posted 03-29-2001 04:18 PM
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LOVE RETURNS!
In the last edition of the Burley Chronicles you were introduced to the Nine Generalized Principles of Investing. You will recall that Generalized Principles apply to all situations whereas Rules are personal and are used to set up how YOU invest.
We will begin this article by talking about "The Game." For the purpose of clarity you should understand when I say, "The Game" I am referring to Money.
I call it "The Game" because to Level Five Active Investors that is exactly what Money and Investing are: a game. A game that we all love to play to win!
In fact, this concept links to the first and most important of the Nine Generalized Principles of Investing. To play "The Game" you must LOVE what you are doing. To be a successful Level Five Active Investor you must do something that excites you, moves you and thrills you. Without this passion for what you do, life�s challenges and learning experiences can all too easily knock you off your path.
The concept of The Game of Money can be broken down into practical steps that you can apply:
1. Discover an area of investing that you feel is a "Good Fit" for you;
2. Apply the Nine Generalized Principles of Investing;
3. Develop your own Rules to the Game.
As you recall in the last issue we discussed applying the Nine Generalized
Principles of Investing. After you have found your area of investment passion
and applied the Nine Generalized Principles to it you must then apply YOUR Rules to The Game.
Remember that it is YOUR GAME and you can play it any way you want. Be like a little kid: if others won�t play your way then just take your ball and go find others who will play your way.
Take a good look at the Rules (conscious or automatic) that you are currently using with regards to money and investing. Are YOUR Rules empowering or limiting your financial success?
A typical example of how Rules can limit your success:
I have met people who tried something and it didn�t work the first time so they decided NEVER to try it again. Maybe this sounds familiar? The scenario might run something like this: you decide to buy shares based on a "hot" tip you got at the water cooler. Of course, right after you buy (at the top of the market) the share crashes to an all-time low, wiping out half your money. You sell immediately and decide to NEVER invest in the share market again because it is too risky.
For many this example may be all too real.
The problem with your action is not that you bought the shares or that you lost money but that you decided to NEVER invest in the share market again because of the loss. You made a Rule that will prevent you from EVER making money in the Stock Market.
And your "rational" mind will constantly remind you of YOUR RULE. Regardless of how good the market is, you will not participate. When anyone ever questions you on why you will not invest in the market you will defend YOUR RULE to the ends of the earth with endless "logical" reasons why one should never invest in the stock market. This is your own "intelligent" psycho-babble. The end result: you lose because you are out of The Game!
In the example cited what you should have done is learned what you could do differently to enhance your probability for success. In the future: do not buy impulsively at the top of the market; check the source of your information; do Market Research; use a stop-loss to limit your potential liability so you cannot lose so much, etc.
Translation: add a Rule to never play that way again, not a Rule to never play The Game (invest) again.
EVERY day I learn new ways to do something or to not do something. I never quit The Game. I merely adjust My Game to incorporate what I learn. You should do the same.
Rule 1. is that I play by My Rules, not the rules of anyone else. Level Five Active Investors know that they must have control at all times. Thus they cannot play by the rules dictated by others (such as so called �expert� financial planners, accountants, lawyers, tax planners, brokers and bankers who all too often play by the rules of "It Can�t be Done" or "We Don�t Do That Here"). Level Five Active Investors design their own Rules and adapt the world to them rather than complying with and adapting to the rules of others.
Note: this does not mean breaking the law! All that I do, whether in the area of business, tax planning, entity strategies, or investing is all completely legal and above board. There is no room in the business and investing world of the Level Five Investor (where your reputation is as vital as your skills), for shades of gray. There is no need. Everything I could ever want to do can be achieved using my own rules, within the framework of existing laws, regulations and codes. I only do what is "white as the driven snow." I strongly recommend you do the same.
Rule 2. The Nine Generalized Principles of Active Investing
Always respect and follow the Nine Generalized Principles of Active (Level Five) Investing. They are the blueprints upon which to build your Rules.
Rule 3. Integrity
It is my belief that the most important quality a person can demonstrate in business and in life is Integrity. If I find that the people I am playing (working or investing) with do not have integrity I stop playing (doing business) with them. I take my ball and go home. And I only play games (businesses and investments) which are compatible with and can be fashioned around my integrity beliefs.
I have learned the hard way that people with a lack of or questionable integrity will usually turn on you or let you down before the deal is done. Always remember: the Integrity of the other person is more important than any other aspect of the deal!
Integrity must always be your starting point and you�re ending point. If you deal with people without integrity you will damage yourself each time. Their association or short term profit appeal is not worth the sacrifices you will invariably make.
I have read some wonderful passages over the years on the subject of integrity, written by great businesspeople, but none better than the selection I would like to share with you here.
Horace Greeley, the founder of the New Yorker in 1834 and coiner of the phrase "Go West young man, go West!" once wrote in a speech on the subject of the "true business man" the following passage:
"I close, then, with some suggestions as to what I consider the bases of a true business career � those which give reasonable assurance of a true business success. I place first among this, integrity: because I believe that there is to day a good deal of misapprehension on this point. There is now and then a case of brilliant rascality known among us; and we hear of this, and talk of it; we are inclined, some of us, to admire it; but, after all, there are no cases, except very exceptional cases, wherein roguery has led to fortune. The rule is almost absolute, that our thrifty men have been essentially upright men. You will find few cases where the dishonest man has continuously flourished. There have been cases of his temporary, transient, meteoric success; but the rule is very uniform in its operation, that business success has been based on a broad platform of integrity."
P.T. Barnum wrote in an often-delivered speech entitled "The Art of Money-Getting" the following passage on integrity and its relationship to wealth creation:
"It is more precious than diamonds or rubies. The old miser said to his sons: "Get money; get it honestly, if you can, but get money." This advice was not only atrociously wicked, but it was the very essence of stupidity. It was as much as to say, "If you find it difficult to obtain money honestly, you can easily get it dishonestly. Get it in that way." Poor fool, not to know that the most difficult thing in life is to make money dishonestly; not to know that our prisons are full of men who attempted to follow this advice; not to understand that no man can be dishonest without soon being found out, and that when his lack of principle is discovered, nearly every avenue to success is closed against him forever. The public very properly shuns all whose integrity is doubted. No matter how polite and pleasant and accommodating a man may be, none of us dare to deal with him if we suspect "false weights and measures." Strict honesty not only lies at the foundation of all the success in life financially, but in every other respect. Uncompromising integrity of character is invaluable. It secures to its possessor a peace and joy which cannot be attained without it � which no amount of money, or houses and lands can purchase."
And finally from Samuel Johnson in Rasselas (1759):
"Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful."
Integrity! Find it within. Follow it through everything you are and do. For without it you are incomplete and live without true meaning. One last thought on Integrity. A very wise person once said, "Once someone shows you who they are, believe them!" In other words, if someone shows you once in a business dealing or in general life that they do not have integrity�BELIEVE THEM! They will invariably continue on their path of deceit and dishonesty in their dealings with you until you no longer let them.
Rule 4. Know the Rules
Before I play "The Game" I want to know four things:
A. The Rules of the Market;
B. The Rules of "The Game" (based on my Niche);
C. The Rules to maximize ROIAT (Return on Investment after Tax) Maximization;
D. My Personal Rules.
Rule 5. Buy Wholesale As an investor I know that to make a profit I must buy wholesale (or sub-wholesale) and then resell at retail (or just below). This is what all great investors do in one form or another, whether they are buying shares that are undervalued or out of favor, vehicles at below red book value or real estate at wholesale prices.
When I invest I need at least one of two aspects of the deal to be wholesale: I need wholesale price or wholesale terms. Wholesale purchase price means the amount of cash in the deal will produce a retail sale price. Wholesale terms will produce higher cash flow to compensate for the higher than wholesale purchase price. Wholesale price and wholesale terms in the same deal is the Level Five Investor�s nirvana.
Rule 6. Profit at Purchase Make your money when you buy, not when you sell.
When making a decision on how much to offer for a property I make my decision solely based on the cash flow or calculated capital gains profit after expenses (not potential appreciation or negative cash flow (negative-gearing) tax benefits).
I NEVER include tax savings or appreciation for the simple reason that they are undetermined constantly changing, and not guaranteed.
Beware of salespeople cloaked as Real Estate Agents or Marketers, StockBrokers, Financial Planners, Investment Advisors, etc. All those fancy charts, brochures, and presentations are designed to fool you. Do not ever buy an investment based on "projected yields" or "future appreciation" or "potential tax savings." That is the "game" of the Level Three Investor.
Whenever these salespeople approach me with their investment schemes I tell them the following: I have an investment portfolio of several million dollars. I consistently make 50-100% annually on my investments. However, I am always looking to improve my return. At this point in the conversation the salesperson gets very enthusiastic as they begin to go into their sales pitch, telling me how they can make me all this money. I ask them to send me a copy of their audited financial statement.
I tell them that if they are doing better than me (on return, not necessarily net worth) then they have got my money (to invest). I also ask for a copy of their last statement showing how much money they have placed in this investment.
Guess what? In all the years not one investment salesperson has ever responded to my requests. The reason? They probably don�t really know what they are doing and they probably do not have any of their own money invested in the product they are offering (nor any other investment for that matter).
When it comes to investing I care about two things: The Money and the Numbers! The REAL numbers! What is my cash-on-cash return going to be this year? If I cannot make money now, I am not interested in the deal. Period. End of story!
Rule 7. No/Low Risk
Presently I only have at risk a small percentage (less than 1%) of MY net worth in any one investment. I do this because even though I have never lost money on a Real Estate investment, I continue to eliminate the possibility (fear) of being financially ruined by a couple of deals gone bad.
However, when I first became an Active Investor I often risked up to 10% of my net worth in a single transaction. The reason was two-fold: I had a relatively small net worth; and I wanted to maximize leverage to accelerate my wealth-building process. If I had taken a loss at that time I was confident that I would still move forward. That was my mindset. Those were My Rules. Bear that in mind. For many people a loss would have resulted in a full retreat from ever investing again.
Clarification: when I say that I only have less than 1% of my net worth at risk in any one investment I am not saying that I only have 1% invested in total. What I am saying is that I have used Level Five investment techniques (Principles and Rules) to limit my downside risk to just 1% of any given investment. I generally have at least 90-95% of my investment capital invested at any one time. Just not 90-95% of it at risk! I minimize my risk by following proper money management risk reduction strategies.
Rule 8. Other People's Money
One money management risk reduction strategy is to use OPM (Other People�s Money) to further reduce your risk. I have done this to the point where I have acquired over 150 properties using none of my own money. (Many of my students throughout the world have done the same types of transactions.) That�s Leverage with No Money Down! Using OPM is part of Rule #7 because it is as No/Low Risk as it gets. If I have no money in the deal, I have no money at risk.
In addition, leverage allows me to do far more transactions than I ever could on my own. I often do transactions with partners because I know it is always better to have a piece of the pie than none of the pie.
My partners are willing to take on the risks for the capital invested and thus my risk in minimal. My integrity is what my partners rely upon over time, not on the basis of any one deal (although they are of course backing my business acumen as well). My partners are willing to risk their capital for good returns and I stake my expertise and my reputation for the opportunity of leverage offered by their investment capital.
The relationship I have with my investors (money partners) has produced tremendous success over the years and we have NEVER lost money on a real estate investment. In fact, I cannot even conceive the possibility of losing money on real estate. My Buy Wholesale Investment Rule and my business systems are all designed to ensure that we do not ever lose money on a deal.
Rule 9. Money Back I structure my transactions so that if I have money in the deal I get all of it back in the quickest possible time.
Remember, one of the major objectives for money is to employ it so that it works for you. Once you retrieve your initial investment capital, your money begins working for you at a rate of return of infinity (which, by the way, is the best possible rate of return!)
I invest in such a way that my money partners and I get all of the principle back within 1-2 years which means that we make 50-100%+ rates of return on each investment (each property).
10. Don't Wanters I buy from people who really do not want their property.
This means that I generally buy my properties from highly motivated sellers (trustees of deceased estates or bankruptcies, liquidators, vacant properties, builder closeouts, mortgages in possession, sheriff sales, mortgage sales, trustee sales, foreclosures, etc.).
If someone does not want their property they are much more likely to be flexible on their price or terms to dispose of it. You are entering the market on Wholesale Price and/or Wholesale Terms which will allow you to easily determine your Profit at Purchase.
In any market, no matter how good, somewhere between 2-5% of sellers are highly motivated to sell. Though these deals take effort to find, my students from throughout the world find them just. Whether you are in the United States, Canada, Asia, Australia, New Zealand, South America, Europe, or Africa these opportunities are readily available to the Level Five Investor who knows how and where to look. And when presented with a written wholesale offer these sellers will often respond in a way that allows the Level Five Investor to lock-up a Profit at Purchase.
Rule 11. Cash Flow
Although I make a Quick Cash profit from the sale of a property and I often acquire properties intentionally to flip just for Quick Cash, I do prefer to generate as much of my profit as possible in the form of Cash Flow. That is my Game and what I love: Passive Income.
To achieve this, I acquire properties wholesale and then re-market them with Vendor Financing (owner financing) or a Lease Purchase Agreement (at retail).
I prefer the liberating power that comes from receiving a check at the beginning of each and every month whether or not I work directly for it.
For me, wealth is Cash Flow, not cash. My problem with cash is that it has a tendency to get spent. Cash Flow continues ad infinitum.
12. Lunch Pail Joe Although I do use several investment vehicles, my main specialty is Real Estate. And with regards to real estate I primarily invest in single family homes that meet my "Lunch Pail Joe" definition:
A. Priced 20% or more below the median (not average) price of the target area;
B. 3 bed/ 1�+ bath (1000-1500 sq.ft. /100-160 sq.m.);
C. Covered parking;
D. Fenced yard;
E. Livable condition;
F. Acceptable neighborhood;
G. No more than 60 minutes away from my home or office (unless you live in a very rural area).
H.
I have found that by investing in "regular houses" in "regular neighborhoods" where "regular people" live, I am in a position to profit whether the market is good or bad. The reason: someone always needs a place to live. And in regular neighborhoods you always have a market because people are continually moving up or moving down. For real estate investing purposes I greatly prefer "regular" houses.
13. No Emotions
When I invest my primary concern is the Return on Investment after Taxes (ROIAT). In an investment what matters most is the Bottomline: The Money and the Numbers.
I don�t care what color the carpet is or about the pretty garden. Just give me the numbers and I�ll show you the money!
The numbers are the most important aspect of investing. Emotions should never play a part in the investment decision. I always tell students who contact me for assistance, "Don�t tell me about the house. Tell me about the numbers." Be like the professionals. Don�t get emotionally involved. Get Rich instead.
This does not mean that you have no emotion attached to what you do. Make no mistake. If you don�t have an underlying love for Your Game you are likely to fail or at best under-achieve. If the deal stacks up you are allowed to "feel good" about the "money and the numbers." This is not really an emotional reaction. Your response should be purely analytical, based on the deal satisfying YOUR RULES.
Be prepared to make some mistakes or errors of judgment when investing. Learn from them and leave them behind. Do not attach emotions to these experiences. Take the lessons analytically. You love the Game, not any one deal or investment. Your future does not depend upon the success of any one deal or investment (at least not if you follow the Nine Generalized Principles of Investing). The numbers make the deal. Learn to love them too.
14. Ride the Winners, Cut the Losers
I have learned that most people "Cut their Winners and Ride their Losers." They often do this because of the recommendations of their "professional" advisors.
Stockbrokers for example are trained to tell you to "sell" when you make a small profit and to "hold" on to shares that have gone down. Why would you want to sell an investment that was going up, or continue to hold on to one that had dramatically fallen in value, when there were better opportunities elsewhere?
Brokers are trained give you this advice for two reasons. First they understand that psychologically most people have a HUGE need to be right. They know that if you have lots of "Wins," no matter how small, you will feel good about yourself. You can tell all your friends about how you made money in the markets with your great broker. They also know that most people cannot psychologically accept losses and that is why they tell you to hold onto your shares that have gone down. For most people, not actually selling means they don�t have to deal with the loss. They can pretend it is not really a loss because they fool themselves into thinking that the stock will come back some day (NOT ALL STOCKS (SHARES) COME BACK!). So, they just continue on their merry way constantly selling far too early their good shares and holding onto the bad stocks for eternity. They "Cut their Winners and Ride their Losers".
The second reason this advice is sometimes given is because the broker wants to continue to make commissions when you sell and then reinvest (over and over and over again). This is called "churning" and it generates a steady stream of commissions for the broker and the brokerage.
How often have you or someone you know sold an investment for a respectable profit only to see the investment continue to go through the roof? Do you know someone who sold Intel, Dell or even Commonwealth Bank five years ago?
Conversely, how often have you held on to an investment despite the fact that it was a "Dog" hoping that some day it would come back? How often has your dogged determination to be right cost you dearly?
Top investors "Ride the Winners and Cut the Losers." They do this primarily through strict money management and tight control over their own investment psychology. You should learn to do the same.
15. Invest Long Term
Most people look at far too short a time frame in regard to their investments. They spend much time chopping and changing, running around looking for the next "Get Rich Quick" scheme or hot investment. The reality is that there are very few surefire and rapid-fire roads to Riches. Rather, the majority of Get Rich investments take time to bring home large returns. Like the reality of the twenty-year overnight success in show business.
That is why when I invest, I primarily do so for the long-term. I am not interested in "spending" assets after short or mid-term gains. I am looking towards my longer-term goals of wealth-building and stewardship of my assets. Many of the best investments carry with them the power of compounding and Lag and are not designed to be readily capitalized upon over the short term.
So when you assess an investment, be clear on your goals, your Dividend Expectation Timeframe (DET) and do not ignore an investment simply because you believe its benefits are not instantaneous. Check the numbers and understand the power of money invested over time. You are building wealth and this takes time. I invest for the long term.
16. Open Mind to Adapt Rules
Always be prepared, based upon your Market Research, to adapt YOUR RULES to a changing market to your own best advantage. Many businesses fail dramatically due to dogged determination to stick to timeworn, but inflexible business practices or attitudes.
You must always keep an open mind in relation to the expectations and changes of your market. Nowhere has this requirement been more dramatically demonstrated in recent years than in the effects and market expectations for e-commerce on western world businesses.
17. Continuing Education
Keep current on your Market Research at all times and practice your skills of Lateral Thinking to keep up with or anticipate the changes. I am constantly attending seminars, reading and learning. Throughout the world I seek out the best teachers and information I can find. I then pay to attend their seminars as a student to learn what they have to teach.
People ask me how often I attend other people�s seminars and why? Well, in 1999 I attended 12 seminars as a student (and sometimes as a guest speaker). I paid many thousands of dollars for the seminars) and the additional books, tapes and manuals I bought at them). Why? Because you can never know enough and you can always learn more. Even if the seminar or material proves to be disappointing, I can always learn at least one new thing. Often there is considerable value in learning what is not important, valuable or legitimate, and thereby reinforcing what you already know.
I strive to continually learn more to improve myself, my relationships, my psychology, my business and my investing. By attending seminars, listening to tapes, watching videos and reading, I accomplish this. Education is an ongoing process and I strongly encourage you to continue your learning beyond your completion of the Money Secrets program.
If you aspire to become a Level Five Active Investor I recommend that you take a long hard look at how your Principles and Rules compare with those of top Level Five and Level Six Investors.
Reinforce those things you are doing right and learn from those things that you need to change. Make sure that you continually review The Nine Generalized Principles and your own Rules to make sure that you are staying on top of your Market.
I know that if you apply the Nine Generalized Principles and follow YOUR RULES that you will WIN "The LOVE Game."
*******************
Adapted from and taken from www.dealmakerscafe.com
[This message has been edited by dorian_gray-from.usa (edited 03-29-2001).]
[This message has been edited by dorian_gray-from.usa (edited 03-29-2001).]
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