Investors: Don't Be Average

Investors: Don't Be Average

I am often asked, "What advice do you have for the average investor?" My reply is, "Don't be average."

Most of us know of the 80/20 rule. That rule is a good rule for averages. And in the world of money, the rule is 90/10. This means 90 percent of the people make 10 percent of the money and 10 percent of the people make 90 percent of the money.

This 90/10 rule holds true in almost anything financial. Take the game of golf, for example. Ten percent of the professional golfers make 90 percent of the money.

Taking the ratio to the next level, the top 10 percent of professional golfers make 90 percent of the money. Just look at Tiger Woods. When you compare his winnings plus endorsements, he is in a league unto himself.

Last year, my wife Kim was invited to play in a pro-am as part of a professional Tour event in New York. (No, they did not invite me...) Kim is pretty good and was the only woman in a field of around 300 golfers. I was a proud husband as she confidently walked alone to the women's tee. Without hesitation, she placed her ball on the tee, took a clean back swing, and swung her club.

She out-drove two of the men in her five-some. Bruce Vaughn, the professional golfer in the group, rushed up to congratulate her. The men amateurs were also complimentary. I could tell they were relived to have a much better than average "woman golfer" in their group. Kim hits her drives longer than most men, myself included.

Tough Way to Earn a Living

The tournament was the first time I got to see the real life of a professional golfer. It is a tough life. It is not the glamour I thought it was. If a professional did not make the cut, they simply moved on to the next tournament in some faraway city...and teed up again. They do not stay for the tournament. They pay for their own transportation, lodging, food, and fees. They are on the road, away from their families for months at a time. Even those who make the cut and play on the weekend have no guarantee of enough earnings to offset expenses. It's a tough way to earn a living.

Like professional golfers, who live and die by the ‘money list,' money is how I keep score. It's my score card, my report card as an investor. It's how I tell how well -- or how poorly -- I'm doing. My rich dad said, ‘Making money is my game.' It's my game, too. And that's why I have so much respect for professional golfers... their livelihood depends upon how well they play the game -- as professionals.

In the world of golf there are average and professional golfers. The same is true with investors. The problem with being an average golfer or investor is that average people rarely make any money. Many average investors are in financial trouble today because they are simply that: average. They never turned pro.

When the financial crisis began in 2007, the professional investors were already out (or getting out) of the market. The average investors did as they were told, which is to invest for the long-term, hanging on tight as the Dow plunged from 14,000 to below 7,000, a 50 percent loss in value. Many real estate flippers and homeowners enjoyed the same wild ride.

Tragedy of the Average Investor

The tragedy is that many amateur investors are still clinging to their losses. They hope the market will bounce back. Amateurs are still following the advice of "invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds." Or they continue to believe "your home is your biggest investment." That is subprime advice for subprime investors.

It seems to me that more people keep track of their golf scores than keep track of their money... their ‘financial' scores. That's why they're amateurs... in the money game.

Even after the crash, the same subprime financial advice continues to be dished out in magazines, newspapers, and on television. Subprime advice continues to flow from real estate and stock market professionals who are not professional investors. They are professional sales people. They live on commissions -- not ROI, the returns on their investments. If they do not sell, they do not eat.

If you're going to turn pro, you will need to upgrade your financial advice. Why continue to invest for the long term while the market is crashing? Why continue to diversify when diversification did not protect investors from the crash?

In 1974, as I was leaving the Marine Corps, I decided I wanted to become an entrepreneur and investor. In other words, I did not want a job with a 401(k). That meant I had to become street smart, rather than school smart. It meant I needed a different set of life skills and better financial mentors if I were to survive on the street.
Just like the life of the pro golfers, there were long stretches of losses, no wins, no money or security.

In early 1985, things got so bad that Kim and I were temporarily homeless. I still remember leaving her in San Diego with only $2 for the week, while I traveled to Australia to put a deal together. Somehow we survived the year. In December of 1985 we finally made $1,500 after a year's worth of losses. That year was a great qualifying school. Today, even in this tough economy, our investments continue to grow. This crisis is a good time for professionals and a bad time for amateurs.

Not Good Enough

Years ago, I asked my rich dad, "What is the difference between a professional and an amateur?" His reply was, "Professionals know their best is not good enough. They always want to do better." He paused before continuing and said, "When someone says, ‘I'll do my best' or ‘I'll give it my best shot' or ‘I'll try,' they've already lost. Those are not words of a winner."

In the world of ‘the best,' your best is never good enough. If you're going to be a winner in life, you have to constantly go beyond your best. Most people are happy being average. Most are happy being faceless in a sea of faces. That's why 10 percent always win 90 percent of the rewards. I get up every day, grateful for what I have accomplished, yet looking forward to doing better. I want do better than my (previous) best everyday. It's not about the money anymore. I have enough money. I just love the game of making money.

Today I give most of my money away...but I will not give up the game of money. I play the game because the game is always better than me...and my best will never be good enough. I continue to work hard to become better at a game I love.

I once read a book on golf that said, "People say amateurs play for the love of the game and professionals play for money. That is not true. Amateurs are amateurs because they do not love the game enough. When it is cold and rainy, a professional golfer will play. The amateur will not. When they are sick, the professional will play. The amateur stays in bed. When they are losing, the professional will practice harder and enter more tournaments. The amateur will quit and take up tennis."

It matters little if the game is golf, tennis, or money. Ten percent of the people will always make 90 percent of the money. When the markets began crashing in 2007, the money did not disappear. Ninety percent of the money went to 10 percent of the investors.

A financial crisis is a great time for professional investors and a horrible time for average ones. If you're going to invest, don't be average. It's time to turn pro... or take up tennis.

Why the Cheap Will Never Get Rich

Why the Cheap Will Never Get Rich

The other day a friend of mine approached me excitedly, saying, "I found the house of my dreams. It's in foreclosure and the bank will sell it to me for a great price."
"How good is the price?" I asked.
"Just before the real estate market crashed, the seller was asking $780,000 for the property. Today, I can buy it from the bank for $215,000. What do you think?" she asked.
"How would I know?" I replied. "All you've given me is the price."
"Yes!" she squealed. "Now my husband and I can afford it."
"Only cheap people buy on price," I replied. "Just because something is cheap doesn't mean it's worth the cost."
I then explained to her one of my most basic money principles: I buy value. I will pay more for value. If I don't like the price, I simply pass. If the seller wants to sell, he will come back with a better price. I let him tell me what he will accept. I know some people love to haggle; personally, I don't. If a person wants to sell, they will sell. If I feel what I am buying is of value, I'll pay the price. Value rather than price has made me rich.
Against my advice, my friend sought financing for her "dream" home.
Fortunately, the bank turned her down. The house was on a busy street in a deteriorating neighborhood. The high school four blocks away was one of the most dangerous schools in the city. Her son and daughter would either have to go to private school or take karate lessons. She is now looking for a cheaper house to buy and has asked her father, who is retired, for help with the down payment. If her past is a crystal ball to her future, she will likely always be cheap and poor, even though she is a good, kind, educated, hard-working person.
My Point of View
What follows are some thoughts on why my friend will probably never get ahead financially -- especially in this market.
1. She and her husband have college degrees but zero financial education. Even worse, neither plans to attend any investment classes. Choosing to remain financially uneducated has caused them to miss out on the greatest bull and bear markets in history. As my rich dad often said, "What you don't know keeps you poor."
2. She is too emotional. In the world of money and investing, you must learn to control your emotions. When you think about it, three of our biggest financial decisions in life are made at times of peak emotional excitement: deciding to get married, buying a home, and having kids.
My dad often said, "High emotions, low intelligence." To be rich, you need to see the good and the bad, the short- and long-term consequences of your decisions. Obviously, this is easier said than done, but it's key to building wealth.
3. She doesn't know the difference between advice from rich people and advice from sales people. Most people get their financial advice from the latter -- people who profit even if you lose. One reason why financial education is so important is because it helps you know the difference between good and bad advice.
As the current crisis demonstrates, our schools teach very little about money management. Millions of people are living in fear because they followed conventional wisdom: Go to school, get a job, work hard, save money, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. Many people who followed this financial prescription are not sleeping at night. They need a new plan. Had they sought out a little financial education, they might not be entangled in this mess.
A Thank You to Jon Stewart
Speaking of finance experts, I personally want to thank Jon Stewart of 'The Daily Show' for taking on Jim Cramer and CNBC. Jon Stewart did an incredible job of representing the millions of people all over the world who have lost their savings in the market. He was right in saying he thought it "disingenuous" to advise people to invest for the long term through their retirement plans while knowing full well that traders could steal Americans' retirement money by trading in and out of the market. Most traders like Cramer realize that investing in mutual funds for the long term is financial suicide. Cramer should have spoken up, but we all know why CNBC won't let him tell the truth. If he did, the station's advertisers would leave.
While I applaud Cramer for going on 'The Daily Show' and facing the music, I'm afraid he was marginalized by Stewart -- certainly outgunned -- and he has lost his credibility. He may pay an even bigger price if the SEC decides to dig deeper.
Jim Cramer is a very smart man. I watch his show. I just do not follow his advice.
In closing, I will say what I have said for years: We need financial education in our schools. Without it, we cannot tell the good advice from the bad.

Predator's Ball: Cashing In Without Getting Fleeced

Predator's Ball: Cashing In Without Getting Fleeced

This will be a politically incorrect article. It may seem unkind, insensitive, and cruel given the fact that so many people are hurting financially. Many have lost their jobs, homes, retirement security, and hope. Yet -- ¬¬if you can see beyond today and let intelligence, not emotion, rule the day -- now is the time to position yourself for riches.

You see, the biggest predator's ball in history is in its planning stages and invitations are being sent out. For about a year now, friends and associates have been inviting me to join their investment pools. One friend has over a billion dollars in cash sitting on the sidelines. Last night, another friend said that a large bank had invited him to bid on their portfolio of foreclosures. The minimum price: $30 million in cash. He estimated that for that price we could acquire over a billion in distressed properties. For $1 million, I could buy a ticket to the party. I passed on the deal, saying the price was out of my league.

Many people got into trouble when times were good. For example, some of my family's friends placed all their money with a financial planner during the boom years, believing the standard sales pitch that the market goes up an average of 8 percent a year -- even though it doesn't. For over 20 years, I encouraged them to learn about investing rather than blindly turn over their money to a stranger. Today, they have lost over 45 percent of their portfolio in the last two years. They are not rich people. Now they want to know what to do.

Two Types of Predator's Balls

My point is this: There are two types of predator's balls. There are balls when times are good. My family's friends were victims of this type of exploitation -- when predators get you excited about rising markets.

For example, when real estate was soaring in price, predators known as flippers emerged and began selling houses to people at sky-high prices -- many of whom had no business buying a home.

There are also predator's balls for bad times. These take advantage of the exploitations that occurred during the good times. I like the bad-times predator's balls the best because deals are plentiful, people are humble, prices are low, and opportunities abound. I hope this party lasts for at least five years. I am investing more today than I was two years ago.

The Best of Times -- the Worst of Times

In 1859, Charles Dickens wrote in 'A Tale of Two Cities':

"It was the best of times, it was the worst of times; it was the age of wisdom; it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair ..."

For millions of people this is the dead of winter. If any of you who are reading this article are going through tough financial straits, I offer you this article and passage as encouragement to keep going -- to make the worst of times your best of times.

As the economy worsens, I am seeing a new predator's ball emerging - one for suckers. This is the ball for gold and silver. If you have been watching television lately, you will have seen ads advising people to send in their old gold jewelry for cash.
Only suckers would do that... but as you know, a sucker is born every minute. I also see ads advertising 100-percent-pure 24-carat gold-plated coins for $29.95. Obviously, the key words are gold-plated. Only a moron would invest in a gold-plated coin. The only way that person can sell that gold-plated coin is by finding another moron -- which I'm sure can be done, especially as the gold and silver markets pick up steam.

A Sign of Bad Business

In Phoenix, a businessman who was convicted on fraud charges recently opened up a new gold coin shop. He had been banned from being in the gold and silver business for ten years. His timing was good because his ten years were up and now he is sending invitations to his party. Invitations are expensive. He has prime retail space, marketing expenses related to advertising heavily on radio and television, half-page ads in newspapers, major yellow page ads, and a slick Web site. This is how predators send out invitations. Any time an investment company has to spend heavily on advertising, it's probably a bad business in which to invest. You may recall that many mutual fund and real estate companies were sending out plenty of invitations during the last stock and real estate predator's balls.

I believe that gold and silver are good investments -- but their prices are at all-time highs, which means it is time to be cautious, not foolish. Today, I hear financial experts on television advising people to buy gold. These are the same guys who were recommending stocks and mutual funds less than two years ago. So be very careful as the gold and silver markets begin their next climb. I am still buying gold and silver but I did most of my buying when gold was at $300 an ounce in 2000 and 2001.

Many gold and silver experts will recommend you buy numismatic coins -- rare and old coins. If you are not a rare coin expert, I'd encourage you to stay away from them. New investors often pay too much for rare coins that are not really rare. If you are new to gold or silver, I recommend you buy as close as possible to the international spot price of the metals, watching out for premiums and commissions per coin. Buy bars or blanks, rather than coins, if premiums are too high. Watch out for scams. If the person you are buying from makes you uneasy, run. Take delivery when you hand over your money. Keep coins or bars in a bank or safe.

A good book I recommend is 'Investing In Gold and Silver' by Mike Maloney. He is one of my personal advisors on the subject, and his book is worth its price in gold.

In closing, I'll leave you with this thought: Remember that when one predator's ball ends, another is starting. If you plan on attending, be sure you are a predator, not the main course.

Paying a High Price for Bad Advice

Paying a High Price for Bad Advice

At this time of financial crisis, people are seeking good, relevant advice. But this can be hard to find.
The following is typical of a question you would see in a financial publication -- and its less-than helpful answer:Q: What can someone whose 401(k) is down do to rebuild their retirement savings?
A: For anyone who is at least five years from retirement, there is probably time for their investments to right themselves.
Resist the urge to take money out of a 401(k) or to stop making contributions to it. Research has shown that dollar-cost averaging -- investing at given intervals -- pays off well in times of crisis.
Check whether the wild market swings have thrown off your asset allocation -- the specific mix of stocks and bonds that makes sense for an individual's financial goals and risk tolerance. If so, then rebalance it by selling shares that are overvalued and buying those that are below optimal levels. Focus on low cost....
Blah, blah, blah.
How naive do the so-called financial experts think people are? Well, obviously, many people are that naive because millions keep listening to the same old advice again and again.
The Same Old Story
So what is wrong with those giving the advice and those following it? Now that the markets have crashed and trillions have been lost, these so-called experts continue on like mindless parrots, saying over and over again, "Polly wants you to invest in a well-diversified portfolio of mutual funds."
Don't they know the market has changed? Don't they know the global economy is contracting, not expanding? Don't they know their advice is bad regardless of whether the market is expanding or contracting? Doesn't the general public realize that most financial "experts" are not professional investors? They're either sales people or journalists -- people who earn money via commissions or a paycheck. And even the people running our biggest investment banks -- or what use to be investment banks -- are compensated via commissions or a paycheck. They are not investors. They are employees working for banks.
So my advice is, be very careful whom you take financial advice from -- and that includes me. My guidance, after all, does not work for 80 percent of the people. My suggestions are not right for those who work for a paycheck or for commissions, nor do they work for those who save money in the bank or a retirement account.
The Right Advice for the Right Audience
My advice is for people who are entrepreneurs or professional investors. I have had a "real" job for only four years of my life, which means I only collected a traditional paycheck for that very short period of time. I do not have a retirement account. If my businesses or my investments are not profitable, then I don't eat. And I like to eat.
I chose to live my life this way because this financial lifestyle keeps me honest. It also keeps me wary and very suspicious of financial experts who offer inane advice. I personally cannot live on such advice. My businesses and investments need to be profitable monthly and pay me monthly, regardless of whether the economy is expanding or contracting.
I don't live in some fairytale world with the hope that the markets will right themselves in five years. I don't keep putting money into a losing venture such as a retirement plan filled with stocks, bonds, and mutual funds. I do not live on false promises. I cannot afford to live on bad advice.
Some Serious Questions
My questions to financial journalists and others who are doling out poor counsel: "What if your advice is wrong in five years? What happens if the markets don't come back? What happens if the markets just stay flat or crash even further? What happens if the markets recover and then crash when the person following your advice is in their late eighties?"
My advice for those seeking financial advice: Look for investments that pay you monthly or quarterly, regardless of whether the markets are up or down or whether the economy is expanding or contracting. Stop listening to those pseudo financial experts with crystal balls and journalism degrees.
The following are tidbits of information to keep in mind as you consider your financial options:
1. I learned my investment philosophy at the age of nine by playing Monopoly. In the game, if I had one green house, I was paid $8. If I had two green houses, then I was paid $16.
I began playing Monopoly for real when I was 26 years old. Today my wife and I have approximately 1,400 little green houses -- each paying us monthly. You do not have to be a rocket scientist or have a Harvard degree to play Monopoly for real. Today's depressed real estate market is the best time to start buying little green houses, even if credit is tight.
In 1987 the stock market crashed. That crash was followed by the crash of the Savings and Loan industry. Those two crashes led to the crash of the real estate market. The economy stayed down from 1987 to 1995. Even though my wife and I were strapped for cash and bankers did not want to lend to small investors, we found ways of putting deals together by using seller financing and creative financing, or simply taking over properties that the bank did not want on its books.
Most financial experts discourage people from doing what I do. They often say that it is risky -- and it certainly can be. But, in my opinion, following their advice of putting money into a savings account and investing in a 401(K) is even riskier in this volatile economy.
2. Today, as the economy is contracting, cash is king. Yet because the Federal Reserve is printing trillions of Monopoly dollars in order to stop deflation, in a few years we could see a hyperinflationary period. Hyperinflation will wipe out the value of a saver's holdings and eventually destroy most mutual funds as the government begins to raise interest rates in an attempt to stem inflation. In a hyperinflationary period, gold and silver will be king.
3. I am not actually recommending gold, silver, or real estate. Assets do not make you rich. Assets can make you poor if you are not careful. In 1980 gold and silver hit all-time highs, gold hitting $800 an ounce and silver $50 an ounce. So the suckers jumped in and were slaughtered. The same thing happened with real estate in 2004.
If you do not know what you are doing, no asset can make you rich. Ultimately, what makes you rich is your financial intelligence. Your greatest asset is your brain -- so take care of it and protect it from bad advice.