Tuesday, July 03, 2007

Dollars and Sense

Financial success does not happen overnight; money is not something to be had instantly. Rather, financial success is the manifestation of a specific behavior set.

Once upon a time there was a boy born in the Midwest; for the purposes of this story, we’ll simply call him W. A bookworm with a natural ability in math, he went to work at his father’s brokerage in 1941. During his first year working there, W purchased a couple shares of stock, just for kicks. Purchasing them for a bit more than $38, he sold them for $40, not making much money from them: The Cities Services stock would soar to $200 months later. In 1944, at the age of 14, he started installing pinball machines in barber shops. Earning $1,400 from the deal, he purchased 40 acres of land and rented it to tenant farmers. A good student, his love of being an entrepreneur came before his desire to attend college. By the time he graduated high school at the age of 16, he had done so in the top 20 of his class and had saved nearly $5,000. His father coaxed him into attending university; yielding to his advice and matriculating at the Wharton School for three years and transferring in the last year. In 1951 he would earn his Masters degree in Economics. By 1956, he founded his first investment partnership with $100 out of his own pocket (and several thousand from multiple limited partners, family and friends). Spending much time learning, from multiple sources, the art of investing, he would run his investment partnership from his bedroom making an excess of 30% compounded returns in a market (1956 to 1969) when 7%-11% is the norm.

In 1962 W would start purchasing shares of a failing textile company, leaving his partnerships to operate it full-time in 1969. Turning it into a holding company, he began purchasing other companies with an emphasis in insurance concerns due to their large cash reserves that they must keep. Over the years, W fashioned himself a “capital allocator,” putting significant sums of money into high-value companies and keeping existing management.

How does such a man perceive his wealth?

I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.

The man? Warren E. Buffet, worth $52.4 billion as of 2007.

What can his rise to power tell the rest of us in the rise to ours?

1. Wealth-building decisions are long-term ones. Studies have shown that wealthy people made decisions for the long-term; usually doing a cost-benefit analysis for a 20-year period. Those on the opposite end of the wealth spectrum, on the other hand, make decisions for the short-term, “what will make me happy now?” In fact, you are more apt to make your own million than to inherit it from someone else: 86 percent of millionaires are first generation; the money is not inherited. Your wealth is the sum total of your decisions to date.

2. Wealth relates more to behaviors and less to number crunching. Think that there is something special about the affluent, like getting an inheritance or maybe that you have “bad luck” over other people? Research has found that wealth disparity couldn’t be explained by income—differences by income only accounted for a 5 percent dispersion. Furthermore the researchers noticed that “’chance events’—inheritances, medical bills, marital status, number of children— explained about 4% of the dispersion.

3. Don’t spend more than you earn. This is a simple axiom: If your net income is negative over a long enough period of time, no matter what your financial goals are, you will not be able to achieve them.

4. Pay off debts. The less debts you have, the more your cash flow will increase. Your income is the most powerful wealth-building tool that you have, and the less strain it has to provide for you, the more ability you will have to become financially successful.

5. Have a clear plan laid out—financial and otherwise. Dream big, but fashion it with rationality. If you plan to be a millionaire in 5 years and you’re currently making $30,000 per year…something drastic will need to happen to get to where you want to be.

6. Find opportunities and learn how exploit them. Success is when opportunity meets preparation. This means everything from being able to spot something that could be profitable in the stock market to knowing when to make a move at your job that could be advantageous to you.

7. Persevere. History is riddled with stories of the greats that kept on doing something “just a bit longer” than everyone else. Their determination and purpose to achieve their desired result allowed them to achieve their goal, which often led to financial success of some fashion.

8. Invest in yourself. If your income is your most valuable wealth-building tool, you are the reason that your income is such a valuable tool. Investing in yourself means sharpening and expanding your skill set through self-directed study and formal education. It also means doing those things to enhance the positive aspects of your life and minimize—or get rid of—the negatives.

9. Help others achieve. Success begets success. Helping others achieve not only helps them, it also helps you: Mentoring offers a different perspective that many people don’t realize and, therefore, don’t care to tap into. Humans are a creature that relies on community; we each have a symbiotic relationship with one another in the sense that what comes around goes around. Just s your success relies on the choices of other people; the success of other people will rely on the choices which you make.

10. Become an entrepreneur. Take an attorney, for example: With about 10 years experience, they have a median salary of about $100,000; considering a conservative 2,000 billable hours each year (for about 2,800 hours worked) at $250 per hour that the client is being charged, you are only realizing 20 percent of the business you are bringing into your law firm. All “blue sky value” aside, you could still make more doing that—albeit with more work—than the alternative of working for someone else. In the greater scheme of things where the affluent are separated from the economically (behaviorally) disadvantaged, having employees that earn you money is what sets the financially successful apart from the rest.

Lastly, think of earning money in this fashion: Split the day into 24 hours and divide your daily earnings by 24. How much money are you making per hour? If you’re working at McDonalds, chances are that you are making, what, about $3 per hour? If you’re the lawyer above, you’re earning significantly more than that. Determine ways to be creative and raise that “hourly earnings” rate that you have.

Money is almost entirely about the decisions that we make from day to day about tomorrow. To repeat something I mentioned earlier: Your wealth is the sum total of your decisions to date.

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