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Chapter 1
Uncommon Sense –
Financial Independence for Anyone
on Planet Earth
Who Believes.
Dedicated to my life partner Marian who taught me about love and friendship through her shining example, Brendan Nichols my mentor who inspired me to be all I could be and Richard Running Deer who encouraged me to write a book to share my knowledge with others.
@copyright - PT Armstrong 2005/2006
After arriving back from Colorado early 2006 at the end of a spiritual tour among the north american indians with Brendon and being told by Richard Running Deer that it was time to write and book and share my knowledge with others…I am left wondering what could I write about that would of interest to people. There are lots of things that I am not qualified enough to write about - love and relationships, business investment, management, sales and marketing…
I have devoted most of my life to wealth creation and achieving financial independence. And 40 years later I have achieved this goal, this destiny.
And after reading at least a thousand books and listening to numerous tapes and attending lots of seminars all on wealth creation and personal development, what could I say that was new, startling and of sufficient value to make you my reader interested enough to read and practice some principles every day for the rest of your life to create financial independence for yourself?
And do you know what? I don’t believe there is any thing that I could write to inspire you enough. This inspiration, this desire, this belief has to come from you - my reader. Only you have the power to create success in your life. Only you can inspire yourself enough to reach your goals.
I can only see you as you truly are. You are more than you can see – more than you seem. All the world’s power and strength is truly yours. But do you know it? Do you?
I mean are there really any secrets to financial success? In my opinion?
And the short answer would have to be no.
Financial Independence (FI) is achieved like any other worth while endeavour. Through gaining knowledge, applying it with sufficient discipline and sustained effort to create the successful completion of that goal.
“99% hard work and 1% creative inspiration”.
I have been lucky enough to have been able to retain some sense of balance through my life with regular exercise, loving relationship with my wife, an average job as a father to my 4 children, some spiritual fervor now and then and a keen and strong desire to always be the best that I could be in what ever I did.
I will be the first to admit that I am lazy - always looking for the shortest, fastest and easiest way to achieve what ever I had in mind to achieve.
The question is will a book be able to make you rich? And the answer is no.
The only thing that can make you rich is your thinking.
Thinking rich, acting rich, feeling rich and being rich is what it takes to live richly in your life. And it takes hard work, years of it in my experience. And it’s not for everyone is it?
Less than 5% of the western world will achieve FI. Why? Because less than 5% of the world are prepared to pay the price for FI.
What is Financial Independence?
My definition is: Sufficient income coming from passive (several hours work per week) investment sources - so that if you wished you could retire and do nothing.
Why FI? Because it allows you to have freedom. Freedom to do what ever you wish to do whenever and wherever you want. And that’s good enough reason for me to obtain FI.
For each person this amount of money required is different and depends on the rate of return that each individual investment earns.
Will you ever retire from life and do nothing? It’s unlikely even though it sounds good when you are over worked and under paid. More likely when you reach financial independence you will continue to keep active, keep productive, keep busy – contributing to yourself, your family, your community, your country and your world.
So How Will You Achieve Financial Independence in Western World?
For the vast majority of people (+80%) the best and safest option is long term (+25 to 50 years) residential property ownership.
Obtain a skill that is needed in your country, work as a good employee and save 10% of your gross income pretax from day one (living off the remaining tax paid amount) and invest your savings in residential property in the areas that you live in, know and understand. This is a long term investment strategy.
You will buy your first house with 10% deposit from your savings. You will buy a nice family home – 3 bedroom home in a leafy treed safe family suburb close to all amenities – the best area that you can afford.
You will put this property into a family trust from day one with your partner and children as beneficiaries.
You will get a principal and interest loan and continue to use your savings of 10% gross income to pay off this mortgage as quickly as possible.
This will be your family’s #1 financial priority. You will defer all unnecessary luxury spending and take on several other part time jobs to assist with the quick repayment of this loan. This may take 10 years or a it may take a lifetime.
Depending on your level of comfort with debt, this will determine when you purchase your first rental residential property investment.
When you have saved enough for a 10% deposit you will buy your second residential property (your 1st rental) - a nice family home – 3 bedroom home in a leafy treed safe family suburb close to all – the best area that you can afford.
This property will produce a small positive cashflow surplus after all costs including interest, maintenance and vacancy factor.
You will put this property into a family trust from day one with your partner and children as beneficiaries.
You will get a principal and interest loan and continue to use your savings of 10% gross income to pay off this mortgage as quickly as possible.
This will be your family’s #1 financial priority. You will defer all unnecessary luxury spending and take on several other part time jobs to assist with the quick repayment of this loan. This may take 10 years or a lifetime.
Depending on your level of comfort with debt, this will determine when you purchase your second rental residential property investment. When you have saved enough for a 10% deposit you will buy your third residential property - a nice family home – 3 bedroom home in a leafy safe suburb – the best area that you can afford. This property will produce a small positive cashflow surplus after all costs including interest, maintenance and vacancy factor You will put this property into a family trust and use both rental properties income to repay this mortgage.
And so on and so on…It’s as simple as this … but not necessarily easy.
It takes financial discipline and ability to work day after day towards a long term goal that will be of benefit to yourself, your family and your children.
Your Family Legacy
When you pass on you will leave your family this legacy of residential property investments that they will continue to build and pass on to their children over and over…eventually the family trust will have sufficient surplus cashflow that they can use it for either further investment, income distributions to family members and even charitable donations.
This long term investment strategy will create long term wealth for all people so that they can all become financially independent. Will there be enough houses for all everyone to buy? If not then we can all begin to buy houses from your nearest neighbouring country and rent them back to them!
The Other 20%
Even if you are in the other 20% of people with high incomes the key to your financial investment should be residential property investment. Sure you can own a business, some commercial property and some shares but make sure that at least 50% of your financial assets are invested in residential property.
Your Continuing Education
Spend 1% of your gross income each and every year without fail on your financial investment education. Read good books, listen to good tapes, join good groups and take good courses.
Focus on residential property investment education together with personal development and motivation. And if you can’t afford that 1% because you’re putting everything into paying off your mortgages then go and use public libraries.
Develop a positive habit so that you go from reading one good investment book per month to one book per week. The only way to expand your investment knowledge and skills is by books/videos/tapes or actually meeting experts. And as there are few real experts in investment world read good books.
Follow Unbreakable Investment Rules
Never Lose Your CAPITAL. (Never borrow against your family home ever.)Obtain a 15% pa return on your capital. At the start of your investment journey this will be hard but after you built up 1 to 2 investment houses this will be much easier.
DO
Buy houses that you can add value to and speed up the process of FI.
Buy properties that are under rented, under managed, under developed and over located.
Buy properties that are undervalued by at least 10% to current market values.
Buy in areas that are growing and in demand with good facilities and services.
Only buy positive cashflow properties after all costs including management and interest.
Buy properties showing a 10% gross income which after adding value grow to 15% net ROI.
Become gainfully employed in an area where there is a good demand – trades such as carpentry, electrical, plumbing, chefs…
Summary
Financial independence is a simple but not easy long term strategy effecting generations of your family line. Focus on buying quality residential properties – 3 bedroom homes – in good areas with good rental demand at attractive prices that yield after all costs cash flow surpluses. And then it’s only a matter of time, timing and good luck (hard work and perseverance) before you too become financially independent.
Further education and knowledge is needed so look for books and talk to experts on following subjects: Tax Advice/ Legal Advice/ Residential Property Advice/Goals-Brian Tracy
Is there anything else I would want to say to you if I was sitting face to face with you?
Yes I would say…Be good to yourself. Be Kind to yourself. Give yourself a break. You are doing the best you possibly can at this given moment so celebrate your current success.
Remember you are always at the right place at the right time with the right people doing the right thing. So it’s all OK and everyone else is OK. It’s all going according to plan and that’s all you have to know. You are in control of your thoughts and feelings so continue to strive towards your goals and be better than you have ever been before.
That’s all I have to say. I believe in you. You can do it. So good luck and take care. Be the Best.We are currently creating content for this section. In order to be able to keep up with our high standards of service, we need a little more time. Please stop by again. Thank you for your interest!
Chapter 2
TRUE GRIT
(BURNT PEAS)
Dedicated to John Wayne’s True Grit log cabin in Colorado mountains; my ancestors who I never really thought much about, but now I know have always believed in me and have given me an abundance of true grit for this life time; and my son Timothy for burnt peas. Thank you, Thank you, Thank you.
True Grit…what is true grit you may or may not ask depending on your level of interest.
True Grit…in my opinion is the key to success and financial independence.
In the western world only 5% of people will achieve financial independence at some stage (usually post 50 years) in their life. The freedom to do what they want, when they want, where they want, whenever they want.
And the other 95% of western world’s population will have to depend on some one else for money – either their employer or their government.
And I believe the deciding factor between these two types of people and their freedom and happiness is a little talked about human characteristic that I call True Grit.
True Grit is getting down to business… True Grit is doing what nobody else wants to do (even yourself) when it has to be done…True Grit is all about getting your hands dirty…True Grit is about doing whatever it takes…True Grit is working for as long as it takes…True Grit is never giving up…True Grit is never giving in…True Grit is knowing that there are going to be obstacles along the way to achieving your goals but that you are determined enough to get around them, or through them or over them or under them…any way that it takes.
Some of the best personal development advice that I have ever read is this…Howard Hunt (US Billionaire) when asked what was the secret to success said: Step 1- Decide exactly what you want and Step 2 - Be prepared to pay the price to achieve this goal.
I never really understood this quote until recently with respect to the part about “being prepared to pay the price” to achieve a goal. I mean what exactly does he mean? Anyways how could you possibly know what price had to be paid in advance in order to achieve a goal?
And I think that’s why he said “be prepared” to pay the price. I thought that this concept was simple. Just intellectually accept that you have to pay a price for achieving a goal. It is simple to understand… but it’s not easy to live, to apply, to put in place every day for the rest of your life if needs be, to achieve your goals - your destiny.
In my own life I have known for 40 years what I wanted - “my destiny”– to be financially independent. And it took me 40 years to achieve it fully. Forty long years.
Little did I know the price that I was going to have to pay! Little did I know the amount of True Grit I was going to have to apply. The true grit of persistence and determination in the face of obstacles that at times appeared insurmountable. Failures that were gut wrenching. Times of staring bankruptcy in the face.
What made me continue on? I’ve got to be honest… there were times when I wanted to quit and I did. Often for years at a time. But I did always come back -at a later date.
I applied and reapplied True Grit. And sometimes I had to hire people to help me. People that were better than I was at particular activities. I couldn’t have done it on my own. And I didn’t achieve financial independence on my own.
I honestly Believe that True Grit applied long enough and hard enough will eventually overcome all life’s obstacles and result in success.
Why is it sometimes all too hard? Why is it that sometimes nothing seems to be going like you want it to go? Who knows. But some how I believe that it’s all about developing character.
And perhaps developing character is like developing steel. It has to be tested and trued by fire before it is strong enough for use. Or like a cheap lump of coal that undergoes tonnes of pressure and stress and turns into a beautiful expensive diamond.
Perhaps for us humans to develop a strong and resilient character requires testing and tribulations so that we can overcome obstacles and be strong as steel both mentally and physically and as precious and beautiful as the most expensive diamond.
So continue towards your destiny. Do not be put off by other people’s scorn or criticisms. Believe in yourself. Be good to yourself. You are truly magnificent. You are special and loved by all your ancestors – all seven generations.
We are the 4th generation and our parents are the 5th, our grand parents the 6th and our great grand parents the 7th. Our children are the 3rd generation and their children the 2nd and their children’s children the 1st generation. All these people both living, dead and yet to be born are your true believers. They are cheering you on from the sidelines. They love you deeply. So go forth and create miracles.
Apply and reapply True Grit to all your activities starting today. And remember you are more than you see. All the world’s power and strength resides within you now. Are you going to use it for the greater benefit of yourself, your family, your generations?
And “burnt peas”…I stayed home today and cooked dinner for my family – something I don’t do very often. While cooking I was also writing this e-booklet and I happened to burn the peas. I served them up anyways and my teenage son Timothy made a big fuss about having to eat burnt peas.
The point is that none of it should have bothered anyone – both having to eat burnt peas and being criticized for doing something for someone else. That’s what True Grit is all about. Can you handle eating burnt peas? If not then how far are you going to go in life? Can you overcome criticisms and condemnations? Where’s your True Grit? Good Luck and True Grit.
p.s. I’m going to name my new cattle and horse ranch when I buy it for free “True GRIT”
Chapter 3
FORGET ABOUT THE NICETIES…
THIS IS NOT KINDERGARTEN
THIS IS A BATTLE
IN THE WAR OF LIFE
BETWEEN FINANCIAL SURVIVAL
OR FINANCIAL OBLIVION.
Dedicated to Sun Zhu, Donald Trump and Richard Branson who more than most to me exemplify the principle of battling as an underdog against the big guys, the big problems and winning.
I mean wouldn’t it be nice to think that we all could apply the principles of love thy neighbour and we could all become rich together holding hands as we walk off into the sunset...
Perhaps I live on a different plane here on this planet earth. Because to me my neighbour i.e. the latest vendor of a “great” business that I have just purchased with my hard won cash, has just ripped me off big time. The business is at the peak, competition is giving me a hiding and in the first year of ownership sales are down 25% from purchase date and next year down a further 40%... and that means I’ve probably lost over $1,000,000 cash without some miracle happening to revive it…and another neighbour, a trusted business mentor introduces a great business to me, where the vendor sells me a business that is financially bankrupt and losing big money from day one…
I’m going to advance a personal theory, a personal belief that a critical component of your character will determine how financially rich you will become. And this is all about how tough you are…being a tough negotiator, a tough deal maker, a tough businessman.
What do I mean by tough? I mean that you have to develop an attitude that does not care about what anyone else would, does, or could possibly think about you and your actions. You are only answerable to the man in the mirror – i.e. yourself.
This is by no means saying that you have to break the law. You must obviously stay within the laws of your community or else you will only have achieved a short term gain which will be offset by long term pain – ie go directly to jail!
What I do mean is that we all have a deep seated drive to be accepted by our community, our peers, our friends and our family. And unfortunately in order to become financially rich you are going to have to move way outside these boundaries.
You are going to have to break all kinds of self imposed and community imposed rules regarding what you can do and what you can’t do to become rich.
You are going to have to ignore it all.
You are going to have to do your own homework.
You are going to have to do your own thinking.
You are going to have to go against the crowd.
You are going to have to become a minority.
You are going to have to become part of the select few.
You are going to have to become one of the vital few and leave behind the trivial many.
And it’s not going to be easy. It’s going to be tough. Tough mentally. Tough socially.
I know personally that if I really wanted to be 10 times richer then I’ll have to be 10 times tougher. Primarily with myself in terms of financial discipline but also in dealing with others in terms of negotiating and deal making.
I have to set tough standards of investment criteria and then I go out there and try to fill them. And it’s not going to be easy.
I’m a firm believer in contrarian investment. Buying bargains that other people don’t want to buy. It’s my business to against the crowd – the trivial many – the investment herd.
I make tough offers that other people laugh at me for because they are so low. But it’s all about toughening yourself up mentally. In the end at some point in time, deals are accepted and then the profit margins are built in from day one. And then we can go about adding value and reaping the rewards in the future.
We have future protected ourselves with our entry price. The principle is the same whether you are buying a business, a property or shares. You don’t want to pay a lot of money for goodwill.
When you are beginning to build your investment funds I would suggest that you want to buy good businesses at a great price and then when you get as rich as Warren Buffett you can change your investment criteria to his of “buying great businesses at a fair price”!
So is all this true. Who knows? I remember reading once somewhere that Rene Rivkin had said that to be a billionaire you had to be a real bastard… and I take it he was referring to kerry who at one time he worked with. It’s my opinion from reading second hand accounts about those who knew kerry best that he was one hell of a tough negotiator – a bastard at the board room table. There was no room for continued screwups and cockups or people would be fired. That it was all about delivering the results.
Well I couldn’t agree more. Business is a battle. It’s a competition. Only the strong and fearless survive. Let’s forget about the niceties. This is not kindergarten. This is war. This is business. This is life and death. Financial Survival or Financial Death.
This is not to say at all that you need to become unethical – a cheat – to win. This is saying that you must play hard. You must play fair. But most of all you must be tough!
Good Luck and Best Wishes for Great Richness, Wealth and Success.
Chapter 4
TODAY I AM A BILLIONAIRE…
(AND YOU ARE TOO BUT MAYBE YOU DON’T YET KNOW IT)
Dedicated to Sir John Templeton the grandfather of mutual funds and Templeton Group.
Today I am a Billionaire – and you are too but maybe you don’t yet know it. Where did this theory come from. Well to tell you the truth it’s not mine. It’s Sir Templeton’s…the grandfather of mutual funds investment. When asked what the secret to being a billionaire was (and he is one) he stated “GRATITUDE”. An attitude of gratitude.
Well that’s a different theory from last chapter where it was proposed that to be a billionaire you had to be a real bastard! Isn’t it? But I like the “attitude of gratitude” theory to richness, wealth and success a lot better and that’s why I’m sharing it with you.
Once again it took a long time – years and years for me to figure this out – that the secret to being a billionaire was an attitude of gratitude. I can remember saying to myself over and over what kind of bullshit is this? How could an attitude of gratitude possibly be able to assist one in becoming a hard coin cash dollar billionaire?
If you read a lot of personal development books like I do then you’ll know that all of them pretty much same the same thing over and over…they tell you to act as if… it’s impossible to fail…like you want to be…like you already have what you want…Well I tried all this. I tried to walk as a billionaire would, I tried to talk as a billionaire would…
And you know some things made sense. When I was sitting in the sun drinking orange juice, I could honestly say to my self that even a billionaire couldn’t have it any better than this. “It doesn’t get any better than this mate.”
Hey let’s be honest. Would the sun be any hotter than this for a billionaire? Would the orange juice taste any better? Would the sky be any bluer? Would that ice cube in my drink be any colder?...So you know what. Right here and right now for this moment I am truly a billionaire.
Hold on I can hear you screaming out to me…let’s be real mate…you don’t have $1,000,000,000 cash in the bank…you don’t have billions of dollars of property assets, businesses and equities – do you mate?
And it’s true I don’t. I’m talking about a different kind of billionairedom. I’m talking about being a spiritual billionaire… a what? Yes you read me right…a powerful spiritual billionaire. Whether you know it or not, we were all born as powerful spiritual billionaires. And by billionaire I mean rich in all aspects of life – mentally, physically, socially, family, money, time…
What’s the only thing you have control of? Or should I say that if you are like the majority of people, you have the potential to control, but you let it run riot?
Your decisions… your thoughts.
Which lead to your feelings.
Which lead to your actions.
Which lead to your results.
Which leads to your beliefs.
Which leads back to your decisions and your thoughts.
So where am I going with all this?
If you just decide right here and right now to think a thought that you are truly a powerful spiritual billionaire over and over…then you will have billionaire feelings…you will take billionaire actions...that will lead to billionaire results (ie you will have all that wealth in your hands)…and that will lead to a strong belief that you are truly a powerful spiritual billionaire.
So it’s something like BE, then DO, then HAVE.
BE the person you want to be through the one thing you can control – your decisions and your thoughts, flowing onto your feelings)…
then DO required actions
and HAVE expected results.
So what does all this have to do with GRATITUDE you ask?
Well let’s just decide that it’s true. An “attitude of Gratitude” is the secret of being a billionaire.
So all day long I am going to think thoughts of gratitude for everything I have in my life…my significant other, my children, the home I live in, the car that I drive, the job that I have, the country that I live, in the air that I breathe, the oceans that I swim in, the people that I work with and socialize with…
Do you see and hear and feel what’s happening here? You’ve tapped the power of gratitude to create an inner belief that you are truly a powerful spiritual billionaire and that will, as surely as night follows day, lead you to the outer manifestation of billionairedom in your world.
And how fast will this happen for you. Well it all depends on you. Your next decision. Your next thought. You can have a powerful spiritual inner being of billionairedom right here and right now…or if you so decide it can take you a week, a month, a year, a life time…the choice is truly yours.
So go forth and create miracles with your thoughts of gratitude.
Chapter 5
I DON’T CARE ANYMORE ABOUT BEING…
A BILLIONAIRE
Dedicated to Deepak Chopra and the law of detachment.
I have now reached the point in my life where I no longer care if I achieve anything else.
That is not to say that I’m not going to continue forward day by day with the appropriate thoughts, feelings and actions towards the successful achievement of all my goals and dreams…it’s to say that I no longer care whether or not I achieve them.
And this is truly a powerful place to be in. A powerful state of mind.
I now know that I truly can achieve any worthwhile goal I decide to achieve…or to rephrase that I can move towards…in the direction…of that goal…I may run out of time on this planet to fully reach this goal but I know that I can, if I want to enough and am prepared enough to pay the price, achieve most all my goals and dreams.
So what is the point of telling you this. Is it to brag that haha I’m better than you?. That I am more powerful than you. I hope not for my sake.
I meant to tell you on some level of communication between ourselves that you too can be as big as any dream that you can dream.
So once again who did I learn this law from? Deepak Chopra – and he called it the law of detachment which states “relinquish your attachment to the outcome, step into the unknown and you will step into the field of all possibilities.”
There is great power in relinquishing all your attachments to your intentions. Why? I don’t know but all I can say is that I feel the power. I now no longer care, in a positive fashion, about the outcome achieved.
If I get richer that’s great. If I stay the same that’s OK too.
I’ve got to be honest though I have not yet, and may never in this life time, reached a level of detachment where I would be comfortable losing my existing wealth and having to start all over again! But that should never happen as long as I follow the 1st and most important investment rule: NEVER LOSE YOUR CAPITAL!!!
This detachment to the financial outcome of my goals and dreams might not seem a very big deal when you look at it written here on paper. But for me it is. A Big Deal. A big Change. A big Relief. 40 years of attachment and worrying about end results. No longer required. Wow.
And do you know what? I have a deep and powerful feeling that I have tapped into the source of all power and richness and wealth.
And that I am going to manifest even greater riches in the future – all because I no longer care.
So perhaps you could decide to implement this strategy into your life today in some fashion and reap the benefits!
The benefits of peace of mind and greater wealth. Wow. Sounds like a miracle formula to me!
Chapter 6
SELF CONFIDENCE – IT’S A DELICATE THING
Isn’t self confidence a delicate thing? Just look at sports teams. The NZ women’s netball team the silver ferns – the current world champions - lost badly on weekend to Australian team. Why? Who knows? Perhaps it was because the world’s greatest goal shoot didn’t start? But you can bet one thing. The silver ferns have suffered a massive blow to their self confidence. The question is can they get back up to win the world cup again?
I know another person who is in their 60’s and building a business model from scratch. Putting every thing on the line – all their money including family money and all their time – husband, wife, son and daughter. And it hasn’t been smooth sailing over past 2 years for them. They have been beset by obstacle after obstacle and are still staring at huge mountains of obstacles yet to overcome. And yet I was recently talking to him on phone and he was telling me how grateful he felt toward every one and every thing going on in his life. His self confidence is strong – even in the face of great adversity.
So how strong is your self confidence? Doesn’t it depend on how well things are going for you in life at the moment? I mean if everything is coming up roses for you it’s pretty easy to have a strong self confidence and a strong self belief in yourself.
But what about when it’s all turning to custard? When nothing seems to be going according to plan? When it all seems to be too much? Too much trouble? Too much struggle? When you’d rather stay in bed and hide out. Come on we’ve all been there.
What did you do to get going again? Perhaps you do need to take a break. Take a holiday and re-think your objectives. Or perhaps you need to laugh at yourself for taking your self so seriously. For being childish. For lacking drive and ambition. One of my favourite quotes is from Bob Proctor and goes like this.
“Your name, you are a child of God and the being God made was never intended for the sort of weak, negative life you are leading. God made you for success, not failure. God never made anyone to be a failure. You are perverting the great object of your existence by giving way to these miserable doubts of yourself, of your ability to do what you desire with all your heart to be. You should be ashamed to go out amongst your associates with a long sad dejected face, as though you were a misfit, as though you lacked creative power within, as though you did not have the ability to do what your Creator sent you here to do. You were made to express what you long to express. Why not do this? Why not stand tall and walk like a conqueror – like David who slew Goliath, like William Wallace who defeated the English, instead of giving way to discouragement and doubt and carrying on like a failure? The image of perfection, the image of your creator lies within you now. You must bring it to the center of your conscious thought and express it to the world. Don’t disgrace your maker by violating that image, by being everything but the magnificent success that God intended you to be”
Good luck and best wishes to all.
Chapter 7
NEW MONEY vs OLD MONEY or Capital Gains vs Income Cashflow
In the beginning of your investment career assuming you are starting off with no assets, then any money that you earn and save, is new money. For most people their daily income comes from their major source of employment – their career. Usually their first investment is a house and a mortgage which they live in. As they pay off their mortgage their savings can be used for other investments such as more property, shares or a business. And with hard work, good luck and continued investments, they build up investment capital which produces investment income.
The question that I want to address is to become financially independent does one have to focus on capital creation or income creation or a combination of the two? And all I can speak from is my past experience. And that is that I am hard wired for capital generation.
Every business decision that I have made up until a few years ago was based on creating more net tangible assets – capital creation. And I did it virtually 100% through commercial property investment. Personally I have found cpi a great way to generate capital over a medium term period of time being approx 5 years per property with some as short as 3 years and some as long as 7 years. And because when we started we had very little investment capital we always purchased problem properties that needed value added to them.
However I did realize along the way that we never had any surplus cashflow from cpi Every time we got some spare money we would have to spend it on a fitout in an existing building, use it to prop up a cashflow negative building, buy another property etc.
So several years ago I decided to purchase some businesses and try to develop some business skills and develop sources of surplus cashflow. Well I quickly learnt that businesses don’t have surplus cashflows either as you are always putting more and more money back into the business to grow it bigger.
I also discovered after losing several million dollars that I was not personally suited to being involved in the direct hands on management and ownership of the business world. So I am in the process of getting out once and for all although I am looking at staying involved in the business world through j/v’s and public listed equity investments.
OK so what does all this have to do with new money vs old money and capital gains vs income cashflow? Well until I actually sold some property and put some cash in the bank (now approx 30% of my NTA) I didn’t understand it either.
When I looked at those 80 odd houses in queenstown, noosa and gold coast, it was the question “the money or the bag.” Do we keep the income or do we trade it for the capital gain potential? The bag represents the possibility of future gains or losses.
Or the question could be “new money decision or an old money decision”. A new money decision is a higher risk capital gains strategy. An old money decision is a safe and secure income cashflow decision. Old money wants to protect their assets and keep a strong internal cashflow. New money is willing to bet all the winnings over and over to increase their capital.
The point is that at some stage, even if you are very lucky, which I was, at some stage you are going to lose. And if you’ve continued to bet the lot then you can get totally wiped out. And are you sure that you can duplicate your past successes? Aren’t there circumstances and events that happened during this time that were out of your control which went in your favour?
So at some stage in your investment career you are going to want to change over to old money – with at least part of your wealth. For the long term security of your family and their future generations.
And then you can start thinking about long term + 10 year investments. Now you can afford to buy that large vacant piece of industrial land and build industrial buildings over next 10 years as and when you have solid tenant demand.
You can buy that semi-completed residential development and turn it into a retirement village and complete the development over 10 years and hold onto if for a generation or more.
New horizons – new journeys – new beginnings.
So good luck with your daily “the money or the bag” decisions!
Chapter 8
THE POWER and the PASSION
Just what is passion and power all about? And how can we use it in our lives? It’s exceptional in our culture to see truly passionate people. In Australasia I can only think of one person who appears to exemplify this trait fully – and that’s Steve Irwin? Of crocodile hunting fame and owner of Australia Zoo. He has so much energy and passion when he’s talking about wild life and how to save them from extinction. That passion brings a lot of power for him to get things done in this regard.
So what is your power and passion? Think back over your life where you felt huge energy and excitement? In my life it’s when I’m involved in deals wrt commercial property investment and redevelopment. Unfortunately because of my investment beliefs I have been out of the market a long time now – 7 years in fact. During this time I have diworsified into business investment and share market trading and speculation. All of which have been financially costly but rewarding wrt mental learning and toughness. Ten business failures and 2 sharemarket total wipeouts later I am still trying? To find the holy grail of successful business and equity investment. Perhaps my hard wiring whereby I am good on technical and mathematical analysis is not suited to business investment world of people and management skills. Of this I am becoming more and more certain every day.
And what about “the grass is greener” concept. I have been feeling lately that going to Australia to live and invest in commercial property would make good family, education, business and investment sense. However perhaps once again I am wrong. It appears to me that perhaps NZ is the world’s greatest country for property investment because of its low tax regime – no stamp tax, no capital gains tax, no death duties and no land tax. A small population who loves to spend and own their own homes (70% of population). Less competition or their was until all these aussie bastard super funds flocked in. Australia is obviously larger 5x but more competition and higher taxes and it would realistically take five years to get to really understand an area which you would have to guess had a long term successful financial future. I’ll just have to wait & continue to exercise more patience.
What I can do is take $1.0m and turn it into $10m over 7 to 10 year time period. This is less money than had last time around – only had $500k and total NTA of $1m. But it all comes down to timing – being at right place at right time doing right thing with right people. And that’s something that you cannot control.
So…next 6 months I expect to take $1m capital and go back into BHP shares. Initially I made a profit of $50k on BHP and 2 takeover bids, then I lost $65k on Warehouse takeover bid so I’m down $15k. Looking to recover my loss and make another $150k on BHP over next 6 months–ie total ROI of 20%. While waiting for cpi cycle to turn to buy.
2007 looking for higher inflation because of oil price rises due to arab conflicts in Gulf states leading to higher interest rates & falling rpi & sharemarkets with cpi coming back 2008/2009. If it happens like this its 3-4 years later than I expected it to happen ie 2005.
Chapter 9
BAKER’S DOZEN BUSINESS FAILURES – WHEN IS ENOUGH – ENOUGH!
1st business venture was purchase of Huka Village Games (HVG) a mini- golf course in Taupo in 1986 for $25k which was all our life savings. I was 30 years old just married with our 1st child. It was a brand new business that was for sale at asset value due to a failed marriage. It never worked as we could not get sufficient tourist traffic through the village and not many people wanted to play mini-golf while there. Sold HVG in 1989 for $10k after owners confiscated it for free. Total loss +$25k excluding hours of lost time.
2nd venture was the purchase of listed public company Hobson Group shares in 1986 and 1987– a commercial property development company that was struggling. I had insider information that it was going to come right and I invested all my spare cash – redundancy payments from State Coal mines – being $12.9k. Hobson went into receivership in 1988. Total loss being $11,645.
3rd venture was the purchase of a Brian Tracy (BT) license whereby I could sell his books, tapes and cd’s. Cost $25k. Loss $25k due to no demand.
4th venture was purchase of Propertyi (Pi) an internet based commercial property leasing and sales website. Cost $30k. Loss +$50k due to no demand.
5th and 6th ventures were purchase of an American franchise system in 1995– LAI – commercial property lease auditing system for NZ and Australia. Cost $250kA. Loss +$500k in 1999 due to system did not work in NZ and Australia.
7th venture was purchase of Panmure Fun Station and installing all equipment in Hamilton 1998. Cost $50k. Loss +$100k. No demand & could not compete with Lollipops.
8th venture was purchase of $300k of australian shares through rene rivkin share tip sheet in 2000-2001. Total loss $50k.
9th venture was purchase of Surabaya (SHL) in 2003 for $1.0m. SHL was an import wholesale business bringing in retail goods for $2 type shops. Closed down business in 2006 for loss +$1m.
10th venture was purchase of All Clean (AC) in 2004 for $250k. AC was a chemicals manufacturing business. Sold AC in 2006 for loss +$100k.
11th venture was purchase of Gone Agencies (GA) in conjunction with AC. GA was a pest control manufacturing business in Australia. Loss $50k.
12th venture was purchase of X-Direct for SHL in 2005 for $50k. Business did not work and selling off stock. Total loss $25k.
13th venture was purchase of Ads on Wheels (AoW) in 2005 for $50k. An advertising business on car wheels with rights for NZ & Australia. Loss $25k due to failure to work.
So…what did I learn from all these business failures? Well…perhaps not enough but here goes.
HVG- after that loss in 1989 I sat down and wrote out 14 things that I learned. If only I had applied them perhaps I wouldn’t have had a further 12 losses. For fun here they are 1) Marian – not to become involved in any sort of business with young pre-school children – as it’s impossible 2) Don’t become involved in greenfields (new businesses starting from scratch) ventures – risk is too high. It took me several more greenfields businesses to learn this for good. 3) Only buy a business where you’ve got complete control. We were at whim of HVG management. 4) Always buy land & buildings if possible – if not then pay close attention to all aspects of lease particularly clauses wrt settlement of disputes. My 1st hand learning of power of a lease to landlord. 5) Never invest in a business which is not within easy reach of your home. 6) Any small business involves hands on daily management for its success. How many times did I have to learn this over years- and still don’t get it. 7) Only invest in businesses operating in areas that you are familiar with. OUCH out of 13 business failures I can safely say that only 3 businesses did I have any direct experience – BT, Pi and LAI. 8) Just because something appears cheap does not mean that it will be successful. Out of 13 ventures I believed that I was buying 12 bargains based on paying only a fraction of original asking price. SHL was the only business where I paid full asking price – but I believed at the time that I was getting it a lot cheaper than current market value which the vendor and his accountant (supposedly) confirmed! 9) Always sleep on every business decision and apply full due diligence and market research to every investigation. In general I am slack in areas of due diligence. BT talks about the fatal flaw in every business for sale. “Look for the fatal flaw in most business propositions. No one sells a successful Business. Whenever someone is attempting to sell you an existing business always look for reasons why. There is almost invariably something wrong with it …a fatal flaw. Usually people who are selling a business are selling because they are losing money in it. Take the time to find out why a person would be selling a successful business/ It’s very seldom the reason you are given. If you can’t find the fatal flaw, and 99% of the time I do find one, and you are thoroughly convinced there is none, only then should you go ahead with it.” 10) Timing of investment is of critical importance – is it the correct timing. Currently 7/06 Feltex Carpets a NZ listed public company floated in 2004 at $1.70 per share is going to be sold to a rival for the maximum sum of 12 cents per share. Excellent timing for venture capital company that floated feltex in 2004. good timing for Godfrey Hirst buying feltex? Poor timing for NZ share investors who have been financially wiped out. 11) Location of investment is also of great importance – is it the correct location for the business? 12) Never operate on optimism alone – develop at least 2 and preferably 3 alternative scenarios for success or escape if the original business model fails. 13) Remember Murphy’s Law – “Everything that can go wrong will go wrong” and be prepared for failure with alternative scenarios and strong liquidity and 14) Maintain cashflow at all costs- “Cash is King”. Never borrow short term to invest long term and allows maintain cash reserves.
All excellent advice 17 years later. I continued on trying to develop businesses from scratch but after several more failures decided to try the franchise route and combine it with something that I knew about and had a passion for. LAI seemed on surface an excellent choice – it was a very successful USA franchise, it was in field of commercial property and most of all we could build a network of LAI associates throughout NZ and Australia who were working with large tenants who we could provide accommodation for when they need it. This was going to be a goldmine for us – at last. Well…it all failed because the work was done on a contingency basis whereby associate found landlord rental and outgoings overcharges and when they made a recovery they shared it 50/50 with tenant. We did find landlord overcharges but in general landlords refused to pay up and as tenants did not want to sue the business model died a quick and painful death.
In 1999 I made a big purchase for me of $10m of cpi based on 100% gearing (at that stage my total nta was only less than $2.0m). After a few years I was ready for some more action but was unable to buy any more attractively priced cpi. So I decided to buy an existing well run and profitable business that had been going for at least 10 years. No more start ups and no more franchises. I was going to pay a premium and buy best business I could afford. And I bought SHL for $1m which had sales of +2m pa and npbt of approx $500k. Unfortunately I bought it at the top of the cycle with lots of competition moving into this field and my future manager left to start up against me with the assistance of former owner of SHL. I purchased a lot of old redundant stock at high values and sales and profitability fell until I had to sell the business for stock value of $300k or just close it down. AC was introduced to me by my business mentor and once again I made several mistakes: I placed too much faith in my business mentor who was related to AC owner and I let him handle bulk of negotiations; I didn’t do proper due diligence particularly wrt investigation of company financial accounts; the business had 2 other buyers, 1 of which I met but I should have met with other buyer; I didn’t do a credit or police check on vendor which would have shown me he was a criminal and the business was dependent on 1 major client which made it very vulnerable.
The last business I bought AoW was brought to me by one of my managers who believed in it. I didn’t but I decided to buy it as a hobby for all managers and jokingly that maybe it would be a huge success seeing as how this time I didn’t believe it was going to be a success. Well a business as a hobby has no one taking responsibility for it and after 1 year nothing was done. Then we got the wheel trims on a car and within 48 hours they fell to bits. So much for a huge success!
So the question is: When is enough really enough. How many more businesses will I buy before I get a success? Does this mean that out of the hundreds and hundreds of businesses that I have looked at over the past 20 years there have not been any good ones that I have turned down? No that’s not the case. In fact I’m looking at 1 now that I turned down 7 years ago for $500k. The price now? $2.50m. Also just before I bought AC I had a contract on another chemical manufacturing business – Supershine. I turned down SS only to end up selling AC to SS purchaser who said it turned out to be a fantastic business.
Why have I had so many failures? What does it all mean? You know what…I don’t know!
Chapter 10
CASHFLOW IS KING – THE POWER OF LONG TERM PASSIVE INCOME
Even though I don’t like bob jones, which I’ll get into in another letter, he is one of NZ’s top commercial property investors and he does makes a lot of sense in some things like investment.
Jones on Property “Good Cash Flows Keep Deals Well Oiled”
I refer to the necessity of maintaining a sizeable cash flow, the absence of which is frequently the cause of a young developer’s downfall…
I recall in my own early property development years feeling constantly puzzled that, the more money I made, the greater the financial pressure I seemed to be under…
He went to ron brierley of Brierley Investments and GPG fame, who explained the rationale of cash flows which to this day I have adhered as a matter of policy…
Simply once he developer has reached a certain size, he must always maintain a major percentage of his capital in permanent investment and utilize the minor portion for capital development. The cash flow from the rental income provides his living, his business overhead and a surplus as well which will prove of valuable use in emergencies to meet capital shortfalls with development projects.
It will also provide the developer with a peace of mind and absence of pressure that will facilitate clearer decision making and, as a result, his development capital will grow bigger more quickly.
I cannot over stress the importance of a cash flow and, in my case, I have a policy of giving the permanent investment component of my activities priority over the capital development sector and currently maintain a gross ten million dollars of cash flow producing property to that end.
Practically every week there’s a bargain on the market with the accompanying explanation that the developer has his back to the wall and is strapped for cash. This would not occur if the developer had more modest aspirations and had balanced his capital development with a corresponding investment portfolio.
An entrepreneur’s tools of trade when beginning his career are, of necessity, his initiative, imagination and energy. He should aim, however, at changing these for the far more sophisticated and easier tools which a large capital sum represents. One can live on one’s wits only so long….
And “My Property World”
The short answer to the dilemma of the constant quest for financial security and a trouble free existence lies in these golden words “cashflow”. And it is cashflow that the developer, the land subdivider and property trader never have. In the property world, cashflow is the sole domain of the investor, yet further testimony to permanent investments superior virtue over the other property activities. Sailing through future economic storms for prudent investors means owning quality buildings, ensuring excellent building maintenance standards and tenant relationships and whenever possible negotiating long leases.
Nearly all property investors start as traders. The vast majority of property operators are traders and remain traders throughout their lives. They need only the readily available current market knowledge – market rentals, lessee demand, building costs and yields. The flaw in this activity is that every success takes them back to scratch in a constant treadmill process and their profits are insignificant compared to a passive investor who makes the right future forecast.
History shows that the vast majority of fortunes are made by astute investors in conventional activities such as property who choose their particular investment vehicles and stick to them, never selling, through thick and thin. Usually such individuals have begun in conventional trading activities, climbed a few rungs on the financial ladder through energy and hard work and then seen the light. (ie Warren Buffett and his “less is more, buy quality and never sell” simplistic approach. To reiterate the successful property investor must be both a historian and a prophet. He will begin mostly as a bargain hunter and naturally will never forego any obvious bargains that fall into his lap – but he will not waste time seeking them out. Rather he will concentrate on studying market cycles, paying particular attention to likely future supply and demand imbalances. If he calls it right and recognizes periodically the entire market is a give away, then a relatively generic approach to acquisitions can be applied with a huge pay off down the line.
In short, the golden rule of property investment is to buy quality at a fair price and never sell!
So can I make the change from “bargain Hunter” to “corporate investor?” So far I haven’t.
Chapter 11
IT’S THE END OF AN ERA – THE FALL AND FALL OF EVEREST BUSINESS
Since early 1990’s I have always wanted to establish a group of successful businesses owned by Everest Business Investments so as to generate positive cashflow surpluses for Everest Group. During this period of time I have looked at hundred’s of potential companies and made dozens of offers which ended up with the purchase of 3 larger companies: 1) Leasehold Analysis International – commercial property auditing license rights for Australia and New Zealand in Nov 1995 for $250kA; 2) Surabaya Holdings in April 2003 for $1mNZ– an import/wholesale company with sales of +$2m and Ebit of $500k and 3) All Clean Holdings Ltd (AC) and Gone Agencies Pty Ltd for $250kNZ in Dec 2004– a chemicals and cleaning and pest control products manufacturing company with sales of +$1m and Ebit of $170k.
Each of these companies was purchased with the original intention of building them up to be independent companies capable of producing +$1m pa ebit. The reason being that for me commercial property investment (cpi) has been an excellent means of creating net tangible assets (nta) but poor at generating surplus cashflows. Businesses were meant to be great at developing surplus cashflows and of less value to creating nta growth. And combining the 2 disciplines together would give Everest Group new good tenants and property opportunities together with resultant NTA and income growth.
But in the end it all turned to custard. Best of intentions not working out in real world. LAI lost about $200k; SHL was sold last week for $210k – loss of approx $800k and a loss of approx $100k for AC…all up losses of about $1.0m and lost time of about 2 years LAI, 3 years SHL and 1 year AC – a total of 6 years time and energy and commitment – and not just from myself but also from all my 5 managers and associates. A painful lesson indeed – for all involved.
So what did I learn from all of the above.
1) Well the number one thing which I thought I already knew on (but it must have been only on a theoretical level and now hopefully it’s on a gut level) – ONLY BUY A BUSINESS THAT HAS A PROVEN STRONG DEMAND / HIGH PROFIT MARGIN / STRONG MONOPOLY / COMPETITIVE ADVANTAGE. LAI didn’t have a proven strong demand; SHL didn’t have a monopoly and thus a protected high profit margin and AC didn’t have a CA or high profit margin.
2) A business is all about the people and not the numbers. Cpi is all about the numbers – and that’s my strength – I’m good at the numbers. But owning and operating a business successfully long term is all about people management, relationships and communications– with your staff, your customers, your suppliers, your bankers etc. People management, relationships and communications are not my forte – to a certain extent I would be quite happy being a hermit on a deserted island – or living in a mountain cabin by myself off the land – or being a monk living in the desert - a simple uncomplicated life. So perhaps I was doomed to failure from the start. I was aware of these short comings before I got started but I wanted to grow and expand that side of my personality and what better way than by jumping in feet first.
But not once did I get even a 50/50 break – not once did I get a business that took off despite my weaknesses. Not once did I get a boost of self confidence and self esteem…and now after 20 years of business failures I don’t know if I have the energy, the drive and the determination to start all over again with another business.
It’s also interesting to note that each of the people who sold me these businesses was subsequently proven to be less than an honest and trustworthy person. My wife has told me all the time that I place too much trust in people - that I am naïve and that comes from my small town background where we knew everyone and trusted everyone. The vendor of LAI – ross was a saleman out to make a buck and we got sucked in by the big story business from him on the basis that his health was not good and he was retiring – but he took my key staff and started up in opposition and took my clients even while I was employing his wife for 3 years at $60k pa; and 3rd vendor was the worst – kerry of AC – a convicted criminal who lied about everything and I was blinded to this by the fact that I placed all my trust in my business coach eddie who arranged the purchase and ultimately deceived me for the money.
If I pride myself on my honesty and trustworthiness then why am I attracting such people into my life? Is it because deep down I am really no different from them? Is it true that you attract into your life people and events and circumstances that you think about most – that who you really are deep down inside? Or perhaps that’s just all mumbo jumbo crap and it’s all about overcoming obstacles placed in your path to develop your character and inner strength and faith. Or perhaps it’s karma. Or perhaps it’s fate. Or perhaps it’s just chance!
3) Business is HARD YAKKA! It’s much harder than cpi – much. There’s so many variables involved – and lot’s outside your control. Take shl for example – it had a strong position but then more and more people entered that area of import/wholesale of $2 retail goods and as everyone was importing the same thing the only way they could differentiate themselves was by price – and lowered prices led to smaller margins combined with greater competition leading to lower sales – all led to a slow death spiral to hell. I took a company in less than 4 years from $24k in daily sales to $24k in monthly sales! SHL goodwill of plus $500k was destroyed in less than 4 years and I would be hard pressed to ever buy a business directly that had a large (or even any) goodwill component.
So in conclusion…I’m going to concentrate on buying BUSINESSES THAT HAVE PROVEN STRONG DEMAND / HIGH PROFIT MARGIN / MONOPOLY / COMPETITIVE ADVANTAGE, with STRONG COMPETENT MANAGEMENT TEAMS, at ATTRACTIVE ENTRY PRICES. And the only place you can find them is on the world’s listed sharemarkets. And that brings a whole new set of skills and knowledge to bear. I am under no illusions that this is a difficult field to consistently win in. My objective is to limit my investments to 10% of my nta and look to make a consistent 15% roi over the long term using conservative low risk strategies.
And that is the end of EBIL – at this point in time I have to give in. Even up to the last week before selling shl I was making offers on other businesses in the hope of a miracle resurrection of shl. But now its sold – its gone – and it’s a sad time – as not only is shl gone but so is the dream of ebil and also the dream of club 500 – at one point I had 5 managers – mike green – epil; mike pocock – epdl/ebdl; peter tapper- ac; ling ha/john murray – shl and toys to go…plus further 6 to 10 staff. THANKS to everyone over years involved with EBIL.
Chapter 12
ASK THOSE WHO DO IT BEST
-What are the most valuable lessons you’ve learned about being successful?
-What was most helpful to you when you were learning the ropes?
-What are the biggest mistakes to avoid and the greatest obstacles to overcome?
-Whom else would you recommend I talk with?
-What books and periodicals should I be reading?
-Are there any courses I should take?
-Are there any professional associations I need to join?
-What do you do to stay up to date?
-If you could give only one piece of advice to someone who wanted to do what you do, what would it be?
-What should I do next?
-Did you accomplish your success by setting goals with timetables and deadlines?
-How do you maintain your balance?
-How do you stop worry and fear after you’ve made a commitment?
-How do you overcome defeat and despair?
-Are you happy? Do you wake up in the morning happy? Or frustrated and worried?
-How do you stay motivated? Long term?
Chapter 13
THE POWER OF CONTROL or the $100,000 Phone Call
In my latest business mentoring session it was brought up that the contributing factor to my financial success was my ability to control – people, events and results. When you first mention control as positive genius potential it doesn’t seem to fit the bill. Webster’s dictionary definition of control “restraint, authority, to regulate, to be in command”. So it doesn’t really have negative connotations. So let’s look at cpi and see how the factor of control comes into play.
There are 5 factors for success in cpi: 1. Purchase – directly controlled – when, where, how much, etc 2. Building – location and quality – both directly controlled through original purchase 3. Tenant – quality and lease – both directly controlled through original purchase and through subsequent leasings although whether or not tenant decides to renew their lease or take on a new lease is outside our direct control. 3. Finance – directly controlled as a condition of purchase 4. Management – directly controlled by your company or indirectly by another company under your control and 5. Sale – directly controlled – when and how much.
And along the journey what kind of things can happen and how can they be controlled?
1. Loss of Tenants – you can release yourself or through an agent – you are in competition with other landlords who have similar vacant space. If you purchased a quality location and a quality building with quality space you should be able to obtain a quality tenant at a quality rental rate 2. Rising Interest Rates – use fixed interest rate interest only loans.
So overall a very good reward to risk ratio for cpi. Cpd has more factors out of your control – such as building costs, tenant leasing and rental rates achieved, interest rates, cap rates and end sale prices. So cpd has a much higher risk:reward ratio than cpi.
So lets look at businesses – firstly franchises such as our LAI investment. Factors for Success 1. Obtaining LAI associates – not directly under our control -we were able to obtain 20 odd over time – but it was hard work doing to it being an unproven system – and quite rightly so 2. Lease errors – not directly under our control – we did find errors but it was like a lottery and we had to look at a lot of leases to find that 1 error and
3. Landlord refunds – totally out of our control and the factor that ended LAI – landlords would not in general (other than Asians) refund tenant’s overpayments. So limited to no control equals business failure.
So how about SHL? Factors for Success 1. Loyal Staff – not directly under our control - I didn’t sign any of old staff up on employment contracts and 1 key staff member did leave to go out in direct competition with me. 2. Loyal Customers and best methods of sales and marketing– not directly under our control – existing customers left for other suppliers and also went to our ex-employee’s new company 3. Sales Price and High gross profit margins which has a number of categories such as excellent buyers of popular stock, at lowest possible prices– some in and some out of our control – being affected by exchange rates, our chinese buyer contacts and charges, our competitors prices etc and 4. Operating Costs – under our control to a certain extent – was about $250k pa now $350k pa. So out of 4 factors being staff, sales, prices and costs – only 1 factor under our complete control, 1 factor partly under our control – staff and 2 factors totally out of our control. So very high risk to reward ratio. Obviously some people are very successful at businesses and therefore you would need to lower the risks in areas of staff loyalty, sales and customer loyalty, and pricing by becoming or bringing in experts to assist with these areas. I did believe that I have hired 2 good managers Ling and then John and we have good staff loyalty subsequently but the area that we couldn’t control ever was increased competition, better buyers of right stock at lower prices than us and better sales methods through sales people, catalogs and indent. It all comes down to there being too many areas to control. And unsuitable for my skill sets of numbers based, hard driving negotiation and control driven personality.
So how about sharemarket investment? Factors for success 1. Strong monopoly competitive advantage driven business 2. Long bright future of consistent earnings growth for that business sector. 3. Excellent entry price near to net tangible asset backing.
4. Strong economic growth and business success. The 1st two factors if you are skillful enough can be applied. The 3rd factor is about patience and good luck. The 4th factor is completely out of your control and all down to good luck. 60/30/10 success in sharemarket is economy/sector/business. So 60% of success comes down to picking right economy at right time and place and 30% in picking right sector within that economy that is going to benefit and only 10% of your success is picking the right business and then buying shares in it. So no wonder not many financially independent people come from sharemarket investing. Too much risk for too little reward.
How about a corporate raider? Not interested in factors 1,2 or 4. Only #3 – ability to buy at a price that is less than asset breakup values. In and out for some quick dollars. High risk and high reward business model. So how much control can you apply to this situation? And that’s what its all about – nerves of steel trying to get in and take over control of a company for less than NTA backing. If you don’t get control then you are in big trouble with a sizeable cash investment in a public company and no means to control your investment. If you can get control then you can take it private and sell off assets and bank any profits left over.
So what about current deals? Do you have control over all factors to success?
1. Ads on Wheels – all control in hands of vendor barry walker – we still don’t have a working set of wheels, he knows all interested nz and aust buyers and hasn’t given us details – so take back control from him – get a set working well and start selling them individually and as a franchise based area system – and if you can’t get a working set then sell it back to barry.
2. Flashpoint.co.nz – factors for success 1. Market demand 2. Sales 3. Sales Price and Gross profit margins and 4. Costs. Market demand for new business idea is always unknown. Not under my control at all. Factors 2,3 and 4 could be controlled if there is sufficient market demand at 200 to 300% gp margin.
3. Sasha - Brisbane 33 unit residential development – unless I could get control over this project then a no-go right from the start. Hey that was easy.
