Why Become An Investor?

I didn’t want to go. I had to wake up at 6am to drag myself out of bed and into the pool to continue my training to try and obtain a spot on the 2004 Canadian Olympic Team. But my girlfriend persisted. “Come on. It will be fun!” She was referring to a weekend Leadership course being held and as I was in the middle of my Masters degree in Computer Science, I was more focused on technical knowledge than people skills. Still, the prospect of spending time with my girlfriend whom I got to see very rarely due to my insane schedule, and my nature desire to procrastinate from a then fledgling thesis topic, I made the choice to attend.

The speaker was Leon Fontaine, a french Canadian minister that I am sure coined the phrase, “Verbal Diarreria” as once he got speaking, you had to be completely focused on him to catch everything he was saying. Despite this, about 3/4 of the way through the seminar, he said something that completely changed the direction of my life. He said, “If there is an area in your life you are struggling in, it is because you lack knowledge in that area.” I’m not sure why that stuck with me, but it did. I started asking myself, “Which areas in my life am I not happy with?” Naturally, the first thing that came to my mind was “Finances”.

Finances. At that time, I had a negative net worth. An average graduate student and full time amateur swimmer does not bring in a lot of money. I had paid off the student loans from my undergraduate degree from a lucrative software engineer job in the Silicon Valley in 2000, just before the bubble popped. But now I was back in school getting back into debt and I really didn’t know anything about getting wealthy other than getting a good job, saving money and investing in mutual funds.

“Are there books on getting rich?” I asked myself. I didn’t have money to buy any books so I fired up my Shareaza P2P sharing application and did a search for “rich”. Hundreds of results came back, but one stuck out to me; an audio book called “Rich Dad Poor Dad” by Robert Kiyosaki (http://www.richdad.com/). I downloaded it (Illegally… but have since purchased thousands of dollars of books, audiobooks, and seminars from Robert) and started listening to it on my Ipod as I walked to and from the swimming pool. That was the start of my financial education journey.

Over the next year, I devoured hundreds of books and audio books and I saw a distinct difference in what was being taught by the rich and what I was taught from my parents, teachers, friends. This made me ask probably the most important question of all… “Who do I listen to?” The answer is simple. You listen to the person who has the results that you are looking for. You don’t hire an overweight person to teach you how to lose weight. The same with financial advice; I only listen to those who have the results that I myself am looking for.

After coming to this realization, I started asking questions about other beliefs i had about money. Here are a few examples:

Old Belief: You get rich by going to school, getting a good grades, and getting a good job.

What I Found: Education is one of the most important, essential elements for a person. But it was clear to me that students from schools were less trained about money than monkeys, who at least have been trained to throw darts at stocks to pick which ones to buy. For people with jobs, less than 1% of them were really, actually rich. How do I define rich? To me I define rich as being able to quit your job and be able to live the the lifestyle you desire because you have enough money coming in to support it. I define this money coming in without you having to work for it as passive income.

What about all those doctors and lawyers? They look “rich” but you only tell if someone is truly rich by looking at their financial statements, and the majority of professionals in North America are only rich in liabilities. Only CEOs and high level executives at large corporations actually met the criteria of “rich”, mostly because they were well networked and could find a capable person of managing their money for them, or they knew enough about businesses and how they worked that they can invest intelligently.

It is also quite clear that job security is now a thing of the past. We are moving from a job based society, to a free-agent nation. The internet has created a “flat world” and now millions of hungry workers in India and China are willing to work for a fraction of what an average North American worker would take. Technology also threatens obsolescence of any job that can be automated. Even if you are in one of the few industries that isn’t threatened by technology or outsourcing, you still will have to deal with millions of workers who are affected and will look to flood into these remaining industries.

Old Belief: You get rich by investing in a well diversified portfolio of mutual funds.

What I Found: Have you ever heard of someone who got rich off of mutual funds? I’ve heard a lot about people complain about losses from their mutual funds, but I have yet to hear someone say, “I’m SO thankful for my mutual funds! I can now retire thanks to this mutual fund!” Warren Buffet, one of the world’s greatest investors thinks that diversifying is for people who don’t know what they are doing and that you are best off putting a few eggs in your basket and then watching that basket VERY closely ( http://finance.yahoo.com/expert/article/richricher/1649 ). If diversifying is for people who don’t know what they doing, why do the bank only sell mutual funds? Because they don’t know what they are doing!!! This may be giving you a brain anurism right now, especially with all the advertising the banks do. Believe me, I felt the same way. But as you begin to learn about investing and how you can get amazing returns with little risk with a little financial education, you start to see that the “investment” professionals at a bank are not professionals at all, but sales people. If you don’t believe me, the next time you go into the bank for investment advice, ask the banker if they make the majority of their money from their investments, or their job. If they say their job or tell you that’s none of your business, you know they don’t know what they are doing.

Let’s say that your mutual fund keeps up with S&P 500 index (Which 80% of mutual fund DO NOT). Take a look at these numbers:

S&P 500 (SPX)
Oct 7, 1996 700.66
Mar 2, 2009 683.38

If you invested on Oct 7, 1996, 12 1/2 years later you would have LOST money! And this doesn’t take into consideration inflation. Your money would have done absolutely nothing over that period of time. Does this mean to not invest in the stock market? No… people make lots of money in the stock market. But the experts, like Warren Buffett for example, don’t diversify. Other experts like George Soros, trade the stock market and don’t invest for the long term. And other use derivative to bring in income and to protect themselves.

Old Belief: There’s nothing safer than money in bank or in bonds like T-Bills.

What I Found: I just read the story of a man who had well over $1 million dollars in a bank account of a bank that recently had to file for bankruptcy due to the credit crisis. He had the exceptionally good luck to find out that his money was insured… up to $100,000. Huh? What about the other $900,000!?!? Gone! Poof! Like a reverse lottery win, your net worth is now 1/10 today of what it was yesterday!

What about T-Bills? The US government could never default on those. That’s true, the US government would likely never default on their debt. But what about inflation? Have you ever noticed that the interest paid on T-Bills is always lower than the inflation rate? So if you get more money back, but that money buys less than it did before, how exactly are you richer?!?! The answer is… you are not. You are poorer.

Old Belief: If you work hard at a company or for the government, you’ll get a good pension to retire on.

What I Found: While the government doesn’t talk about it’s Social Security liabilities much, others have been keeping track and the numbers are very disturbing. A report from Eric Sprott, founder of Sprott Asset Management ( http://www.sprott.com/ ) calculated the unfunded Social Security trust fund liability at $17,500,000,000,000. No, that’s not a typo. 17.5 TRILLION dollars!!! And that is just it’s Social Security oblingations. When you add Medicare oblingations and outstanding US debt, the total is a staggering $118,612,870,150,873. To put this in perspective, US revenue for an entire year is just over 2 trillion dollars. The US would have to spend it’s entire budget on JUST debt repayment for the next 60 years to pay off it’s debt. To me, I’m not putting my faith in the government’s financial skills. Governments are very good at spending money, but that is about it. And if you do get a pension, it is unlikely to be enough to live on. According to a USA Today article, the average pension for a government employee with 20 years of service is $20,000/year. While it may be possible to live on $20k/yr, it certainly is not going to be that much fun.

What does this all mean to you? I believe that this is perfect example of why you must take responsibility for your money and your financial future by becoming a “professional investor”. By “professional investor”, I don’t mean quitting your job tomorrow to trade the stock market or flip real estate or anything like that. What I mean by professional investor is:
Start getting educated in how investing works
Pick an investment vehicle that interests you and is in line with your strengths to maximize the efficiency of your results
Create a plan to become financially free
Start getting experience investing with small amounts
Work your plan, making adjustments as necessary
Get to the point where the monthly income from your investments is greater than your monthly income from your job
Yet this is not the path most people are taking. In fact it was found that for 50% of Americans, their hope for retirement lies in winning the lottery! And since the lottery is just a tax on people who are bad at math, it is not going to end well for the majority of these people. Becoming a professional investor is a process that takes time and effort, much like getting a university degree. And while it is possible to get out of the rat race in as little as 1 year, it can take significantly more time as well. I will get into techniques on how to cut down the time it takes to as close to that 1 year mark as possible in later posts. But for now, if you understand why it is so important to start down the path of becoming a professional investor, then I’ve done my job.

Life your life… Choose freedom

Shane Brewer

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One response to “Why Become An Investor?

  1. Wow! Great artilce. I loved when you said:

    “They look “rich” but you only tell if someone is truly rich by looking at their financial statements, and the majority of professionals in North America are only rich in liabilities.”

    Rich Dad Poor Dad was the first time I understood a definition of asset and liability that was easy to understand and that made sense.

    I laughed out loud when I read “And since the lottery is just a tax on people who are bad at math, it is not going to end well for the majority of these people.” You are a good writer. Looking forward to your next post.

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