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The sophisticated
investor’s first
question is:
“How fast do I get my
money back?”
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161
People who hate risk put their money in the bank. In the long run,
safe savings are better than no savings. But it takes a long time to get
your money back and, in most instances, you don’t get anything for
free with it.
On every one of my investments, there must be an upside,
something for free—like a condominium, a mini-storage, a piece
of free land, a house, stock shares, or an office building. And there
must be limited risk, or a low-risk idea. There are books devoted
entirely to this subject, so I will not talk about it here. Ray Kroc, of
McDonald’s fame, sold hamburger franchises, not because he loved
hamburgers, but because he wanted the real estate under the franchise
for free.
So wise investors must look at more than ROI. They look at
the assets they get for free once they get their money back. That is
financial intelligence.
8. Use assets to buy luxuries: the power of focus
A friend’s child has been developing a nasty habit of burning a
hole in his pocket. Just 16, he wanted his own car. The excuse: “All his
friends’ parents gave their kids cars.” The child wanted to go into his
savings and use it for a down payment. That was when his father called
me and then came to see me.
“Do you think I should let him do it, or should I just buy him a car?”
I answered, “It might relieve the pressure in the short term, but what
have you taught him in the long term? Can you use this desire to own a
car and inspire your son to learn something?” Suddenly the lights went
on, and he hurried home.
Two months later I ran into my friend again. “Does your son have
his new car?” I asked.
“No, he doesn’t. But I gave him $3,000 for the car. I told him to
use my money instead of his college money.”
“Well, that’s generous of you,” I said.
“Not really. The money came with a hitch.”
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162
“So what was the hitch?” I asked.
“Well, first we played your CASHFLOW game. We then had
a long discussion about the wise use of money. After that, I gave him
a subscription to the Wall Street Journal and a few books on the
stock market.”
“Then what?” I asked. “What was the catch?”
“I told him the $3,000 was his, but he could not directly buy a car
with it. He could use it to find a stockbroker and buy and sell stocks.
Once he had made $6,000 with the $3,000, the money would be his
for the car, and the $3,000 would go into his college fund.”
“And what are the results?” I asked.
“Well, he got lucky early in his trading, but lost everything a few
days later. Then he really got interested. Today, I would say he is down
$2,000, but his interest is up. He has read all the books I bought him,
and he’s gone to the library to get more. He reads the Wall Street Journal
voraciously, watching for indicators. He’s got only $1,000 left, but his
interest and learning are sky-high. He knows that if he loses that money,
he walks for two more years. But he does not seem to care. He even seems
uninterested in getting a car, because he’s found a game that is more fun.”
“What happens if he loses all the money?” I asked.
“We’ll cross that bridge when we get to it. I’d rather have him lose
everything now than wait till he’s our age to risk losing everything.
And besides, that is the best $3,000 I’ve ever spent on his education.
What he is learning will serve him for life, and he seems to have gained
a new respect for the power of money.”
As I said earlier, if a person cannot master the power of self-
discipline, it is best not to try to get rich. I say this because, although
the process of developing cash flow from an asset column is easy in
theory, what’s hard is the mental fortitude to direct money to the
correct use. Due to external temptations, it is much easier in today’s
consumer world to simply blow money out the expense column.
With weak mental fortitude, that money flows into the paths of
least resistance. That is the cause of poverty and financial struggle.
The following example illustrates the financial intelligence needed
to direct money to make more money.
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163
If we give 100 people $10,000 at the start of the year, I believe that
at the end of the year:
•
80 would have nothing left. In fact, many would have created
greater debt by making a down payment on a new car,
refrigerator, electronics, or a holiday.
•
16 would have increased that $10,000 by 5-10 percent.
•
Four would have increased it to $20,000 or into the millions.
We go to school to learn a profession so we can work for money.
It is my opinion that it’s just as important to learn how to have money
work for you.
I love my luxuries as much as anyone else. The difference is I don’t
buy them on credit. It’s the keep-up-with-the-Joneses trap. When I
wanted to buy a Porsche, the easy road would have been to call my
banker and get a loan. Instead of choosing to focus in the liability
column, I chose to focus in the asset column.
As a habit, I use my desire to consume to inspire and motivate my
financial genius to invest.
Too often today, we focus on borrowing money to get the things
we want instead of focusing on creating money. One is easier in the
short term, but harder in the long term. It’s a bad habit that we as
individuals, and as a nation, have gotten into. Remember, the easy
road often becomes hard, and the hard road often becomes easy.
The earlier you can train yourself and those you love to be masters
of money, the better. Money is a powerful force. Unfortunately,
people use the power of money against themselves. If your financial
intelligence is low, money will run all over you. It will be smarter than
you. If money is smarter than you, you will work for it all your life.
To be the master of money, you need to be smarter than it. Then
money will do as it is told. It will obey you. Instead of being a slave to
it, you will be the master of it. That is financial intelligence.
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164
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