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How the Financial Crisis Was Built Into the System

noreply@blogger.com (ROBERT) — Fri, 06 Nov 2009 10:02:00 +0000

How the Financial Crisis Was Built Into the System

How did we get into the current financial mess? Great question.

Turmoil in the Making

In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.

In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.

In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.

In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.

In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.

Power and Domination

Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.

I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.

Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.

An Extreme Example

I was in South Africa in July of this year. During my television and radio interviews there, I was often asked my opinion on the world economy. Speaking bluntly, I said that South Africans had a better opportunity of comprehending the global turmoil because they're neighbors to Zimbabwe, a country run by Robert Mugabe.

In my interviews, I said, "What Mugabe has done to Zimbabwe, the Federal Reserve Bank and the IMF are doing to the world." Obviously, my statements disturbed many of the journalists. I did my best to comfort them and assure them I was not an anarchist. I explained, as best I could, that Zimbabwe was an extreme example of an out of control power struggle.

After they were assured I was only using Zimbabwe to illustrate my point, I said, "If you want to understand the world economy, take a refugee from Zimbabwe to lunch." I advised them to ask the refugee these questions:

1. How fast did the economy turn?

2. When did you know that you were in financial trouble?

3. When did you finally decide to leave Zimbabwe?

4. If you could do things differently, what would you have done?

Three Approaches to a Crumbling Economy

I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.

One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn't survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could've done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.

The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would've saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.

The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they'll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they'll be in a strong financial position.

Many Problems, Few Solutions

There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.

For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.

The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.

Apocalypse Soon

The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.

Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.

Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.

Taking Steps to Prepare for the Worst

noreply@blogger.com (ROBERT) — Thu, 08 Oct 2009 02:41:00 +0000

Taking Steps to Prepare for the Worst

In Sunday school I was taught the parable of the pharaoh of Egypt and his dream of seven fat cows being eaten by seven skinny cows. Deeply disturbed, the pharaoh sought the interpretation of his dream. A young slave boy interpreted the dream to mean Egypt would have seven years of plenty to be followed by seven years of famine. The message: Prepare for the lean years during the years of plenty. The pharaoh prepared Egypt for the lean years and led it into an era of prosperity.

My rich dad used the story of the three little pigs to make a similar point. As you know, one pig built his house out of straw, the other of sticks. Once the first two pigs finished their houses they began to party, taunting and laughing at the third pig who was taking longer, building his house of bricks. After the house of bricks was finished, a big bad wolf appeared and blew down the houses of straw and sticks. If not for the shelter of the house of bricks, the first two pigs would have been pork dinner.

In 2007 a big bad wolf known as the ‘subprime crisis' blew down financial houses made of straw and sticks, houses known as Lehman Brothers, Bear Stearns, AIG, Merrill Lynch, Washington Mutual, Fannie Mae, and Countrywide -- as well as the homes and businesses of people who built their lives on straw and sticks.

Lessons of the Pharaoh

Last month's column was about reasons why people should prepare for the worst. This article is about how to prepare for the worst. Preparation begins with understanding the lessons of the pharaoh and the three little pigs: Prepare for the worst even when times are good.

For me, it was not easy to follow these lessons, especially during the boom years. It was tough preparing for bad times while my friends were enjoying the good times. It was tough not to climb the corporate ladder seeking higher pay and job security or chasing financial fads such as flipping real estate, day trading stocks, gambling on dotcom companies, investing in mutual funds, or using my home as an ATM to pay off my credit cards. Today, many of my fellow baby boomers who enjoyed the boom years are concerned about survival in the lean years.

In 1973, returning from the Vietnam War, I found my dad, in his fifties and in the prime of his life, unemployed. Although a highly educated, honest, hard-working man -- and former superintendent of education for the state of Hawaii and Republican Party candidate for Lt. governor of the state - he was sitting at home, looking for work. My dad's situation, combined with my experience of the war, was my wake-up call. I knew something was wrong, but I did not know what was wrong.

The stories of the pharaoh and the three little pigs danced in my head. I knew I had to prepare, but for what I did not know. I just knew I could not follow my dad's advice, which was to fly for the airlines or go back to school and get my PhD. My instincts, sharpened by the war, knew his advice was not right for me. I decided to follow in my rich dad's footsteps, not my poor dad's.

One Path to Take

The following are some of the steps I took to prepare for the worst. I do not recommend my path; I will simply state why I did what I did and what benefits were gained.

1. I became an entrepreneur, not an employee. This was a tough choice. I did not have the skills, experience, or financial backing to support me through the lean years and my mistakes...and there were many lean years and mistakes. Many of the businesses I started failed.

Thirty-six years later, I own a number of businesses and employ hundreds of people all over the world. Some of the benefits: A) I make more money and pay less in taxes because I provide jobs, and that is what this economy needs -- more jobs. When President Obama speaks about raising taxes on the rich, he speaks about high-income employees and small business owners, not entrepreneurs who build big businesses. As you know today, many big businesses are doing better as small businesses crumble. B) I can start new businesses as the economy changes and new opportunities appear. C) I can start businesses in different countries when new opportunities appear. D) I am not afraid of losing my job. E) My income goes up as my business grows.

The good news is that it is easier to be an entrepreneur today. The Web and new technology offer more opportunities to reach a world market at a lower price. Today a person can start a business at home and reach the world market.

2. I invest for cash flow, not capital gains. Most people invest for capital gains. These are the people who have lost a lot of money or are afraid of losing more money. When a person says, "My house has appreciated in value" or "The stock market is going up," they are investing for capital gains. Investing for capital gains is like building a house of straw or sticks.

In 1973 I took a real estate course to learn how to invest for cash flow. Even though the real estate market crashed in 2007, my rental properties continue to produce cash flow. Even though banks are not lending money to many homeowners, the government continues to loan millions, via the FHA, to investors who provide housing. This means we receive tax breaks and use debt -- other people's money -- to increase income.

The good news is, when prices crash, cash flow investments become more affordable. For example, stocks such as Johnson & Johnson, a company that pays a steady dividend (cash flow), become more affordable. If you want to start your real estate career, now is the time to invest for cash flow.

3. I invest for inflation. In 1971 President Nixon took the world off the gold standard, which means the world's central banks can print as much money as they want. I was in Vietnam in 1972 and saw what happens when people do not trust paper money. Rather than try to live below my means and save money, I invest in gold, silver, and oil -- commodities that go up in price as the government prints more money.

When investing for inflation, I am not investing for cash flow. In this case, I am investing to protect my wealth from the predatory practices of the Federal Reserve Bank, the U.S. Treasury, and the ultra rich manipulating the world economy.
China does not trust the U.S. dollar. Today China is using U.S. dollars to buy commodities such as oil, copper, gold, and silver. The good news is silver is still inexpensive. In 2007 gold was approximately 50 times more expensive than silver. In 2009 the gap is 70 times -- which means silver is a bargain.

Silver is used in the electronics industry and is consumed daily; stock piles of silver are dwindling. On top of that, for the first time in modern history, there is more gold in the world than silver. In other words, silver is more valuable than gold. The good news is, at less than $20 an ounce, almost anyone can afford to start preparing for the worst and building their own house of silver.

In conclusion: My mom and dad lived through the last depression. They knew lean years. The baby boom generation is about to have their fat cows eaten by skinny cows. The good news is, if you can thrive when times are bad, these are the best of times.

The Root of All Evil

noreply@blogger.com (ROBERT) — Mon, 21 Sep 2009 09:53:00 +0000

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The Root of All Evil

Is the love of money the root of all evil? Or, is it the ignorance of money?

What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money? Is the lack of financial education in our schools simply an oversight by our educational leaders? Or is it part of a larger conspiracy? Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money. Like it or not, money has a tremendous impact on our lives in today's world.

Changing the Rules of Money

In 1971, President Richard Nixon changed the rules of money: Without the approval of Congress, he severed the U.S. dollar's relationship with gold. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.

President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical because the U.S. Treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the government was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.

Preparing for the Worst

noreply@blogger.com (ROBERT) — Thu, 27 Aug 2009 08:54:00 +0000

Preparing for the Worst

"Is the crisis over?" is a question I am often asked. "Is the economy coming back?"
My reply is, "I don't think so. I would prepare for the worst."

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of "green shoots" fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking... and I don't blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government's hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, "Sometimes the cure is worse than the disease." I say the government stimulus cure is killing us frogs.

3. Old frogs don't hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years -- their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it's my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare...Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they're concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker's money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬-- and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the "Age War." The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not coming...it is upon us now. This is one of many reasons why I remain cautious and say, "The worst is yet to come."

Investors: Don't Be Average

noreply@blogger.com (ROBERT) — Sat, 11 Jul 2009 10:44:00 +0000

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

noreply@blogger.com (ROBERT) — Wed, 08 Apr 2009 13:52:00 +0000

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

noreply@blogger.com (ROBERT) — Wed, 18 Feb 2009 13:58:00 +0000

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

noreply@blogger.com (ROBERT) — Wed, 14 Jan 2009 01:27:00 +0000

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.

How the Financial Crisis Was Built Into the System

noreply@blogger.com (ROBERT) — Thu, 27 Nov 2008 10:33:00 +0000

How did we get into the current financial mess? Great question.
Turmoil in the Making
In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.
In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.
In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.
In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.
In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.
Power and Domination
Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.
I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.
Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.
An Extreme Example
I was in South Africa in July of this year. During my television and radio interviews there, I was often asked my opinion on the world economy. Speaking bluntly, I said that South Africans had a better opportunity of comprehending the global turmoil because they're neighbors to Zimbabwe, a country run by Robert Mugabe.
In my interviews, I said, "What Mugabe has done to Zimbabwe, the Federal Reserve Bank and the IMF are doing to the world." Obviously, my statements disturbed many of the journalists. I did my best to comfort them and assure them I was not an anarchist. I explained, as best I could, that Zimbabwe was an extreme example of an out of control power struggle.
After they were assured I was only using Zimbabwe to illustrate my point, I said, "If you want to understand the world economy, take a refugee from Zimbabwe to lunch." I advised them to ask the refugee these questions:
1. How fast did the economy turn?
2. When did you know that you were in financial trouble?
3. When did you finally decide to leave Zimbabwe?
4. If you could do things differently, what would you have done?
Three Approaches to a Crumbling Economy
I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.
One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn't survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could've done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.
The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would've saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.
The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they'll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they'll be in a strong financial position.
Many Problems, Few Solutions
There are three major problems with the events of 1913, 1944, and 1971. The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.
For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.
The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.
Apocalypse Soon
The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.
Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.
Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.

As Capitalism Crumbles, U.S. Taxpayers Pick Up the Pieces

noreply@blogger.com (ROBERT) — Wed, 24 Sep 2008 13:30:00 +0000

As Capitalism Crumbles, U.S. Taxpayers Pick Up the Pieces

As we all know, the world changed drastically on Sept. 11, 2001, when the twin towers of the World Trade Center fell.
This year, on the eve of Sept. 11, the twin towers of Fannie Mae and Freddie Mac crumbled. Then, on Sept. 15, Lehman Brothers and Merrill Lynch disappeared. Actually, that was a triple-tower collapse if you count AIG.
In a few years, the biggest pair of towers will collapse: Social Security and Medicare. Even today, they're looking shaky. How many ground zeros can we as people, a nation, and a world withstand before we admit something is very wrong with our global financial systems? What will it take to wake us up?
Government Can't Fix It
Personally, I believe the biggest it's a problem that so many Americans are looking to this year's presidential candidates, Barack Obama and John McCain, to save our financial system. How did we become so financially weak that we surrender our economic independence to politicians? Where does it say in the Constitution that the government should solve our financial problems?
And why have so many people throughout the world come to expect financial life-support from their political leaders? It seems most people will vote for anyone who promises a chicken in every pot and a guaranteed mortgage payment.
We're in the midst of a problem neither candidate can solve: A lack of comprehensive financial education in our school systems. What else explains the economic blunders committed by our political and financial leaders? Or why so many consumers are in debt up to their eyeballs? Or why millions of people expect a quick government fix of some kind?
Under Water
A few months ago, a friend of mine from Hawaii asked me if I wanted to buy his new powerboat with twin motors. Apparently, in late 2007, he purchased it brand new for approximately $85,000. His plan was to refinance his house when it appreciated in value and use the difference to pay for the boat.
Failing to obtain new financing, he called to ask me if I would buy the boat from him -- just take over the payments and it was mine. I passed, and the bank eventually repossessed his boat. Later, his wife called to tell me he's now having problems making his mortgage payments. Apparently, my friend planned to pay for his house the same way he planned on paying for the boat, by refinancing his debt.
I mention this story because it illustrates the problem Obama or McCain face: Limited financial education and diminished financial common sense. Apparently, my and the nation's business leaders all went to same school of finance.
A Cynical Aside
If you want to know why the towers of American capitalism are crumbling, I recommend reading "The Creature from Jekyll Island" by G. Edward Griffin. It's not an easy book to find, but once you start reading it's to put down. In fact, in many ways it's a murder mystery about the financial "murder" of the middle class.
A very important lesson in the book is how political leaders use financial spin to deceive the public. The very, very rich use the system to legally steal from the rest of us by appealing to our sense of patriotism. When our leaders say, "We're bailing out Fannie Mae and Freddie Mac because we want to protect the American people," they really mean "We're saving our rich friends."
All the bankers and politicians have to do is wave the red, white, and blue, play a few bars of "Yankee Doodle," and the masses get teary-eyed and pledge greater allegiance to legalized robbery. Yes, it's true that ignorance is bliss -- but ignorance is also expensive, and it cost us our freedom.
Freedom at Peril
A bailout can be different things. First, printing more money is a kind of bailout that leads to higher inflation. Rather than protecting people, it makes life for the poor and middle class more expensive. The other kind of bailout is protection for our rich and incompetent friends. If you or I fail at business, we fail. If we cheat and fail, we go to jail. But if you're rich and politically connected, your incompetence may be protected by a government bailout.
As a former Marine and a Vietnam War veteran, it saddens me to see some of the freedoms I thought I went to war to protect being stolen from us by bankers and politicians. Unfortunately, few Americans know the difference between the words "nationalize" and "socialize." Socialize means we turn more of our personal powers over to Big Brother, not free enterprise. It means we as a people grow weaker and need a higher power -- the same power that got us into this mess -- to protect us.
In short, when the towers of Fannie, Freddie, Merrill, Lehman, and AIG came crashing down, more came down than just money. What we're losing is the very freedom this country was founded on, and what most of the world yearns for.

When Pessimism Prevails, It's Time to Get Rich

noreply@blogger.com (ROBERT) — Wed, 23 Jul 2008 15:05:00 +0000

When Pessimism Prevails, It's Time to Get Rich

If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.
The Weird Turn Pro
Journalist Hunter S. Thompson used to say, "When the going gets weird, the weird turn pro." That's true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That's what's happening now.
Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world's vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, "This is a bad one. The worst is yet to come."
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, "The difference between an optimist and a pessimist is that a pessimist is a realist. I'm just being realistic."
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists -- and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.
Surviving the Bad Times
Back in 1987, as savings and loans closed and investors' stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, "Now is the time for you to begin investing."
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and -- because more people are renting than buying -- she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book "The Art of the Comeback," my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.
Two-Year Warning
I believe we're through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it's real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you'll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don't come along often, so this is your time to get rich.
Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we're due for the mother of all market crashes, and that the U.S. economy is running on borrowed time -- and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn't jumped yet. But rest assured that it will.

Peace Through Prosperity

noreply@blogger.com (ROBERT) — Wed, 02 Jul 2008 15:15:00 +0000

Peace Through Prosperity

In 1972, I was flying a helicopter just south of the DMZ (the demilitarized zone), a line that separated North and South Vietnam. On that mission, my aircraft was not configured as a gunship.

Instead, my assignment that day was not to fight, but to observe the battle below and report what I saw. Unfortunately, what I saw was tragic. The North Vietnamese kicked our butts. Not only did we lose a number of aircraft, but many men lost their lives.

Tough Questions Unanswered

Back in the pilots' ready-room aboard an aircraft carrier, the debriefing began. Most of us were shaken and our spirits were low. Seeing fellow pilots shot down and men dying leave memories that can never be forgotten.

Once the debriefing was over, my commanding officer asked if there were any questions. Raising my hand, I asked, "Sir, why do their Vietnamese fight harder than our Vietnamese?"

Without waiting for his reply, I continued, "We have the most powerful military on earth. We have B-52 bombers pounding the enemy with 1,000-pound bombs. We have fighter jets dropping napalm on them. We have tanks. We have Navy battleships with 16-inch guns pounding them. We have squadrons of Army and Marine Corps helicopters armed with rockets and machine guns providing close air support. The North Vietnamese don't have much, and yet they keep coming and keep fighting."

There was a long silence in the room. I suspect some of my fellow pilots had similar thoughts. Being Marine helicopter pilots, we had a bird's eye view of the war that few others had.

"We're the richest nation on earth," I continued, "North Vietnam is one of the poorest. We give the South Vietnamese the best military support in the world, yet they're losing."

The silence continued. My original question -- "Why do their Vietnamese fight harder than our Vietnamese?" -- was never answered.

Fighting Not to Lose

Back in 1972, we all knew the Vietnam War was over. We knew the U.S. was looking for a way out. We were no longer fighting to win -- we were fighting not to lose. That made it made it almost impossible to keep fighting.

You may notice similarities with what's going on in Iraq and Afghanistan today. There are three lessons from 1972 I believe are relevant to the world today. They are:

How powerful the human spirit is.
Flying over the North Vietnamese in 1972, I was stunned at how fiercely they fought. We had all the modern weapons, but we couldn't beat them. Their spirit was unstoppable.
Today, when I hear fellow Americans complaining about their own lack of money, or how they can't afford to invest, or how middle-class America is having a tough time, I'm reminded of the North Vietnamese soldiers taking on the richest country in the world. If you've lost your spirit, even living in the richest country in the world can't help you become rich.
It's tough to negotiate from a position of weakness.
It was only after the U.S. recognized we had lost the Vietnam War that we agreed to sit down at the so-called "peace table." Today, as the wars in Iraq and Afghanistan still rage, we're doing the exact same thing. In war or in business, it's disastrous to negotiate from a position of weakness.

Don't let someone else run your life.
During Vietnam, defense secretary Robert McNamara and President Lyndon Johnson called the shots from Washington rather than listening to the men on the front lines. In Iraq and Afghanistan, we have the same problem.
President Bush, Vice President Cheney, and former defense secretary Rumsfeld, all men without combat experience, are calling the shots from Washington. They're not listening to their generals with Vietnam experience, generals such as Colin Powell. It appears that our leaders place little or no value on experience.

The Spirit to Succeed

The same sort of misguided leadership occurs in the world of investing. Today, there are millions of workers who put trillions of dollars in the hands of mutual fund companies even though many of these companies have horrible track records.

Many fund managers can't even beat the S&P Index. Yet, in spite of their poor investment record, many of these managers are paid billions of dollars in bonuses -- bonuses paid for with the sweat and toil and hopes and dreams of workers.

Personally, I would rather manage my own money than let strangers control it and my future.

In 1972, I saw many young soldiers lose their lives due to incompetent leadership in Washington. Today, millions of workers' retirements are at risk due to incompetent leadership on Wall Street.

But I also witnessed the power of the human spirit while flying over Vietnam -- a spirit stronger than the mightiest military power in the world, and one that beat the richest country in the world.

Today, I see the same spirit in the world of global business. America is still the richest country in the world, but countries like China and India are coming on strong. It's estimated that China holds nearly a trillion dollars of America's debt, which is more than enough to destroy our economy.

Play to Win

Financially, there are three classes of people. The rich are those who play to win. The middle class plays not to lose.

For the middle class, financial security is more important than financial opportunity. Ironically, today there's far more financial opportunity than financial security, yet the middle class still seeks security.

The third group, of course, is the poor, who often work very hard yet have lost the spirit to compete in the world of money. Without spirit, it's tough to win financially, even in the richest country in the world.

I resigned from the Marine Corps and flying in 1974, even though I loved them both. I quit because I no longer wanted to fight for peace. Instead, I believe we can build a more sustainable peace by working for prosperity. Instead of playing games of winners and losers militarily, why not work for solutions in which all sides win financially? After all, in business, it makes no sense to kill your customers.

In closing, I believe that as the scarcity of oil increases, so will the fighting. To me, scarcity in a world of abundance means opportunities for solutions. As the saying goes, "An eye for an eye makes us all blind." Instead, I ask we work for peace and prosperity -- for all sides.

Learning from the Best

noreply@blogger.com (ROBERT) — Tue, 01 Jul 2008 15:21:00 +0000

Learning from the Best

Now that our book, Why We Want You to Be Rich, is out, I can tell you what working with Donald Trump has been like.

Millions of people know "the Donald" as the tough guy who says, "You're fired" at the end of The Apprentice. I've been asked often if he's that gruff in real life. The answer is yes. My experience with Donald is that he's being real whether he's on camera or off. He never pretends to be Donald Trump. He is Donald Trump.

Obviously, co-authoring a book with him has been a milestone for me -- as an author and as a businessman. Appearing on Larry King Live, The Big Idea with Donny Deutsch, The Today Show, The Early Show, and CNBC with Donald gave me more credibility in the business world.

An Unofficial Apprenticeship

Yet I gained more than just recognition and credibility. I also became a better businessman and a better person just from working with Donald over the years.

Here are a few of the ways that knowing Donald has enriched my life:

1. I got tougher.

I know many people don't like Donald because he comes across as a tough guy. That's their problem. In spending time with him, I realized that I wasn't as successful as I could be simply because I wasn't tough enough.

As a businessman, I often didn't say what I wanted to say because I was afraid of hurting someone's feelings, or of having my feelings hurt. Instead of being forthright, I would be polite. Because of my association with Donald, I took back control of my business in 2005 and 2006 and fired people who should have been let go a long time ago.

The employees I got rid of weren't bad people, they were just the wrong people for my company. Today, business is thriving and people are happier.

2. I became kinder and more respectful.

One of my problems is that I'm very impatient and get angry too quickly. I believe Donald can be the same. Yet I saw him be patient, kind, and respectful in many situations that would have caused me to lose my patience.

When I asked him about this trait, he simply said, "One of the most important lessons my parents taught me was to treat all people with respect, even if I'm angry with them." Today, in my dealings with people, I do my best to treat all people with respect -- especially if I'm angry at them. Although I haven't always been successful, I believe I've become a little kinder as a result.

3. I got richer.

My wife, Kim, and I have more than enough money. We consider ourselves rich. When we entered Donald's world, however, we saw a whole new level of rich.

There's a difference between being a millionaire and a billionaire. The Trump lifestyle -- the penthouse, mansion, limos, and 727 -- gave me a firsthand glimpse into his world, and I began to understand why he constantly talks about thinking big.

Just being around him, I began to think bigger and richer. I set my sights on becoming a billionaire and began redesigning my business to become a billion-dollar business. Today, I constantly remind my staff that my job is to make them millionaires -- and their job is to make me a billionaire.

4. I became less petty.

One day, during a meeting in Donald's office, I was complaining about someone we were doing business with. I didn't like the way we were being treated. When I asked Donald about this person and voiced my concerns, he simply said, "Don't be so petty. Sometimes you have to do business with people you don't like. It doesn't mean you have to be like them or like them."

From that, I learned to think bigger and, more important, to know the difference between paying attention to details and being petty.

5. I was reminded of the value of collaboration and partnership, as well as the value of loyalty.

I saw this repeatedly as we developed the concept for our book, discovered our shared concerns and our passion for teaching, and shared the stage for dozens of media interviews.

Getting on Larry King Live and The Today Show is easy for Donald, but in booking a few of these interviews he insisted that we get equal billing. And when a show host mispronounced my name, Donald jumped in to correct him on national television. These simple acts spoke volumes.

History in the Making

About the same time our book was released, a new book about Andrew Carnegie, the richest man in the world at the start of the 20th century, was also published. The timing is ironic. I believe that when history looks back at the start of the 21st century, Bill Gates, Warren Buffett, and Donald Trump will be seen as the Carnegies of the era.

Many historians view Carnegie as a ruthless man, and I know that many people also see these three in the same light. Yet if you study Carnegie's life, you find that he was extremely generous, and donated billions of dollars in support of building libraries and preserving world peace.

He even envisioned the League of Peace, a precursor to President Wilson's League of Nations. I trust that history will allow a space for the good that Gates, Buffett, and Trump have done, and not simply resent them for their wealth.

Donald and I got together to write our book as teachers, not just as rich men. We're both concerned about the lack of financial education in our schools. In the process of writing it, I not only became a richer person, I believe I also become a better human being. And for this, I feel privileged to have seen a side of Donald Trump that not many people see.

Keeping Your Business Ideas Fresh

noreply@blogger.com (ROBERT) — Tue, 01 Jul 2008 15:05:00 +0000

Keeping Your Business Ideas Fresh

Sometimes life just isn't fair.

When I was growing up in the 1960s, my parents said to me, "Listen to your elders. You need to learn to respect their wisdom. Someday when you're older, young people will listen to you." So I listened to my parents and grew up respecting the wisdom of those older than I was.

But that notion has been turned upside down: Nowadays, people my age need to listen to and respect the wisdom of people who are younger than we are.

Ideas from an Earlier Age

In business, success often depends upon the relative age of your ideas. And today, people of all ages are in trouble because their ideas aren't just old, they're obsolete.

One example of an old idea is that of the traditional job. Jobs are a centuries-old concept created during the industrial revolution. Despite the reality that we're now deep in the Information Age, many people are studying for, or working at, or clinging to the Industrial Age idea of a safe, secure job.

Now people aren't just losing their jobs -- their jobs are migrating to foreign countries or disappearing altogether. As Alan Blinder, an economist and former vice chairman of the Board of Governors of the Federal Reserve System, says, "A new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of this country in the next decade or two." That's double the number of U.S. workers in manufacturing today.

In spite of such alarming figures, our schools still program kids to look for jobs. Advising people to go to school to learn to be an employee is as obsolete as advising young people to become peasants and work for a landlord. People need to be trained to be investors and entrepreneurs, not employees.

Obsolete Every 18 Months

My point is this: In a rapidly changing world, nothing is more dangerous than an idea whose time has come and gone. Just look at how Amazon.com has changed the world of brick-and-mortar booksellers such as Borders and Barnes & Noble, or how Skype is tearing down monster corporations like AT&T, or how Napster shot a torpedo into the record industry. Where do you think the people who work for those Industrial Age employers will be in 10 years?

As I said, people aren't losing their jobs -- jobs and companies are disappearing. I'm glad I listened to my rich dad and became an entrepreneur rather than the employee my poor dad wanted me to be.

Most people today realize that knowledge is doubling every 18 months. Does that mean that we now become obsolete every 18 months? Maybe so. Personally, it makes me feel like I need to assign an expiration date to my ideas, and update them regularly.

Many people my age are in serious financial trouble because they have old, Industrial Age ideas that they never update -- wanting job security, counting on a pension for life, relying on Social Security and Medicare -- while attempting to survive in the Information Age.

That's a mistake. Much of my company's revenue comes from the web, even though I remain a technophobe. My company survives because I've learned to respect the ideas of people younger than me, and recognize when my wisdom is obsolete.

Timeless Business Ideas

Although many business ideas go out of date every day, there are some that are timeless and essential regardless of the era we're in. Here are a few:

• Be passionate about your products and what your brand stands for. Brands die if the leader's passion dies, or if the leader's passion is simply to make money.

• Build a community. Good entrepreneurs are community builders, actively involved with their communities and dedicated to the community's well being. If you're dedicated to your community, it will be dedicated to you.

• Communicate clearly. Speak in the language of your customers. Don't attempt to baffle them with jargon in an attempt to appear smarter than they are.

• Tell it like it is, and don't be a phony. In business, there are too many people who will say anything to get their hands on your money.

• Be human. Don't be afraid to say, "I don't know" or "Can you help me?" If you're a good leader, people will be more than happy to help you build your business.

Now more than ever, we all need to be careful about whom we listen to. Just because someone is older than you no longer means they're wiser. Their ideas may have been good yesterday, but tomorrow they might be obsolete.

Fear Can Cost You Money

noreply@blogger.com (ROBERT) — Fri, 20 Jun 2008 14:30:00 +0000

Fear Can Cost You Money

Wall Street recently paid out billions in bonuses to its employees. Those bonuses came from investors who believe investing is risky. In other words, there's a giant industry built around investor fears. The more fear, the bigger the bonuses.

A recent Time magazine article called "How Americans Are Living Dangerously" makes a number of good points on this reality. I'll look at a few of them.

Illusory Control

We misjudge risk if we feel we have some control over it, even if it's an illusory sense of control. The article uses the example of people who drive rather than fly.

Even though the risks of death are higher driving than flying, many people would rather drive simply because they feel they have more control driving. The facts are that only a few hundred people die a year flying and 44,000 are killed a year driving. After Sept. 11, 2001, many people took to the roads rather than the skies. Not surprisingly, between October and December 2001, there were a 1,000 more deaths.

Today, many people feel they have more control if they have money in savings. Thus the saying, "Safe as money in the bank." But the fact is that savers are the biggest losers of all.

Between 1996 and 2006, the purchasing power of the dollar dropped by 50 percent compared to gold. In 1996, gold was approximately $275 an ounce; by 2006 it was over $600 an ounce. In 1996, oil was approximately $10 a barrel ; in 2006 it was over $60 dollars a barrel. Compare the price of real estate in your area between the same 10 years and you'll notice that the purchasing power of your dollar has slipped.

The point is, in spite of the facts, many people feel safer with money in the bank because they feel they have more control over it. They don't have control over the price of gold, oil, or real estate, so they think investing in these assets is risky.

The Biggest Risks of All

The second point the Time article makes is that when we're afraid, we tend to ignore the statistics and listen to our emotions. As I mentioned above, you're over 500 times more likely to die in a car than in an airplane. Yet cars are not the biggest of all killers.

Of the 2.5 million deaths annually in the United States, the No. 1 killer is heart disease. In 2003, there were 685,089 deaths due to heart attack. Auto accidents caused 44,000 deaths. Only 17,732 deaths by murder and 1 death by shark attack occurred in the same year.

Despite these statistics, more people are afraid of sharks and murderers than driving up to a fast food restaurant and saying, "Super-size it." French fries kill more people than guns and sharks, yet nobody's afraid of french fries.

The same is true in the investment world. Since many people believe investing is risky, they go for the second-riskiest investment, mutual funds. As my rich dad used to say, "Mutual funds are like french fries. They may fill you up, but they aren't good for you in the long run."

John C. Bogle, founder of the Vanguard Funds, states in his book The Battle for the Soul of Capitalism, "When we have strong managers, weak directors, and passive owners, it's only a matter of time until the looting begins." Bogle has spoken out this way because the mutual funds industry is legally looting money from investors.

To put it another way, since most people think investing is risky and full of sharks, they've turned their money over to some of the biggest sharks in the world -- the managers of mutual funds.

True Expertise Counts

One of the reasons people think investing is risky is because there's an entire industry that wants you to believe so. Trading on your fears is very profitable.

This leads to point number three in the Time piece. The magazine quotes the findings of a study in which a panel of 20 communications and finance experts were asked about the risk of human-to-human transmission of avian (bird) flu. These experts said the risk was 60 percent. When the same question was asked of medical experts, their answer was 10 percent.

The point is that you need to be critical of experts. Is the person you seek advice from able to give you a credible answer?

Qualified and Unqualified Advice

There are three experts who are often not qualified to give you sound investment advice. They are:

Non-investors
I'm always surprised by the number of people who take investment advice from non-investors -- people such as friends, family, and co-workers. A few years ago, I found a spectacular little condominium for sale for $50,000 in Phoenix, Ariz. All I had to do was put down $6,000 and assume the loan.
At the time, it was worth about $95,000. Today the units in the same complex sell for $195,000. Best of all, the monthly rent at the time was approximately $1,000 a month and today rents are around $1,500.
A friend from Portland, Ore., asked if I would let her purchase it. My wife, Kim, and I agreed, thinking at the time that this unit would be a great start for our friend. A few months went by and we asked her how the purchase was coming along. She said, "Oh, I forgot to tell you. I didn't buy the unit." When we asked her why, she said, "My neighbor Marge said it was too risky."
"How many investment properties does Marge own?"
"None."
Clearly, taking advice from someone who doesn't know what they're talking about is the real risk.
Perceived experts, such as financial planners or stock or real estate brokers
Most people take financial advice from salespeople, not rich people. Most stockbrokers are not rich nor do they invest in what they sell. The numbers are even worse for real estate brokers.
Investors themselves
I've shown several great investments to an investor friend of mine. To this date, he hasn't purchased anything I've recommended. That's because he can always find something wrong with the investment. Instead of looking at what's good about them, he looks for what's wrong and then talks himself out of taking action.
This is one reason why I invest as part of a team, so that I can consult with other investors rather than talk myself out of great deals.

The Time article made it clear that fear is normal. We all experience fear; I admit that I've let it hold me back. I probably would've been a lot richer a lot sooner if I flew more and drove less.

The important thing to remember is to pay attention to what we worry about -- and what we should be worrying about.

Reading, Writing, and Resisting Debt

noreply@blogger.com (ROBERT) — Wed, 18 Jun 2008 14:22:00 +0000

Reading, Writing, and Resisting Debt

When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.

Most of us know that millions of People are deeply mired in credit card debt. Many financial experts have said repeatedly, "Get out your scissors and cut up your credit cards." While this may sound like good advice, to me it seems like a painful, short-sighted answer to a more complex problem.

That problem is a lack of financial education. Why don't we teach kids about money in school? Rich or poor, smart or not-so-smart, we all use money. Yet, while there are a few schools beginning to offer some financial education, it seems that most educators believe money isn't a subject worthy of the hallowed halls of our learning institutions.

A History of Credit

When I was a kid, there were no credit cards. Instead, retailers offered layaway plans. My mom would go to a store, such as a furniture outlet, choose the sofa she wanted, and put it on layaway. That meant she put a little money down to hold the sofa, and every payday she'd pay a little toward the purchase. When the sofa was paid for in full, she would bring it home.

At that time, stores also offered "buy now, pay later" plans. This meant my mom could buy the sofa, sign a payment agreement, and take the sofa home that day.

Today, while a few stores still offer such plans or even variations of them, most people simply put their purchases on a credit card. But credit has been a part of American life even before there were credit cards.

A Growth Industry

There are many reasons why credit cards have grown in popularity, including these:

• Wall Street has turned debt into an asset.

Today, your friendly banker issues you a credit card. He then sells your debt to a Wall Street firm, which collects your monthly payments at high interest rates -- which is why it's an asset to them.

The minute a Wall Street firm purchases your debt, your bank no longer has it on its financial statement, which then allows the bank to look for more credit card customers. That's one reason why you get so many credit card offers.

• The purchasing power of the dollar has dropped.

If you've followed these columns, you know that in 1971, President Nixon converted the U.S. dollar from money to a currency. That means the U.S. and other governments can print money faster than you can earn it -- or save it.

In terms of purchasing power, if you earned $50,000 in 1996, you would have to earn $100,000 in 2006 just to stay even. Many people aren't earning more even though prices are rising, so they make up the difference by using their credit cards for everyday purchases.

• When wages go up, so do taxes.

Because the purchasing power of the dollar has dropped, many people work harder, ask for raises, or take on extra work (or a second job) to earn more money. And when they earn more money, they move into higher tax brackets.

Today, the alternative minimum tax (AMT) -- first levied in 1970 as a tax against the rich -- is penalizing the middle class. In many ways, the AMT is a form of double taxation. Many working people are now making more money but taking home less because they pay a higher percentage of taxes.

• The cost of retirement has gone up.

When I was young, many people worked for a company with a pension plan that covered them for as long as they lived. If they didn't have a pension plan, they could count on Social Security and Medicare.

That's all changed. Today, millions of workers need to be able to afford their day-to-day living as well as put enough money aside for when they can no longer work.

I Love Credit Cards

Clearly, cutting up credit cards won't address these economic changes or solve America's debt problem.

In the real world, credit cards are essential. It would be extremely difficult to rent a car or make hotel and airline reservations without a credit card. It would also be tough to pick up the tab at a business lunch or shop online without a credit card.

Personally, I love my credit cards because of the financial freedom they allow me, and my life would come to a grinding halt without them.

Fight Debt with Debt

Whenever anyone asks me how to solve the credit card problem, I tell them to fight fire with fire -- and debt with debt. The way I solve my increasing needs for cash is to go deeper into debt -- good debt, not bad debt.

For example, I use debt -- which is essentially tax-free money -- to invest in real estate, which in turn increases my cash flow. Not only do I not pay taxes on my debt, I could also pay no taxes (or very little in taxes) on the income from the debt. Hence I earn more but pay less in taxes.

Obviously, in order to do this you need to know how to use debt wisely and responsibly, and must be able to find great investments that increase cash flow.

The Root of the Problem

Most financial experts will scoff at my "fight debt with debt" approach. They'll say my advice is based on flawed logic, and it may well be -- for most people. But I ask you to step back and take a look at the world of finance. As I stated earlier, Wall Street is able to take your debt and turn it into their asset. That's what financially smart people do, and it's one example of why rich people get richer.

Unfortunately, most people take bad debt and turn it into horrible debt. This is especially true of poor people and people with bad credit, who have access to only the worst forms of debt and pay the highest interest rates on it.

But their problem isn't credit cards -- it's a lack of financial know-how. And at the root of that lack of knowledge is our school system and its archaic curriculum, which is out of touch with the way people really live.

Clearly, advising people to cut up their credit cards won't solve the problem of excessive credit card debt. A pair of scissors won't make anyone financially smarter, but some financial education just might.

Educate Yourself into Riches

noreply@blogger.com (ROBERT) — Thu, 12 Jun 2008 00:37:00 +0000

Many of Wall Street's elite firms were being required to pay tens of millions of dollars in fines to investors, according to media reports. The penalties are for alleged bad investment advice, courtesy of New York State Attorney General Eliot Spitzer.
This brings me to one of my favorite quotes from famed investor Warren Buffett goes: "Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."
I have been highly critical of the standard financial planning advice -- "work hard, save money, get out of debt, invest for the long term, and diversify" -- for a long time. Such guidance is often more a financial advisor's (subway rider's) sales pitch than a solid investment guide.
But while I think it's courageous that Spitzer slaps millions in fines on a few Wall Street firms for their bad investment guidance, I believe the investors who accepted that unsound advice have some responsibility, too. Isn't knowing the difference between good and bad advice part of knowing what you're doing?
The Difference Between Investing and Shopping
The problem is, most investors don't know how bad the standard investment advice is. This mantra of "work hard, save money, get out of debt, invest for the long term, and diversify" is followed by millions of investors -- who lost $7 trillion to $9 trillion between 2000 and 2004. Many are still following this bad advice today.
Not only did millions of investors lose trillions of dollars, many also missed the boom in real estate, oil, gas, and previous metals. Furthermore, despite investors' huge losses, Wall Street paid out some of its biggest bonuses in history.
However, investors should realize it's "buyer beware." Investing is different from shopping. If I go to Sears and don't like the tool or shirt I purchased, I can generally get my money back. When we go shopping, we expect value for our money. But when we invest, we do so in the hopes of making more money -- and knowing that we risk making losses. What would happen to the financial industry if brokers were sued every time a client lost money? The wheels of world commerce would grind to a halt.
My point is: The world is filled with honest people handing out bad advice. An example of honest bad investment advice is the standard one of "work hard, save money, get out of debt, invest for the long term, and diversify".
The world is also filled with biased advice, which is why people say, "Never ask an insurance broker if you need insurance, or a mutual-fund sales person if they recommend mutual funds." Furthermore, there are many crooks and con artists as well, who intentionally promote dishonest ventures.
Spotting the Difference
So while it's imperative that we have the Securities and Exchange Commission and a brave Attorney General such as Spitzer to enforce the rules, we, as individual investors, still need to be vigilant and personally responsible for the advice we receive and what we do with our money.
In my opinion, that means each of us needs to be responsible for our own financial education so we can tell the difference between good advice, biased advice, and crooked advice. If you can educate yourself to know the differences between those three types of advice, getting rich is easy.
Or, if you take investing advice from a subway rider, don't be surprised if you wind up on the subway.

Throwing Good Money After Bad

noreply@blogger.com (ROBERT) — Fri, 06 Jun 2008 06:49:00 +0000

Throwing Good Money After Bad

All booms eventually go bust.
We all remember the stock market crash of 2000, and most of us remember the real estate crash after the implementation of the 1986 Tax Reform Act. Today, many people are anticipating another real estate crash.
Unfortunately, despite our understanding of booms and inevitable busts, it's always near the top of a boom that "dumb money" buys in. Currently, this has set the scene for a potential market bust of which few people are aware. I'll describe it today's column, and advise how best to prepare in my next column.
Express-Lane Inspiration
About a year ago, I wrote warning readers that the real estate boom was over. How did I forecast the end of the boom? I got my hot tip from the cashier at my local Safeway supermarket.
While she was tallying the cost of my apples, broccoli, and steaks, she handed me her new real estate agent's card and invited me to call her for my next real estate investment. Moments later, I was home writing that column. As my rich dad used to say, "When dumb money chases smart money, the party's over." Needless to say, many real estate agents and investors wrote me nasty notes.
I'm not a hundred-percent certain where things are going today. Most economists are forecasting a strong economy, but economists worry me more than newly minted real estate agents. Most seem to be happy that inflation is in check; when I hear that inflation is in check, I begin to think about deflation, and as most of us know, deflation is much, much, worse than inflation.
An Inconvenient Truth
In the simplest terms, inflation occurs when there' too much money in the system. On the flip side, deflation occurs when there are too few dollars in circulation. When that happens, prices start to fall. For example, in inflationary times, prices of houses go up. In deflationary times, prices of houses come down. If prices of houses begin to drop too fast right now, it could be 1986 all over again.
I wrote a colum years ago about how I love debt and my credit cards. The trouble is that most people do. Today, you can qualify for a loan to buy a house simply if you're alive and breathing.
The strong economy we've been experiencing for years has thus been built on dumb money -- in addition to smart money -- borrowing more and more. Even the U.S. government has had a field day borrowing money to do such things as fight a war and attempt to rebuild Iraq and Afghanistan rather than rebuild our country. And the inconvenient truth about debt is that it has to be paid back.
A Certain Ratio
For the next two years, I'm cautioning people to watch their ratios between good debt and bad debt, and keep liquid reserves such as cash, gold, or silver.
Good debt is debt that makes you rich. An example of good debt is the debt on the apartment houses I own. That debt is good only as long as there are tenants to pay my mortgages. If tenants stop paying their rent, my good debt turns into bad debt.
Most people don't have good debt -- all they have is bad debt. Bad debt is debt that makes you poorer. I count the mortgage on my home as bad debt, because I'm the one paying on it. Other forms of bad debt are car payments, credit card balances, or other consumer loans.
On our home, my wife, Kim, and I keep a 25 percent debt-to-equity ratio. In other words, our debt is 25 percent of the home's value. Unfortunately, many people have an 80 percent or higher debt-to-equity ratio. That means the debt on their home is 80 percent and their equity is only 20 percent.
On our investment properties, we carry a higher debt-to-equity ratio. To protect ourselves, we have cash reserves to cover the expenses of the properties. For example, in case all the tenants leave and no one is left to pay the mortgage and expenses, we have separate funds for each property, with enough liquidity -- i.e. cash, stocks, and bonds -- to carry the building for a year. Unfortunately, the dumb-money crowd has no reserve funds for their properties.
Where Deflation Does Its Damage
In a deflationary market, the value of your home can drop. If the value drops, the bank may call in your loan. Even if you've never missed a payment, and even if you're ahead on the payment schedule, the bank can call in your loan if they feel the value of the property is lower than the loan amount.
For example, say you buy a house for $100,000 and put 20 percent down and borrow $80,000. If the market deflates and the value of your home drops to $70,000 (because everyone else is selling their homes to get out of debt), the lender may ask you to pay the $80,000 you owe immediately.
If such deflation happens, cash will become king. There will be half-price sales on BMWs, expensive restaurants will close, and people will be out of work. And anybody who caters to people with dumb money will be in trouble. As I said before, deflation is much worse than inflation.
Smart Money, Bad Times
The good news is that during deflationary times, smart money reenters the market, so crashes are great for smart people with smart money. Instead of listening to the optimistic economists, then, you should eliminate bad debt and improve your debt-to-equity ratios on good debt.
Most important, study; if you want to be smart, you need to learn. I'll discuss what you should study in the second part of this column. For now, be aware that if deflation comes and there's a recession, it won't have much effect on the poor. Instead, it'll punish middle-class people who think they're rich because their houses and stocks have gone up in value.
I'll explain more in a couple of weeks.

To Get Rich, Seek Out Rich Financial Advice

noreply@blogger.com (ROBERT) — Thu, 29 May 2008 11:34:00 +0000

To Get Rich, Seek Out Rich Financial Advice

I've been on television recently discussing the U.S. financial crisis. These shows often feature a panel of so-called financial experts who rarely agree with each other. The reason their advice is different is simply because each expert speaks to a different segment of the population.
Giving Credit
For example, Suze Orman, Dave Ramsey, and Larry Winget speak to people who are deep in credit card debt. Their advice is excellent, direct, practical, and to the point. I should know -- in the late 1970s, I was one of the debt-ridden people they're speaking to. I was deeply in debt because my business was suffering and I was using credit cards to live on. Instead of paying off my credit card, I'd get a new credit card and use that one to pay off the old credit card. I, too, once used a home equity loan to invest in my business -- and lost it all.
At my lowest point, I was nearly $700,000 in debt. One evening, I attempted to check into a motel in upstate New York and my credit card was declined. I slept in the car that night. Many people might say that this was a horrible experience, but that isn't true -- it was a wake-up call. It was clearly time to look in the mirror and face who I really was. I realized that if I wasn't going to be tough on me, the world would take on the job.
Today, older and wiser, I have tremendous respect for the power of debt and the value of credit. Credit is another word for trustworthiness. I'm currently millions of dollars in debt, but it's good debt invested in income-producing real estate. While millions of homeowners are threatened with foreclosure, my investment real estate is doing very well. In fact, I'm doing even better because more people are renting than buying.
The Strata of Financial Advice
If you're deeply in debt like I was and want to get rich someday, I suggest you start by following the advice of Orman, Ramsey, and Winget. For a certain portion of the population, their advice is very rich indeed.
But there are other types of financial advice, some of it not nearly as beneficial. The lowest kind assures people that the government will take care of them. This is what the people who are counting on Social Security and Medicare have been led to believe. The problem is that the U.S. government is the biggest debtor in the world, and those depending on it to take care of them will only become poorer.
Another type of bad financial advice tells us to get a safe job, save money, live below our means, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. On those financial TV shows, I get into the most head-butting with the so-called financial experts who subscribe to this philosophy. That's because, according to the Census Bureau, in 1999 the average U.S. income was $49,244. By 2006, the average income declined to $48,201. This means that U.S. workers haven't had a pay raise for seven years. So much for the advice about getting a safe job -- it's the opposite of rich advice.
Diversify at Your Peril
Moreover, in January 2008 the Federal Reserve Board dropped the interest rate twice over a period of just eight days, by a record 1.25 percent. If my crystal ball is accurate, I expect another .5 percent drop sometime later this year. Savers are actually losers, then, because interest rates are low and inflation is high. So urging people to save money isn't rich advice, either.
Finally, the S&P stood at 1,352.99 in March 2008, which is below its mark of 1,362.80 in April of 1999. So much for the advice of investing for the long term in a well-diversified portfolio of mutual funds -- that's also not rich advice.
Warren Buffett has said that diversification is for people who don't know what they're doing. And my rich dad once told me, "Diversifying is like going to a horse race and betting on every horse. The only way you win is if the darkest of dark horses wins." So my concern is that people who follow this second type of financial advice may actually wind up poor in the long term.
Get Rich, Stay Rich
So there's different financial advice for different people, and the price of poor advice is that millions will be poor if they follow advice that isn't aimed at them.
To become rich, I recommend investing in your financial education. There's a difference between that and financial advice. A solid financial education allows you to know the difference between good advice and bad advice, rich advisers and poor advisers.
If you want to become rich -- and remain that way -- it's important to know what financial advice is best for you.

Mutual Funds Get Greedy

noreply@blogger.com (ROBERT) — Tue, 27 May 2008 17:04:00 +0000

Mutual Funds Get Greedy

I was on a radio program not long ago. My host was a financial planner who was upset about the book Donald Trump and I wrote, "Why We Want You to Be Rich." In the book, Donald and I don't speak highly of mutual funds.

Rather than listening to what I had to say, the interviewer wanted to argue. His position was that Donald and I weren't experts on mutual funds, and had no right to criticize. I agreed that we weren't experts on mutual funds, and reminded the host that Donald I never claimed to be.

An On-Air Dustup

Instead, we were quoting John C. Bogle, a true expert and leader in the mutual fund industry whom I mentioned before. For those who may not know, John Bogle is the founder of the Vanguard family of funds.

Rather than consider my position -- that Donald and I were not experts, but John Bogle was -- the on-air financial planner defensively said, "John Bogle loves mutual funds."

Again agreeing with him, I replied, "Bogle does love mutual funds. That's why he's upset, because mutual fund investors are being ripped off by mutual fund managers."

Our on-air argument continued for approximately five more minutes. I asked the host if he'd read Bogle's book, "The Battle for the Soul of Capitalism." He admitted that he hadn't, and had no future plans to do so. His position was that I had misinterpreted the book and was taking Bogle's statements out of context.

Bogle on Funds

There's a saying that goes, "Minds are like parachutes. They only work when open." Since the radio-show host's mind was closed, and so was mine, I asked to end the interview early. Rather than continue arguing about a book the listening audience couldn't see and the host didn't plan on reading, I decided to make my case here, with Yahoo! Finance readers.

Essentially, John Bogle's position in "The Battle for the Soul of Capitalism" is that investors -- what he calls the true owners of major corporations and mutual funds -- are being robbed blind by corporation and mutual fund company managers. He refers to it as the shift from owner's capitalism to manager's capitalism.

Most of us have heard about the investors (and true owners) of Enron, WorldCom, and other corporations being fleeced by the likes of Ken Lay, Jeff Skilling, and Bernie Ebbers. Bogle contends that the same type of theft practiced by these men is going on in the mutual fund industry. He doesn't point to just a few bad apples, either -- he fingers the industry as a whole.

To quote Bogle, "Simply put, fund managers have arrogated to themselves an excessive share of the financial markets' returns, and left fund investors with too small a share." Elaborating on that point, Bogle writes, "With today's dividend yields on stocks at about 1.8 percent, a typical equity funds expense ratio consumes fully 80 percent of a fund's income."

As I put it on the air that day, "Eighty percent is a bit greedy."

A Money Vacuum

To illustrate his point, Bogle writes that "while $10,000 invested in the stock market [in 1985] earned a profit of $109,800 [over 20 years], the average mutual fund investor earned a profit of just $29,700. Together, the cost penalty, the timing penalty, and the selection penalty consumed an amazing 73 percent of the profit available simply by buying and holding the stock market itself, leaving the average fund stockholder with a mere 27 percent of the total."

In other words, if investors had invested in the stock market back in 1985, they would have made $109,800 dollars over 20 years. That's including the ups and downs of the market. During the same period, investors who put the same $10,000 in mutual funds made only $29,700.

That's what prompted me to tell the radio interviewer, "That's why mutual funds suck. Not only do they suck 80 percent of the dividends, in come cases they suck another 73 percent of other gains from investors."

I believe my comment was bleeped.

Caveat Emptor

Reading "The Battle for the Soul of Capitalism," you begin to understand Bogle's motivation for writing it. As the radio host accurately told me, "John Bogle loves mutual funds." If that financial planner had read the book, he'd understand that that's precisely why Bogle is so frustrated.

Mutual funds are a beautifully conceived investment vehicle designed to provide long-term wealth for passive investors. Sadly, over the years, fund managers have been both legally and illegally ripping off investors who count on their investments to provide a college education for their kids or retirement security for themselves. It seems that mutual fund managers, like the managers of our major corporations, have sold their souls for fast money, and have left the investors behind.

I agree with Bogle's call for more governance from fund managers. If the rip-off continues, it'll be harder to raise money from investors to fund our entrepreneurs and businesses. Many U.S. investors are already investing overseas rather than at home.

Yet regardless of whether or not our capital market leaders tighten the rules and fund managers regain their capitalistic souls, I remind you of a timeless bit of investing wisdom: "Let the buyer beware." Ultimately, it's your money, so be very careful about what you invest in and who you invest with.

Rich Today, Poor Tomorrow

noreply@blogger.com (ROBERT) — Sun, 25 May 2008 17:00:00 +0000

Rich Today, Poor Tomorrow

As promised in my former post, this week I'll explain why deflation will severely punish the upper middle class. These are the people who think they're rich because their houses and stocks have gone up in value -- that is, because of inflation.

What Goes Up...

People concerned about inflation today tend to buy big houses and nice cars. They believe that the purchasing power of the dollar is going down. But what happens if cash becomes king?

This cash squeeze is already affecting many people who thought they were rich. My wife, Kim, has a friend who's a successful architect. Her husband was a manager of a good sized advertising agency. They have three children, the oldest in high school, and earn about $350,000 a year in combined income.

Because they were flush with cash, this couple purchased two high-end vacation homes, one in the mountains and one at the beach. They live most of the year in a McMansion in Phoenix.

Things were going along fine until the husband lost his biggest client. Then he lost his job, and in less than three months their savings was depleted. They then tried to sell their vacation homes, but the values had dropped below the mortgage amount. Today, they continue to pay the mortgages on their houses and hope the price of real estate will go back up. They sold one of their BMWs at a loss.

In 2005, they were net-worth millionaires. In 2007, they're facing bankruptcy.

Follow the Arrows

People like this couple aren't concerned enough about is the credit bubble bursting, which could lead to deflation. Today, nationwide savings are low and debt per household is up. Most of us know the following equation from Economics 101:

cash + credit = the economy

Ever since 2000, there's been an oversupply of credit. When the Y2K threat loomed, the Federal Reserve flooded the market with credit. After the terrorist attacks of 9/11 and the stock market downturn in 2002, the market was again flooded with easy credit. Excessive credit and lower interest rates kept the economy afloat.

It was a smart move at the time. In the first five years of his presidency, President Bush borrowed nearly a trillion dollars, more money than all of our previous 43 presidents combined, and the resulting credit bubble helped keep the stock market from collapsing entirely and led to a boom in real estate.

The problem is that this debt must be repaid. So the trillion-dollar question is, can the government, businesses, and consumers keep the credit bubble inflated? Here's that equation:

↑
cash +

↑
credit

↑
= the economy (inflationary)

If credit is cut off or the debt can't be repaid, the equation changes to this:

cash +
↓

credit
↓

= the economy (deflationary)
↓

Fresh-Squeezed Stocks

If the credit bubble bursts, it could trigger a short squeeze.

"Short squeeze," a trader term, is when a stock's price is high and many traders short the stock. Shorting a stock means borrowing shares from an investment house, selling them, and hoping the price of the stock drops. When the price drops, a trader buys the stock back and returns it to the investment house he borrowed it from.

For example, say XYZ stock is selling for $100 a share. A trader borrows 10 shares from the investment house and sells them for $1,000. The stock drops to $60. Now the trader buys back 10 shares from the market for $600 and returns the 10 shares to the investment house. He now has a gross profit of $400 before paying interest and fees to the investment house.

A short squeeze occurs when the market goes the other way. In this example, instead of XYZ stock dropping to $60 a share, it rises from $100 to $150. The investment house issues a margin call, which means the trader needs to return the 10 shares he borrowed.

Suddenly, all the other traders who shorted the stock need to buy shares of XYZ in order to return them. As more short traders begin buying XYZ, the price of the stock goes up and up -- from $150 to $160 to $170, for instance. This is a short squeeze in stocks. The traders who thought the price of the stock would go down are squeezed into becoming the ones who drive the price up.

Putting the Squeeze on the Economy

A short squeeze could happen with the U.S. dollar if lenders suddenly forced debtors to pay in cash.

The couple I mentioned above is technically caught in a short squeeze, since they're short of cash and long on debt. They had to sell their luxury car at a huge loss because they were desperate. As time goes on and their savings dwindles, they may become desperate enough to sell their vacation homes at huge losses.

If the credit markets bust, there could be millions of couples just like this who seemed rich but are suddenly poor. This could send the lending rate of the dollar higher, making the value of the dollar higher as well -- essentially causing a deflation.

I don't want the U.S. economy to go into a short squeeze, and I hope the credit bubble doesn't burst. Deflation isn't good, and inflation is easier to cure than deflation.

Invest in Money Smarts

My concern about deflation is best represented by the following equation:

cash +
↓

credit
↓

= the economy (recession)
↓

If the credit bubble bursts, not only will credit disappear, but people will stop spending and start hoarding cash, and savings will increase. Money is fuel for the economy, so when credit is gone and money is in hiding, the economy slows and a recession -- or worse, a depression -- can occur. In this case, prices go down, not up, and cash becomes king.

I certainly don't want this to happen. Nonetheless, given the lack of a clear direction in markets today, a good investment for 2007 may be to pay off some high-interest debt, put a little extra cash aside, and wait for bargains. If there's a short squeeze on cash, I believe it will be short lived. Once the Fed pumps more money into the system, the dollar will continue its fall.

In conclusion, your best investment today may be in time, not money. That is, invest your time in studying, reading books, and going to seminars. I recommend you study the asset class that's high-priced today, and could be low-priced tomorrow. For example, if you want to acquire real estate, study real estate while prices are high.

And if and when the market crashes, be ready to buy.

The Slow-Motion Stock Market Crash

noreply@blogger.com (ROBERT) — Sun, 25 May 2008 16:58:00 +0000

The Slow-Motion Stock Market Crash

When my book "Rich Dad's Prophecy" was released in 2002, most financial newspapers and magazines trashed it because I discussed a looming stock market crash. Ironically, much of what I predicted in the book is coming true earlier than I expected.

On Feb. 27 of this year, a 9 percent market sell-off in China sent ripples of fear through stocks markets across the world. In the United States, the Dow's one-day plunge of 416 points was the steepest decline since the market opened after Sept. 11, 2001.

So the question is: Should stock investors be worried? As you might expect, some say yes and some say no.

Correction or Crash?

Personally, if I were counting on the stock market for my retirement or to put my kids through college, I'd be worried. Why? Because from my perspective, even if the Dow were to miraculously soar through 15,000, the stock market has been experiencing a long, slow crash for years.

This February, investors witnessed a drop of $583 billion in U.S. market wealth. Many experts are quick to point out that this loss of wealth is a mere drop in the bucket when you take into account that the stock market has been going up for four years. Most market experts say that the market was due for a correction, which is true.

In fact, the recent 3.5 percent drop is miniscule when compared to the 21 percent drop of the S&P 500 back in 1987. By definition, such a small drop isn't even classified as a true correction. According to BusinessWeek, a full-fledged correction is defined as a 10 percent drop, and a bear market is defined as a 20 percent drop.

Comparing Apples to Oranges

So how can I say that the market is crashing even if it continues to go up? To see the true crash, educated investors need to compare apples to oranges, not apples to apples.

When you compare the Dow to the Dow, or the S&P 500 to the S&P 500, that's comparing apples to apples. The Dow at 12,000 appears better than the Dow at 9,000, just as an apple at $1 a pound looks better than at $1.50 a pound, even though it's still the same apple. All that's happened is the price per pound of the apple has gone up -- the apple hasn't changed.

Years ago, my rich dad taught me to be a comparison shopper, especially when it comes to investments. He said, "You need to understand value more than price. Just because the price of something goes up doesn't necessarily mean the value has gone up."

He also told me, "If prices go up without a corresponding increase in value, it means the value of the asset has actually gone down." This holds true for all assets, including stocks, bonds, and real estate.

For example, when the price of a house goes up it doesn't mean that the house is more valuable. And prices going up may mean that something else is going down in value. In today's global markets, what's going down is the purchasing power of the U.S. dollar.

The Dow vs. Gold

To get a truer picture of comparative values, compare the Dow to the price of gold. When the purchasing power of gold is compared to the purchasing power of the Dow, the Dow appears to be crashing.

That means the average investor will need at least a 15 percent annual return on their stocks or mutual funds just to stay ahead of the U.S. dollar's purchasing power erosion -- that is, just to break even.

In my earlier Yahoo! Finance columns, I used history to forecast the future by comparing the dollar to gold and oil over a 10-year period. Here's the data:

	1996	2006	Percent Increase
Oil	$10/barrel	$60/barrel	500
Gold	$275/ounce	$600/ounce	118

Table updated 3/21/07.

What Next?

What this means for you depends upon your bullish or bearish outlook, your financial education, and financial experience. For example, I hear many young people today saying that the price of real estate doesn't go down. This is a naive opinion due to lack of financial education and experience. I heard similar misguided opinions about stocks in the dotcom era, just before the market crashed.

Personally, I tend to heed former Federal Reserve Chairman Alan Greenspan's caution about a possible recession ahead. I predict that if there is a recession, current Fed chairman Ben Bernanke (and, in an attempt to hold onto the White House, the Republicans) will flood the market with more money at lower interest rates.

Then the purchasing power of the dollar will once again drop, asset prices may rise, and the financially naive will actually believe that the value of their assets -- houses, stocks, and mutual funds -- have gone up in value.

Thanks to Mike Maloney, my go-to guy for information on gold and silver.

Riding Out the Subprime Disaster

noreply@blogger.com (ROBERT) — Sun, 25 May 2008 16:55:00 +0000

Riding Out the Subprime Disaster

You've no doubt heard about the subprime mess in the mortgage industry. That's the bad news.

But there's a flip side: Even though there's trouble in the subprime market, bankers haven't stopped lending money on good real estate to sound investors.

How Subprime Went Down the Drain

Instead of quivering in fear of a real estate crash, savvy investors need to ask what led to the subprime disaster and how they can profit from it. Here are some of the causes:

1. Early in 2001, the crashing stock market caused Alan Greenspan to drop short-term interest rates to 1 percent. Instead of the stock market roaring back, the residential real estate market took off.

2. Pension fund managers -- the people who collect your 401(k) money, for example -- needed to find returns that were higher than those in the stock or bond markets, so they began lending money to hedge funds, private equity funds, and large mortgage firms.

In other words, the people you entrusted your retirement savings to were willing to invest it in riskier ventures just to get you a higher return.

3. China and other foreign nations were willing to finance our national debt, our war, and our lifestyle. Foreigners loaned us money to invest or to use to buy their products.

4. This led to five types of foolish or unsophisticated investors, who drove up the price of real estate, which led to the boom in subprime loans and the eventual bursting of the bubble.

The Usual Suspects

Those five investor types are best illustrated by the following people (and although I've changed their names, they're actual people I met):

• John and Sally: First-time homebuyers

With low interest rates and easy loan qualification, newlyweds John and Sally bought a new house in a bad neighborhood at an inflated price. They signed their future earnings away with a 125 percent loan. With the extra money, they put in a pool and bought all new furniture. Their first child arrived a year later -- and their home has dropped in value.

• Joe and Suzy: Credit card abusers

These folks use their house like it's an ATM. Every time Joe and Suzy get into credit trouble, they refinance their home to pay off their credit card bills. That is, they substitute short-term credit for lifelong debt.

• Ed and Mary: Empty nesters

Ed and Mary are baby boomers whose kids have left home for college. With their extra money, the couple bought a vacation home as an investment. They used the equity in their primary residence as a down payment on the vacation home, and now have two mortgage payments. They're wrongly convinced that the houses are assets, and that real estate always goes up in value.

• Jack and Janice: Bigger is better

Jack and Janice, surprised by the escalation of prices in their neighborhood, sold their home and bought a bigger home in a more prestigious and expensive neighborhood. Today, they're having a tough time financing their (or rather their neighbors') standard of living.

• Fred and Phyllis: The flippers

These are novice investors who think flipping real estate is the way to wealth. Fred and Phyllis have never been through a real estate downturn. Prior to the real estate bubble, they were day traders in dotcom stocks.

In 2003, they became real estate "experts." Believing that real estate always goes up in value, they found a mortgage broker who financed 10 properties with nothing down, with what are known as liar loans.

The problem is, the project Fred and Phyllis invested in wasn't built yet and then ran into construction delays. Rather than go through the pain of selling their 10 homes, the couple turned in the keys and walked away, returning to their day jobs.

A Silk Purse from a Sow's Ear

Does all this make real estate a bad investment? Obviously not, just as a stock market crash doesn't make stocks a bad investment. What it does do is underscore the foolishness of crowds and the mania of markets.

Actually, right now is a great time for real estate investors. Today, in many markets, the price of real estate is still coming down. On top of that, interest rates are low. So the subprime mortgage mess is bad news for sellers but good news for buyers.

As usual, there's an outcry that the government should intervene. But that raises the question of how laws against greed, stupidity, and foolishness are passed and enforced. The fact is that subprime lending will never end -- people with bad credit, or who are greedy and/or excessively foolish, will always find ways to get the credit they neither deserve nor can afford.

Think I'm wrong? This evening, right after a TV news story on the subprime disaster, a commercial appeared encouraging homeowners to buy furniture today and not make payments until 2009. I rest my case.

A Fender-Bender or a Train Wreck?

Last month, Alan Greenspan cautioned the world that a U.S. recession is possible in 2007. If the subprime mess continues to spread and credit dries up, his warning could come true. A recession, along with the ongoing Iraq war, the national debt, and baby boomers retiring in massive numbers, would deliver a severe blow to the U.S. and world economies.

So I recommend that you get into a cash position, and save as much as you can as quickly as possible. The good news is that there will be bargains galore. If you have cash you'll be able to purchase real assets and fancy liabilities such as jewelry, artwork, nice cars, and big homes at cut-rate prices.

Unfortunately, in a recession the people who suffer the most aren't the rich, but the wanna-be rich and the poor. The poor will find it harder than ever to get additional credit, even if they're hard-working, have a decent credit score, and have some cash. The wanna-be rich -- those who are rich in credit only -- will be the ones donating their homes and their bling to bankruptcy auctions, second-hand stores, garage sales, and swap meets.

Many experts and commentators say that the subprime debacle is just a fender-bender in the economic parking lot; others say it's the headlight of an oncoming train. Regardless of which one it is, it represents a great time for bargain hunters to become genuinely richer.

Finding Your Magic Investing Formula

noreply@blogger.com (ROBERT) — Mon, 19 May 2008 06:17:00 +0000

Finding Your Magic Investing Formula

People often ask me, "How do you find great investments?" My standard reply is, "You have to train your brain to see them. Great investments are all around you."
I know that's not a very satisfying answer. Most people want something more specific and concrete. But my reply is as accurate as possible. If we could've seen all the great investments just in the past decade, we'd all be multibillionaires.
Missing Out on Millions
There have never been more opportunities to become rich than in the last 10 years. And there'll be even more opportunities in the next 10.
Let me explain. Like many investors, I didn't see the power of eBay almost a decade ago. If I had, I'd be a billionaire today. Nor did I see the power of YouTube, or Google, or MySpace. Being an old guy, my brain isn't trained to see investing opportunities in cyberspace. So I missed them.
Thirty years ago, when my business career was just starting at Xerox, I was introduced to a new type of computer. I wasn't tuned into computers at the time, so little did I know that I was looking at the early version of what was to become the Macintosh. So I also missed that billion-dollar opportunity, too. How many billion-dollar opportunities have I missed? Maybe millions.
If I've missed so many million- and billion-dollar opportunities, why am I writing this blog? That's a valid question, and the answer has to do with helping you find great investments.
Perseverance Pays Off
I took my first real estate investment course in 1974 in Honolulu. The cost was $385, and I believe it was two or three days long. Toward the end of the class, the instructor said something I've never forgotten: "Now you know the difference between good real estate investments and bad real estate investments. Now you all know what to look for."
He paused and then added, "The problem is, most people will tell you such investments don't exist. Your friends will tell you so, and so will real estate agents." Truer words were never spoken. For the next few months, I went from real estate office to real estate office, looking for investments. As promised, the real estate agents told me what I was looking for didn't exist. My friends and co-workers at Xerox told me the same thing, and said I was either dreaming or smoking funny cigarettes.
Finally, in a small, obscure real estate office in downtown Waikiki, I met a scruffy little broker who said, "I have what you want." The next weekend I was on a plane to Maui, where he'd found an entire condominium development that was in foreclosure.
I purchased my first piece of investment real estate for $18,000, putting the $2,000 down payment on my credit card. The one-bedroom/one-bath condo paid me a positive cash flow, even after all the expenses and mortgage payments. My investment career had begun. More important, I was training my brain to see what most people don't see. That $385 real estate course has made me millions of dollars over the years.
Keep an Open mind
From My last post called "Think Rich to Lower Your Taxes". It was about an investment strategy known as the "velocity of money," and how I use it to invest, make a lot of money, and then legally use the tax laws to minimize my own taxes. I suspected the column would spark some controversy, and it did.
For a couple of weeks, I kept track of the reader responses to it. Some of the less-complimentary comments reminded me of what those real estate agents and my friends at Xerox said to me back in 1974.
You see, our brains are either our greatest assets or our greatest liabilities. As I said, when it comes to investment opportunities in technology, my brain is a liability; I just don't get it. When it comes to investment opportunities in real estate, gold, oil, and silver I'm above average, but not great. And that's because I've trained my brain to see opportunities in those areas.
So, instead of criticizing the readers who were close-minded (or even mean-spirited) about my advice, I encourage them to keep an open mind and find their own way of seeing investments most people miss. That's how you get rich. People who refuse to open their minds to new strategies seldom become rich -- which I guess is why there are more critics in the world than rich people.
Finding Your Magic Formula
One of the most important things my rich dad taught me was to never say, "I can't do it" or "I can't afford it." Those thoughts are self-limiting, and it's hard to find great investments when you're basing your behavior on limitations. In today's world, there are more investing opportunities than ever before. Why would anyone want limited financial results in an unlimited world?
One of the reasons I write this Blog is to put forth ideas that challenge the way people think about investing. If you want the same old financial-planning dogma of "work hard, save money, live below your means, get out of debt, and invest in a well-diversified portfolio of mutual funds," then my column is obviously not for you.
My job is to stimulate your thinking, inform you about why rich people get richer, and encourage you to find the magic financial formula that works for you. I found mine, and I want you to find yours.

Lazy People Don't Get Rich

noreply@blogger.com (ROBERT) — Mon, 19 May 2008 04:08:00 +0000

Lazy People Don't Get Rich

Allow me to be politically incorrect: The No. 1 reason people aren't rich is because they're lazy. This is purely my opinion and no one else's, and I have no scientific proof to back it up.
Why the sudden honesty? I'll tell you.
The Best Policy?
One of the things I loved most about the Marine Corps was that I never had to worry about what anyone was thinking. When I was preparing to be an officer, there was no sensitivity training. When superior officers spoke to you, they didn't have to wrap their words in ribbons and bows, and didn't worry about hurting anyone's feelings.
In fact, we often went out of our way to hurt others' feelings just to test their core toughness. (I'd repeat some of the more choice comments I've treasured over the years, but I'm not writing for a military audience.)
When I returned from the war and entered the civilized world of business, I was shocked by the phoniness, the covert hostility (disguised as caring), and the fake smiles that are rampant to this day. It's been over 30 years since I was discharged from the Marines, and I still haven't adjusted.
Today, I'm still hesitant to let my employees know exactly what I'm not satisfied with for fear of being sued, or to compliment a pretty woman for fear of being accused of sexual harassment.
But I'm happy to say that things are changing. We now have reality TV instead of Father Knows Best, a phony show about fake family harmony from my era. Today, commentators like Bill Maher and Jon Stewart rip into politicians under the guise of humor.
We also have Donald Trump, who has millions of people from all over the world tuning in just to hear him say the magic words "you're fired" to an apprentice wannabe. And of course there's Simon Cowell of American Idol, the critic of all critics, whose book of brutally honest dismissals I was recently tempted to buy.
An Honest Assessment
All of this overt honesty, while sometimes contrived, encourages me to be more honest about my favorite subject -- getting rich, and who's most likely to do so.
Most of you who follow my books and this column know how I make my money. First of all, I'm an entrepreneur. I've been starting companies since I was a kid. I never wanted to be an employee -- I always wanted to be in control. I didn't want someone like me telling me what to do. Consequently, I now have companies, agencies, or strategic partners all over the world.
Second, I love real estate. Not only do I think it's the best investment in the world, I can prove it. What other investment is there that has bankers lining up to lend you money? They won't lend you millions of dollars for years at a time to buy stocks, bonds, or mutual funds. And what other investment will your insurance company insure against losses? Surely not mutual funds or a 401(k).
Third, I love commodities like oil and gas. Why do I love them? Because they're in short supply and in great demand. Wars have been fought over oil and gas for years. What do you think the war in Iraq is about?
Finally, I've loved gold and silver for years. Why? Because I don't trust the U.S. government to be good stewards of money. As you may know, the Bush administration has printed more funny money -- over a trillion dollars' worth -- in six years than all past U.S. presidents combined.
Wars have been fought over gold and silver, too. Why do you think the Incas lost their empire to the Spaniards, or the American Indians lost their land to the European settlers? The conquerors may have said that they were acting in the name of God, but remember -- there's only a single letter's difference between "God" and "gold."
No More Political Correctness
The recent outbreak of honesty also inspires me to be more forthcoming in general, and less politically correct. This is the web, after all, where honesty is respected, not suppressed, censored, or forced to be "sensitive" like our old, more traditional forms of media.
You wouldn't be reading Yahoo! Finance if you weren't serious about being rich or becoming rich. So I owe it to you to be more truthful. And I'm not worried about offending the financial losers of the world, because financial losers don't read this column.
So, rather than tell you week after week about real estate, entrepreneurship, gold, silver, oil, and gas, I've decided to occasionally run a less-than-politically-correct column and tell you exactly what I think about the subject of getting rich.
The L Words
It's in this spirit that I opened by saying that lazy people don't get rich. I also said that the difference between "God" and "gold" is a simple "L" -- as in "lazy," or "looting." The conquistadors who looted the Inca Empire in the name of God weren't lazy. They were thugs with guns, but they had ambition.
Another word that begins with "L" is "loser." Over the years, I've met many losers who pray to God to give them gold. They'll never get it that way because, as the Sunday school I went to taught me, God helps those who help themselves. Again, the conquistadors may have been killers and thieves, but at least they knew how to help themselves.
I do, too. As some of you may be aware, I wasn't born rich. And I've written openly about my failures as an entrepreneur and my losses as an investor. I haven't hidden my horror stories. The reason I don't keep them secret is because my failures are the best learning experiences of my life. We learn by making mistakes -- except in school, where we're punished for making mistakes. This may be why most schoolteachers aren't rich.
I'm not recommending that you become an ambitious looter, as Ken Lay and Jeff Skilling were convicted of being. I only want to point out that if you're not a lazy loser, you may find yourself with more gold in your life without having to resort to looting.