Hi,
Welcome to your July edition of Financial Independence.
I'm writing this from the Canadian Province of British Columbia, where I'm working on an exciting new project with marketing expert Don Campbell.
It hasn't all been work though. I've found the time to do some spectacular hikes and even play some golf, although I'm somewhat of a hack.
This month I'd like to take a break from the regular format (the old format will return next month) and present you with a special newsletter that focuses on two topics:
- A review of a case study that appeared in the national-wide Canadian newspaper - National Post. The article is a true story about a man who lost all his life savings overnight by investing in a high-spec stock, Bre-X. It's a fantastic insight into the mind of a man who has lost all his money and holds some valuable insights for all Inner Circle members.
- Details of a special template covered in a special report titled - The Truth About Wealth, Defining What True Wealth Means To You Using The 9 Step WEALTH Template.
Complete the nine-step wealth template and create a better understanding of what your exact money goal is.
O.K. let's begin by looking at our case study.
How Would You Feel If You Lost All Your Life Savings?
While there are a lot of differences between Australia and North America, the approach to wealth creation is not one of them.
The case study below is taken from an article that appeared on the 29th June in the Canadian newspaper - National Post about a man that lost his life savings trying to get rich quickly. It holds a very special message for all Wealth Tips Online members. Please read and enjoy the story, then review my analysis at the bottom of the article.
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"To Lose Your Life's Savings National Post (http://www.nationalpost.com) National Post writer Allen Abel recently spoke to 12 unusual Canadians who have had extraordinary experiences. In the fifth part of his series, he talks to Nagalingam Nadarajah, 75, of Mississauga. Mr. Nadarajah, who was born in Sri Lanka, is a retired statistician who worked with the United Nations and Statistics Canada. He lost almost his entire life's savings -- $150,000 -- overnight investing in Bre-X stock. --- I am not a wealthy man, although I might have been a billionaire at the time, if you were counting it in rupees. I had lost a little money in another gold-mining stock. I invested about $30,000 and I lost $20,000. So I was greedy; I wanted to recoup my losses. I had read many books about stock investing. But I did not know that book knowledge is not enough. You need also to have inside knowledge. If I had had inside knowledge, and if I had been a bit of a crook, I would have done all right. Every day, I was reading about Bre-X. Every day, there was more news, there were more fresh finds, more analysis. They said the mine was worth $25-billion at some stage. The mistake I made was putting everything in one basket instead of distributing my money widely. It was foolish: When a person who has already been a loser butts his head against the wall again, it is foolish. Then it all crashed. It was a very weird and shocking feeling. For a while, I was hanging on to the hope that at least it should be worth something. But it was gone. I lost $150,000. You could say that was almost my entire savings. It happened all in one day. I found out over the TV. I did not go to the temple. What would be the use? I can pray wherever I am. I did not cry. No member of my family, at the time or at any time since then, has ever talked about it. My sweet wife did not chide me, ever. She never even mentioned it. She never asked how much I had lost. This may make her sound as if she is an ignorant person, but she is not. She is a very educated person. She did not want to rub salt into my wounds. What would be the use of that? I heard that some people committed suicide. These are people who have lost everything -- my heart goes out to them. I am happy that God helped me to weather this storm, this debacle, this tempest. They say man does not live by bread alone. I had my bread, anyway. As Shakespeare said, "Sweet are the uses of adversity." Losing all my investment gave me a real perspective on how a man should live. Before, I was thinking only about money, not about people. I was a miser, a Shylock. I'm a much, much happier man now. I don't invest in anything. I don't even buy lotteries. Investing is not healthful; it is injurious to your psyche, being under tension all the time. I am a realist. I am also an optimist. I have had many blessings: I have a house, I have my good, dear wife, our four children who are doing pretty well. I lost my money, but I did not lose my mind. I still have my pension. In fact, now I spend more money than I did before. I just took my daughter and my dear wife on a trip around the globe -- Australia, Malaysia, Singapore, Madras. Now I think about people, not about money. Money you can get, and it can go away, at any time. Are we going to take all this money when we leave?" Source (& Picture): Http://nationalpost.com/search/story.html?f=/stories/20010629/605467.html&qs=Nadarajah |
This is a fantastic case study because it reveals a lot of what not to do when it comes to wealth accumulation.
Let's explore the article in more depth and see what we can discover to improve our own wealth position.
The Message Being Delivered...
Perhaps sadly, the theme running throughout the article is despair - eventually resulting in acceptance of a seemingly hopeless financial position.
The first paragraph begins "I am not a wealthy man, although I might have been a billionaire at the time, if you were counting it in rupees."
While these are the words of a man lamenting about a lost fortune, it's also evident that Mr. Nadarajah doesn't think of himself as being capable of becoming a wealthy man. This is probably true since the government pension he and his wife now live off will make life difficult.
Being Poor Is Temporary,
But Thinking Broke Is Forever!
A lot of people will never be wealthy because they don't think they deserve to be rich - we're told from a young age to accept what we're given rather than to aspire to something different or better.
It can be uncomfortable if you achieve more than your parents or friends. In fact, as you become wealthier, you may find your friends actually hold you back from achieving your money goals.
I found that as my money outlook changed, so too did the people I attracted as friends. I found that when I opened up my mind, people came into my life with the skills I was looking to acquire.
That's the reason why I created the Inner Circle. Your Wealth Tips Online membership is a great opportunity for you to network with people who are willing and able to guide you through the wealth accumulation process.
Falling Victim To The Fast-Buck School Of Wealth
Bre-X was some sort of mining stock that was clearly in the press. The promoters of the stock (ie. the ones selling it to the market) were probably hyping it up... feeding rumours to the press and throughout the analysts... bait for investors with little or no knowledge of how to pick value in the market.
Then along comes Mr. Nadarajah who's looking to get very rich very quick and is motivated by the greed of the large sums advertised and the fear of missing out on what the insiders know. He says,
"Every day, I was reading about Bre-X. Every day, there was more news, there were more fresh finds, more analysis. They said the mine was worth $25-billion at some stage."
A truth about investing that plagues us all is:
The Reality Of Picking Quality
Stocks Over The Long Term Just Isn't Sexy Enough
To Keep The Human Emotions Of Fear And Greed In Check.
Can you just picture what went through our friend's mind? '$25 billion sounds like a lot of money and they say it's a great time to buy... look at all the analysis... look at what the experts are saying! I'll be retiring in a few years and this is my ticket to a better life.'
To make sure you don't fall into the fear and greed trap... ask yourself:
- Who is making money by selling when you buy?
- A Steve McKnight Investing Rule:
In this case it would be the stockbrokers and anyone who purchased the stock at a cheaper price. If Mr. Nadarajah may have become suspicious if he realised the analysis may not have come from an independent broker or management, since often the papers report what is released in a press statement and this information does not need to be audited.
The Bigger The Hype,
The Bigger The Hoax.
Greed attracts undisciplined investors who fear they'll miss out on something and are greedy about making quick money.
Mr N. falls into this category as he says, "I was greedy; I wanted to recoup my losses."
Before Investing In Any Market,
Make Sure You Look At Who The Major Owners Of The Investment Are.
In the case of stocks, I'm always interested to see if any major institutional investors own the stock. While it's likely that our investment strategies will be different, I can still keep an eye on what the major fund managers think about a stock.
Please understand that there is no easy way to become wealthy. Some people do strike it lucky, just like gold prospectors did in the 1800's. But those who get rich this way are the exception to the rule and do nothing other than to feed the greed of unsophisticated investors.
In Order For Things To Change...
If you're looking to acquire more wealth you do so because you lack something, something that your present circumstance or lifestyle does not provide.
A lot of people look to change their circumstance without changing their lifestyle or work habits, which is a very difficult way to become financially independent. The article shows us that it's true...
You Can't Expect To Change
Without Changing
Mr. Nadarajah tells us about his previous investment experience when he says:
"I had lost a little money in another gold-mining stock. I invested about $30,000 and I lost $20,000."
This says a lot about the sophistication of our investing friend. He says that he's read a lot of books about stock investing, but he must have missed the chapter about setting stop losses.
He risked $30,000 (which was 20% of his life savings) on a stock and only got out after losing 66% of his capital.
A better approach would have been to create a strategy for all his investments. Documenting your strategy helps you to make rules. Then all you need to do is follow them. If you find yourself breaking a rule then alarm bells telling you that you're becoming greedy and fearful should be ringing.
But instead of learning the lesson the first time, Mr. Nadarajah bets everything to recoup the losses from his first investment... and more. At a time of his life when he should be conservative, he risks all on a high spec mining stock.
He invests all his life savings on the knowledge of reading a few books and on his interpretation of what some so-called expert says about a stock. This approach is baffling, especially when you recall that Mr. Nadarajah's occupation was a statistician for the government.
It's a cruel irony that someone who needed to be so careful about the integrity of numbers in his career, ends up losing everything by throwing caution into the wind.
Yet in the end, Mr. Nadarajah does learn the lesson:
"The mistake I made was putting everything in one basket instead of distributing my money widely. It was foolish: When a person who has already been a loser butts his head against the wall again, it is foolish."
Think about your past investing achievements. Are they telling you something about the way you invest?
What can you do to protect yourself against the human emotions of greed and fear?
What must you change to try and break the cycle - or are you like Mr. Nadarajah and expect something to be different next time you invest in a way that's lost money before?
Taking Responsibility For Your Investments
It's one thing to be crazy enough to invest all you life savings in a mining stock, but it's another thing to blame other people for your mistake.
Stocks generally don't just crash unless there is a major market correction. There is usually a lead period when selling becomes more frenzied as the last of the investors driven by fear and greed purchase and sophisticated investors sell.
Only when there are no more ignorant investors left does the true position presents itself - in this case, a stock with no real value.
Mr. Nadarajah was clearly not in control of his investment. He picked the stock based on greed and then showed little regard for trying to determine it's true value. He says," It happened all in one day. I found out over the TV."
Madness! The major investment in his life and he tracks it by watching television!
Mr. Nadarajah hasn't taken responsibility for actively monitoring his investment. He's blamed the people who prompted him to buy the stock and then concludes that:
"...I did not know that book knowledge is not enough. You need also to have inside knowledge. If I had had inside knowledge, and if I had been a bit of a crook, I would have done all right."
This is the psychology of a person who blames other people for his poor investment decision. If his claim was true then no ordinary investor could hope to make money in the stockmarket by any means expect luck.
Make Strategies For All Your Investments,
Including Identifying An Exit Strategy Before You Buy.
How do you monitor your investments? How much of the numbers do you understand? In the months ahead I'll begin to outline how you can read a financial report by looking at key financial ratios to make sure the results match up with what management says.
You can also be watching out for the danger signs that your investment may be about to crash. I monitor large increases in average trade volume and when the share price opens lower and doesn't reach the previous day's close (called a gap down).
Finally, who do you blame when you lose money?
The Sign Of Someone Who Has Given Up... Money Doesn't Matter Anyway!
It's sad to learn that Mr. Nadarajah lost his life savings and now depends on a government pension for the rest of his life.
But what upsets me the most is how he's dismissed the goal of becoming wealthy, saying he's "... much, much happier man now. I don't invest in anything."
I'm sure he's right by saying that losing money has taught him a perspective about how a man should live... but I don't think that accepting failure is it.
Saying that "Investing is not healthful; it is injurious to your psyche, being under tension all the time" is only true of someone who invests without a strategy and doesn't watch for the warning signs of impending trouble.
These are the bitter words of someone who dared... and failed because of greed and ignorance. The white flag of surrender and defeat is raised high in the final two paragraphs:
"Now I think about people, not about money. Money you can get, and it can go away, at any time.
Are we going to take all this money when we leave?"
When you examine Mr. Nadarajah's position you realise that he is at the end of the financial road. There is not much below relying on a government pension forever... he might as well try something.
In fact, despite his age, there is still time to start again. He could even allocate a small portion of his pension money on a high-risk stock, provided he follows rules #1 and #2 outlined above.
Have you ever thought "oh well... it's only money"? These are the words of a person with a dangerous predisposition to making bad value calls. Listen to the words you use to justify failure, as they are a great indication of your investing psychology.
Mr. Nadarajah has been able to contribute a valuable lesson to us all about how we may succeed, by helping us to understand the probable outcome of an investment based on greed and hype.
It also gives us an insight into the psychology of someone who has given up on becoming financially independent.
A Summary Of The Lessons
While this case study has a strong stock theme, there are many lessons that come from it.
- You shouldn't be afraid of failure - but when you do, try to understand what you need to change about your approach to improve your chances the next time around. If you don't learn from your mistakes then you are in real danger of losing a lot of money.
- Develop written strategies two protect against becoming greedy. Your strategy should include an 'exit plan' that documents when it's time to cut your losses and sell, as well as a plan for what you are going to do with the money that you make.
- Don't buy an investment because you think you should. Your decision needs to be based on value rather than on hype. Avoid investments designed primarily to give you a tax deduction now for a possible gain later. Remember, the bigger the hype... the bigger the hoax.
- Take control of your investment by regularly monitoring its progress against the investment plan you've devised. If you don't have the time to monitor your investments then seek the aid of an investment adviser.
- Don't bet the house and be bitter if you lose. Mr. Nadarajah is accurate when he says "Money you can get, and it can go away, at any time." If you have the right attitude and follow some simple investing rules then you'll find the small amount you lose from time to time is tiny by comparison to the higher returns over your lifetime.
- A lot of people are afraid to try something different, yet when you analyse their situation you realise they have very little to risk. This is how I was until I finally realised that if I failed at investing, I could always get another job working as an accountant. I didn't really have anything to lose, because I was already an accountant. A friend of mine, Paul Harper, recently told me a great acronym for FEAR... FALSE EXPECTATIONS APPEARING REAL.
- The end of the financial road is relying on the government for you financial future. When you're at this point you might as well try something to improve your situation - not just surrender. It's never too late to make a fist of something financially and enjoy the satisfaction that you are not a failure.
Sometimes quantifying the outcome is helpful... such as saying "I'm willing to risk $X to make $Y. When you have risked $X, or made $Y, then it's time to re-evaluate the investment."
I hope you've enjoyed this case study. The are so many great lessons to learn from the article, it was too good an opportunity to pass up. I welcome you to share your comments, feelings and perhaps even own experiences through the Inner Circle forum.
The Truth About Wealth,
Defining What True Wealth Means To You Using The 9 Step WEALTH Template
I'm presenting to a seminar of investors in Edmenton Alberta on the 7 July 2001.
The topic of my presentation is "The Truth About Wealth". As an Inner Circle member, I'd like for you to have a copy of the notes I've prepared for the event, as well as an expanded outline of how to use the 9-Step template.
Contrary to what most people believe, wealth is not just measured by the size of your bank balance, nice houses or month long winter holidays in Cancun. Wealth is truly defined as: sustaining a long-term acceptable lifestyle, while retaining control of your time.
Let's explore this concept further.
Sustaining:
Here's a sad fact. In most cases, when a typical Canadian heads home after their last day of work, they immediately take a cut in pay and lifestyle. And, for many people, stopping work all together just isn't a viable option. Financial security (or wealth) is the exact opposite... meaning you can stop working TODAY while having no adverse effect on your lifestyle. Stopping work should be the beginning of one of the most fun and exciting parts of your life. The key question is: "Do You Have The Assets and Cash Flow To Sustain The Lifestyle You Want, Without Working In A Regular Job?"
Long-term Acceptable Lifestyle:
How much money will it cost to live the lifestyle you desire? Many people think in symbols (like cars, boats, jewellery etc.), yet in reality there are far more important indicators of wealth - like being able to afford top quality health care (especially now that your Prime Minister is talking about user fees), travelling wherever you want, as well as enjoying life's luxuries.
Retaining Control Of Your Time:
This one is the key. Money is infinite. Time is finite. You can always make more money, but you can't buy back time. The most important perk to having true wealth is you have the power to control your time independent of any need for money. Just imagine the lifestyle you'll live when you have complete control over what you do with your time.
Although there are many different ways to create wealth, real estate is unique in that it can provide you with all three of the above benefits. Increased Net Assets, Increased Monthly Cash Flow and Time Leverage. So congratulations, by being in this group, you are already on the right track.
The Bottom Line Measurement of Wealth Is:
Doing Whatever You Want,
Whenever You Want
...With No Second Thought To Cost!
While the road to attaining this type of wealth isn't easy... getting started is always the most difficult part. I have developed a unique program that many of my clients have used to kick-start themselves down this road to wealth. Let me walk you through the program I call:
The Nine Steps To WEALTH Template™
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Step One |
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How old are you? |
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Step Two |
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How old will you be on the day you die? |
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Step Three |
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How many more years do you plan to live? |
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Step Four |
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How many more years do you plan to work for a living? |
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Step Five |
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How old will you be when you work your last
day for money? |
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Step Six |
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How many years will you live without working
for money? |
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Step Seven |
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Given your current lifestyle, |
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Step Eight |
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As a lump sum, how much do you need
to fund your current lifestyle when you no longer work? |
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Step Nine |
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By what date are you going to make this a reality? |
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Instructions (Inner Circle Members Only)
The objective of the template is to help you to identify exactly how much money you need when you no longer work for money (ie. become financially independent).
You have probably heard Bob Chapman explain the importance of having a financial plan on the 'Personal Wealth' Inner Circle tape. The 'Nine Steps To Wealth' Template allows you to create a plan. By the time you've finished all the steps, you'll have a beginning (where you are now) and also an end, so you can devise the path of least resistance to get you to your goal.
Steps One To Three
These first questions may be a little confronting, but it's important that you answer them carefully. This exercise this is important because you need to understand you may live for a long time when your salary is no longer you main source of income.
Steps Four To Six
Once you know how many more years you plan to be alive, then you can work out how much money you'll need to live the lifestyle you currently enjoy and hopefully more besides.
You probably don't want to be an employee or self-employed business owner forever, so let's now work out how many more years you plan to work for money.
Step Seven
This question asks you to write down how much money before tax you need to live each year. If you're in a relationship or family, then just write down what it costs for you to live your current lifestyle.
If you don't know the exact amount then just estimate a figure and then add $10,000 to be safe.
Step Eight
To work out how much money you need (ignoring inflation) to fund your lifestyle when you no longer work, just multiply Step 6 by Step 7.
Step Nine
Now that you have a lump sum amount, you can now concentrate on how you're going to accumulate the money.
The Time For Action Is NOW!
Well done! Just by completing this template, you're already ahead of 97% of the rest of would-be wealth creators. Now you need to keep your momentum going.
Here are some steps I recommend you follow to keep you on track and on task:
- Stay Focused On Your Wealth Creation Strategy.
Don't allow yourself to get distracted by the latest "Hot Money Making Idea." Creating wealth is all about focus. - Surround Yourself With Positive-Thinking, Success-Oriented,
Like-Minded People, Like Wealth Tips Online Members.
Beware of the tips from your broke neighbour or relative... remember they are broke for a reason! - Don't Monkey Around... Get Out There &
Do It!
Knowing the theory is great, taking action is the key.
That's it for this edition... all the way from beautiful British Columbia, Canada. It's refreshing to know that everyone around the world faces the same wealth creation issues, so you're not alone!
Don't forget to post your questions and comments on the Inner Circle forum and remember success comes by doing things differently.
Regards
Steve McKnight (in Canada)
