Saturday, November 21, 2015

How to get rich without "slinging crack rock or having a wicked jump shot"

This articles title quote comes from the movie Boiler Room and a Notorious B.I.G. rap. I like this clip because even though it is a movie it illustrates a certain sentiment towards making money that is prevalent among many people today. Everybody wants to make money but very few want to to do the hard work required. People choose to take shortcuts like the young brokers in the movie selling worthless dogshit stocks to the schlubs and shoeclerks. In the end they give it all back and get busted by the FBI.

Others do what I did for many years, subscribe to every newsletter guru that offered a way to "beat the market". I wasted a ton of time and money and got sub par results. I even tried some different MLM plans and many other "get rich quick" schemes even though deep down I knew it was all BS and they wouldn't work. I wanted it fast and easy.

With investing, like most endeavors in life, the secret to success isn't really that secret or that difficult. Want to lose weight? There is a $60 billion dollar industry waiting to take your money and deliver disappointing results. How do you successfully lose weight? Eat less and move more. Why aren't people successful in losing weight? Because they are lazy and do not want to do the work. They rationalize skipping a workout or stopping at Taco Bell instead of preparing a healthy nutritious meal at home. One missed workout turns into two and etc etc...they are back on the couch watching a Law and Order marathon and telling themselves tomorrow they will start again. Of course they never do.

Getting out of debt is the same mindset as losing weight. Earlier in my life I was in some serious credit card debt of over $40k. I was making minimum payments and not making head way financially. I was frustrated and pissed off. I followed this plan and got out of debt in a couple of years. Like losing weight getting out of debt is simple; adopt an austere lifestyle, cut unnecessary expenses and apply the funds to debt reduction. No big secret but people don't want to do it because it means living an austere and minimalist lifestyle for a couple of years.

I find the same thing when discussing investing with people. They say, "Hey, I always see you reading the Wall Street Journal or Forbes". "Got any stock tips?"   They want a hot tip like one of those degenerate gamblers you see hanging around at the dog track. Just give me a tip and I can thoughtlessly dump a couple of grand into the name and hopefully it will go up. That is not investing.

So how does one get rich?

Most wealthy people I know started and grew a business that they were passionate about. This means providing a good or service that people are willing to pay for and then day after day, month after month, year after year growing the business and reinvesting time and money into the business. Hopefully, people will actually pay for the product or service you are offering at a price that nets you a profit. If they are good at what they are doing after many years they have accumulated a nice sum from their profits or they sell the business and walk away with a good chunk of dough.

Another way to get rich is real estate investing. There are plenty of people that bought a duplex or apartment building. They may have even lived in one of the units when they started out in order to save money. They then used the equity from that property to buy additional properties which they rented out to working joes. Rinse and repeat.

Notice the common denominator: work, save up a grub stake,invest, time, reinvestment of profits, compounding, consistency, and most of all patience.

How do I create wealth? I use the various public markets (stock, commodity, bonds, options). The same thing applies to these markets as applies to the above examples. You think Warren Buffett is a genius. He really is not. Go back and read the early annual reports of Berkshire Hathaway. The original Berkshire Hathaway was a textile manufacturer in New England that was struggling.

Buffet was struggling massively to turn the company around. He eventually figured out that the way to make big money was to buy parts of solid businesses (that's what shares of stocks are) that are gushing cash, at a low valuation and then sit back and let that business compound wealth over time.

He then was consistent in ignoring market cycles and investing additional cash when other market participants became irrational and sold their pieces of businesses (stocks) during times of emotional stress such as bear markets or crashes (2008).

Anyone can do it. Don't believe me read about the janitor that accumulated an $8 million dollar portfolio. However, like losing weight or getting out of debt it takes work, commitment, and time. There is no fast and easy way to wealth. It is all work. I will have more to say about these factors in future "How to Get Rich" articles.

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