Face to Face with the 1%

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Source: commons.wikimedia.org

At a reunion at my alma-mater, I had the opportunity to partake in a professional panel event where some older, experienced gentlemen in my social circle dispensed wisdom on wealth and life.  The event was particularly notable to me because all of the panelists were black men who had been extraordinarily successful in their chosen endeavors.  As a black man myself, I realize how rare this is within our community.  It is always so refreshing to see those who come from the same place you come from go out in the world and be successful, particularly when the overall statistics for the professional success for black males is not particularly in our favor.

I have enclosed my notes from the event below, with significant portions redacted to ensure privacy and to focus on one key question asked of the panel, “How do you define wealth?”

The moderator opened up by introducing the panelists:

Panelist #1: consultant and CEO (multiple companies)

Panelist #2: Executive VP, Fortune 500 company

Panelist #3: Corporate VP, Fortune 500 company

Panelist #4: Rhodes Scholar, startup founder

Panelist #5: self-made entrepreneur (multiple companies)

The moderator framed the first question in the context of three life phases: early adulthood (up through the end of college and graduate schooling), career and family (generally 20s, 30s, and 40s), and later life (50s to “whenever”).

How do you define wealth?

A distinction was made between wealth and income. The panelists agreed that income is cash flow that you receive for the work that you do or the work that your assets do. Wealth is an accumulation of savings that are well invested and that grow over time. Wealth was also defined as freedom to do whatever you want to do with your life.

Panelist #4 noted that he and his wife have always lived well below their means, and were able to have much more flexibility throughout their professional careers as a result.  He stated, “You set yourself up in a position where you are able to choose the job that you want, not be forced to have the job choose you.”

This was seconded by the other panelists. A brother from the audience recommended the book The Millionaire Next Door by Thomas Stanley as good reading material that expands upon this concept.

There was also discussion about how investing your surplus savings wisely is incredibly important. Panelist #5 talked about how diversification has a place for the preservation of wealth, but is not very useful as a concept for building it. He advocated making focused, concentrated bets on yourself in an area in which you are highly competent. The implication was that when you have already achieved the necessary growth to reach your goals, then diversify.

Panelist #2 stated that there was no overall, planned out strategy with regards to his method of investing. Instead, he trains himself to see opportunities when they come up, and then acts upon them. He gave an example of early in his career, when he met a young Spike Lee and invested with him to produce the movie She’s Gotta Have It (his second film). He invested [X] and it yielded a [Y] return for him personally.

Panelist #2 also talked about the perception of how people achieve their wealth, especially among the black community, is also very skewed. He mentioned that one day he was having a package delivered to his home (all homes in the neighborhood are worth well over $1 million). The delivery man was a brother, and upon delivering the package remarked at how nice the neighborhood was and asked emphatically, “how many athletes live over here?”

Follow up question: How much money would you consider wealthy?

The panelists generally did not give their opinion on any specific number. Panelist #5 made an important point that “wealth is not really just a number, it’s a quotient”, meaning that you have to consider what “enough” is for you personally. Otherwise, as he said he did in his younger years, “you set the bar at one place and then when you reach it you simply keep raising the bar higher”. Panelist #5  noted that he had retired multiple times from his various business ventures, but kept coming back to do something new, demonstrating that no matter how much money we have, we all need a purpose in life.

There was a question from the audience about whether anyone would recommend seeking the services of a financial advisor as way to help accumulate wealth. No one responded enthusiastically for the idea, and Panelist #5 stated that “no one will care about your money more than you do.” There seemed to be agreement that educating yourself about your money and what it is invested in is paramount to hiring someone else to do the thinking for you.

Panelist #5 also expressed that selling your time for money can only get you so far along the spectrum of financial success. Those who are ultra-wealthy have businesses and build systems that leverage the work (and money) of other people.

Although no one dropped an explicit number of what they considered wealthy, the idea was kicked around that many people will “only make it to the one or two million dollar level”, as far as net worth goes. This implies the ambitions of these men have reached/will reach hectomillionaire or billionaire status.

Follow up question: How do you pass on wealth – is there a legacy to leave financially?

Those on the panel who have children seemed pleased with their financial success in that they could provide for their children (particularly with education-related expenses), but admitted they were nervous about the mismanagement of wealth they had built in future generations. They seemed aware of the fact that most (around 80%) of wealth is lost by the third generation (one of the panelists quoted this).

Those without children indicated that they often pass on their wealth through philanthropic efforts. They also give to close family members’ children (nieces and nephews) in order to pay for their higher education, or to assist with business ventures.

[rest redacted]

I found this portion of the conversation alone to be very powerful.  Here I was, sitting in a room face to face with some of the wealthiest and most successful black men – and people period – in the nation.  This was the 1%.  Although I have read many personal finance books written by “gurus” and various other others, I found it quite refreshing to get some no-nonsense opinions about wealth in general and what it takes to become wealthy.

The point about differentiating wealth and income is so, so true.  If income is not gradually inventoried into wise investments and savings, then there is no possibility of wealth down the road.  It simply cannot happen.  I don’t care if you sign a multi million dollar contract with an NFL team tomorrow, if you spend all of your income on consumable items, taxes, and Lord knows what else, there will be no wealth being built.

I already really like the point about defining “enough”.  What is enough?  That is a question I have been kicking around in my head for some time now.  Defining how far you are willing to go to achieve a certain level of financial independence is in my view, very important.  Otherwise you’ll be chasing your tail and end up unfulfilled, ultimately.  I talked about this some time ago, making the point that it is very important we put a clear price on our dreams.  If we don’t know what we actually want – how will we know when we’ve got it?  A deep thing to think about, indeed.

My other favorite point was the shunning of traditional “diversify, diversify, diversify” advice that is so prevalent in the financial media.  It is so much more worthwhile to focus on areas of extreme competence, and put your energy into productively utilizing that competence.  This echoes some of Thomas J. Stanley’s work, where he recounted how many of the wealthy people he interviewed told him that, although they invest in many things, their primary focus has been their vocation and growing their business.

The gentleman on the panel who made this comment successfully started multiple ventures throughout his career.  After the panel, I looked up one of his businesses, and this guy isn’t messing around.  It made me reflect a bit – if diversification as a concept was really that important for wealth building, wouldn’t more people that invest out there be rich?  So many people tout mutual funds, for example, as being generally “safe investments” because they often have 100-200 separate holdings.  Well, what if 150 of those companies have mediocre financial performance or are downright terrible?  What if 50% of the funds assets are concentrated in the top 10 or so holdings?  Does that really serve the needs of the investor well?  It’s certainly food for thought.

It was a great discussion, and I’m glad I was able to attend.  It reminded me that there is so much wisdom out there that other people have – it’s our responsibility to always keep our eyes and ears open so that we don’t miss opportunities to learn something new and to challenge our thinking.  Little nuggets of wisdom, added up over time and applied well, can lead to extraordinary results over the course of one’s life.

Ownership is King

When I was in college, I had a friend that introduced me to the My Coke Rewards program.  If you’re not familiar, it’s a program from the Coca-Cola company, where, by collecting codes printed on various Coke products, you can earn points and eventually redeem them for prizes.  So, every time I or a friend got a Coke from one of the dorm vending machines, or bought a 2-liter at the nearby convenience store, I could enter the code on the cap and get a few points for it.

This started when I was say, a sophomore.  Whenever I saw an empty bottle at the top of the recycling bin, I grabbed the cap.  Whenever a friend was done with their soda, I’d ask for the cap.  Being a natural saver, it wasn’t long before I ended up storing a decent pile of caps each week.  Periodically I’d go through them, enter the codes on the rewards website, and toss the used caps in the trash.  I figured, with enough diligence, I’d be able to get some sweet prizes in the long run.

This process went on for about two years.  I never spent any of the points.  At the time, Mrs. Mase was making fun of my cheapness (and rightly so, as I realized later!)  Eventually, I had accumulated enough to get what looked like at the time, a decent prize, which were some in-ear headphones.  I listened to music constantly walking around campus, and my headphones had to be replaced frequently (couldn’t afford high quality ones, so the cheapest had to do).  Why not, right?

Finally, one day I cashed in my points for the headphones and waited.  When my package arrived a few days later, I excitedly unwrapped the headphones and put them to work on my iPod.  As soon as I started listening I thought, “these are the most uncomfortable, cheapest sound quality earphones I’ve ever used!”

Fast forward a few years to the point where I’m out of college now.  Life is going well, I’m a little more mature financially and I had started reading about assets, investing, and dividend paying stocks.  My wife and I purchased our first stock by buying Coca-Cola when it had dipped to around $38 per share.  With the dividend yield historically high, and the quality of the company unparalleled, I figured it couldn’t be a bad idea.  That was in February of 2014.  As I write this in October of 2015, we have received a total of seven dividend payments from the company, totaling $65.61.  The payments grew from an initial first payment of $8.85 to the most recent payment of $10.02.

KO_Div_Oct_2015

It may not seem like much, but that is real money flowing into my family’s accounts.  All dividends were reinvested, and no more money was put in after the initial purchase was made.  All by itself, the income grew 13% over this 2o month time period.  Most of that was from a dividend raise by the company (about 9%) and the rest was from the process of dividend reinvestment.

I remember when that first dividend payment hit the account.  It was a real eye opener for me.  All of those years, I had scrimped and saved for those My Coke Rewards points.  Now, here I am as an owner of this great enterprise, collecting money for my ownership.  Wow, I really wish I had been buying KO stock with my money back then instead of wasting time collecting bottlecaps!

Economically, ownership is king.  Promotional deals and programs like the one I participated in are simply ways for a company to cement brand loyalty and increase customer engagement.  In order to receive a higher level of economic benefit, instead of participating in this program, I shifted to becoming a part owner of the program.  Not only that, but my family is now a part owner of the entire Coca-Cola business.  Sure, our ownership is small right now, but it is a self-reinforcing cycle of wealth creation and that is what matters.

One day, I believe my family will own thousands, if not tens of thousands of shares of this company and others like it.  When you lay a claim to an ownership of the profits of an enterprise, you’re the one that gets the risk if things go south.  However, you’re also the one that reaps the rewards when the profits roll in.

Right now, the Old Man Mase family is focused on paying off debt, so no more stock purchases (other than the BHIP) for quite a while.  It does make me laugh though, to look at the account statements now and realize that we’re now getting paid by the same company that I used to run around circles for with their promotional programs.  By placing yourself at a different place in the economic food chain, you set yourself up to reap greater rewards in the future.  It’s the old adage about living on the economy, rather than in the economy, that counts financially.

Richard H., Real Estate Investor

During the recent Chick-Fil-A grand opening event that I went to, I met a handful of interesting people.  There was one in particular who I found fascinating and was able to talk to for a great length of time.  It was a gentleman named Richard, who eventually revealed to me that he was financially independent and had done so at a relatively young age (mid-40s).  After hearing what he had to say and asking him lots of questions about him and his story, I couldn’t help but think that he would make a great case study.

Although I have yet to do any biographical case studies, it is something I think I am going to make a greater effort towards.  You never know the kind of interesting people that you will meet as you walk through life, or the amazing stories you will encounter of people through books or other means.  Allow me to introduce Richard as the introductory case study toward a hopefully ongoing series.

Richard H. Net Worth and Biographical Overview

Full Name: Richard H. (real name redacted for privacy)

Born: c. 1970

Gender: Male

Nationality: United States

Family: Married, with children

Education: College

Estimated Net Worth: 1,000,000 – 2,000,000 USD

Source: residential real estate – single family homes, multi-unit homes

Richard H. Business Model

  • Work hard to achieve academic excellence, if you know it is going to take you to a well-paying career eventually.  Richard started out poor, graduated in top 5 of his high school.  Most students didn’t go to college because gang violence caught up with them.
  • Keep trying until something sticks.  Richard went to local college on a scholarship and then eventually transferred to another university.  He didn’t know what to pursue professionally – tried engineering, then accounting, then computer science/IT.
  • Continually seek to earn more, especially early in life.  OK grades in college but nothing spectacular; needed time to work.  He worked five jobs at one point during college (computer lab, furniture store, etc.).
  • Eliminate debt as quickly as possible.  The reason for working so much was to graduate with little debt as possible; graduated with $10,000 in debt, but paid it off the first year out of school
  • Go into a field that pays well and has room for growth.  He started working in IT (really loves technical challenges) with a decent salary.  As far as career goes, he stated that it is important to work in a field/environment where there is a high ceiling on income.  otherwise it is hard to progress quickly toward financial goals (i.e. you cannot save as much quickly).
  • Constantly expand your circle of competence.  Richard is always expanding his circle of competence in his field.  He figured out which type of developer positions paid the best, and set out to learn all necessary skills and certifications, always making himself more marketable.
  • Seek higher paying positions when the increase in pay and lifestyle change justifies it.  He switched jobs a few times but did not do so unless it was for a justifiably higher salary ($20k – $30k increases).
    • Advice on salary negotiation: figure out your desired salary, and then tell them you are making a reasonable amount less.  Ex. “I am making $80k looking to make $90k”.  Of course, be sure that the position you are applying for has value at the level of the desired salary.
  • Be well-liked and high achieving so people naturally help you reach higher positions of responsibility.  He eventually worked his way up to lead developer (technical role), then was good enough with people that he was encouraged to accept a manager role, making $100k+.
  • Take advantage of special situations.  The most recent company he worked for got bought out; he knew he was very valuable to the new company in order to help transition their old systems over to the new company.  He was thinking of leaving because he knew the role they would transition him to made less than he did at the time.  Instead the new company made him an offer to double his salary ($200k+)
  • When the time is right, buy back your most precious resource – time.  Once the transition was complete, he decided he was prepared enough to be self-employed/do something different.
  • Savings lots of money consistently provides greater flexibility as life progresses.  Throughout IT career he saved close to 15% of earnings in 401(k) plans, as well as money in regular savings.  He left IT job and created two companies: one for [redacted] and one for real estate investment.
  • Use the structural nature of the tax-code to your advantage to build wealth.  He consulted necessary professionals and rolled 401(k) into Solo 401(k); used Solo 401(k) money plus other cash to do first real estate deal.
  • When venturing into a new field, find a mentor to accelerate the process.  Richard had a friend that had been doing real estate investing for a decade that mentored him through the first deal as well as several more.
  • Build passive income by buying cash-generating assets.  Over the past 2.5 years, he has focused almost exclusively on real estate; now up to 9 rental units.
  • Building the right team is critical for real estate investment success.  Some homes are locally owned, while some are out of state; he stated that property management company was worth the cost for the out of state rentals.
  • Understand your niche and stick to your strategy.  He only buys distressed properties, usually at auction, and fixes them up (he has construction skills and his brother has equipment).  Richard’s  target rents for each property is $800-$1200/month.
    • if value of property is too low, you risk tenants messing up the property, more hassle
    • if value of property is too high, you risk higher tenant turnover because people can/will buy houses
    • targets 10-12% cash-on-cash rate of return
    • uses rents received only for maintenance and re-investment in more properties
  • State clear goals from the outset so that you know when you have achieved them.  The initial goal was to replace old manager’s salary of $100,000 with passive income; now almost there at around $90,000.  Ever since college he wanted to be financially independent by 45 years old; recently turned 45 and feels he has finally achieved that goal.
  • Avoid debt for investing – it requires more patience but reduces risk.  He never uses debt to buy rental properties – an rarity in the real estate investing world.  He only has a mortgage on his personal residence; all nine rental units he owns are paid for.
  • Allow your lifestyle goals to change as you age.  He will continue to invest in single family homes but will shift more time to help with his and his brother’s family business.
  • Think like a business owner when it comes to investment.  He thinks that many real estate investors simply “play games” with weird and shady deals – not true property owners.
  • Never stop giving back and enjoying life with people you love.  Richard enjoys playing golf, so he volunteers at a local golf course and gets to play for free; brought down his golf game from a 95 to a 75 handicap.  Also, he is now able to spend more time with his daughter and play tennis.  He ran his first half marathon this year and is going to run in a full marathon this fall.
  • Commit to a plan and follow it consistently – over time it will not feel like much of a sacrifice.  He said that he and his wife, over the years have not really had to sacrifice much to have what they have (nice home, cars).

Practical Lessons from Richard’s Core Economic Engines

Career in Information Technology

Richard’s career in IT proved successful, even right out of college.  The constant learning of new information and what was valuable to the organizations he worked for enabled Richard to command higher salaries for his services.  He knew that most of his peers would not take the time to get extra certifications and take extra technical classes that were particularly challenging.  By setting himself up to be a learning machine, he paved the way for quick and steady career growth throughout his 20s and 30s.

His high income and avoidance of debt allowed him to maintain a solid savings rate over the period of a few decades.  For most, this simply would not be possible because of either a moderate/low income, or simply not enough time to let money stack up and compound.

Transition to Real Estate

One of the things that inspired me most about Richard’s story was that he found a way to invest in real estate without going into debt, a true rarity in today’s world of low interest rates, especially.  The wisdom is that yes, a higher cash-on-cash return could be made through leverage, but the quality of an investment is not measured by rate of return alone.  The quality of the cash flows an asset provides, as well as the risks inherently associated with an asset, need to be considered.

Note the gradual progression of Richard’s finances.  Him and his wife saved tens of thousands of dollars each year for a decade, consistently living on less than they made.  It was only with a big pile of cash in his various accounts that Richard felt comfortable enough diving into a completely new field.  With the help of his mentor he was able to purchase nine rental units in less than a three year time period.  That would not have been possible without a combination of factors occurring at the same time:

  1. Lots of liquidity available to make deals happen quickly.
  2. The advice of a mentor to avoid major pitfalls and provide specialized education.
  3. The power of paying for properties completely in cash, thereby lowering the overall cost of investment (buying distressed properties at auction).

Once the first deal was done, it was simply wash, rinse, and repeat.  Upon reaching the 9th rental unit, enough passive income was coming in that he declared himself financially independent.  The transition to working on his family’s business and spending more time with family and volunteering became possible once the primary economic engine of the real estate portfolio was firmly in place.  This portfolio, in turn, would not have been possible  to build so quickly if not for the years of savings that had been consistently set aside.