/to Australia kills me.

– Personal Finance & Public speaking … twin passions of mine. I hope to be able to combine these, one day. The money I might earn is irrelevant.

I rarely get to indulge in public speaking these days; the hidden cost of no longer being attached to the corporate world. But, I discovered this passion about 30 years ago, yet have spoken publicly less and less as time has gone on. This blog, as well as being a passion in its own right, is one step towards resurrecting myself as a public speaker. My book (out soon!) is the second.

– Venture Capital … this goes with the ‘traveling mentally’ bit.

I must admit I was worried. Stories about VC’s investing in 10 businesses in order to (hope) that one may succeed scared me, with typical (VC-like) bricks and mortar investments requiring upwards of $250k each. Fortunately, the internet came along and I’m happily working on my little angel investing fund, which allocates $25k+ per investment. If 10 fail, well, it shouldn’t hurt much more than my pride. Fortunately, success rates are closer to 30%, so I’m told (hope!). In either case, but don’t tell my partners this, I’m only in it for the stimulation and … fun!

– the touchy/feely spiritual stuff. I’m not exactly the next great guru, but this doesn’t cost any money – or much time – and feels … well … nice.

So, for me success is more about what I do than what I have.

But, I am just starting to live my Life’s Purpose: I’m beginning to travel more; but, I am just starting my venture capital activities and my book isn’t out yet (hence, the speaking offers haven’t exactly flooded in) … so, I am working on my ‘success’ but am clearly not there, yet.

Now, I suggest that you find out what REALLY matters to you and go about becoming ‘successful’ too 🙂

The myth of paying yourself first …

One of the first books that I ever read on the subject of personal finance was The Richest Man In Babylon … if you haven’t read it, get it and read it.

It is a wonderful primer on the basics of personal finance.

The part that stood out for me – since repopularized by David Bach in his hugely popular Automatic Millionaire series – is the notion of paying yourself first.

The story goes: if you would only pay yourself first [insert popular pay yourself first amount here: 10% of your gross; 15% of your net; up to the employer match; one hour of salary a day; etc.] you will be well on your way to financial success.

Except that it’s a crock …

If you pay yourself first, you’ll be slightly better off than the Jones’, but that’s about it.

Does that mean that you shouldn’t bother to pay yourself first i.e. save a portion of your income?

Of course you should, but not:

(a) where the popular financial press tells you to,

(b) in the amount that the popular financial press tells you to, and

(b) for the purposes that the popular financial press tells you to!

Before we examine how they got it so wrong, let’s take a look at why it doesn’t work; we’ll start with the typical ‘pay yourself first’ amount of 10% of your gross salary:

Let’s say that you start with a $50,000 annual household income, and you want to maintain your current standard of living in retirement … which is in approx. 20 years.

[AJC: why anybody would want to work for 20 years just to maintain their current standard of living is beyond me?! But, let’s go with it, just for the sake of proving a point ;)]

Firstly, you can assume CPI salary increases between now and your retirement date, so in 20 years your salary will approximately double to $100,000. Of course, since they’re only CPI increases, you haven’t really earned a pay rise as all as your gas, bread, milk and so on have also doubled in that time.

At a 4% so-called ‘safe’ withdrawal rate (to allow for average investment returns less the effects of taxes and ongoing inflation, etc.), you will need an approx. $2.5 million after tax lump sum in 20 years to generate $100k for life [AJC: assumption, assumption assumption … but, we’ll go with this, too].

Note: you can get by with less, if you trust that Social Security will be around in 20 years, but I wouldn’t bet on it … and, neither should you.

In order to generate $2.5 million in 20 years you will need to pay yourself firstdrum roll please …. 75% of your gross income, starting now and continuing for the next 20 years.

This assumes a 9% after tax return on your investments; 8% undershoots by a couple of hundred grand and 10% overshoots by about the same.

So, what does David Bach’s 1 hour of salary a day (or 12.5% of your gross) actually do for you?

It gives you about $15,000 a year to live off (a little less than $8k a year in today’s dollars) making you a real Automatic Thousandaire 🙂

Next time, I’ll answer the where in for questions …

Follow the fundamentals …

The relatively recent gyrations of the stock market from all-time highs to many year lows and back again, and so on, have scared many into pulling their money out of the market … and, keeping it out.

This is a mistake …

Unless you have solid plans (and, expertise) in investing elsewhere, the stock market is a pretty good place to try and build up your warchest.

I would like to see you make major forays into businesses and/or real-estate, as these offer the best opportunity to make money that can be counted in the millions, but the stock market is a pretty good alternative.

And, certainly better than sticking your money in the bank!

The problem is that most people panic during a crash …

What they don’t realize is that crashes will occur around every 10 to 20 years, and recessionary downturns occur every 10 years – more or less – as well.

The question is: which one leads to the other? The answer is not always clear-cut. But, it doesn’t really matter.

You see the market always recovers.

Unless there’s a ‘fundamental change to life as we know it’ (such as the fall of the Roman Empire) the market comes back to life.

Here’s why:

The stock market wasn’t developed as a means to speculate on some random ticker prices, as it has become to many professional traders and certainly to most lay-investors (that’s you and me, bud).

It was developed as a means to share partial ownership (i.e. to raise capital for expansion, etc.) of real, live companies.

Real, live businesses make stuff, sell stuff, and (usually) make a profit in doing so. Their ability to make a profit is more closely related to market forces (i.e. customers, competition, etc.) than it is to economics.

And, their ability to make a profit has virtually zero correlation to stock market sentiment.

Yet here’s what occurs [hypothetical chart]:

The yellow line represents some hypothetical economic indicator (e.g. growth in GDP), and does its thing.

The blue line represents the stock price of a company we are tracking and it rises and falls as prices (both the prices its customers are willing to pay and prices its suppliers feel that they are able to charge) and labor costs and so on rise and fall.

Interestingly, company profits (hence earnings per share) are somewhat related to the economy, but not always obviously: in a down economy, a huge new contract with upfront payments could help to improve company profits; so could a new plant being completed (it was probably commissioned when the economy was looking good!).

However, the red line – which represents the share price of our company – reflects market sentiment: there’s a rumor going around that the ceo is about to be indicted on a racketeering charge, so it goes south very sharply. The ceo, of course, steps aside pending the investigation and in a week or two, there will be an announcement that no charges were made.

Notice that the company still commissions its plant and production goes up; some customers hold off on new purchases because of the rumors (catching up after the ceo steps aside amidst the rumors, and certainly after the charges are eventually dropped) but most contracts were signed weeks/months ago and business generally improves.

The share price, of course, will rebound making some traders very rich.

So, here’s the crux: if you’re a stock trader, you will live by these market sentiment issues; they will misprice the market and/or individual stock prices over and over again and you will make or lose a fortune depending on how well you read things.

But, if you are a stock market investor, you will look to buy future company profits, not future market sentiment.

Investing in market sentiment is gambling, and you can see where that might lead.

But, investing in future company profits is a pretty good game, if you choose good, solid companies and simply close your eyes when the market plays its little games.

Just ask Warren Buffett 😉


The entrepreneurial investor …

There’s a misconception amongst my friends – which I don’t bother correcting – and, amongst some of my newer readers – which I will correct in this post – that I made my first $7 million through selling my businesses.

Since the sale was to a public company, the details of the sales (there was more than one) are equally public …

… which is one reason why I choose to remain ‘semi-anonymous’ here.

What my friends don’t realize is that well before selling my businesses even became an option, I had been quietly building up a real-estate and stock investment portfolio instead of paying myself a decent salary.

In fact, my self-paid salary never exceeded $50k a year (plus cars) until I moved to the USA, at a time when my professional friends were all earning at least double or triple my salary.

At one stage, I owned 5 condos and a commercial office building (now, I still own the five condos, but sold the building, adding an extra house, a small, downtown retail shopfront, plus two high-rise condo development sites in its place, not to mention various business and venture investments).

I did this because I didn’t know that I ever would be able to sell my business …

In fact, I wouldn’t be writing this blog if my first $7 million (that I made in just 7 years) relied on either selling my business, or drawing a huge salary as that wouldn’t be repeatable for most of you.

You see, only a minority of people (a) are really driven (as opposed to simply want) to be entrepreneurs, and (b) only a minority of those ever succeed, and (c) only a minority of those ever succeed in spectacular fashion.

So, for me to write a personal finance blog about my (later) business success would be about as useful as a lottery winner writing about their lottery success: interesting, but hardly a key learning experience 😉

So, you do NOT need to be an entrepreneur to make your own $7 million in 7 years …

… but, you do need to be entrepreneurial.

You don’t need to start a business, but you have to make investing your business.

And, that takes a particular mindset; I’m not sure if it can be learned, either. That’s because I believe that entrepreneurialism is an instinct.

How can you tell if you have the entrepreneurial instinct?

Well, I can think of at least three ways:

1. There’s an old joke that asks: “how you can tell who the psychologists are at the movies?”

Answer: instead of watching the movie, they’re the ones in the audience watching everybody else!

Well, my twist is to ask: “how can you tell who are the entrepreneurs at the movies?”

Answer: they are the ones counting the number of seats that are occupied v unoccupied and mentally calculating the ticket price of each to try an work out how much money the theater is making!

Are you that guy? If so, you probably have the entrepreneurial instinct to try and find the ‘deal’ in eveything that you do.

2. Do you play poker? If so, what kind of player are you?

Are you a ‘rock’ or ‘grinder’ who plays tight and patiently waits for the ‘nuts’ (think a pair of Aces or Kings, if you don’t play poker and you’ll get the idea)? Then you’re probably more suited to frugal ‘save and wait’ personal finance philosophy … forget making $7 million in 7 years: it’ll never happen.

Are you a ‘fish’ who just plays the two cards in your own hand without considering what the other guy may have, do, or represent? If so, you should probably quit poker now; equally, you probably don’t have the creativity and imagination to succeed in ‘serious investing’ either.

Or, are you a creative player who knows when to flat call (with the occasional raise, just to be cagey) with a speculative hand (such as a pair of 3’s, or a small suited connector like a 7 or hearts together with a 6 of hearts) knowing that you will either throw the hand away pretty quickly or you will take a lot of money from the ‘rocks’, if you hit your third 3 or make two pair, a straight, or a flush with your 6 and 7 of hearts.

This is the kind of thinking that will help you test an investment, then follow through if it proves to be working for you.

3. You can try a psychological test.

I distinctly remember making the mental ‘click’ from thinking like an employee who wanted to rise up the corporate ladder to an entrepreneur who wanted to be in his own business …

… but, even though I ended up in my own business/es, I didn’t realize that I had true entrepreurial instincts until I signed up to do a Kolbe A-Test.

Not surprisingly – in hindsight (!) – I came up as an entrepreneur … by instinct!

That gave me even more confidence to proceed at ‘full steam’ with my investing (and, business) plans; maybe one (or more) of these methods might do the same for you?

The Fisherman Fallacy

Ashton Fourie  proposes a fallacy:

I think it really doesn’t matter how you define retirement. What matters is what you are doing, and whether it is what you love doing.

Am I retired? Well, I don’t really care. I can’t see that I would want to be doing any less of what I’m doing now when I’m 70, or 80, or 120 (which is how old I want to become to finish all the work I still want to do)

It doesn’t feel like a fallacy: the idea to make money doing what you love doing has to be ‘right’, right?

To find out, let’s revisit the famous parable of the Fisherman and The Investment Banker:

In case you don’t remember the story [full parable + commentary here], it’s about a fisherman who meets a big time Wall Street investment banking-type who asks what he does.

The fisherman says that he fishes for just a few hours each day then spends the rest of his time with his family and playing cards with his friends.

The Investment Banker then goes into an analysis of how the fisherman could work hard for a few years to build up a big fish-wholesaling business so that he can finally retire and … do what?

Spend the rest of his time with his family and playing cards with his friends!

What this story proposes is that you simply enjoy your life now, and don’t worry about the money.

Well, that’s all well and good until you find that you can no longer fish …

Living from the fruits (actually, fish) of your own labor – or, selling your labor and/or time as Ashton does – are very dangerous ways to live. You may love what you do for now, but one day you may (a) no longer love what you do and/or (b) be ABLE to do what you love to do.

What does a concert pianist with arthritis do?

I enjoyed working for a Fortune 100 company, but after 6 years I’d had enough.

I enjoyed starting my business from scratch, but after a few years I couldn’t wait to sell out.

I’m sure that I’d love fishing, consulting, public speaking, venture capitalizing, whatever …

…. but, after a few years, I’d want to do something else instead.

Unfortunately, my Life’s Purpose is all about traveling physically, mentally, spiritually. It’s ‘unfortunate’ because the life that I have chosen for myself takes a lot of time and money 🙁

But, reaching my Number has made living it possible 🙂