At any rate, I found The New Elite last year but hadn’t had a chance to read it until now. It’s an easy read that can be done in a weekend or so, but it explores with some really interesting topics. The authors are consultants from the marketing and branding industries who decided to mount a comprehensive effort to study the truly wealthy. They conducted several studies and used two different definitions of wealthy for the book: $5 million in liquid assets (not including primary residence, collections, or any nonliquid business ownership interests), and/or $500k in disposable income. These criteria put these households in the top 0.5% of those in the US, and there are 750,000 such households.

These were my favorite observations from the book:

Start your own company

If you want to build wealth in America, you pretty much have to start a company. Start it on the side in your living room or garage, but start something. The vast majority of the wealthy families covered in this book made their money initially through entrepreneurship.

Money attracts more money

The amount of time that a person has been wealthy is a strong predictor of how wealthy they are. The authors split the respondents into three groups: apprentices (wealthy for 5 years or less), journeymen (wealthy for 6 – 14 years), and masters (wealthy for 15 years or more). The three groups exhibit different psychological and behavioral patterns, which is to be expected, but what’s interesting to me is that you can see the effects of the “gravitational pull” of money. The apprentices had an average net worth of less than $10 million, while the masters average net worth was more than $75 million. Income also more than tripled from apprentices to masters, going from $1 million annually to $3.3 million annually. The implications are clear: the hardest part of getting super-rich is cracking into the bottom tier of the wealthy and then waiting.

Difficulty of studying the wealthy

Probably the most interesting thing in the book was something I had never stopped to think about: it’s really hard to study the wealthy. The rich and famous we see on TV aren’t representative of the wealthy households of this country. The vast majority of wealthy households fly under the radar, are private, and aren’t motivated by the small stipends that market research companies give out for filling out surveys and participating in studies. The authors detail how they went about overcoming this hurdle, but they pointed out that because of the difficulty of reaching the wealthy, very few studies cover households with income in excess of $250k / yr, which is considered affluent, but not wealthy. Coupled with the images the media shows of celebrities misbehaving, we end up with a very skewed perception of the wealthy and how they live. This inability to properly survey the wealthy has other consequences as well. For example, researchers have conducted numerous studies that show that once your basic needs are met, having more money does not make you happier. However, the majority of these studies had essentially no participants above $250k / yr. The authors of the book asked their wealthy participants this question and more than 95% responded that they were very happy in life, a statistically-significant amount above the national average. Now, the issue of cause or effect can wait for another day, but it’s interesting to think about other areas in which our inability to even connect with this demographic limits our understanding of wealth.

If you enjoy reading about wealth or you work in an industry that caters to the wealthy, I recommend this book.

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“I have failed in certain working relationships. I have failed to live up to an intellectual standard I once set for myself. Thus far, I feel as if I have failed to achieve the level of spiritual maturity I believe right for a man of my age. But I will not permit these failures to stop me from a continuing reach to grow and overcome the limitations my failures have disclosed.“

- Gordon McDonald
A Mid-Course Correction

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3. Dream with your hands

A friend recently asked me if I was concerned about diminishing quality since I’m forcing myself to post so frequently. The thought has definitely crossed my mind, but I believe that forcing myself to write something every day for public consumption will improve my writing. I’ve only been blogging daily for the last month or so, and I can already see the difference in how I think about things or approach questions that I want to explore. Hopefully I’ll continue to improve my ability to translate this into a form that readers can understand and benefit from.

That said, this same friend also suggested an alternative strategy of spending a certain amount of time every day working on a post, but only publishing once a week. The advantage of such an approach would be that it retains the daily discipline of writing, but I would have the opportunity to go deeper and explore topics more thoroughly than I’m able to most days. I may try this approach next month.

While I’m on this topic, let me also encourage you to comment or contact me and let me know what posts you enjoy, which could be improved, and what you’d like to hear more about.

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The situation gets really ugly when you consider that you could invest all that money saved. We still need cell phones, but we’d just get prepaid phones and use Skype for calls in the office, which could easily cut our monthly bill from $150 / month down to $50 / month. If we invested that $700 we saved by not buying the phones, and then saved an extra $100 / month at an inflation-adjusted return of 8% over the next 40 years, we’d end up with $366,000 (even after you adjust for inflation). I’m not sure there’s any Tetris clone or Wikipedia entry that’s worth that much to me. This is especially true when I consider that I too often use the phone as a means to escape my current reality, which is detrimental to my desire to be more present, purposeful, and engaged.

Now, you can break just about anything down like this. Enjoying that cup of coffee? Well just think of how much you could have if you never drank coffee again and invested the money instead!! Some financial authors advocate just this, though I think the more salient point is that you should think carefully about what’s really important to you, and look at the true cost of ownership before you flush hundreds of thousands down the toilet without even realizing it.

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1. Magento is much better than most of the alternatives.

The popular PHP open-source competitors are OSCommerce, ZenCart, QuickCart, and X-Cart. There are others, but these are the ones I see most often. I haven’t used QuickCart and X-Cart much, but I’ve worked on multiple sites with the first two, and they’re all universally terrible. It’s hard for me to imagine a piece of software more poorly designed than OSCommerce is. There are no “modules”: plugins are “installed” by following directions in a text file to hack the application core. Stuff like: “open cart.php, find line 37, which should look something like this, and paste this in after it.” This means that after you install a few plugins, you can never upgrade the core, and you’ll have more and more issues installing future plugins, because the core code won’t look like those text instructions expect it to. Truly awful. If you designed OSCommerce, you should be ashamed of yourself.

By contrast, Magento is pretty clean, follows a standard, uses object-oriented design patterns, and is completely modular.

2. Magento still is pretty terrible.

The main issue I have with Magento is the documentation. Specifically, that there isn’t any. It’s an incredibly powerful ecommerce platform, built around an extensible architecture that developers can extend, and the docs would all fit on a few sheets of paper. It’s very, very frustrating, and even more so because the business model of the company who produced Magento apparently is to sell subscriptions to the “Enterprise Edition” at $12,000 a year, so they have little incentive to create good docs to help developers avoid the need for their expensive services.

3. If you can, use Shopify.

Ecommerce is a fairly complicated area and the software generally reflects that. So if you can avoid reinventing the wheel, you should. You can do this via using open source platforms like Magento, but you’ll still spend a pretty penny on design and development talent. Another way to go if you need something a little less flexible are hosted ecommerce offerings like Yahoo Stores or Shopify. From what I’ve seen of Shopify, they offer an incredible value for people just getting started in ecommerce (and even some pretty big stores) for a very reasonable price. And you still have the option of customizing things to a great degree. However, there will be those times when you just need more control than hosted solutions offer. And when those times come, I can honestly say that Magento is a great solution. Just be prepared to pull your hair out for a few weeks (or months) while you learn your way around.

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Regardless of how it started, it seems the natural progression of such a system of power where some corruption takes hold is that honest folks don’t want anything to do with it. So the people it ends up attracting are the ones who are attracted to the power and the corruption, which only makes the problem worse. Incidentally, I think a lot of the same things are true about any position of power. The police are a stellar example. As a police department deals with criminals all day long, they gradually start to adopt a subconscious belief that all citizens are criminals on some level, and an “us-vs-them” mentality begins to set in. They overstep their bounds, they violate people’s rights, and then they try to cover it up. The worse things get, the more they attract the kinds of people who want that sort of authoritarian power for the wrong reasons, and things just continue to spiral down. And just like with Congress, you can have checks and balances, but corruption is a difficult thing to have a systemic check against, because by definition it’s a usurping of the system.

So there’s the question of how you deal with this on a societal level, but also just the personal level. Power is not inherently bad, and what do you do if you’re an honest citizen with good intentions who wants to represent your fellow Americans as a Congressperson? You’re desperately needed, but how will you actually accomplish anything when you get there? The entire system forces you to choose to either compromise and play the game, or get nothing done. How does an honest individual avoid this conundrum?

The only real answer I have for the politics question is to cultivate influence outside of the realm of politics that can still be expended within the political sphere. Money is the best example of this, though fame might work equally well. Mayor Bloomberg seems an excellent example of this; with a personal net worth of > $10 billion, he has the money to avoid fundraising and ass-kissing (for money) completely. Is this the ideal scenario? Not in the slightest; it’s disconcerting to think that maybe we live in a world where you have to be either rich, unethical, or ineffectual (though you can certainly be all three). But maybe that’s the world we live in, and if it is, denial won’t get us any closer to change.

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• I wish I had lived a life true to myself, instead of the one others expected of me
• I wish I hadn’t worked so hard

They’re both pretty common death-bed refrains, but it’s the combination that caught my eye. The thing about working too hard has always bugged me, because it seems to subtly imply that work isn’t as important as other things in life, like friends, family, etc. But is that always true? Isn’t purpose the most important thing in life? And can’t you find that through your work? Would they have regretted working so hard if the work had been part of the life they wanted? I completely understand the sentiment of wishing you hadn’t worked so hard, but only if that work was part of the life others expected of you.

Will we hear this same regret about working too hard from Steve Jobs, Richard Branson, your local pediatrician, your local inner-city youth counselor, and anyone else who works hard at the thing they were born to do?

I hope not.

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So if you’re about to go to college or you’re in college and you’re thinking that maybe you should skip it because so many other successful folks did, take a second look. If you don’t have that something that pretty much forces you to drop out, I wouldn’t do it. If you feel like you’re torn and you’re not sure what to do, don’t quit. You should only quit if you literally just can’t keep going because you’ve started something on the side and it’s blowing up so fast that you can’t keep your head above water. And even then, you should try and leave the doors open to return in a year or two if things don’t work out.

Oh, and if you’re entrepreneurially-inclined, do seriously consider starting something in college. You probably will never have as easy a launching pad and such a plethora of potential co-founders. It could go nowhere (but you’ll learn something), it could pay for books and beers, or it could be the start of the story you’ll tell someday about how you dropped out of Harvard to run your fledgling company that’s now worth billions. You really have very little to lose.

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Dreaming with your mind alone gets you nowhere. Today is my 28th birthday, and for too many of those years, I’ve lived in a fantasy-land, dreaming of what I’ll do Someday. I make a lot of plans. I consider myself a person of great passion and vision. But after 28 years, that hasn’t taken me nearly as far as I thought it would. If you had asked me at 18 where I would be at 28, I would have probably been outwardly modest, but I thought I’d be running the world by now. So what happened? Somewhere along the way, I got really caught up in the idea of accomplishment. It become more about the end goal, the destination. I lost sight of the importance of the journey, of living well, of being a good man, a good husband. I thought those were byproducts of the destination, just more accomplishments along the way. But I’m starting to realize that they’re really the whole point. That life is more about the inputs, the journey, and who you are than it is about what you accomplish. And it’s really difficult to change who you are from inside your comfort zone.

Birthdays are usually full of angst for me. But this birthday has been different, somehow. It’s been a really good year so far. There have been disappointments and setbacks, but something is different. If I had to put my finger on just one thing, I’d say that I feel better about who I am than I ever have. I’m proud of my dreams for the future. But mostly, I’m proud of the fact that my dreams have escaped the prison of my mind, that I’m risking something, that I’m working harder than ever on building a foundation of character and discipline.

Aristotle said: “We are what we repeatedly do. Excellence, then, is not an act, but a habit.” I’d put the emphasis in that quote on the word “do”. You can’t reach for the stars with your mind. You can’t play it safe and hope that someday things will magically change. Ultimately, you have to step out, take risks, do the work, do something.

So don’t stop dreaming. Dream, and dream big, but dream with your hands.

Note: the title of this post comes from a similar phrase in this recent Corvette ad . I was surprised when I googled it and found absolutely no results, as I think it’s a perfect and succinct way of expressing a complex thought.

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The article makes the really good point that you should be in the startup game primarily for the love of what you’re doing, not the money. But this is true for almost any endeavor, because the reality of almost anything where you can get rich is that it’s definitely not a sure thing. So if you’re going to spend years of your life slaving away at something without a good chance of a big payoff at the end, you better be enjoying the journey itself or you might get to the end of your life and find that you wasted it on something you hated for nothing.

I can’t deny that the math of the piece is solid, but I really do question the assumption that you should take that money that you made creating value by running a business and invest it in the stock market, where you have zero input or control over the outcome. There are lots of other paths you can take, but I’ll focus on the one that I know best: multifamily real estate.

I know, I know: real estate is such a risky proposition right now! Am I crazy?!? Let me run through the numbers with you, and you can tell me.

Let’s take our hypothetical entrepreneur who just cashed out for $4.3mm and see if we can retire her within a year or two. And to be more conservative, let’s just use $1.3mm of the money for real estate. She can put the rest in stocks, bonds, or Uncle Morgan’s ice cream truck business.

Our goal is to purchase a nice, class B apartment complex in a good market with solid fundamentals. For the sake of this example, let’s use the Dallas market. I jumped on LoopNet.com for a few minutes to look for good prospects, which is also conservative, as the best deals don’t ever make it to LoopNet. You’d be better off retaining an experienced multifamily broker in the market, but this will suit our purposes for now. We’re going to take our $1.3mm and put a 20% down payment on an apartment complex, obtaining financing for the remaining 80%, either through a traditional bank loan, seller financing, or some combination. This will give us the ability to purchase a property valued at around $6.5mm. Let’s be conservative and limit to $6mm, so we can keep some cash in reserves and pay for any deferred maintenance on the property. So a perusal of LoopNet turns up this potential investment:

Asking price is $5.5mm, it looks like a solid class B place, it’s got 151 units, mostly 1 bedrooms, it’s 80% occupied (more on this in a bit), and it was built in 1985, so hopefully it’s not falling apart yet. The effective gross income on the property is $920k / year. Now, obviously this would require a LOT more due diligence, but this is one of several properties like this that I found with a few minutes of searching in one market in the US, so it’s not terribly unlikely to find a similar deal even if the numbers didn’t pan out on this one.

Operating expenses on properties like this vary, but 50% of the gross income is a good rule of thumb. The listing for this property says $500k, so that’s about right. Let’s use $500k as the number for the operating expenses, which includes maintenance, taxes, insurance, management, etc, basically everything except for debt service.

So our hypothetical entrepreneur does her due diligence and decides to buy the property. Let’s assume that she pays the asking price, puts down her $1.2mm (holding $100k in reserve) and gets a 6% loan for the remaining $4.3mm. With a 30 year amortization, that’s an annual debt service of about $310k. Her net pre-tax cashflow is therefore $920k – $500k – $310k = $110k / yr. This represents a cash-on-cash return of just over 9%. So not quite $200k / yr, but we’ve also only invested about 1/4th of our total cash to get that annual cashflow. And there are some other big benefits here as well:

First, our entrepreneur is in control, unlike the stock market. If things change with her property, she can be proactive and adjust her strategy, having a direct impact on the management of the asset.

Second, there are other potential sources of return beyond just the annual cashflow. She’s amortizing the loan every year, building up equity in the property. And there may be appreciation as well, though you don’t want to count on this. Still, it’s a nice bonus if it happens.

Third, real estate is a natural hedge against inflation. The rents can be raised annually to keep pace with inflation. (Bonus: your mortgage payments do not increase annually.)

Fourth, this particular property may offer some attractive options for adding value. The occupancy rate of 80% could be improved, for example. Improving the condition of the property, putting in new management, cutting expenses where possible, raising rents, and getting the property leased up to 95% could easily double the pre-tax cashflow on the property, and seriously increase the overall value.

Finally, we should take tax benefits into account. You’re allowed to write off a portion of the value of the property (excluding the value of the land) each year as depreciation. And thanks to this write-off, it’s very likely that this property would show a paper loss for the first few years, which means our intrepid entrepreneur would pay zero income taxes on that cashflow. Zip, zilch, nada. No federal income tax, no state income tax, no FICA, nothing.

Is this an easy or risk-free investment? No, it’s really not. You’ll need to learn a lot about real estate before you head down this road. Buying an apartment complex like this is buying a business, and you should treat it accordingly. But you should also learn a lot about the stock market before you head down that road. If you turn your money over to some wealth manager and have no idea what they’re doing with it, you’re putting yourself in a bad position. And it’s definitely true that real estate is a lot more work than just pulling up etrade.com and buying some shares. But then, that’s the difference between growing your net worth from $4m to $400m, or running out of money at 50. In the end, which approach is really riskier?

Update: if I could recommend just one book on the type of investing I’m describing above, it would be this one: The Complete Guide to Buying and Selling Apartment Buildings

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