Every so often we like to present a refresher course, a sort of back-to-basics recap of how to become a successful investor. Obviously, we”re not trying to diminish, in any way, THE first 10 commandments, but when it comes to investing, here are ten principles you should pay attention to.
1. Thou shalt become educated
Knowledge might be the most powerful tool on the planet. It’s not all about diplomas, certificates, and college degrees. This education is the one you undertake for yourself in order to become your own best advisor. Don’t rely on anyone else. Don’t put the responsibility on anyone else. Don’t even rely on us. Do your own due diligence so there are no surprises along the way.
2. Thou shalt have a professional Investment Counselor.
This does not mean you throw everything at your professional investment counselor and say “Going to the golf course. Have fun! (see commandment number one). What it does mean is you need a partner you trust to help coordinate your entire investment plan. Only invest with professionals who stay with you for the long-term. Your advisor should buy for themselves what they sell, putting their money where their mouth is, and getting paid for producing results rather than moving air with their gums.
Let’s say you walk into a company like Merrill-Lynch and sit down across the table from a 28 year-old guy, who’s wearing a nice suit, graduated from a great school – he’s got all the credentials. Problem is, he isn’t doing what he’s telling you to do. How can you feel confident in a source like that?
Which brings up what we feel is one of the shining positives about Platinum Properties Investor Network. An early quality control measure we put into place with our investment counselors and area managers was they must buy their own product.
Years ago, when Jason first launched this new division of the company, he immediately noticed a problem. People would constantly come up to him and say, “Hey, Jason, I wanna open this area. I think it’s a good market.” Obviously, he couldn’t just hand out positions on a whim and, to keep the product high and abide by his own commandment, put into place the policy that Platinum Property advisors had to own what they sold. If it’s a good enough deal to recommend to a client, then it’s a good enough deal for them to be in themselves.
3. Thou shalt maintain control.
Never leave your financial future in the hands of incompetent, unethical or greedy brokerage houses, fund managers or corporations. Always be a direct investor. In this case, it’s good to be a control freak. You don’t want to be in someone else’s deal. You do want to control your own investments. Stay away from LLC’s, partnerships, tenant-in-common deals, real estate investment trusts and especially Wall Street stocks and bonds. With any of these you relinquish control to someone else.
What’s the big problem with giving up control? Actually, there are three major problems. Lets take a look at them.
Problem #1 is you might be investing with a crook. Do names like Enron, World Comm, or Global Crossing ring a bell? They should. Real people got hurt real bad through the outright criminal behavior or these companies. The damage wasn’t limited only to jobs going down the drain. Retirement plans were ruined, laid to waste in one fell swoop. Nest eggs accumulated over a lifetime of hard work vanished.
Problem #2 is you might be investing with someone who has the best of intentions but is incompetent. Maybe this professional is honest and is the nicest guy or gal in the world but simply does not have a clue about his job.
Problem #3 is you might be paying a hefty fee right off the top in return for handling your investments or managing a deal. This is a great reason to be a direct investor. Manage the deal yourself and all the profits fall nicely into your lap.
Let’s explore problem #3 in a bit more depth. You’ve heard of Lou Dobbs? The money guy on CNN? Well, Mr. Dobbs has written a book called War on the Middle Class. In chapter two he talks about the corporate world and what the managers of corporations are doing with your money. When you invest in someone else’s stock, here’s how they’re spending it. Mostly on themselves.
Dobbs says that median CEO compensation went from $1.8 million in 1992 to $6.1 million in 2000. CEO pay increased 340% in those eight years while compensation for rank and file employees increased a mere 36%.
In the past few years, we’ve seen levels of pay for individual CEOs that is beyond most people’s ability to comprehend, numbers that look like they belong on a company’s revenue column, rather than on a paycheck. Don’t be the schlub that funds their greedy lifestyle. We’ll say it again, keep your profits!
Here are a few recent examples:
Geez. Who do they think they are, professional athletes?
Dobbs goes on to say, “The standard rationalization for these astronomical salaries by CEOs, their boards of directors, and their consultants is that these CEOs are worth it because the companies they run benefit from their leadership and they bring great value to their shareholders. How then do they explain the fact that over the past five years, the CEOs of AT&T, BellSouth, Hewlett Packard, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon, and Wal-Mart were paid an aggregate of $865 million in compensation, almost a billion dollars, while their shareholders lost a total of $640 billion? Clearly, these CEOs were not being paid for benefiting their shareholders.”
A final example to ponder is Larry Ellison, founder and CEO of Oracle. For the two year period from 2000 to 2002, his personal take from the company was $781 million but shareholders return was negative 61% over the same time span. We’ve said it before and we’ll say it again. Maintain direct control of your own investments.
4. Thou shalt use prudent financial planning techniques.
Always invest with your goals in mind (retirement, financial freedom, creating wealth) and abide by your risk tolerance and investing style. As much as we dislike what most of Wall Street is about, they can teach us some very good stuff in this area. They recognize that everyone who walks in the front door has a different risk tolerance, different goals, and different time horizons. Some are conservative. Some are aggressive. Some want cash flow, some want capital appreciation, and some are most concerned with tax benefits.
Doesn’t matter if any or all of the above apply to you. Just remember to use the prudent financial planning techniques taught by Platinum Properties in all your investments.
5. Thou shalt not gamble.
Be a prudent long-term value investor, never a get-rich-quick gambler, speculator or flipper, by investing only in properties that make good financial sense the day you buy them. At Platinum Properties we don’t gamble. We don’t speculate. We don’t flip properties. While CEO Jason Hartman has, at times over the course of his more than two decades in real estate, done almost every technique there is, one thing he noticed always holds true: the people who flip properties have spending money. The people who buy and hold properties have real wealth.
We’d rather have real wealth than a little bit of pocket spending money and hope you would too. Part of having real wealth is that the property must make sense the day you close the deal. Nothing extraordinary should have to happen for you to make a nice return on your money. What do we consider a nice return? 40% annually. Don’t try that in a mutual fund.
6. Thou shalt diversify.
You’ll hear it from most prudent financial advisors – diversify, diversify, diversify, chanted like a mantra. Not a bad mantra, to be sure. Diversity in investments leads to reduced risk and maximized returns, which equals steadily growing wealth. That’s a good thing, right?
The problem is the average financial advisor is telling you to diversify amongst a set of fairly lame assets like stocks, bonds, and mutual funds. Those assets are not proven, they really don’t work, and, furthermore, have not created wealth for tens of millions of people like real estate has.
We’ve been doing our seminars for a long time and always ask this question, “Who knows someone who’s gotten rich in real estate starting with very little capital?” Reliably, almost every hand in the room goes up. When we ask the same question about the stock market, rarely does a hand go up. If it does, it was a day trader who hit it lucky or someone playing options who hit it REALLY lucky.
Sure, the old saying goes you’d rather be lucky than good. Well, yeah, we would too but we’re investors, not gamblers and certainly not going to gamble on Mr. Luck for our financial future. Stay conservative when it comes to investing. The returns come back to you many fold.
Jason Hartman on diversity:
“Diversify into many, many markets. Back in 1989, I owned several rental properties here in Orange County and I was a busy, successful realtor in Orange County, running around listing and selling properties for people, and we went into this seven-year downturn in the real estate market here when Reagan ended the Cold War. Thank you for that. There was a hangover from it when all of the defense contractors got laid off. We all remember that mostly, right? I decided this time I was not going to go through that downturn again. The best way to do that is to not have all my eggs in one basket. So don’t have all your eggs in one Becoming accredited demonstrates that your drivers ed to go meets the very highest standards of quality and safety. basket. Take the best asset class, the one that is most proven, real estate, and diversify in amongst several markets and areas.”
Former Speaker of the House Tip O’Neil was famous for saying all politics is local. Well, all real estate is local too. The news media, whether it be CNBC, a magazine or a newspaper, all the gurus and experts love to try to paint real estate with a broad national brush. Sorry, you just can’t do that. Actually, you can do that but it is a completely inaccurate portrayal. Real estate is a local investment. Tens of thousands of different localities make up the real estate market. Investment diversity does not mean taking a wild swing at a handful of stocks. It does mean locating and purchasing income producing investment properties in various geographic areas around the country.
Yes, there is a real estate bubble but it’s not over the entire country. Areas like California, Arizona, Nevada, Oregon, Hawaii, New York, Massachusetts, Washington DC, and Florida are mostly over valued. We don’t recommend these markets right now because we are solidly Area Agnostic. However, that still leaves a lot of country out there for us to analyze and pick the ripe investment fruit. We go where the properties make sense.
7. Thou shalt be Area Agnostic™.
To avoid a conflict of interest, only invest with an adviser who is not partial to any one area or investment. Consider a variety of opportunities. Currently, Platinum Properties has agreements with developers and real estate brokers in 37 markets, but we only recommend about a dozen of those markets right now because we see property investing as a dynamic and fluid endeavor. When a market makes sense, we go there. When it doesn’t make sense, we go somewhere else.
From an investor’s standpoint, it’s illogical to fall in love with one area or another unless it makes good financial sense, so don’t do it. Don’t have a pre-conceived notion about a certain market just because you happen to like the weather or whatever else it might seem to have going for it. Take the emotion out of it and make a good business decision. That’s what we mean by being area agnostic.
8. Thou shalt borrow to maximize leverage and accelerate wealth creation.
Use as much borrowed money and as little of your own money as possible. Borrowed money can be repaid by the tenant. Let other people’s money work for you, reduce your risk and get wealthy. In a later chapter, we’re going to challenge some peoples’ long held beliefs about debt. Keep an open mind and it won’t be painful.
There are certain kinds of debt that will make you incredibly wealthy. Another word for debt is leverage and that, when used properly, is a powerful tool. It can be used to destroy or create. Either way, it can perhaps be compared to a nuclear weapon. Some people say these devices will be the end of us all. Perhaps. From a different perspective, the deterrence it provides might be what ultimately saves us.
So it is with debt. Use it carelessly and it will destroy your financial life. Use it in a prudent, careful manner and watch your wealth creation accelerate faster than you ever dreamed.
9. Thou shalt only invest where there is universal need.
No one needs stocks, bonds or gold but EVERYONE needs a place to live and with growing affluence around the world, consumption of raw materials will continue to cause upward price pressure on improved real estate.
At every seminar we do it never fails that someone comes up during the break and asks, “Well, what do you think about commercial real estate?” We say it’s okay but only okay and not nearly as good as residential real estate. The reason is simple and has to do with outsourcing, a term you’re probably familiar with these days.
It works like this: You need tech support and end up talking to Mike in Bangalore at 3:00 AM his time. It’s easy to outsource work like this to cheap labor call centers in India; it’s just as easy to outsource manufacturing to China, and retail to the Internet. This leaves us with less demand for industrial properties, office space, and shopping centers. But the one thing we know for sure is that each and every human being wants a place to live and a pillow upon which to rest their head at the end of a long day. That’s universal need and that’s why we like housing the best.
10. Thou shalt invest only in tax-favored assets.
Real estate is the most tax-favored asset in America. Don’t get bored. People tend to do that when the subject of taxes comes up. Taxes should be exciting to you. Tax structures favored by real estate investors (like the 1031 exchange) will accelerate your wealth building to an extent you may not completely realize yet. Don’t worry. We’ll get into more detail about that subject later.
Take care of these ten things in your investing life and the chance of success goes way, WAY up.
The Solomon Success Team
(Flickr / @jbtaylor)