Wealthology Read online

  We can be knowledgeable with other men"s knowledge, but we cannot be wise with other men"s wisdom. ~Michel de Montaigne.

  Rule #6: Follow the Central Bank Let‘s face, predicting the future ain‘t easy. But we still do it. And as long as someone in the marketplace is making more money than everyone else, we know they‘re doing a better job of guessing.

  What I‘m about to tell you will help you become a much better guesser. This will give you a huge competitive advantage by giving you a better crystal ball. If I were to ask you what one thing makes educated guessing hard, you probably wouldn‘t say a central bank unless you‘ve taken the time to study the banking system in depth.

  But that‘s just it. Our central bank, the Federal Reserve, (we‘ll call it the Fed for short from here on) makes the entrepreneur‘s job much more difficult than it has to be. Every investor must understand how the Fed affects their ability to make money.

  “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ~Henry Ford.

  Is You Rich or Not? As you read the following description, keep this in mind: When we make something for our customers, we must know whether they‘ll have the money to buy our products or services. This isn‘t brain science. It‘s how the world works (gold diggers don‘t look for sugar daddies in the ghetto). Here‘s how it works for real estate entrepreneurs.

  When the Fed arbitrarily lowers interest rates (borrowing costs) to 1%, demand will go up and prices rise because more people seem to be able to afford more stuff. If interest rates go up, demand will fall because the cost of borrowing is higher.

  Here‘s the problem: We have no idea when the Fed will screw up our plans. They can make your customers poor one day and rich another by giving them a line of credit or by taking it away. This continual, arbitrary adjustment of interest rates makes the entrepreneur‘s job more difficult than it has to be.

  “A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” ~Robert Frost.

  The Problem With Real Estate Do you ever wonder why all across the globe, real estate developers seem to be super rich one day and bankrupt the next? Why don‘t we see the ketchup industry going through boom and bust cycles?

  Real estate developers and investors have gone bankrupt, lost their fortunes, their homes, and marriages because of false entrepreneurial calculation. When rates are artificially low, these entrepreneurs are fooled into thinking home buyers have more money than they do.

  Because buyers feel richer than they are, demand for housing goes up. Buyers tell real estate entrepreneurs, ―I got mad cash. Build me my dream home!‖ The real estate entrepreneur then starts building more expensive, longer term, capital intensive projects because buyers have got all this new credit. As the credit gets spent, it pushes everyone into higher income brackets. Wages go up when credit floods the economy and buyers can show higher earnings on their W-2s to qualify for bigger loans.

  Everyone‘s saying, ―Forget the spam and canned tuna baby, I want me some caviar and exotic fish I ain‘t even heard of before!‖

  For the real estate developer demand is demand. They see the go signal and they go for it. They don‘t have time to study monetary policy and understand the ins and outs of how the Fed operates. He just wants to do his job and make some money.

  “The more the government „plans", the more difficult planning becomes for the individual.” ~Friedrich Von Hayek.

  The Big No-No

  So the entrepreneur mistakes credit for wealth, and debt for income. He invests his money and time to build the million dollar homes. All his predictions are based on one, really big illusion. People can‘t really afford what he‘s planning to build, but he thinks his project will be profitable based on current economic conditions. He doesn‘t understand that his customers ain‘t got real money (savings) to afford what he‘ll make.

  In fact, buyers couldn‘t even afford the new plasma TVs and nutsoline guzzling NUTS-UVs they‘ve purchased. Instead of saving and investing, people are borrowing to consume.

  Developers have two seemingly rational reasons for being optimistic. First, they expect that credit will be available for their customers (homebuyers). Second, everyone‘s real pay looks like it‘s increasing. They are overly optimistic about the future because money is flowing.

  So developers take the cue: They start building lots of homes. So now, both consumers and producers (i.e., homebuyers and developers) are actually dependent on continued credit expansion. The credit being pumped into the economy to stimulate growth is creating an addiction to credit caused by irresponsible spending (which was encouraged in the first place by the Fed).

  “Rather go to bed without dinner than to rise in debt.” ~Benjamin Franklin.

  The Central Dealer When the Fed starts raising interest rates to calm the fake boom they‘ve created, even less people can afford to buy the developer‘s finished product than before the boom began. The availability of too much credit always causes people to foolishly spend their savings. What real estate investors eventually find out is that, not only have potential customers spent all their real money, but they‘re in more debt than ever before. Fewer people can afford to buy million dollar homes without credit (debt).

  Look at the horrible timing of the Fed. They raise rates after everyone has spent their real money (savings) and need credit the most. It‘s as if we have a Central Drug Dealer handing out free drugs on every street corner, turning people into addicts and then suddenly outlaws drugs.

  This is a snapshot of how the Fed creates boom and bust cycles. You must understand where you are in relation to this cycle. When the central bank lowers the rate of interest to stimulate the economy, understand that the following boom is simply a mirage, a hoax. Don‘t take the bait. When credit is cheap, save more, when credit isn‘t available buy discounted assets.

  “From now on, depressions will be scientifically created.” ~Charles Lindbergh Sr.

  Rule #7: Experiment

  Kidus, I cannot do enough to stress the importance of experimenting in building your money making skills. Experience is the greatest teacher of all. Experience helps us make sense of the information we get from books, it also increases its usefulness. The more we experience, the more we‘ll learn how the world of money runs; we‘ll be able to connect the dots and trace wealth effects to their causes.

  When Napoleon was giving advice to military officers, he told them that, ―tactics can be learned from books but knowledge of the higher aspects of war can be acquired only through experience, through the study of the history of wars and of the battles of the great captains. Can we learn how to compose a book of the Iliad through the study of grammar?‖

  Obviously, we can‘t become great poets simply by studying grammar. But that‘s what most people do in life—they simply study the grammar of prosperity. We must therefore, compose, draft and rewrite our business plans in order to become successful. But above all, we must not fear failure—we must act. After all, can we learn to make money by simply studying business?

  “All life is an experiment. The more experiments you make the better.” ~Emerson.

  Recap: Seven Rules for Entrepreneurial Life The seven rules I‘ve presented are ways to make sure your bet—be it a business venture, investment or a job—is a good one. In order to become successful nutpreneurs, we must (1) Learn from History; (2) Master Luck; (3) Find the Right Environment; (4) Follow the Money; (5) Follow the Leaders; (6) Follow the Central Bank; (7) Experiment.

  These are all methods of reducing error (i.e., guaranteeing success)— the whole point of nutpreneurship, investing and meaningful work. These rules are designed to make the nut accumulation phase a lot easier and far less risky. If you read this letter a second time, you‘ll notice that at every turn, I‘ve pointed out ways to reduce your risk while increasing the likelihood of financial gain.

 
Wealthy people don‘t gamble with their money. Neither should we if we wish to join their ranks.

  Your Loving Uncle, Akinaw.

  Part II

  The Secrets of Economic Literacy

  Why You Need Economic Literacy

  Dear Kidus,

  We have a saying in the U.S. that goes, ―You‘re only as strong as your weakest link.‖ When it comes to building wealth, our weakest link can literally make us or break us. Fortunately, there are only four links in the wealth building chain—entrepreneurship, economic literacy, capital management and productivity. Not understanding these four principles is the cause of most financial failures and economic recessions.

  For example, as critical as entrepreneurship is in building wealth, that skill alone isn‘t always enough to keep and grow the wealth you‘ve created. After all, whether you hold on to your profits as cash, invest in bonds, treasuries, real estate, stocks, or simply choose to spend it, something must be done with what you‘ve earned. You must make a decision.

  Know this: Every decision has a financial consequence. Regardless of what you invest in, your decision will add to or subtract from your net worth.

  Crossing the Hidden Line I hinted at this need for economic literacy when I gave the example of a good entrepreneur who made $100 million but ended up losing $96 million when he entered the real estate business. That entrepreneur‘s name is John McAfee, founder of McAfee Incorporated—the virus software company. You can see his name in red, bold type on hundreds of thousands of pages online.

  So, why did a seasoned entrepreneur lose so much money? It staggers the mind. There‘s no doubt that he‘s a great entrepreneur, no one can argue that. Years before the technology boom, he was an experienced computer programmer. He must have had great entrepreneurial sense to see the market potential of computers in the 1960s. It must have also taken a great deal of courage to quit a day job and start a business in the computer virus industry.

  So what happened? What caused McAfee to lose $96 million if he was such a talented entrepreneur? The answer is simple: McAfee, like 95% of the world‘s population, didn‘t understand true economics. He might‘ve learned a bit of it in college, but he most likely didn‘t learn the correct theory of economics—the only true theory of economics; it‘s not taught in our school system (you‘ll find out why).

  Economic literacy would have told McAfee that when he ventured from the software business to the real estate business, he was crossing a big line. The software industry is in the consumer goods industry while real estate is in the capital goods industry.

  Although crossing that line is such a big deal, most real estate investors don‘t understand this basic point. During the last eight years, I‘ve had thousands of discussions with real estate investors but I don‘t remember one about the special risks of working in the capital goods industry.

  Everyone just believed real estate prices would never go down. So why did real estate prices collapse? We‘ve already answered this question (Rule #6).

  Each market sector has its special risks but the real estate industry is more likely to go through boom and bust cycles because property prices depend on interest rates, not just supply and demand.

  The real estate crash which started in 2007 is really the result of Alan Squirrelspan‘s policy of keeping interest rates too low for too long. As he started to raise rates to avoid inflation, millions of people who had bought into the bubble he created were about to see their dreams burst.

  That‘s what Squirrelspan did—in the hope of temporarily stimulating the nutconomy he baited millions of squirrels into buying overvalued tree houses. Home builders were also baited into building an oversupply of homes because they mistook false, inflationary demand for real demand.

  What McAfee didn‘t realize was that real estate feels the abuse of the Fed‘s arbitrary power to change interest rates (the cost of debt) more than other industries. It does so because property values are denominated in debt.

  Consumer goods industries like retail and food, don‘t experience huge boom and bust cycles. That‘s why we never see a boom or bust cycle in the ketchup, chicken, mustard, hamburger or mayonnaise industries. Those things must be bought with cash.

  People don‘t buy properties with cash; they buy it with debt (this means most homeowners can‘t afford their homes!). Property prices go up and down with the cost of debt like a thermometer does with the temperature of a room.

  I don‘t think McAfee understood this difference.

  “An educated person is one who has learned that information almost always turns out to be at best incomplete and very often false, misleading, fictitious, mendacious—just dead wrong.” ~Russell Baker.

  The Economics of Fried Chicken A lack of economic education affects our financial lives in other ways. Of the possible illustrations that can be given of the importance of economic literacy, one of the best is a story about one of the most recognizable faces in the world.

  The story of Colonel Sanders and the Kentucky Fried Chicken restaurants he created is both uplifting and a bit sad. It‘s uplifting because he never gave up on himself or his dreams, the mark of a true entrepreneur. For years, he worked odd jobs from steamboat driver to a railroad worker. He kept striving.

  While he was taking odd jobs, he was also taking correspondence courses to become a lawyer. That career ended after he reportedly got into a fist fight with a client in the courtroom. Then he owned and operated a gas station which also served as his home for awhile.

  But as the saying goes, ―You can‘t keep a good man down.‖ Instead of giving up, Colonel Sanders remained open to the possibility of success. And guess what? Opportunity knocked.

  Sanders began serving meals out the back of his gas station. Meal after meal, he kept searching for the right recipe for his fried chicken. While he was looking for that perfect recipe, he started gaining popularity and more people came to taste it (I‘m getting hungry thinking about it). To keep up with demand, he built a restaurant that could seat up to 142 people.

  Two years later a fire burned down the restaurant—but not his dreams. The Colonel built another restaurant, and added a motel to it this time. He opened the door, started the fryer, rooms filled up, seats filled up and so did his bank account. But then…another tragedy struck.

  A new interstate highway was built that drastically reduced traffic to his restaurant. When most people would‘ve quit, Sanders refused to give up on his dream. He auctioned off the restaurant and motel, took his now famous secret chicken recipe and hit the road in the hopes of selling franchises.

  It worked. He was about 65 years old when he began to strike it rich by franchising Kentucky Fried Chicken restaurants. It took him a long time to build up his entrepreneurial skill but he had done it—a great story of never giving up. The story gets really interesting when we look at what happened after he achieved that initial success. While looking at his fascinating story, I learned that Sanders didn‘t really understand the stock market or finance. You see this fact come out in the way he decided to sell his company.

  When Colonel Sanders sold KFC to a couple of investors, he sold the brand for a measly $2 million. It was worth way more than that. The investors who purchased the business from Sanders turned around and sold the business for $275 million just 7 years later! There‘s more to the story.

  Along with the $2 million purchase price, the investors offered Sanders 10,000 shares in the new company, but he turned it down because he didn‘t understand what was being offered to him. As a result, Sanders‘ net worth was barely a nickel more than the secretaries who took stock options in the company before it went public.

  Sanders had, through years of ups and downs, become a great nutpreneur and built a regional brand, which would soon become the biggest restaurant chain in Squirrelmerica but failed to add financial education to his skill set. Here‘s the point of this story.

  Without understanding how to value an asset, you"re always in danger of making a bad trade, purchase
or sale. Not knowing how to value things is the one thing that can negatively affect all your nutconomic activities.

  Most people will have an opportunity to be able to sell or trade whatever asset they own for a profit or a loss. When we sell and how we sell depends on how we judge value. In order to understand how to value assets, you must become economically literate. The two investors who initially purchased KFC made the better trade because they understood the intrinsic value of the business they were buying. So did the KFC workers who traded pay for stock.

  “The roots of education are bitter, but the fruit is sweet.” ~Aristotle.

  Going for Gold Knowing how to avoid a possible financial catastrophe (McAfee) and knowing when and how to sell an asset (Sanders) are two big benefits of economic literacy. These are very practical skills to build because we‘ll have to use them at some point. After all, most people will own a home or own shares in some kind of a business or have an investment portfolio.

  One other benefit of economic education is being able to make bold business or investment decisions. Henry David Thoreau once advised us all to, ―go forth boldly in the direction of [our] dreams, live the life [we‘ve] imagined.‖ Becoming wealthy requires that we become bold. But boldness requires something else.

  In order to be bold, go all out, or ―put the pedal to the metal‖ or ―put a little boogie in it‖ or ―put a little wet on your whistle‖ or ―get jiggy with it‖ or ―put your back into it‖ or…sorry, I‘m getting carried away. To go all out, we must first understand what we‘re doing. We must figure out how the system works; we must understand our economic context.

  If you‘ve observed parents who have a few young children in the same age range, you‘ve probably seen a glassy, dazed look in their eyes and a face painted with touch of desperation. I get that look whenever I go shopping with my fiancé. I don‘t know where I came from or where I‘m going. I‘m thirsty, hungry, cold, confused and tired. I‘ve got a look of hurried confusion.