Wealthology

by Akinaw Bulcha

  For over thirty years, my mother struggled to sell enough liquor, to buy enough cows to rent to enough farmers to retire, to be able to live just outside the gates of poverty. Thirty years!

  Americans need not struggle as long as she had to, in order to retire (and do so with much more dignity than is afforded her). However, the time Americans have to be able to save is slowly running out.

  America is still one of the wealthiest countries in the world but that distinction may be coming to a close for reasons most people do not yet see. Any genuine economist who‘s not bought by a special interest will tell you that the economy won‘t be getting any better for awhile. The long term structural problems are much worse than the current recession.

  There‘s no denying that the trees in Squirrelmerica‘s forests are not producing as many nuts as they used to. We must admit this reality in order to understand a crucial point: We must save all the nuts we can now and plant new trees so that we‘ll have an adequate supply in the future.

  This means that two groups especially—the middle class and baby boomers—have a short window of opportunity (5 to 10 years) to save and invest their way to financial security. We must remember that our government‘s economic policies have been slowly shutting the doors to financial freedom for almost 100 years. It‘s all about to come to a horrible conclusion. The more they do, the harder it will become to preserve what wealth remains in the system.

  Every government program that‘s been set up to guarantee our financial security has been used to enrich the few and impoverish the many. All of these programs from Social Security to Medicare are all bankrupt. There‘s less financial security in the United States as a result of these programs than ever before.

  Our total unfunded debt is over $100 trillion. For the first time in our history, a child born in the U.S. must declare bankruptcy by their first birthday because they‘ll owe over $1 million dollars as soon as they‘re born. America‘s future generations will be born into economic slavery. There are 40 million people on food stamps, more than at any other time in Squirrelmerican history.

  Our government promised Americans paradise if we gave it control over our lives. We took the bait and are now facing a harsh financial desert.

  “I"m living so far beyond my income that we may almost be said to be living apart.” ~E.E Cummings

  Hidden Mines

  But all of this is the bright side of our economic future. There are other reasons why saving will be more difficult in the years to come. One hidden mine that‘s about to burst is the coming shortage of commodities (like energy and materials). As the economies of developing nations grow, the prices of all commodities from oil, gas, gold, copper and raw materials will rise dramatically.

  China is already the largest importer of Saudi Arabian oil. And as I said before, Middle East nations would rather do business with China than with the U.S. because of what one Saudi prince referred to as ―relational baggage‖ which he attributed to our intervention in the affairs of Arab states. In other words, we don‘t have ―energy security‖ if the people we depend on for oil have both a grudge and another cash rich buyer.

  As oil and other commodity prices rise, so will the costs of just about everything else. If wheat prices go up, so will cereal. If oil prices go up, gas prices do too. In fact, high oil prices increase the cost of every product in the global economy. As these prices increase, Americans will have less money to save.

  Of course, we‘ve been broke for over 25 years but no one has cared because our credit was still good. We charged everything onto our credit card by monetizing our debt (printing money). But the rest of the world is on to our scheme. The perception of American economic invincibility is being shattered.

  The U.S. Treasury is having difficulty selling enough bonds to finance government expenses. I remember watching a show once and finding out that the Fed was buying billions of dollars of Treasury notes when there were no other buyers. One commentator then asked, ―Isn‘t that a Ponzi scheme?‖

  That‘s exactly what it is. Our government is engaged in the biggest Ponzi scheme in history. How can the government sell Treasury notes to itself? What this tells us is that people don‘t want our debt as much as they did at one time. So buying increasingly expensive imports on credit will come to an end much sooner than we realize.

  If more and more of our incomes become devoted to paying for food and energy, we‘ll have less capital to save and invest. And therefore, we‘ll be just another step closer to the constant dread of a hand to mouth existence that people in third world countries experience every day.

  Secondly, there‘s a final problem we need to be aware of: How is the government going to pay for over $100 trillion of unfunded liabilities? Here are its options: (1) Reduce benefits (e.g., raise social security eligibility age to 70 or even 75); (2) Raise taxes; (3) Print a huge amount of money.

  Regardless of how the government pays for its debts, American standards of living will be reduced in the process. Our out of pocket costs will increase. Squirrelmericans will be living from nutcheck to nutcheck much longer than they‘d have to were it not for Uncle Sam. This is an important reason to save now.

  Third, as our government prints more dollars to cope with its debt, each dollar will be worth less. Costs for everything from gas, oil, iron, copper and food will increase. These increases will be far more costly as a percentage of income for the middle class and the poor than the rich.

  Fourth, as the rest of the world develops, we won‘t have the advantage of cheap labor to subsidize our living standards. Chinese workers, who have subsidized our lifestyle by keeping inflation low, are going on strike for more pay. As their salaries increase, our imports will become more expensive. Once again, this will be a greater burden for the middle class who have less disposable income to afford the cost increases.

  All these trends will basically create a caste system for those who do not understand the importance of saving. Never in Squirrelmerica‘s history has saving nuts for the winter been so important. Your job is to make as much money as you can now, save as much of it as possible and invest those savings wisely while the doors to financial freedom are still open.

  However, the doors of prosperity always remain open to people who are economically literate. Nothing is too hard for us to overcome through education. The following story is a great example of this.

  Although George Washington Carver was born a slave, he ended up working with the famous Henry Ford and became an agricultural advisor to three presidents: Calvin Coolidge, Theodore Roosevelt and Franklin Roosevelt. His research, patents and innovations led to hundreds of products that we enjoy today—dyes, axle grease, soy milk, peanut butter, cosmetics and hundreds of other uses for peanuts, soy and sweet potatoes. He also discovered that crop rotation would help the agricultural output of southern farmers. His story shows that it doesn‘t matter how bad things get in the economy, we‘ll never start out in the type of conditions Carver was born into.

  His advice to us is this: ―There is no short cut to achievement. Life requires through preparation—veneer isn‘t worth anything.‖ Let‘s heed his words and remember that our economic conditions are as useless in keeping us from our dreams as slavery was from keeping Carver from his. Thorough preparation isn‘t easy but it pays the best dividends.

  Your loving Uncle, Akinaw.

  Golden Gloves and Golden Records

  Dear Kidus, I hope you see why I said it‘s easier to become wealthy than it is to be rich. People who have invested the time to understand how the economy works and where it‘s headed are wealthy.

  In my last letter, for example, I‘ve shown that understanding the global context helps us see why we should save. Others like Grace Groner have learned, by living through the Great Depression, the importance of saving as well as finding contentment in people rather than possessions.

  Being rich, on the other hand, does not depend on education or experience. It usually depends on unusual characteristics, natu
ral talents, constant work or just pure luck. Lottery winners, movie stars, professional athletes and performers are rich. Sports team owners, record label owners, and movie producers are wealthy.

  There are more rich people in the U.S. than anywhere else in the world. It‘s easier to get rich here than anywhere else in the world but I‘ve noticed that rich people seem to end up broke. And to my surprise, it doesn‘t matter how much money rich people make, they‘ll find a way to blow it away.

  Magic Castles Actor Nicolas Cage, for example, has made almost $4 billion dollars throughout his career as an actor—an unimaginable amount of money for most people to even grasp. Think about the interest that amount of principal would generate.

  When I was in college, I remember talking to my friends about how hard it would be to spend the interest on a billion dollars. We thought it would be impossible.

  We used to talk about rich people and calculate the interest they‘d make on their money. We would say things like, ―Do you realize that if Bill Gates spent $50 million every month for the rest of his life, he‘d never go broke?‖

  Well, I‘ve learned that it doesn‘t matter how much money you have, it‘s possible to go broke. Even though Nicolas Cage made such a staggering amount of money, he‘s blown a lot of it away. His mansions in California, Las Vegas and New Orleans are going into foreclosure and in order to pay his debts (including $20 million he owes the IRS), he‘s forced to sell his other assets in a recession—at enormous discounts. He unsuccessfully tried to sell his Bel Air mansion a year ago for $35 million. He put the same property back up on the market this year for $10.4 million but there were no bidders!

  So where did all the money go? What‘s the cause of his financial woes? How can you possibly spend billions by the age of 45? Here are some clues: 1. 18 motorcycles and 50 cars including Ferrari‘s, Lamborghinis, and nine Rolls Royces.

  2. A Gulf Stream Jet.

  3. Four yachts.

  4. 15 enormous mansions in Bel Air, Las Vegas, Newport Beach, New Orleans and other places.

  5. Two islands in the Bajamas!

  6. A $1.6 million comic book collection.

  7. And don‘t forget the castles in Germany and England.

  You may be tempted to think that Mr. Cage‘s financial problems resulted from his spending but it‘s not that simple. It wasn‘t his spending but what he was spending that dragged him to financial ruin.

  There‘s one thing that wealthy people know never to spend: their principal! Spending your principal is giving up your freedom, something wealthy people see as the road to financial ruin.

  “Too many people spend money they haven"t earned, to buy things they don't want, to impress people they don"t like.” ~Will Smith.

  Golden Gloves and Golden Records

  Despite making over $500 million throughout his career, famed boxer Mike Tyson is broke. Iron Mike didn‘t understand money, so he spent his principal. Mike spent his principal on a $14 million mansion in Connecticut that he was eventually forced to sell. The man who now sleeps in that mansion is rap star 50 Cent.

  The irony of this story is that both of these men are entertainers; but the one who‘s kickin‘ it in Mike‘s old crib isn‘t rich—he‘s wealthy. The only difference I could see between them was their perspective on money.

  50 Cent recently appeared on TV to promote a book he‘d co-written— the 50th Law. During the interview, I was fascinated to learn that this guy is no ordinary, rich entertainer.

  He said that living in a mansion that once belonged to someone who made over $500 million in his boxing career, is a daily reminder to always live below his means. What he‘s saying of course is that he doesn‘t spend his principal—there"s no other way to live below your means. The true definition of saving is under-consumption, living below our means.

  What makes 50 Cent even more remarkable is his exceptional business sense. He respects capital. A few years back, he invested $10 million in Vitamin Water, used his celebrity status to promote it and earned an after-tax profit of $100 million when the company was sold to Coca-Cola.

  When I saw him in the Vitamin Water commercials, I thought he was just another rich entertainer working for someone else—I had no idea he owned his own ideas, his own brands and wrote his own checks.

  Now, I‘m not surprised that someone who‘s good at capital management would also be a good entrepreneur. Good habits have a way of attracting other good habits. The great thing about building wealth is that we can start the process through any of the four principles I‘ve identified as being the only paths to financial prosperity. Just start with your strength.

  I said in one of my earliest letters that the four principles of wealth creation are interrelated. 50 Cent"s story is a clear example of it.

  He used talent, drive and hard work to produce popular songs (productivity); then he saved his money by living below his means (capital management); and lastly, by investing his savings in Vitamin Water, he experimented his way to a $100 million after-tax profit (entrepreneurship).

  Guess what he‘s up to now? Having mastered music, beverages and book publishing, he‘s now learning the movie production business. None of this would have been possible if he hadn‘t learned to save, without living below his means.

  “A word to the wise ain"t necessary—it"s the stupid ones that need the advice.” ~Bill Cosby.

  No Need for Extremes As I‘ve grown older, I‘ve lost control of my bowels. No, I‘m kidding—just wanted to see if you‘re paying attention. But seriously, growing older has taught me some important things. I‘ve become an extremist about saving money. I see ways to save money today that I‘d never thought of when I was younger because I understand how savings fits into the structure of nutconomic activity.

  A great way to save a lot of money is to not overpay for an asset (real estate, stocks, bonds, etc.). Buying in a bubble is always a danger. That‘s why I showed you how to value an asset through the letters on economic literacy.

  The real estate crash taught me a lot about asset valuation. I learned in the words of Milton the poet, how ―few sometimes may know, when thousands err.‖ I‘ve taken the time to learn what it is that the few know.

  I‘ve slowly and painstakingly become a nutconomic expert because I never want to overpay for any asset or get stuck in a nutconomic recession.

  In addition to reading voraciously, I also listen to countless audio files whenever I drive anywhere—the grocery store, to work, when I took a break, or went to sleep. I read until my eyes burned. And because I was thinking about economics every minute of the day, I even dreamt about it. One night, I had a dream that I was advising Obama on how he should responsibly spur growth based on the four principles of wealth creation.

  Another night, I dreamt that four cobra snakes were dancing together in my living room. Each snake was a different color but they were all dancing in unison and headed in the same direction (four principles). Snakes are a symbol of healing. My subconscious was giving me positive feedback about Wealthology.

  But you don‘t need to go to such lengths to learn every aspect of our nutconomy. I do all that work because it‘s what I love. In order to craft my skills in being a successful investor and lay a solid foundation as a fund manager, the one thing I must do better than 99% of people on earth is know how much assets are really worth at any given time.

  Most people don‘t need to know as much to be prosperous (if what little they do know is learned accurately). Remember that Grace Groner was a lifelong secretary. Although she wasn‘t an expert economist, she had one thing most others didn‘t—commitment and discipline. That commitment produced a financial snowball.

  Giving up momentary comforts is worth getting to a place where you can experience the magic of compounding interest. If we must resort to buying day old bread, used clothes, or moving into a cramped studio apartment in a ―not-so-good part of town‖ to start the automatic capital accumulation process, we should do so. It‘s worth it. John D. Rockefeller was right to
say, ―Compounding interest is the 8thwonder of the world.‖

  Most people need not go to extremes to get their passive, interest/dividend income to exceed their living expenses; all they must do is reduce their expenditures and invest the savings wisely.

  When I was 19 I began working for Citigroup marketing financial products. As part of our sales pitch, we‘d illustrate the magic of compounding interest by calculating the long term effect of cutting out their daily cup of coffee from their budget and instead investing that money at a 10% growth rate.

  People are surprised at how much money that adds up to. Assume that someone buys a $4 cup of coffee every other day. That comes out to $728 spent on coffee every year. Here‘s how the math works:

  1. $728/year for 20 years.

  2. At 10% compounding rate.

  3. Total in 20 years: $50,763.44!

  “Beware of little expenses; a small leak will sink a great ship.” ~Benjamin Franklin.

  Anatomy of a Millionaire In my twenties, one of the few members of my family who encouraged my entrepreneurial drive was my cousin Ken. Every Christmas or Thanksgiving, he‘d either give me a financial book, let me borrow his or tell me to go pick up a copy myself if he thought I should read it.

  One of these books was The Millionaire Mind by Thomas J. Stanley, Ph.D. It‘s based on a national survey of 733 millionaires (households that had at least a net worth of $1 million). The findings are interesting because the study sample was so large. So what did this exhaustive study find out about the average millionaire‘s perception of money?

  Answer: They‘re extremely frugal.

  Instead of buying new furniture, they get old ones reupholstered. Instead of buying new shoes, they get them resoled; instead of buying indiscriminately, they shop from lists, buy home supplies in bulk and even clip coupons. The frugality extends to recreation as it does to making buying decisions.

  In their spare time, while the middle class is blowing their paycheck at a bar or at the mall, most millionaires don‘t spend a dime. In their spare time, 86% of the 733 millionaires said they planned their investments. Seventy eight per cent said they researched investment opportunities.