Episode 14: Building Wealth

Everywhere you turn today, you hear people lamenting the income gap between the top 10% of earners and the bottom 50%, or below.

Those people are half right.  There is a big difference between those who earn the most and those who just barely get by. But, as we will discuss in detail later, it is not a gap but a pyramid, something else much easier to manage. The reality is that anyone who learns the skills they need and develops the mindset of the wealthy and not the poor can create wealth and never have to work again.

But first, let’s look at what will not work:  a better job or a raise will not get you there.  Think about it.

In the US, to join the top 10%, you need an income of about $250,000/year. That is the equivalent of a salary of $125/hour.  The average family income for those who work for a salary is about 10% of that.

There just aren’t that many jobs like that.

And, any job you have can be gone tomorrow.

So what will work?

There is a sign in Malibu, where I live, that says, “One good investment is worth a lifetime of toil”.  That is absolutely true.  

To create real financial security, what you need is to create Wealth

A job is not Wealth. A job is just income that can be gone tomorrow.

Wealth means that you have created investment assets that will work for you 24 hours a day.  Wealth will provide for your retirement, help launch a career for your children, or fund a charity you love. If you build Wealth, having “a better job” will never matter to you again.

But how do you start if you don’t already have money?

To create Wealth, you need assets to invest.

But, cash is not the only asset.  Skills are also an asset

So forget about just getting a better job.  A job--even a very good one—can be gone tomorrow. Instead, look at any job as an opportunity to learn skills and turn them into assets.  A job is a tool—nothing more. It is a tool to help build Wealth and Financial Freedom.

There are two basic ways to convert skills to assets

Seek Ownership Opportunities.  Whenever possible, find jobs where some equity in the business is part of the pay package.  Most of the new billionaires that you read about did not start the company that made them rich; they joined it when it was young and took part of their pay in equity.  Steve Ballmer, who is a billionaire and just bought a basketball team in Los Angeles, started out by going to work for a little start-up company called Microsoft.  In the beginning, there were some risks, but he undoubtedly knew that he had the skills to try again if the first company failed.  

Use OPM. That is just an abbreviation for “Other People’s Money”, and it is what you can attract if you develop skills that other people either do not have or do not have the time to use.  I have a friend who just a few years ago suffered the complete collapse of the business he was in through no fault of his own.  In less that 5 years he has built a new business in a field he was never in before that provides him a nice house, college tuition for his children and expensive vacations for his family. The secret was two things: he had developed skills that could be used anywhere (which we have talked about, and he knew he would need money for his new business and used the skills of language and persuasion that we have also talked about to convince other people with lesser or different skills, but who had money, to invest with him.  He has made himself rich and his investors richer.

I built my wealth the same way and anyone with marketable skills can do it—so develop those skills!

Episode 15: Wealth Building Tools - Corporations

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We hear a lot of talk these days about “corporate greed” and many people, particularly young people, believe that their chances of success are being “oppressed” by the power and greed of big corporations.

Let me let you in on an important secret: there is no such thing as “corporate greed.”  To understand why that is true requires that we realize that corporations are nothing more or less than tools and the greed or altruism associated with them is no more or less than that of their owners.

Thinking of corporations as some kind of enemy and failing to understand how they really work is a recipe for the failure of dreams.  Think a bit about these things:

1. A corporation is a tool that enables someone with a dream to pursue it without fear that one mistake could destroy everything they have built or created for themselves or those they love.  Suppose you made toys that children loved and were selling like crazy and both children and parents loved them.  Then one day, through no fault of your own, a child injures itself with one of your toys and you are sued for millions.  If the business were a corporation, that could still be very bad, but losing that suit would not mean you lose your home or your car or your savings.  Only the business would be at risk.  A loss would be traumatic, but you could begin again.  That is what corporations do.  They separate the owners’ personal assets from the risks of running a business.

2. That separation is what makes it possible for an entrepreneur to find the capital needed to start a new business.  No one would have invested in Tesla Motors if they ran the risk that one defective automobile could wipe out their life savings.  The same would be true of Uber, or Google or any other successful company.  A corporation is what makes it possible for almost all the new innovations, from iPhones to electric cars, to happen.  Without that thing called a “corporation”, no one would risk their money and nothing would ever get done.

3. But can corporations be used for evil?  Yes, of course, and in time they will almost always be found out and go out of business.  But that will not destroy the lives of the people who innocently believed they were investing in something good.  The founders and managers of the corporation may have great difficulty ever getting money for their next venture, and in some cases might go to jail, and the people who invested will lose their investment---but not their most cherished personal assets.  That is the magic of a corporation, and its power to do good as well.  

4. A corporation is a tool, an incredibly useful one without which your chance and mine of success would be much less.  I use a separate corporation for each business I create or invest in and that enables me to enlist others to invest their money with me because we both know that failure will not destroy us and we can recover to build a new great business.

Episode 16: Zero Sum Games

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Welcome back. We need now to talk a bit about one of the most important concepts you can ever learn about building wealth and financial freedom. It is actually quite simple and can be summed up in one phrase: “Success is not a zero sum game.”

What does that mean? Think about any sports contest. Whether it is baseball, football, or any other competition, there is only one winner. Second place is only the first loser. But financial success is not like that. Think about Apple Computer, the most valuable company in the world as I am writing this. One of the reasons that Apple is so successful is that it has created platforms for apps on which independent developers can produce and distribute apps that
can make their creators very wealthy very fast.

But consider this: everytime one of those app developers creates a successful app, Apple computer gets richer. But this is an important distinction. Apple does not get rich by making the app producer poorer. It gets rich by making the app producer richer. This is the exact opposite of a zero sum game. It is a game in which success by one party increases the success and wealth of the other. That is how business in a free society works at its best.

Are there exceptions? Sure, in some rare cases there is competition in which there is only a winner and a loser. I own interest in a company that frequently bids on US and foreign contracts. These can result in revenues of 10’s of millions of dollars. In those bids, there is only one winner. But notice something even here. In order to increase our chances of success, we often form partnerships with companies who have skills our people lack. That increases our chances of winning the contract. But it also means we have to share the income from the contract if we win.

Is that bad? No, quite the opposite. By sharing the wealth and the skills of two companies, we increase our chances of winning more contracts. Thus, even where there is a clear winner and loser, the players who share skills and profits are more likely to be successful than those who do not.

Let me give you another personal example. Many years ago I was part of a team that was helping and owner decide which of several bidders was going to acquire some real estate worth hundreds of millions of dollars. One investor was the clear favorite, but he made a crucial mistake. He tried to drive such a hard bargain that no one else could benefit. My clients heard his pitch and walked away from the negotiations. In business you often hear the saying, “you have to leave something on the table for the other guy”. This bidder did not understand that. He wanted it all. What he got was nothing and another bidder, who offered some attractive benefits to the seller, my client, won the contract. He gave up something in the beginning but ended up one of the richest men in the world as a result. He understood that Life (and business) is not a zero sum game.

If you can apply that principal in life and business, always looking for ways to make those around you wealthier as well and looking for ways to make the result of your efforts greater by cooperating instead of wanting everything for yourself, you have taken a giant first step toward success.

Success in business is not a Zero Sum Game. If you try to make it one, you are almost guaranteed to lose. Help others succeed and you will help yourself.