Wealthology

by Akinaw Bulcha

  Kidus, I know it seems like the government creates a horrendous environment in which to create wealth but that doesn‘t mean it makes it impossible. The information you‘ve received isn‘t meant to discourage ambition but to give it a ground on which to stand. It will save you a great deal of disappointment and disillusionment later on if you don‘t look at these things now. Reality is just reality—the sooner we can understand it, the sooner our financial lives will improve.

  Being realistic doesn‘t mean you can‘t be optimistic—it just means you have to have good reasons for it.

  Your Loving Uncle, Akinaw.

  Part III

  The Secrets of Capital Management

  Riches to Rags

  Dear Kidus, Wealthy people are not just born, they‘re made. Even if some of them inherit their wealth, preserving it takes some skill. To get the most from the following letters, you must realize that 90% of capital management is the preservation of capital; the other 10% is growing it.

  The rich create their riches through wealth consciousness—by learning the art of building and preserving wealth. Building wealth is an art that must be learned through experience and education. It rarely, if ever, just comes naturally. One of the most fascinating things about self-made wealthy people is how important a role an entrepreneurial parent played in their success.

  If you were to pick up a copy of Forbes magazine‘s richest people list, you‘ll notice 9 out of 10 had entrepreneurial parents. This shows that wealthy people pass on more than just money—they pass on the knowledge of how to make it and keep it.

  Of course, every other social class passes intellectual capital from one generation to another. The talk around the dinner table of a welfare family is how to get more welfare checks. Middle class families tend to talk about getting jobs or job security. The wealthy, on the other hand, talk about business, investing or politics.

  Just like animals, human parents teach their kids how to hunt different types of prey. Whether a child learns how to apply for welfare or how to start a profitable business, they‘re getting an education—they‘re receiving capital. They earn an amount of interest that corresponds to the skill or know-how they"ve learned from their parents or their environment.

  Wealthy people, for example, don‘t outsource investing knowledge to so called ‗experts‘. Instead, they learn what to do with their money as they grow up. Kids of poor parents, on the other hand, don‘t learn how to handle money or understand how to value assets.

  If you were to give a million dollars to someone who‘s never had money training, you can be sure it‘ll be blown away in a heartbeat. Lottery winners, for example, usually find themselves back where they were within a few years. Or better yet, think about former boxing champ and exmultimillionaire Leon Spinks.

  Below is a Boston Globe story about him titled, ―Riches to Rags.‖ As you read this short story, see if you can recognize a trend: ―The years have been tough. Spinks got divorced and lived briefly in an East St. Louis shelter. He was a greeter at Mike Ditka‘s restaurant in Chicago. He says he helped start a gym in Detroit and did odd jobs in California. Now he cleans the local YMCA for $5.15 an hour on weekends, sometimes unloads trucks at McDonald‘s, and volunteers to help the homeless. The Champ also likes his second job at the local McDonald‘s. ―I get 50 percent off on Big Macs and everything,‖ he said. Spinks also goes to several autograph shows each year. Three of Spinks‘ sons followed in their father‘s footsteps and became professional fighters. Leon, the eldest, was murdered in St. Louis in 1993. Darryl had 20 professional fights, and their younger brother, Cory, born just five days after his father beat Ali, is a former welterweight champion. Spinks, who was arrested in April 1978 for cocaine possession, is told that the public perception of him is that he partied away the nearly $5 million he made from fighting. ―That‘s [expletive],‖ he said. ―That‘s what people think. I was stupid and I gave [the lawyers] power of attorney.‖ He says he never saw a penny of the $3.75 million he made for the Ali-Spinks 2.‖2

  Sad right? Despite the title of the article being ―Riches to Rags‖, Spinks was never really rich to begin with because riches are always a product of a state of mind. He never had a millionaire mind—he had the mind of a minimum wage worker who could throw a good punch.

  Did you notice the career paths all three of his sons chose? Spinks didn‘t push them into what naturally turned into the family biz.

  The truth is, in a lot of cases, kids follow in the footsteps of their parents because it‘s the easiest way to acquire intellectual capital—the knowhow to produce a product or service to meet their needs.

  But unfortunately, as cynical as it may sound, the following generations (even if they learn how to make millions from boxing) still may not know-how to save money, invest wisely, or as may have been the case for Spinks, know how to deal with legal contracts and lawyers.

  Why I want to teach capital management is because it‘s easy to allow the misconceptions of the crowd and the economically illiterate to affect our financial future. Our society has spiritual sons in the same way that Spinks had sons. Society procreates thought forms—people. The beauty of knowledge is that you can give birth to yourself. ―As a man thinketh‖, said Solomon, ―so is he.‖ The promise of that proverb is that you can be what you think. Thinking correctly about capital is foundational to creating the financial life you desire.

  2 http://www.boston.com/sports/other_sports/boxing/articles/2005/12/21/riches_to_rags

  “Education is the transmission of civilization.” ~Will Durant.

  Your Loving Uncle, Akinaw.

  Be Like Grace

  Dear Kidus, Entrepreneurship has always been in my blood. Before coming to the U.S. at the age of 8, I watched my mother run a home based business. She didn‘t answer phones or knit sweaters, instead she served homemade alcohol in a make shift bar carved out of our living room.

  As a single mother, she did the best she could but selling alcohol came with its obvious dangers. Unsavory men were coming in and out of the house at late hours of the night. Imagine the kind of nerve and toughness it took to run such a business with a young child in the house.

  Because there were no male relatives in the house at times, some of those nights were a bit scary. I remember one experience very vividly. A man was sitting at the bar table drinking one shot after another by candlelight (we had no electricity). He slowly became very intoxicated. He began to run his fingers through a candle flame.

  The bearded drunk kept running his fingers through the flame, mumbling incoherent jargon until he knocked a candle over. He began to curse and yell at the candle. He seemed to be getting increasingly violent. He was losing control of his movements. At that point, my mother encouraged him to leave—but only after payment for his last few drinks.

  He grumbled, staggered to the door, stepped outside and, for some reason, just stopped. He turned around and wouldn‘t let my mother close the door. I was terrified because I intuitively knew he didn‘t want to come back in just to have another drink.

  All of a sudden, my mother took an empty alcohol bottle she had in her right hand and smashed it down on his head. The bearded menace fell backwards like a tree, flat on his back. He was knocked out cold. My mother calmly closed the door and to this day, I don‘t know how long he remained unconscious at our doorstep before staggering home. What I do know is that my mother and I slept with three eyes open—her two and my one.

  “Through the humbling dispensations of Divine Providence, men are sometimes fitted for his service.” ~John Woolman.

  Lessons Learned

  That experience taught me some very valuable lessons about money. First, money isn‘t always easy to make. Sometimes you risk everything to get so very little, just as my mother had done to provide me with food and shelter. Accumulating capital can be a rough, gritty, experience if you‘re doing it in the wrong environment.

  Second, making just enough money to live another day is a cyclical, hand to mouth existen
ce. My mother had to sell more liquor to more strangers night after night in order to keep bread on the table.

  But the most important lesson came after I‘d been in the U.S. for twenty years—the purpose of making money is to buy time and freedom. Every dollar you earn must be strategically saved and invested so that it earns enough dividends/interest to pay for your living expenses. Passive income should be the first and most important goal of any financial plan.

  My mother didn‘t have a business plan; she never received a business education but she understood this principle intuitively. When I was six years old, my job was shepherding the one family cow we owned. Years later, when I returned to Ethiopia for a visit, my mother had about a dozen cows she was renting to other farmers. She was also renting our first home, she was receiving passive income.

  Billions of people around the world must work so very hard to get so little. But because a great amount of wealth has been accumulated in the Western world, making a great living is much easier. Squirrelmerica"s nut forests have more trees in them because previous generations of squirrels have planted them.

  Lastly, I‘ve learned we should save much more when times are good. Money can flow out of an economy just as easily as it can flow in. Wherever it goes, it produces jobs and income. Capital is fluid. It‘s not stagnant. It moves, it‘s borderless.

  The total net worth of an economy changes depending on the collective action of its inhabitants. If previous generations of Squirrelmericans had not been savers and producers, their children would not have the bountiful prosperity they now see. A lot of people think our wealth in the Western world will endure. But that‘s not necessarily true. There have been over 4,000 civilizations on record but each one has collapsed.

  Central management of Squirrelmerica‘s economy can only succeed in destroying the available store of nuts in its economy. I‘ve already shown how government and the Fed only contribute to the deforestation of nut trees in the Squirrelmerica story. We know that a foolish squirrel can squander its own inheritance but government is the only thing that can make foolish squirrels of us all. Remember that the squirrels ate a lot of their nut inheritance because they were misled into thinking the forest trees were producing an abundant harvest.

  “If you would be wealthy, think of saving as well as getting.” ~Ben Franklin

  Saving and Success

  Saving does more than just give us the seed money to compound our returns. We can also duplicate ourselves. One benefit of passive income is freedom from all sorts of anxiety. When you relieve yourself of anxiety, you‘re more productive because you can stop and think about opportunities. Not having to worry about where your next meal will come from buys you the time to come up with creative ways of making greater amounts of money.

  Psychologist Mihaly Csikszentmihalyi (I thought my name was difficult) has shown in his book, Creativity, that creativity comes from a surplus of attention. Poor people don‘t have a surplus of attention because with every passing hour they‘re on the edge of economic ruin. They have no time to invest in themselves. People in the middle and lower classes have a huge disadvantage because large sums of money are only paid to people who create ideas. Without breathing space, you can‘t come up with good money making ideas.

  I‘ve heard that Apple CEO Steve Jobs came up with the idea of the Ipod at a meditative retreat. That doesn‘t surprise me. If Jobs was broke, running from one job to another to make ends meet, he wouldn‘t have come up with the perfect idea. The habit of saving does more than just compound interest; it also unleashes our creative imagination to create wealth out of thin air. It allows us to compound our brain.

  Unfortunately, many people go to bed every night not knowing how they‘ll be able to provide food and shelter for their children. Every day thousands of people go to work injured because they have no other way of paying for food and rent. Most of these people will never have five minutes to devote to creating a way out of the cycle (it‘s up to their friends and family to interrupt them).

  There are only two ways to get out of the trap: 1) Save and 2) Make money. The art of capital management starts with saving your nuts and compounding returns (planting nut trees). All the other concepts we‘ll learn (such as inflation, Social Security, gold, stock markets, currencies, taxes, etc.) are all designed to help you do just two things with your money: save it and grow it.

  “The wise man saves for the future but the foolish man spends whatever he gets.” ~Proverbs 21:20.

  Simple and Time Tested The art of saving is the starting point of financial success. We can‘t become independently wealthy without making a commitment to save. In the history of mankind, no one has ever achieved lasting prosperity without saving.

  Getting to the pinnacle of financial success is accomplished only through a spirit of frugality. Consider the famous Warren Buffett. His first rule of business is ―Don‘t lose money‖, his second rule is ―Don‘t forget rule number one.‖ His car license plate even reads ―Mr. Thrifty.‖ What more evidence do we need that prosperity is a result of under consumption (savings) and wise money management?

  But you may think Mr. Buffett created his billions because he‘s a trained investor who understands the world of high finance. Can the art of saving produce any real results for the average person?

  First of all, Buffett is a brilliant investor but his success is more a result of character and temperament than just intelligence. His mentor, Benjamin Graham, once said that anyone with the right character can earn high returns because intelligent investing isn‘t just about brains. As long as you can develop the right character within yourself, you too can accomplish the same things others have.

  “Empty pockets never held anyone back. Only empty heads and empty hearts can do that.” ~Norman Vincent Peale

  Be Like Grace To prove to you that saving is a golden path to prosperity for just about anyone, I‘d like to introduce you to a secretary who turned $180 into $7 million. Her name was Grace Groner.

  In 1935, she purchased stock in a company (Abbott Laboratories) worth $180. Having lived through the Great Depression, Grace learned the value of saving, whenever her stock paid dividends, she reinvested the money by buying more shares of stock. Year after year, she continued with the habit of re-investing her profits as she continued working as a secretary.

  Her initial $180 soon turned into a million, then two million and finally ballooned to over $7 million. Grace didn‘t abruptly quit her job as a secretary when she became a millionaire. She stayed at her job for 43 years.

  She didn‘t live a lavish life. Instead, she shopped for clothes at second hand stores, walked to work instead of buying a car, and although she could‘ve owned any property in the city of Lake Forest, she lived in a one-bedroom house. Grace received more joy from giving than from spending. Throughout the years, her giving enabled numerous students to study abroad even as she continued to save.

  Her friends said that she just had a knack for saving money and finding deals. So her money grew until it snowballed into a fortune.

  When she donated $7 million to a local college, the size of her fortune surprised everyone—including her closest friends and relatives. No one expected a secretary to become a multi-millionaire—it defied conventional thought. But it defied the conventional thinking of people who are in the habit of spending all they earn.

  Savers like Warren Buffett, I‘m sure, are not surprised that saving leads to automatic wealth creation. There‘s no other way to build and maintain wealth. Once we begin to save, invest and reinvest dividends, we realize the powerful effect of compounding interest. We see our wealth grow without having to work to make it happen.

  “The waste of money cures itself, for soon there is no more to waste.” ~M.W. Harrison

  Why People Don’t Save

  In order for us to build this all-important habit, we must decide what‘s important to us—we must understand how we relate to money. The inability to save for most people results from a limiting belief of som
e kind. Some people with self-worth issues, for example, give the money away because they don‘t feel they deserve it. We can never have something we don‘t feel we deserve.

  When I was training salespeople, I remember that one of my trainees would successfully convince a prospect to buy a product but then hang up before asking for payment.

  Others use money to alleviate whatever anxiety is in their hearts. But I‘ve come to learn that whatever we use to alleviate our anxiety eventually turns on us and becomes another source of anxiety for which a new drug must be found.

  Know thyself and be at peace. Grace Groner was fulfilled in her relationships with her family and friends. It was that fulfillment that allowed her to save—a value she learned living through the Great Depression.

  Both Grace and Buffett share the characteristic of contentment. When I was watching a documentary about Buffett, I remember hearing someone describing him as ―content.‖ He still lives in the same house he‘s been in for decades. He doesn‘t wear flashy clothes or drive a Rolls Royce.

  Howard Hughes, America‘s first billionaire, drove a beat up car around the streets of LA. One day his publicist got in the beat up old car and asked him, ―Howard, if you can afford any car you want, why do you drive this beat up old thing?‖ Hughes turned to him and said, ―What do I have to prove?‖

  No wealth or security can be had if you don‘t save. Remember always Benjamin Franklin‘s words: ―The way to wealth is industry and frugality.‖

  “Contentment makes poor men rich; discontentment makes rich men poor.” ~Benjamin Franklin

  The Advantage of American Prosperity Having experienced poverty for the first eight years of my life, I understand the real advantage of American prosperity. It‘s just one thing: American citizens have the ability to save and invest enough money to buy their time and economic freedom within a relatively short amount of time compared to the rest of the world.