Does Money Make You Rich?
August 18, 2009 by Vagabond Investors · 1 Comment
For a decade, I’ve been obsessed with the question: What makes a person wealthy? I confess that although I think that in order for one to be truly wealthy, money comes after excellent health and deeply fulfilling relationships, I am a big fan of money. Philosophical attributes about wealth aside, I am going to talk about wealth in terms of the raw and almighty dollar (or any currency for that matter).
So does money make you rich? We all know people who work 40-60 hours a week, in other words they work hard for money, but fail to become rich. Ironically, many only get deeper into debt with each dollar they get their hands on. We have all heard stories of people who invested in commodities, stocks or real estate and lost it all. Maybe you are one of those people
Money alone does not make a person rich. Hard work does not make a person rich. Businesses, stocks, real estate, commodities or any investment does not make a person rich. You read that right. The explanation is very simple, yet something most people, my former self included, miss.
I’ve seen people win and lose with the same stock in the same market. I’ve seen people buy excellent investment properties and turn them into nightmares (foreclosed investors note). I’ve seen people own profitable businesses only to lose everything the next year. I bet we have all seen people who work hard and never get ahead financially.
So, it’s not the business, investment or hard work that makes you rich. It is information, knowledge, wisdom and know-how, in other words financial intelligence, that makes one wealthy. The asset is not valuable, it’s the information relative to the asset that is valuable.
Too many people invest with little financial education. Partly this is because they have to (remember, arbitrary low interest rates encourage speculation). Many people are also becoming to realize that Social Security and Medicare may not be around when they retire.
I think it is absolutely necessary for average people to learn the basics about money and investing. I am astounded that schools teach little to nothing about money and investing. Instead, people are funneled into jobs and encouraged to spend everything they make. If anything is left over (there seldom is), they are told to hand over their money to strangers who wear suits and sound intelligent. Most people work hard for money for 40 years and never learn the basics of making their money work for them.
It’s no use to blame others or justify the situation. It is time to take responsibility and get educated. Read books, attend seminars and learn the basic language of money and investing. You will soon realize that you know more than your financial planner and you are on a high-way to lifetime financial security, and if you dare, total financial independence.
I invite you to read our educational blog about financial intelligence and markets on our website: www.lessoninwealth.com
Best
Jaakko
Drug Dealing For Risk Management
March 10, 2009 by Vagabond Investors · 1 Comment
I thought I would share a little story with you guys. I had some headwind with one of my properties. It’s funny how unexpected and improbable things can turn out to be a real pain in the rectum.
I.
When the bill arrived in my mailbox, I was shocked to see the bottom line. One of my investment properties had been renovated. To be accurate, it wasn’t merely renovated. It was completely rebuilt from the inside. Everything - and I mean everything - that could be torn apart was torn apart and rebuilt. My tenant had thrashed the place and disappeared. He did a decent job at it. Needless to say, this meant losses to me as a landlord.
This was after I received a phone call from the narcotic police, which informed me that they had raided his home with some kind of a tactical team and found guns and heroine. The African guy, my tenant, had turned out to be a drug dealer in Helsinki. After he was arrested, he had been temporarily released until further evidence could be found. During this time he had played around with a water hose in his home (my property) and wetted everything in sight. He had especially taken the time to destroy the bathroom, which was under renovation anyway. He disappeared very quickly and went undercover. Nobody, not even the police, had any idea where had gone.
II.
Until there were any problems, I was happy to own the place. When I bought the property, I was aware of the fact that the property manager was going to renovate the bathrooms in the block. There had been a water leakage and many bathrooms needed to be dried before anything else could be done.
I knew there was an African guy living the property, which was fine with me. He had a good track record of paying rent in time. I even phoned the guy to make sure he didn’t use the bathroom, since it was strictly forbidden. He seemed a little shy as he said that he was using his friend’s bathroom next door. He didn’t have a criminal record. His credit score was fine. Of all I knew, everything was in good order. Yet something was bothering me.
The property manager informed me that they were not in schedule with my apartment. There were some legal problems that needed to be solved before they could move on. I thought that there was nothing I could do about it. So I kept buying new properties and enjoyed my life as a real estate investor. Meantime the tenant lived in an apartment without a bathroom.
Then hit the subprime crisis, which was easy to see before it happened. After all, it was a classic pattern of a crisis. What surprised me was the pace at which wealth disappeared and how quickly the financial sector began to tear apart. So far I had made no connection between my African tenant and the credit crisis. I thought I was properly protected.
My phone rang on an idle Tuesday when I was preparing to go train Krav Maga. The property manager told me that he had visited my apartment. He was taking the drying equipment out when he realized that something was wrong with the tenant. There were burned knifes and bent spoons all over the place. He also said that he felt a little dizzy because of a strange smell.
“Must be some kind of African herbs”, I said as I was putting on my gear.
“Yeah”, the property manager replied. ” wonder what they did with those spoons, though. Anyway, the neighbors said your guy is keeping noise with his friends. You might want to tell him to be quiet at night.”
“I’ll give him a call.” I put the phone down and took off.
I wasn’t used to restless tenants because I was extremely strict with tenant selection. I usually didn’t have tenants in my properties when I bought them. This way I could be more accurate with the selection. I had overlooked this factor when I saw the numbers of the deal (it is funny how I would advise every client to check and re-check everything but didn’t do it myself!) I thought that even though the tenant didnt pay their rent, I could always replace them and it would still be an excellent deal.
The next day the phone rang again. This time it was the narco police. They said they had raided the house based on a hint. They had found a good deal of heroine and some weapons. They suggested I kept an eye on the tenant. I remember thinking to myself that what the heck could I do about something like that. I remembered, though, that I had a statement in the lease agreement about controlled substances, including drugs and guns. Based on that I decided to evict the tenant. So I did.
The good part was that the guy left. The bad part was that he thrashed and watered the place which the property manager had taken time to dry during the past three months. Oddly, he cleaned everything before he left! He took with him every piece of wood that came out of kitchen doors - which he had torn with his hammer. He even wiped off the dust! The property was clean but… it was in a completely useless condition. I have never seen anything like that.
The tenant disappeared. Nobody knew where he went. The insurance company decided not to cover any losses. This was because the tenant had obviously done the damage intentionally. I wasn’t happy about that.
I had a renovation team get to work as soon as possible. They had to virtually rebuild the whole property from the inside. The window and front door weren’t broken so they could be left in place. Everything else (or what was left of it) had to be taken out and built over.
Here’s the twist. I had always thought that if ever something as unlikely as this would happen, I could always borrow the money to fix the property and have its value increase in the process. However, now that the financial crisis had become a full scale systemic banking crisis, nobody trusted anybody and that included me. The bank wouldn’t lend me any money “due to company policy in times like this.” I had to dig in my pockets. To finance the whole thing, I even had to sell a portion of my gold. I was miserable the day that I sold it.
Eventually the property got fixed. The cost was astronomical compared to the value it created. I was happy to have the property give me positive cash flow again but I was very unhappy about the losses it had given me.
The mistakes that I made with the property have taught me priceless lessons. Maybe someday the financial crisis is over and I have the chance to borrow money to cover my losses. Until then, my portfolio is lighter in gold but personally I am rich in lessons in wealth.
III.
Of all the factors that contributed to my losses with the property, perhaps the most obvious variable was the lack of proper tenant selection. This is of course apparent afterwards. I was so excited with the motivated seller and her low asking price that I bought the property unseen as soon as I had completed my due diligence.
Still, the real reason why I got into such trouble was not the tenant. It was me, the investor. It was my lack of proper asset allocation.
Remember, I thought I had protected myself. I had always thought that with a strong cash flow I could finance all kind of unexpected costs and simultaneously increase the value of my property. I assumed this, because in the past I could always get financing.
It turned out that every bank rejected my loan offer. The whole banking sector was in a systemic crisis. It was this lack of access to capital that caused me the trouble. I had to dig deep into my pockets to finance the rebuilding of my property. This severely unbalanced my asset allocation to meet any unexpected losses in the near future.
Every investor has to come to terms with losses. In my case, it is of no use to blame the tenant. It is also a waste of time to justify the loss with some kind of a tax deduction. It is only necessary to take responsibility and learn something from the experience. I certainly learned a ton of things about asset allocation and risk management. The lessons go well beyond the scope of that particular property.
From now on I am much better at recognizing possible bottlenecks with risk management. I learned a bitter lesson about the importance of a large enough safety basket. I will never run out of quick liquidity again. As an investor, I am prepared to go whichever way the economy goes. No matter what happens, I will be in a position to protect myself, exit or take advantage of the situation.
Those are some of the things I learned. Then there is a whole list of personal attitude changes I do not wish to address here. I have to tell you, this experience has changed my plans radically for the better.
Still, I got to tell you, I miss those gold coins every time I think of Mr. Bernanke’s money printing press.
Jaakko
Getting Rich With A Good Plan Is Almost Automatic
February 2, 2009 by Vagabond Investors · 4 Comments
Years ago I met an old friend of mine. We had studied entrepreneurship and finance together. He asked me to join him to eat lunch that week and I agreed.
Over lunch, he asked me what I was doing. I told him I was an entrepreneur, investor and a coach to many people who wanted to become financially independent. His eyes widened and he wanted to know more immediately. He asked a lot of questions about financial independence and investing.
 I told him my formula and what I had found out it really took to become financially free. I thought my friend would be excited to hear that. Instead, he was disappointed.
âWhat?â he said. âIf it were so simple, why donât more people do it?â
âI donât knowâ I replied. âIâve thought about the same thing.â
âI donât believe you. Such a simple formula will not take you there. It has to be more complex. There has to be more risk. It canât be that easy!â he said raising his voice. I could hear the irritation in his voice.
âI never said itâs too easy. I just said itâs that simple.â
âYouâre lyingâ he said. âIâm getting out of here.â So he did and I was left alone eating Thai food.
I think my friend failed to understand that we donât need to be deco-millionaires to be financially independent. We donât even want the million dollars. We want what we think only those millions can buy. The truth is, most of our deepest dreams donât cost that much.
As to the formula I told him, investing is not what most people think it is. Most people want a hot tip or a quick fix. They think that investing is complex and risky. Most people actually prefer complex to simple. They seem to think that if a formula is not complex and difficult, it canât be a good formula.
To me, investing is not a magic formula. Investing is a plan. Investing is a simple, often boring and almost mechanical system of getting rich. Personally, I hate risk. To me risk is a four-letter word. Thereâs always some risk but it doesnât have to be risky. I believe that when it comes to investing, simple is better than complex. Just look at the financial mess on the market today which was caused by systems so complex that even the brightest minds on the planet didnât understand them. Human judgment is far more limited than we think. Weâve met the enemy, and he is us.
I like to keep it simple. If the formula is complex, itâs not worth following. Keeping it simple is always better. I realize why itâs so hard for most people to follow a simple plan. The reason is that it is boring. People want excitement and amusement. I want it too, but I find my adrenaline thrills somewhere else. I prefer simple, uncomplicated plans of getting rich. Because the world is changing all the time, my plan is constantly under revision but it remains simple.
A formula that has been a winning formula for wealth for at least 200 years is this: build businesses and have your businesses buy your real estate and paper assets. Thatâs it.
For most people, the real goal is to find a sense of financial freedom. They want freedom from the day-to-day grind of working for money. All they have to do is find a formula that will make them rich and follow it. When theyâre found it, all it takes is discipline. When it comes to money, discipline is often a rare commodity.
As with my friend, you have to ask yourself how badly do you want it? Are you willing to keep an open mind and accept that investing does not have to be risky and complex? Are you willing to increase your financial IQ so that you can become financially independent? Are you willing to be honest with where youâre starting from and give it some time? Are you willing to pay the price?
My friend obviously didnât. He thought itâs easier to work for the rest of his life. To me, that was too high a price. I have always chosen to pay the price to financial independence. That price is not always measured in money, but in deep feelings and courage to move on.
That is why keeping it simple is such a powerful idea. You will find the strategies and tools that we use on this website. In my opinion, the very best of them are the simplest ones.
Jaakko
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Visit Ground Zero: Kill All You Ever Knew About Investing!
January 20, 2009 by Vagabond Investors · 3 Comments
There is a story about Einstein and his assistant. Einstein gave a test to his science class. As he was collecting test papers his assistant came to him. “Dr. Einstein, wasn’t that the same test you gave to the class last year?” he asked. “Yes, indeed” said Einstein. Puzzled and confused the assistant asked, “But Dr. Einstein, how can that be?” Einstein laid back in his chair and smiled as he replied: “Because the answers have changed.”
That’s the point. The answers have changed. Answers are changing all the time. This is just a fact of life to every investor. Our life is different from what it was five years ago. So is everything else.
As the world is changing, we need go back to the basics. Now is the time to revisit everything we thought we knew about money and investing. Basic financial education has never been so important to us than it is right now. We have to dispose our old paradigms and crystallize our thinking. The following are the areas I am currently working on:
1. How do we make money?
2. How do we budget money?
3. How do we allocate money?
4. How do we leverage our money, time, systems and knowledge?
5. How do we protect our wealth?
6. How, when and under what circumstances do we exit?
7. What asset classes are likely to gain most in the upcoming years?
8. How may we serve more people with less effort?
There are a lot of people who are expecting us to deliver our views about the things I outlined above (which I will do to support your education). The problem is that these people have what is called the quick fix mentality. They want the quick fix. Quick weight-loss, quick buck, quick lunch. These people would want to go to heaven if it didn’t require dying.
The truth is that quick fixes never work. Only extensive working on anything produces a significant result. We have to commit to learning.
That doesn’t mean it has to be difficult. It can be super simple. It can be the easiest thing there is. Drinking water is easy and yet most of us don’t drink enough water. Raising financial education is like drinking water. It has to be over and over again. Like fluids in the body that eventually come out, out-dated financial education has to be disposed. Take everything you knew about money and investing and mentally destroy it. Kill it. Let the toilet swallow it. Why? You guessed it! The answers are changing.
Becoming financially independent has never been easier in the history of mankind. Some people think that the depression will last forever and that all hope is lost. Don’t you believe it. The sun will shine again. It’s not what happens to us but how we respond.
So, let’s get back to the basics. Resolve now to take time to re-educate yourself and answer at least the questions I outlined above. This work will pay in huge dividends. Forget what you thought you knew about the world. Test assumptions. Re-educate yourself as soon as possible. That is, of course, if you wish to become financially independent. In today’s world, that is not optional. Don’t expect anyone else (the government included) to support you.
Take the time. Put it in your calendar. If you’re still just looking for another quick-fix, you’re better buying instant coffee than investing.
See you on the next wave to wealth!
Jaakko
Lessons In Wealth #1: Accept Responsibility
January 12, 2009 by Vagabond Investors · 1 Comment
Everybody faces problems, big problems. That is a given constant and nobody can escape it. The most important thing that separates the rich from the rest of the population is their attitude towards life.
The rich firmly believe that they create their life. They believe that its not what happens but how we respond that matters. We cant control all the things that happen to us, but we have absolute control over our response to what happens.
The poor believe that life happens to them. They believe that the external world dominates what we can do. This difference in attitude determines how we handle the inevitable problems of life.
When the waves come, we can choose to take responsibility or play victim. No one of us really is a victim. It is a role we have to choose. We need to understand that there is no such thing as a wealthy victim. Fulfilling, sustained and life-supporting wealth didnt just happen. Life doesnt just happen to us. We are participators and thus co-creators of our destinies.
How do we know if we are playing victim? Its easy and simple. Lets just take a look at our lives and see if we can find any clues of victim behavior. Consider the following.
1. Blame
Poor people tend to blame other people and circumstances that they are no rich yet. These same people really believe that the lottery tickets will solve their money problems some day. Probably they wont. Statistically most of the lottery winners back in the start square or in worse situation than before the lottery win in five years. Now thats something to think about.
The first step is to stop blaming and taking responsibility on everything that happens in our lives. If we are honest, we have contributed somehow to the problem. Its not that we chose to blow things, but we were part of the process. Lets accept it.
2. Justifying
The second typical victim behavior is justifying and rationalizing the situation. One common justification is that money is really not that important for me after all. Really? Is it not? Lets face it right now. Money is unbelievably important in areas in where it works and totally useless in areas in the areas in which it doesnt. When we need money, there simply arent that many substitutes.
Lets think about our loved ones. What if we choose to believe that theyre not important to us? Well he/she is not really that important. I dont really need a spouse anyway. Chances are they would not stay around for much longer.
Whether we like it or not, the same is true with money. If we believe that money is not important to us, we probably wont see much of it. The rich people admit and accept that money is important. They treat it as something important. They believe and behave accordingly.
3. Complaining
Complaining is passive aggression. We can complain as much as we want but its effect on solving our problems is exactly zero. Its a waste of valuable life energy. In our interpretation of the world, whatever we focus on grows. Whats wrong is always available and so is whats right. Which one we choose to focus on determines what we call our life. We are living magnets and we attract what we think most of the time.
The fact is that we can always choose between victim and victor behavior. To some extent, we are all choosing to be victims and victors. The key is to make a conscious choice to take the road of victors, that is, take responsibility.
We can always accept the situation as it is and take responsibility. We can either change the problem itself or change our perception of it. We can do something differently to solve the problem or at least we can try to find something we can learn from it. Blaming, justifying and complaining just wont work.
Remember, we create our wealth and non-wealth through our attitudes, thoughts and actions. Its not what happens but how we respond. As the saying goes, circumstances do not make a man, they reveal him. The choice is ours.
It always has been.
Matias
How Banks Work: Money Creation Leads To Inflation
December 9, 2008 by Vagabond Investors · 6 Comments
How Banks Work
Let me tell you in overly simplified terms how banks work. Banks make money by making loans. Depositors put money into the bank and the bank lends the money out to a borrower. The banks charge a higher interest rate on the borrower than the rate it pays to the depositor. This difference is known as spread.
Banks can lend more money out than they have. In other words, they can lend out money that they donât actually own. What? Yes. Letâs see how that works.
Money Creation
How much they can lend depends on the reserve required given by the central bank (for example, the Federal Reserve). This is typically 10%. A low reserve rate magnifies the amount of money banks make from lending money. The fact that banks donât have to keep 100% reserves but only a fraction of that is called fractional reserve banking.
Suppose you deposit $10,000 in your account. The bank has a reserve ratio of 10%. It has to keep 10% of your deposit or $1,000. It is free to lend the rest 90% or $9,000 at interest. The person who borrows it will spend it somewhere and the money ultimately gets deposited again. From that new deposit of $9,000, the bank again keeps $900 and lends $8,100. This process is repeated over and over. Each time the bank gets money, it keeps 10% and lends out the rest at interest.
This process is repeated as many times as possible. Ultimately your $10,000 can become up to $100,000 in the overall money supply. You can calculate this by dividing the initial deposit of $10,000 by 10%. The total money supply of in the economy increases as banks make loans. Therefore, for every $1 that is deposited, up to $9 new money can be created on top of it. This process is called the money multiplier.
It works with the Federal Government as well. The government wants to borrow $10 billion. It prints bonds and gives them to the Fed. The Fed in turn prints $10 billion worth money and gives it to the government in exchange of those bonds. It was all created out of thin air. The government then deposits this money into a bank. The bank keeps 10% or $1 billion of this in required reserves. It has an excess of $9 billion in reserves which is lends out. Hereâs the twist:
The Federal Government borrowed                        $10 billion
The bank holds a fractional cash deposit of          - $1  billion
The bank lent out the rest                                      = $9  billion
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Now, it is important to recognize that the $9 billion is created on top of the $10 billion. It comes on top of the existing money supply. Where did that new money come from? It was created out of thin air because of the fractional reserve system. New money comes into existence in loans.
This creates an interesting outcome.
Inflation
When a person needs money, it borrows money from the bank. The bank lends the person the money. That money is debt. The loan principal has to be paid back with interest. Almost every single dollar must be paid back with interest as well. The interest must come from the existing money supply.
But wait a minute! All money comes from central banks. It is expanded by commercial banks through loans. The principal is the money supply. Where is the money that is needed to cover the interest?
It doesnât exist. It needs to be created.
In the economy, the money that is needed back to the banks (principal + interest) will always be more than is available in circulation. New money must be created to cover the interest. An increase in money supply leads to inflation.
This is why inflation is a constant in the economy. Money is debt. The game of modern capitalism is: Who is indebted to whom? In times of inflation, savers are losers and debtors are winners.
As an academic side note, which is almost too boring even for me, I know that some of the people reading this are keen to point out this: Inflation is actually an increase on the money supply and that it is the increase that leads to higher prices. Inflation is the devaluation of the currency and leads to higher nominal prices. I am aware of that. For simplicityâs sake, we will define inflation simply as higher prices. In other words, the money is worth less. Things cost more.
The Fed Creates Inflation
Who is in control of the money supply in the United States? Itâs the Federal Reserve. Interestingly enough, the Federal Reserve is accountable to no one. It has no budget. It is subject to no audit. Nobody can truly supervise its operations. It is in almost total control of the nationâs money supply. Yet its chairman Ben Bernanke was never elected by the general public and he thinks that printing money at will is a good idea. It may be, but for whom?
The fact that it is accountable to nobody is trumpeted as a virtue. Still, it is the Fed that is responsible for money creation and thus creating inflation. Theyâre happy to create $700 billion out of thin air to bail out their banker friends in Wall Street and more, much more is on the pipeline.
Who Pays The Price?
Who pays the price in taxes? Whoâs left out dry with the upcoming inflation from that money creation? Who gets the short end of the stick?
Itâs the taxpayer. Itâs the average Joe Blow on the street. Itâs you and me. Such is life and itâs getting sucher and sucher all the time.
Get Educated
Thatâs why getting financial education is so important. Unfortunately, you donât get it in school. We have dedicated this website for your future. Please take the time to educate yourself and learn how you can ride the upcoming inflation waves instead of be run over by them. You can survive and profit handsomely, if you know the rules of the game.
So how do we survive? How do we profit? Which asset classes thrive on inflation?
Letâs look at that in the upcoming posts.
Jaakko
Parody Video: Hitler Faces Foreclosure And Wants To Be Bailed Out
December 5, 2008 by Vagabond Investors · 1 Comment
Hey all,
Somebody had a brilliant idea to make a video parody of Hitler as a real estate flipper. He bought a house to flip, faces foreclosure and wants to be bailed out.
I watched it and laughed my butt off! Iâll post it here for you to see. Enjoy!
JaakkoÂ
The Seven Levels Of Investors
December 1, 2008 by Vagabond Investors · 1 Comment
A few weeks ago as I was traveling to hold a seminar I reread some of my old business books on the way. I came across Robert Kiyosakiâs âCashflow Quadrantâ (an excellent book, which I remember knocked me out mentally years ago). Iâm going to reiterate an excellent point in the book. I highly recommend you buy and read the book carefully from cover to cover.
The Seven Levels Of Investors
Level 0: Those with nothing to invest. These people have no money to invest. They spend all they make or more than they make. About 50% of adult population is on this level.
Level 1: Borrowers. These people solve financial problems by borrowing money. Theyâre not conscious of their spending habits. They may have some assets, but their level of debt is simply too high.
Level 2: Savers. These people save small amounts of money in low-risk, low-return vehicles such as a CD. They often save to consume rather than invest. They have a deep need for security. Theyâre afraid of debt and pay in cash. People in this group waste their most precious commodity, time, trying to save pennies instead of learning how to invest. In times of inflation, they end up as losers.
Level 3: âSmartâ investors. These are educated intelligent people. However, when it comes to investing, theyâre uneducated. Some of these people have convinced themselves that they donât understand money and never will. Some are cynics. They sound intelligent but are really cowards under their intellectual exterior. Others are gamblers who think that investing is like Las Vegas. Itâs just luck. They have no rules or principles and often lose it all.
Level 4: Long-term investors. These investors have a clearly laid out long-term plan that will allow them to reach their financial objectives. They get educated before actually buying an investment. If youâre not yet a long-term investor, get yourself there as quickly as you can. Keep it simple. Forget sophisticated investments. Put some money down and start small. This level is where most of the millionaires in America come from. Live within your means, minimize your debt and incrementally increase your assets. You donât have to be great to start, but you have to start.
Level 5: Sophisticated investors. These people have more aggressive investment strategies, because they can afford them. They have good money habits and have a long track record of winning. They have a solid foundation of money and conservative investments. Â Their debt-to-equity levels are under control. They put their own deals together. They are clear on their own principles and rules of investing. They reinvest their gains and hold their wealth in legal entities such as corporations.
Level 6: Capitalists. Very few people reach this level of investment excellence. These are the movers and shakers of the world. Their purpose is to make money by orchestrating other peopleâs money, other peopleâs talents and other peopleâs time. They usually have large businesses and large investments. True capitalist create investments and sell them to the market. They love the game of money and are generally very generous. They think that money is not a thing but an idea created in their head.
What level of investor are you?
What level of investor do you need to be in the near future?
Remember, anyone with the goal of becoming a level 5 or level 6 investor must develop their skills first as a level 4 investor. Level 4 can never ever be skipped. Anyone who tries to skip it is actually a level 3 investor â a gambler!
As I approached the city I was going to give my speech, I was thrilled. Something so simple and so profound reminded me of how important it is to be clear on your current level and objectives. Needless to say, I was more than inspired to give my speech.
Jaakko
Blood On The Streets? Time To Make A Killing.
September 22, 2008 by Vagabond Investors · 3 Comments
The very best time to find new and profitable opportunities is when the market goes bad. In other words, when the news is full of gloomy data, itâs time to get excited. That day has come.
Successful investors keep on seeing opportunities when the markets are deeply in red and stormy clounds fill the horizon. Financially intelligent people see problems as opportunities. Solve a problem and you reap a profit. For example, Warren Buffet is looking for to buy some parts of Goldman Sachs on discount at the moment. While itâs true that you and I canât put together deals like that, we can make other outstanding deals in the market.
How can an average person like you and me benefit from the down market?
First, identify the direction. It doesnât matter which way the market is going as long as we can recognize it. Second, take proper action. For example, letâs say that youâre expecting the stock market to go down. You can buy put options, short ETFs or short stocks on sectors that are going down. This is just like buying call options, ETFs and stocks on a bull market. Itâs just that now weâre doing it in the opposite direction. You have to let go of the obsession that you can only make money when the markets go up. The truth is you can make money in good and bad times.
Personally, I like bad times better. Public panic is more electrifying than public optimism. Why is that?
Down movements in the market are typically more aggressive than the up movements. They offer faster profits. If youâre like me, you prefer to have your profits sooner than later. Anybody who invested a couple of hundred dollars in the financial sector put options last spring has made tens of thousands in profits by now. Their total risk was limited to those couple of hundred bucks all the time.
How could these people see the coming crash of the financial sector?
Difficulties in the financial sector have been in the news headlines for more than a year now. It didnât take a rocket scientist to find the companies that have been on a bad shape. After Bear Sterns was rescued and the mega bailout of Fannie Mae and Freddie Mac was announced, even the rest of us should have understood that the situation is going to get a lot worse (and it did). These troubles were clearly announced and it is a perfect example of a problem turned into a huge opportunity.
What about real estate? Do the same principles apply there too?
Yes! Itâs no different. Forget the price speculation. Focus on the essentials. Keep looking for deals that give you positive cash flow. There is a sustained period of exceptional opportunities in the market! There are a lot of people who suffer and theyâre desperately trying to get rid of their houses, because theyâre late on their payments. They want you to buy their houses âat almost any price! Help them move on in their lives and make a fortune on the process. Thatâs a great way to help people. Think about it.
My message is simple. Keep your eyes open and try to figure out, what kind of opportunities Mr. Market is offering you today. Itâs your job to find them, and the best news is, theyâre always there! The deal of the decade comes along about once a week, if not more often. Now is the time to find your opportunities and take a GIANT step closer to financial freedom.
Now is the time to make big profits. There will come a day that the sun is shining again, and the best opportunities are gone. Are you going to say “I’m glad I did” or “I wish I had?” One these days you’re going to have to answer to that question.
Matias
Investments Will Not Make You Rich
September 3, 2008 by Vagabond Investors · 4 Comments
Dear readers,
I want to share something with you. Iâm going to talk about a problem. In fact, not even a problem. Iâm going to issue The-One-Big-Mistake-That-People-Make-With-Financial-Matters.
Please, pay close attention now.
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The most common mistake people make with their money is that they think that their business or investments can make them rich. In other words, they think that stocks, bonds, mutual funds, gold, real estate, hard work or a good business can make them rich. It isnât so. None of them can make you rich.
Itâs not about what you have. Itâs all about two things:
1. What you know about money, investing, business etc.
2. How you apply that information to benefit yourself and others.
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This is exactly what we mean by financial intelligence. This is the key to a more abundant life. It is the only key.
We all face financial problems. Problems will never go away. The only place where you donât have problems is the cemetery. Problems are a sign of life. They are hidden opportunities that challenge us to learn.
The only way to increase your financial IQ is to solve financial problems. The better you get at it the bigger problems you can solve. Bigger problems mean better opportunities to learn. Problems can be converted to income, if they are solved in a creative way.
The wealthy tend to think that each problem has a hidden opportunity in it. They turn their problems into questions. How fast can I turn this around? What can I learn from this?
We live in a world of cause and effect. We choose to do something and it leads us to some outcome. If youâre in a good physical condition, youâve chosen something different from the individual who looks like a Michelin man.
Wealth is a result of specific causes. The lack of money is never the problem. Itâs just an outcome of some causes that inevitably lead to it. It may be something as common as doing nothing. Many a problem has come about when good people have done nothing. That is an active choice as well. There are always lateral options to do something.
So what is intelligence? It is the ability to find causes behind desired results and act on them. We need both information and action. The ability to act is also called personal power. In most cases, wealth creation requires massive action in few critical areas. One of them is increasing your financial IQ so that you know what you should do in the first place. There is no more important investment than that.
Let me give you an example. Letâs say you have a stock portfolio which has taken some serious beating on the market. You decide to take responsibility (response-ability). You ask how you could have protected yourself from the downturn. You come to realize that you could have used protective stop-loss orders or change your strategy after noticing that the support level has failed. The options are virtually unlimited. Personally, I think that owning a stock without stop-loss orders is like having casual sex without a condom. It could be exciting and adventurous for a while but there comes a day that things will go seriously wrong.
How do you increase your financial IQ? The quickest way is to study the subject. Go to the market and get some experiences (might be learning experiences at first). Then analyze it. Ask good quality questions and learn from your experience.
Focus on one asset class at a time. Find a working strategy, keep learning until you master it, and then learn a new one. Then open your mind for a different view on some other asset class or instrument.
For example, you can start with long-term buy-and-hold real estate deals with excess cash flow as your goal. You can then move to flipping houses, if that catches your attention. You could turn to trading stocks or building automated businesses. The game of money is fantastic, because there are zillions of ways to make a ton of money and have fun doing it! Expand your view. You can never learn less.
I hope this clarifies that itâs not about the investment but the investor. The investor is far more important than the investment. Ultimately, all profit and risk lie on the investor, not the investment.
Take care!
Matias
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Reality Check: Lessons in Shaping Your World
August 24, 2008 by Vagabond Investors · Leave a Comment
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Your reality is different from other peopleâs realities. We live in the same world only in a geographical sense. That sounds like a harsh statement. I know and I agree. Thanks for your support. Letâs look at how our reality is constructed and what we can do about it.
The world is full of information and stimuli, which is filtered in our minds. Only a small fraction of what we sense is coming through. Do you remember the last time you bought a car? Did you notice how many similar cars were suddenly in the traffic jam with you? In the same way, babies seem to pop up everywhere when you hear that you (or your wife) is pregnant.
Hold on. The cars and babies were always there, right? How come we didnât notice that?
First, our conscious mind is only capable of accepting things that grab our interest. In the face of tragic news, we find it hard to accept the circumstances. The first reaction is to say that what has happened is not true! It canât be, we think, but it is.
Second, our mind is constantly looking for ways to support the beliefs that we have created. We find evidence to support whatever we have chosen to believe â in a conscious or an unconscious way. Most things that we donât believe in get little attention from our minds. We literally do not see them.
Imagine you live in a world filled with possibilities. Imagine virtually everyone you meet wants to help you. This is world is a projection of a mind which has prosperity consciousness. If we choose to believe in it, itâs a very different world from somebody elseâs ârealityâ if they happen to think exactly the opposite. They might believe that the world is constantly becoming a worse place to everyone living in it and that people are only there to serve their own selfish interests with little caring to anybody else. They have what is called a scarcity consciousness. Our beliefs literally shape the world we see, touch, smell, hear and taste.
Third, our fears shape our thinking. Fear gets our full attention in such a way that all other things are wiped out of the conscious mind. Let me give you an example. Suppose you knew beyond a shadow of a doubt that you would be in a terrible accident this week. Do you think it would affect the way you think of your upcoming sky diving course or rock climbing session? I bet it would. You would probably be so afraid of it that you would miss out on most of the positive things in your life. You see, fears shrink us. Fears make us live a smaller life. When we do the thing we fear, the death of fear is certain. Therefore faith is the key to a bigger life.
Just in case you should say think that the world is a terminally boring or unsafe place, let me tell you something. Thatâs the good news! Itâs all in your mind! You have the power to shape your thoughts, beliefs and fears. There is no âout thereâ out there. There is no the state of things as they actually exist. Your mind represents (re-presents) everything!
You are not in control of the outside world but you have total control of your inside world. We donât see situations as they are. We see them as we are, that is, as we see ourselves.
Give these ideas a little room in your mind this week and see if you could see a new world. See if you could become more sensitive to the heart beat of life. You can respond to the world with your new thoughts, new beliefs and new faith. Try it out for just this week!
Matias
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Why Paying Down Debt and Saving Money Is Stupid
July 3, 2008 by Vagabond Investors · 5 Comments
It’s everywhere. The newspapers, TV shows, you name it. People and institutions have too much debt. Savings rate is low. Recession raises its ugly head and the consensus is starting to feel fearful. Panic is not far away. Then come the financial advocating a message that is familiar to most people: “Pay down all your debt and save money.”. Some disregard it, some believe it and some - like us - think that it’s not good financial advice. How can we say that?
We have a different philosophy on debt. You see, we happen to like debt. There is a radical difference between good debt and bad debt. Simply put, good debt makes you rich and bad debt makes you poor. This distinction is critical and it can make the difference between getting rich or falling behind.
For example, if you buy a leveraged investment which pays for its own debt, it would be considered good debt. Then again, if you buy stuff that goes down in value and does not pay for its own debt, it is bad debt.We like good debt and we do not believe you should get rid of it. After all, it’s one of the best ways to leverage investments.
We do think, though, that it makes sense to pay down your bad debt. Debt is like a loaded gun. It should be respected on all circumstances. It’s always potentially dangerous. Yet it makes a big difference whether you aim the gun on the target or on your own foot.
In order to use good debt in a correct manner, check your asset allocation. It is the most important thing you should do right now, if you have not done it already. Do it now.
What about savings? Don’t we think that saving money is a good idea? After all, most people are not saving money and that is a big problem, right?
No, I wouldn’t say so. Not for the new rich, anyway. A currency is designed to lose value. Inflation is running high. Although we believe that the numbers are manipulated, even some 4% inflation will do serious damage to your savings. The problem is that central banks can print money faster than you can save it. They are doing it all the time. Instead of saving money, we once again recommend you check your asset allocation.
Don’t try to avoid risk by saving money. Learn to manage risk and invest money. It should be relatively safe, profitable and fun too! The next time you hear financial advice that states that you should pay down all your debt and save money, think if you can be smarter than that. It all comes down to financial intelligence.
Remember, you can never learn less. That’s why we have given you this blog to read. The safest and most profitable investment of all is to raise your financial IQ. With it all is possible, without it nothing is possible in the game of money.
Until next time,
Jaakko
The Leverage of Your Mind (Plus: How to Create Supreme Ideas)
June 26, 2008 by Vagabond Investors · 5 Comments
The greatest leverage of all is the leverage of your mind. The six inches between your ears is definitely your most valuable asset. You have no idea what you are capable at. Your brain is so complex and so powerful that you are only using a small fraction of its capacity. The limit of better quality life is not out there. It is in your mind.
What is reality? Simply, what we think is real, is our reality. Itâs not how things actually are, itâs how you perceive them to be. A good example of this is if you think you canât afford something. We all do this once in a while. The reality is not that you canât afford it. Itâs just that the thing you pursuit is outside of your current reality, i.e. you donât know how you could afford it.
Itâs not money that makes people rich. It is the ability to expand the reality that ultimately makes people richer. Money is not the solution to money problems. The mind is. It is the cure-all. Any constraint in the outside world can be overcome with creativity. The ultimate resource is resourcefulness. The reality is a mind game.
A large part of what we call reality is constructed on our beliefs. A belief is nothing more than a feeling of certainty. We have beliefs of life, ourselves, people around us, money, our abilities, everything. The big realization is, of course, that none of these are true. Belief systems are all fundamentally false. Yet the human mind inevitably constructs beliefs to perceive the world. The good news is you can change your beliefs. You can change your reality.
Many arguments in life are caused by differences in reality. People donât really argue about things themselves. What they argue about is their realities that collide against one another.
You have to ability to choose your reality. The way that you are constantly doing this is by focusing your mind. At the moment, you are focusing on this. Yet at the same time, your heartbeat in your left ear is just as real. Were you aware of it? Chances are that you werenât. Thatâs because you didnât focus on it. Wherever focus goes, energy flows.
As to creating a better reality, you have to solve some problems. Problems will never go away. They are a sign of life. Getting rich is a matter of having better quality problems. From too little money you can go to having too much money. Both realities are possible and both problems are real. Yet the difference in quality of those problems is enormous. One comes from scarcity, the other from abundance. Wealth, after all, is all about abundance. Itâs about a better reality and better problems.
The question then becomes, how do you change your reality? The answer is, by solving problems. That is, by answering questions. Problems are questions, arenât they? Thatâs a question, too. Isnât it?
To solve better problems ask better questions. Better solutions mean better ideas. Ideas are the doorway to new realities. For example, donât say âI canât afford it.â I contend that itâs a sign of mental laziness. Ask âHow can I afford thisâ.
Iâve listed some good and bad questions below to let you see the difference here.
Bad question                                           Good question
Why donât I have any money?                How can I make a ton of money and have fun doing it?
Should I work longer hours?                   How can I increase the number and size of my assets?
Whoâs to blame?                                    How can I turn this around quickly?
Whatâs wrong with my life?                   Whatâs right with my life?
How can I earn more?                            How can I earn more and work less?
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Turn your problems into questions. Focus on finding solutions. Spend a maximum 20% of your time and energy on problems and at least 80% on solutions. This alone will yield supreme results in your reality.
Expand your reality by reading and listening to people who already have achieved what you want to achieve. Raising financial IQ is all about the leverage of your mind. The fastest way to become financially independent is to be able to change your realities faster. If you want to progress quickly, you need to have an open mind to new ideas and have the skill to take on possibilities greater than your current abilities.
Reality is negotiable. Expand the limits of your reality. Earl Nightingale put it eloquently: You become what you think about most of the time.
How do you create superior ideas? Iâll give you a quick guide to something that has worked like a miracle to me. This method is worth its weight in gold.
1.     Gather raw material for your ideas. Get specific material as well as general. Try to find quickly as much as you can. Work consistently and donât give up. File the material to notebook or a computer file. I personally prefer a notebook. I clip pictures and everything that relates to the problem and put them to the pages of my notebook.
2.     Work it over in your mind. Ideas are just new combinations. Take one fact and look at it in different angels and lights. Bring two facts together and see how they fit. First you will get partial ideas. Keep on generating new ideas even if you think you canât find anything more.. Write them all down regardless if they sound a bit silly.
3.     Let go and forget your puzzle. Do something totally different that stimulates your imagination and emotions. Take a shower, listen to music or exercise. I like to train muay thai, krav maga, Brazilian jiu-jitsu or some other combat sport to empty my mind.
4.     An idea will appear out of nowhere. This will happen when you least expect it. In the middle of something else, you suddenly get the solution or a brilliant partial one.
5.     Bring your idea into the reality. Develop your idea with other people. Submit it for criticism. Shape and develop the idea to practical usefulness.
There you have it. The leverage of your mind is the most powerful form of leverage there is. All you need is within you right now. Keep on increasing your financial IQ. You will find that making superior deals to finance your lifestyle and creating automated income streams through all three asset classes become easier and easier. With cash flow and time, everything is possible.
Jaakko
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Financial Intelligence & Financial IQ
June 23, 2008 by Vagabond Investors · 7 Comments
Reading this you are gonna learn the basics that will catapult your financial future to the very different level. These are the building block for the long-term financial freedom and LifeStyle design.
The most important common dominator for successful investors and people enjoying financial freedom is high financial IQ. Financial IQ is a measurement of the financial intelligence. We all have money problems. Some of us have a problem of having not enough money same time as some of us are solving the problem of too much money.
Financial intelligence is that part of our intelligence we use to solve financial problems. To get to the next level of the money game we should increase our financial intelligence. That simply means that we are ready to solve different and more complicated money problems. We are ready to learn new strategies and abandon some old believes and habits. Let’s have a look at the five basic financial IQs
- Making more money
- Protecting your money
- Budgeting your money
- Leveraging your money
- Financial knowledge
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1. Making More Money
The more money you are capable to make the higher your money making intelligence is. The lowest level is to work for money. Higher solution is to make money and other people work for you. This includes the capability to use different investment strategies and generate automated and portfolio income.
Which one of the following guys has higher financial IQ? Patric works 50 hours a week and earns respectable 8 grand per month and Mystery Mike works 10 hours a week and earns huge 3 grand per month. Is Patric more intelligence than Mike? if we focus on absolute returns the answer is expectable yes. How about relative income? Mike has 40 extra weekly hours and earns 68 per hour compared to Patric’s 36 per hour. In case of relative income Mike’s financial intelligence is a lot higher.
2. Protecting Your Money
It is never about how much money you make but how much money you keep. This is absolutely true in everyday money habits as well as tax planing and investment strategies. It is crucial how much you keep when you make a wrong investment decision. It is only a mater of time when mister market will fool you. It is a part of the game.
3. Budgeting Your Money
Taking control of your spending habits will jump start you wealth accumulation. Spend less than you earn and invest the difference. Isn’t it SEXY? The life won’t get any better than that. Look carefully your expenses to recognize the good expenses and to eliminate the bad ones. Pay always your self first. Put aside 10 to 30 % of your income and live with rest. Having surplus is something you have to actively budget for.
Let’s have an example. Person A earns 60 000 annually and his expenses are 55 000. His surplus is 5 grand. Not bad at all. Let’s have a look at the person B. She earns 43 000 annually and her expenses are just 22 000. Her surplus is 21 000 per year.
If both of them invest the surplus and get 10 % p.a next 10 years Person A have a portfolio of respectable 79 687. That is a great start but a way from financial freedom. To keep the calculation simple we forget inflation. Portfolio represents 17 moths of expenses of current life style.
Person B has a portfolio of 350 623. If she continues to get 10 % return on capital she doesn’t need to work anymore.
Which one of these has a higher financial intelligence? Not a tricky question.
4. Leveraging Your Money
This is absolutely my favorite. After getting a surplus the next thing is to leverage the money to earn higher return on investment. A person who earns 25 % p.a on investment have higher financial IQ than person who gets only 7 %.
I can already hear you screaming that no one can accumulate over time such a high return on investment. If you believe so, it is true for you. In my world it is possible. Let’s live in my world for a while. I guarantee it is more fun anyway.
5. Financial Knowledge
It is true in life that you should first learn the basics to move one. The money game is not anyhow different. To make your money game more predictable you have to improve your financial knowledge and capabilities to understand financial information. This includes all different investment strategies you are gonna learn later from Vagabond Investors.
I can’t guarantee that the strategies we tell you will necessary work for you and they definitely don’t work every single time but we have been very successful among many others using these.
One thing I can guarantee is that increasing your financial IQ is the only 100 % secure investment you can do. You can’t learn less. Reading our E-Books, watching our videos and DVD seminars you are gonna know more about making money than 98 % of people who are working in the financial industry. Think about that the next time you give money to experts aka. put money in the mutual funds.
Matias
P.S. You don’t have to be a millionaire to live exiting and fulfilling life. Just in case you might still wanna be one, watch the following video clip.
Three Inner Obstacles to Building the Wealth You Desire
June 2, 2008 by Vagabond Investors · 1 Comment
I have good news for you. There are only three basic obstacles to our indefinite success. So whatâs holding us back on a daily basis?
First, thereâs impatience. The antidote to this is patience. Second, we doubt. The antidote to this is belief. In the Bible it says, upon to your belief it is done unto you. The third, disappointment is not being grateful for what we get. Disappointment can be overcome by gratitude. The moment we choose to live by these virtues will be the greatest moment of our lives. We have within us the power to beat our inner demons. We have to be patient, believe and be grateful.
All growth is growth towards our inner selves. Thatâs what life is about. We have to turn these three stones to make them our friends, not our enemies.
One of the greatest pains in life comes from not knowing that we always get more than we give. Time after time we feel confused, because what we are asking for is not always given to us or itâs not coming in the form that we had hoped. Itâs typical that we donât know when we get what we ask for. It may come in many forms, sometimes confusing us even more.
It is wise to be careful for what we ask for. When you know what it is that you truly want, ask a bit more than that. You see, you get what you settle for. Everything that we need is given to us. In most cases, we get even more than that.
Focus on what you want and donât think of the things that you do not want. You become what you think about most of the time. Youâre not what you think you are, but what you think⌠you are. You will see it manifest in your everyday life. Right after you bought your car, you immediately began to notice those cars come around every street corner. Isnât that right?
Seek good and beautiful and that is what you will find. Focus on misery and you can rest assured that you will find it grow in your life. This is simple but not necessarily easy.
Life is a weird adventure filled with paradoxes. Whenever we feel scarcity, we should give for that is what we get. We get whatever it is that we are trying to give other people. You get what you give, be it money, respect or friendship.
Itâs not so hard after all.
Matias
The Leverage of Money
May 23, 2008 by Vagabond Investors · 5 Comments
Youâre about to discover some Ăźber fantastic ways to multiply your returns with the next five minutes that you spend reading this article. Implementing these simple ideas can open a whole new world for you. You might also recognize some adverse behavior you want to get rid of.
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The definition of leverage is this: better results with less effort. The most well-known form of leverage is debt. Why is it that most people donât really know how to use leverage in their favor? After all itâs all about super simple math. You need not be a rocket scientiest, but you have to figure out some basics. First, you have to understand the difference between good debt and bad debt. Second, you need to know how leverage affects your expected outcome in different scenarios. Third, you need to use leverage in a safe way.
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Good Debt VS. Bad Debt
Leverage is like a loaded gun. You have to be extremely careful with it and know how to handle it. The reckless use of debt is a financial suicide while the appropriate use of it will catapult your financial future to the orbit.
Hereâs the twist. Good debt makes you richer and bad debt makes you poorer. Now what the hell does that mean? In simple terms, everything that puts money in your pocket is good and everything that takes money out of your pocket is stupid. Get the picture?
Hereâs an example of bad debt. Letâs say you buy something on credit. That something then depreciates in value and does not put money in your pocket. This might be your car, stereos, boat, summer cottage, consumer debt, you name it. This is the kind of stuff that goes down in value. If you buy it before you can really afford it, youâre using bad debt.
You might say âI get that. Tell me about the mysterious good debt if there is such a thing!â Here it comes. If you use debt to generate more income and wealth for you, youâre using good debt. For example, you buy a nice piece of real estate using 20% of your own money and 80% of your bankerâs money. You then collect an annual rent of $8,000. Your expenses before interest payments and taxes are $1,500 and your interest payments are $4,000 per annum. Whatâs left is a solid $2,500 before taxes (remember, interest payments on real estate are tax-deductable in most parts of this planet). This is cash that you get every year no matter what happens to the price of that property. It might go up or down but you still collect the money!
Itâs in the very nature of good debt on real estate that it brings cash in every year. In addition, the formula is not based on any appreciation expectations. So what happens when the price of that property invariably changes in one way or another? Letâs look at some numbers.
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|
Equity / |
Price change |
-2 % |
0 % |
2 % |
3 % |
5 % |
6 % |
|
10 % |
-9,2 % |
10,8 % |
30,8 % |
40,8 % |
60,8 % |
70,8 % |
|
|
20 % |
-2,8 % |
7,2 % |
17,2 % |
22,2 % |
32,2 % |
37,2 % |
|
|
30 % |
-0,7 % |
6,0 % |
12,7 % |
16,0 % |
22,7 % |
26,0 % |
|
|
40 % |
0,4 % |
5,4 % |
10,4 % |
12,9 % |
17,9 % |
20,4 % |
|
|
50 % |
1,0 % |
5,0 % |
9,0 % |
11,0 % |
15,0 % |
17,0 % |
|
|
100 % |
2,3 % |
4,3 % |
6,3 % |
7,3 % |
9,3 % |
10,3 % |
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The calculations above are based on these numbers:
ĂÂ Interest rate: Â 5%.
ĂÂ Net rental income: 6 %
ĂÂ Tax rate of rental income: 28 %
ĂÂ No depreciation.
ĂÂ Real estate purchase price: $100,000
ĂÂ Equity: $20,000
ĂÂ Bankerâs money: $80,000
ĂÂ Rental income after expenses:Â $6,000 (6% of $100,000)
ĂÂ Interest rate expenses: Â $4,000 (5% of $80,000)
ĂÂ Tax expenses: $5,60 (28% of $6,000-$4,000)
ĂÂ Appreciation: $2,000 (2% of $100,000)
ĂÂ Total capital gain and income: $3,440 ($2,000-$560+$2,000)
ĂÂ Return on equity: $3,440 / $20,000 = 17.2 %
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Letâs say we have two people we call Julia and Harry. Julia is a sophisticated investor and has 90/10 leverage (90% debt, 10% equity) on his portfolio. Her property does not appreciate in value at all. Harry is a conservative investor and uses 100% equity to finance his purchase. He enjoys a solid 6 % annual appreciation in his property. We can easily see that they both almost get the same return! The difference is in the leverage. This is exactly the reason why itâs so important to finance your investments in an appropriate way. If you do your homework and buy the right investments, debt can be your best friend.
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Investment advisorsâ advice
However, most investment advisors will say you that youâre nuts if you tell them that your goal is to get around 17 % return on your equity. They will say itâs far too risky. The fact is that investments are never risky. The risk is in the investor that does not know what heâs doing. Do you think you can find a mutual fund that gives your equity a 17% annual return year after year? I wouldnât bet my financial future on that horse.
Why hasnât your investment advisor told you about this? Thatâs because most investment advisors are not good investors. In fact, most of them probably have no investments at all. Be careful whose advice you take seriously.
Personally, I never use debt in speculative investments. I always require a positive cash flow from my assets. Period.
I canât emphasize enough how important it is to understand the beauty of good leverage. To be able to create financial freedom you must understand the use of good debt in a deep level. Dismiss it and youâre like a race horse with three legs.
The use of debt can make you enormously wealthy or exceptionally poor. The difference is whether you use good debt or bad debt. Do yourself a big favor and donât shoot yourself in the foot with bad debt.
Find out more about this subject in this Vagabond Investorsâ blog.
Matias
The Road Less Travelled
May 5, 2008 by Vagabond Investors · 2 Comments
Sometimes it just so happens to be that seeing a tree right in the middle of the road is a surprising thing. Seeing one after another makes me wonder if there are any better ways to make roads. Look at thisâŚÂ
 
 
 
 
 I would understand one tree in the middle of the road. Can you imagine that you can find four of these within a 15 minute walk in Helsinki Finland? Yep, thatâs the same country where Nokia came from.
The idea behind the road planning is not clear to me, but seeing these trees on the way leads me to interesting thoughts. The road less traveled can be found astonishingly close to our everyday life. I have walked tens of times these same streets, yet today was the very first time I noticed these trees. It makes me wonder if thereâs something else in life that I havenât seen even when itâs right in front of me.
Itâs a very healthy habit to stop every now and then to take a careful look at where you are in your life. At the moment you stop, remember that your best thinking brought you where you are. To progress you have to adapt new and better thoughts and abandon the old ones at the same time.
Spend a minute to think, whose ideas and thoughts you have been taking seriously for the last years. The fruits of the ideas will tell the whole story. If youâre not satisfied with your results, stop doing what youâre doing right now! Find a better approach!
Itâs pure insanity to keep on doing the same old things and expecting different results. Focus on the cause instead. Results will follow automatically. Itâs not difficult. Yes, it is uncomfortable to change habits and adopt better thinking patterns, but it surely is not difficult.
The fact that something is common doesnât necessarily mean that itâs intelligent or anyhow a good idea. Many times we just adopt socially reinforced thinking patterns and unconsciously think that it must be the best practice even if it could be the dumbest one ever. Watch over your thoughts. You might be surprised to realize what you find in your everyday thinking.
You probably hate this, but Iâm sure you have been face to face with a million dollar/pound/euro opportunity 3 times during the last 12 months and not even understood that. You see only the things that you think are possible for you. Choose a road less traveled and open your eyes to new opportunities that you have never believed to exist.
Wealth is an attitude. Financial freedom is a state of mind. Money is just an idea.
Have an adventurous day!
Matias
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Looking those trees keep me wondering which way to pass the tree
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