Wednesday, June 5, 2013

Wealth VS Rich and How Can I Get Some?

How does one become wealthy?  How do you create wealth?

Not just rich but wealthy.  There’s a big difference, as only the great Chris Rock can explain.  Simply put, there’re a lot of rich people running around in the world but wealthy people, there’s only a few thousand of those in the world.

Sports stars are rich.  I do mean STARS, like Manning, Brady (whose wife makes more than he does per year and has a longer earnings period), Jordan, Kobe, Shaq, Lebron, A-Rod, Verlander, Messi, Ronaldo, etc.  These are the athletes that are truly rich.  Rich as in, their families will be taken care of long time after they retire. 

Presidents are rich.  Some before taking office but most earn their money after they are president.  Through speaking engagements and use of their name alone will get them multi million dollar deals per year. 

Most CEO’s these days are rich.  The income gap between what the average worker makes and the heads of the company they work for grows each year.  Some are in charge of old companies like Bob Iger of Disney or Alan Mulally of Ford and some are upstart kids like Facebook CEO Mark Zuckerberg.  All these guys are rich.  Some are “super” rich. 

Wealthy is a whole other bracket.  Take the Guggenheim Partners.  They just recently bought the Los Angeles Dodgers for 2.15 BILLION dollars.  They’re a firm that manages over 125 Billion in assets.  Wealthy is being able to drop a billion dollars in cash and it not affecting you.

Bill Gates is wealthy, duh…but follow my train of thought.  When you’ve got a company whose products (in some manner) are in 80-90% of American homes, you’re wealthy.  

The Mars Family.  Yes, even something as simple as candy can be the start of an empire.  Why invest in oil or real estate when there is a holiday dedicated to buying and handing out candy?  Halloween, Valentine's Day, Christmas, Easter, etc.  I can't think of a holiday where candy hasn't wedged itself into.  The three Mars family members that are listed on the Forbes 100, are each said to be worth 17 billion.  Each.

When you’re trying to get a table at an exclusive restaurant and they say they’re all booked so you go and give the maitre d’ a blank check and tell him that you just bought the BUILDING, that’s wealth!  Wait…I think that was Bruce Wayne in a Batman movie.  Before I move on, can someone please tell me how Bruce Wayne became so rich?  His dad was a doctor.  Even the best doctors only make a million or so a year.  Thomas Wayne also dabbled in city planning (as doctors usually do) but that alone couldn’t have made him “F-U” money.  Did Bruce’s parent foresee a tragic death for themselves and have the most profitable life insurance policy ever?  The Wayne family seemed to have a long history of only-children which would to avoid diluting the Wayne fortune between siblings.  Somehow I became obsessed with this question and here’s how the Wayne Family is so rich.  I still question the continued viability of Wayne Enterprises.  Bruce Wayne’s “project” of being Batman must hemorrhage money, but yet the company seems as strong as ever.  I’ll leave this for my comic book blog to address…

Anyway, what was the question again; oh yes “How Does One Become Wealthy?”  It’s actually pretty simple.  While rich can be a crap shoot of the genetic lottery (where as you’re the best basketball player in the world) or you come up with an idea that will revolutionize society (create an app or website like Facebook or Twitter); rich can be obtained with a little hard work and a lot of luck.  Wealth is much easier but alas, harder to obtain.  All it takes to become wealthy is Time and Patience.  That’s why most wealth or wealthy people come from “old money”. 

The best and quickest example of this comes from Indiana Jones and the Raiders of the Los Ark, said by Belloq “Look at this. [holds out a pocket watch.] It's worthless. Ten dollars from a vendor in the street. But I take it, I bury it in the sand for a thousand years, it becomes priceless...like the Ark. Men will kill for it.”

If you have Time and Patience you can turn the simplest of things into wealth.  The trick is usually having a bit of money to start with.  The following is a story that was told to me about how a man became wealthy.  All it took was a little bit of knowledge, a little bit of money and then the patience to wait over time which caused him to be extremely wealthy (Keep in mind inflation / worth of money at the time of this story and that this wasn’t the sole investment this guy made.  It’s an example of a wealthy decision.).

During the real estate crash of the late 1980’s / early 1990’s there were more smaller / individual / local banks which held the mortgages against people’s homes.  Now a days this probably wouldn’t happen because 1) banks don’t hold mortgages any longer, they’re mostly packaged in groups and sold on Wall Street as investment instruments, or 2) banks that do hold mortgages are so big, there wouldn’t be a way to go to them with this proposition nor would one person have the power to sign off on this type of plan.  In the crash of the 90’s here’s what one man did.

This investor had connections with a local bank.  The investor was talking to the manager of the bank.  Over the course of their conversation the bank manager told the investor about all the loans that they had which were either “under water” or the borrowers weren’t paying their mortgage.  To the bank, these were toxic assets.  The investor shrewdly saw an opportunity.  The investor inquired to see if the bank was willing to sell him the NOTE on these properties for a discounted amount.  The bank, who saw that the borrowers weren’t making the payments or they were going to have to go through costly foreclosures proceedings, said sure.  They’d sell these “worthless” notes for pennies on the dollar.  So the investor said, “How much can I get for $100,000?”  The manager took him to the basement and said, “For $100,000, take whatever you can carry.”  The investor reviewed a few of the boxes of NOTES.  He didn’t take much time actually going through each file but got a good sense of what these were.  Many of the NOTES were from local houses here in Los Angeles and so he grabbed a few boxes and the sale was complete.  The bank got some capital back and the investor had ownership of these “worthless” NOTES. 

This is where time and patience kicks in.  The investor went through each of the files.  He contacted each borrower.  Some had abandoned the property and some were truly just junk.  There would be some foreclosure proceedings that he’d farm out to companies that handled that type of business and even on the ones that were junk, he didn’t loose too much money on them considering the overall cost.  But the ones he made contact with, he spoke to the borrowers to see what they had planned.  He wanted to find out if these were borrowers who fell on hard times or maybe if these were properties that lost value and to the current owners it wasn’t worth paying the mortgage.  This is when the investor started to play the long game.  He’d already spent the $100,000 to acquire what was between $3 - $5 million in face value of the notes so he wasn’t loosing any additional money.  He didn’t have shareholders to report to so whether the loans performed at a certain rate and time, it didn’t matter.  He told the borrowers to forget making payments.  He told them to not worry about the payments for now, but he’d keep track of the interest that accrued.  He told them to live in the house.  Take care of it.  They were still the owners.  When it came time to sell, that’s when he’d collect at the full face value of the NOTE and include all the interest that accrued over time.

Knowing that real estate will always go up in value over time (especially Los Angeles), the investor knew that one day the properties would regain their previous value.  He also knew that not everyone was trying to “scam” the lenders but the economy was in recession.  People would eventually find jobs and life would get better.  Many would want to move to other homes.  In the meantime, if the borrowers lived in a home that they still owned they’d take care of the home more than if they rented the home or it sat vacant.

Sure enough, the economy turned.  Home values went up.  People either refinanced or sold their homes and that’s when the investor cashed in.  Multi-thousand-dollar (50 – 200k) NOTES that he paid $500, $1,000 or maybe even $5,000 for, eventually were paid back in full and with the accrued interest.  With these kinds of profits, only one out of ten needed to pay off.  I assure you his record was better than that.  From just one $100,000 investment the investor would never have to work again in his life.  All it took was time and patience.

Why tell this story?  Turning 100k into a few million, albeit impressive, how is that “wealthy”?  Mainly because this is a story on how one becomes wealthy.  It’s a mindset and a way of looking at the world.  As I said in the beginning, rich is hard work and luck.  Wealth is something more.  Wealth is something greater.  A few million is not by itself a wealthy man made.  To turn a profit of over 100 times the starting cost, that’s wealth.  The investor barely lifted a finger or broke his back creating this wealth.  The luck needed was minimal.  If you consider what all the outcomes could have been, there wasn’t much luck at all.  Property values always go up.  People take care of things if they own it.  Seeing the economy over the long term and knowing that hard times don’t last forever.  These are all things that the wealthy consider when making their moves.

I remember when I first started doing a little stock trading in the early 2000’s.  This was right before the internet bubble crashed.  While I was trying to learn about what tech stock would make me the quickest profit, I would read about Warren Buffett and Berkshire Hathaway.  There were articles written about him and about his aversion to investing in these internet startups that promised to make people into millionaires.  He was described as a dinosaur that would soon die out in this new technology age.  Needless to say, while I and untold thousands of investors lost billions of dollars on tech stocks, Berkshire Hathaway value has quadrupled in the last 13 years while it’s hard to find a tech startup stock that’s either in business or worth a fraction of their all time high value.  Don’t be confused about a 4x improvement.  This is a stock that was at $45,000 per share and now sits at about $167,000 per share.  It’s not a penny stock that went from a $.50 to $2 based on “good news”. 

To become rich, you’ve got to work for your money.  When you’re wealthy, you’re money works for you.

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