The Millionaire Fastlane (14 page)

The Warden of Wealth: Intrinsic Value

How is money earned in a job?

Intrinsic value.

Intrinsic value is determined by the marketplace and is the price at which you can trade your time for money. Intrinsic value is what you earn working a job. How much is someone willing to pay you for what you offer to society? Intrinsic value is measured in units of time, either
hourly
or
annually
. If you're paid $10/hour to flip burgers at the neighborhood grill, your intrinsic value is $10 per hour. If you're an accountant and earn a $120,000 annual salary, your intrinsic value is $120,000 per year.

JOB [Your Intrinsic Value] = (Hourly Rate of Pay) X (Hours Worked)

~ or ~

JOB [Your Intrinsic Value] = Annual Salary

Notice that intrinsic value is measured in units of TIME.

This “time attachment” introduces the Slowlane's first punitive element of wealth creation.

Can you control time? Can you leverage time? You can't.

Your time is limited to 24 hours of exchange. If you earn $200/hour, you can't miraculously demand to work 400 hours in one day. If you earn $50,000/year, you can't miraculously demand to work 400 years in your life.
Time has no leverage.

For the hourly worker, your maximum upper limit is 24 hours, and guess what. There's nothing you can do to change this limit. In theory, you can trade 24 hours of your day for income, but you can't trade more. Of course, working 24 hours a day is humanly impossible, so 8 to 12 hours per day are traded.

For the salaried worker, the prohibition is the same. You can't work more years than your normal life expectancy. What is the upper limit of this exchange? Forty, fifty years? In all of recorded history, no human has ever worked 10,000 years of his or her life. Whether you're paid hourly or annually-it doesn't matter-you can't leverage time!

Consider this.

Is 12 a large number? Or 50? Are these numbers predisposed to create millionaires? They aren't, and it exposes why the mathematics of a job are wealth punitive: Your time is limited to small numbers and cannot be leveraged. “Hours worked” or “annual salary” are mathematically inept because they're based on time measurements that cannot be controlled or manipulated. Mathematics doesn't lie; 12 will always be less than 10,000,000. If leverage is limited, so is wealth creation.
Small numbers do not make millionaires
.

Behind limited leverage is another corrosive wealth killer-no control. Can you control your employer? Can you control your salary? Can you control the economy? Can you earn $50,000 one year and next year bank $50 million? Can you control anything about your job, including your measly 4% pay raise? You might think you can by job-hopping, but you can't. Control is weak, if not absent.

Compound Interest: What “They” Don't Tell You

The second variable in the Slowlane wealth equation is the “primary wealth accelerator,” which comes from market investments like mutual funds, 401(k)s, and other traditional investments touted by gurus and financial advisers. These investments use the financial strategy known as “compound interest,” which is a mathematical construct that outlines the power of interest accumulation over great periods of time.

The fundamental sell of compound interest is the old guru swan song regurgitated ad nauseum: $10,000 invested today will be worth gazillions in 40 years. Invest $250 a month for 50 years and you will retire rich! Used correctly, “compound interest” is a powerful ally to wealth; used for Slowlane purposes and it dredges the wealth road trip to a crawl. Why? Again, the puzzle is solved if you exploit the math-the answer plays sibling to why a job won't make you rich: TIME.

Wealth creation via compound interest requires the passing of time and lots of it. Like a job, compound interest, or market investments such as mutual funds and 401(k)s, can't be leveraged nor can they be controlled. They rely on deficient math to create wealth.

Inasmuch as the income you make in a job is measured in an hourly rate or an annual salary, the wealth acceleration process of “compound interest” is also measured in time (years) multiplied by a yearly yield. Let's again review the physics, the mathematical formula for the Slowlane pathology to wealth:

WEALTH = (Job) + (Market Investments)

Or factored:

WEALTH = [Intrinsic Value (Yearly)] + [Compound Interest (Yearly)]

Factored further:

WEALTH = (Time X Hourly or Salaried Value) + Invested Sum X (1 + Yield)
^time

Like a job, the flaw in “compound interest” lies in the same mathematical restrictions in which numbers work AGAINST you instead of FOR you. Take a look at this chart, which highlights the effect of compound interest and that $10,000 investment.

A Slowlane guru preaches that a $10,000 investment grown at 15% will be worth over $2.5 million dollars in 40 years!!! Hooray!!!

What don't they tell you?

They don't tell you that a 15% return year-after-year is impossible unless you invest with Bernie Madoff or Charles Ponzi. They don't tell you that in 40 years you'll be dead, and if you're not, you'll be close. They don't tell you that in 40 years, your $2.5 million will likely be worth $250,000 in today's dollars and that a gallon of milk will cost $12.00. They don't tell you that this method of wealth acceleration is not what they use. They don't tell you plenty, and yet you're supposed to believe it without question.

Uncontrollable Limited Leverage (ULL) - Part 2

For compound interest to be effective, you need three things:

1. TIME, as measured in years.
   
2. A favorable YEARLY INVESTMENT YIELD within those years.
   
3. An INVESTED SUM, repeatedly invested.
   

These three variables make up the latter portion of our Slowlane wealth equation:

Compound Interest = Invested Sum X (1 + Yield)
^time

Although this is a simplified version of a more complicated equation, the point of this analysis is its variable components. Compound interest demands that your investments yield a predictable 10% return per year. Good luck with that 40-year gamble. Have the markets ever lost 20% in one year? Or 40%? They have, and when they do, your hard-earned savings evaporate.

You see, wealth acceleration via compound interest is deficient because its variables are deficient. Neither time nor yield can be leveraged or controlled. Again, meet my friend Uncontrollable Limited Leverage.

Can you demand a 2,000% return on your money this year? Can you demand your investment time horizon increase from the standard 40 years to 400 years? Again, the numbers can't be leveraged. Your upper limit of time investment horizon is 50 years. Yield is worse-6%, 8%, or 10% yearly investment returns are typical standards. Time is restrained by the years in your life, yield is restrained by the average yield of typical market investments, and sum is limited because your means of creating income comes from a job-also limited! The only way to subvert the mathematical weakness of compound interest is to start with a large number, and large numbers require leverage!

Additionally, like a job, you can't control compound interest. Can you demand your bank pay 25% interest on your savings? Hey, Mr. Slowlane Bank, I demand a 25% yield on my savings account! Can you control the economy? Hey, Mr. Economy, can you guarantee me low unemployment and a business-friendly tax environment? Can you control the average yield of the stock market? Hey, Mr. Stock Market, I'm tired of 8% returns, can you give me 250% this year? Funny stuff! Can you control anything in this equation other than a furious, labor-intensive search for the best investments to ensure you eek out another marginal 1%?

You can't.

Why Mutual Funds and 401(k)s Won't Make You Rich

In 2008, I went to a fixed-income investment seminar given by a major brokerage house. Fixed-income investments are instruments like municipal and corporate bonds. Approximately 50 people attended the standing-room-only seminar. I sat in the back and surveyed the crowd. Remove the gray hair, the socks-n-sandals combos, the canes, and the wheelchairs and what was left? Just me. I was the youngest person in the room (and heck, I'm not even that young anymore). How does a thirty-something get in a room full of retirees?

The people in the room were Slowlane success stories. They used time to accelerate wealth, and what it got them was old age. I don't say that to be mean-spirited to older generations, but to cast light on the point: Compound interest (401(k)s, mutual funds, the stock market) cannot accelerate wealth fast.

According to research and marketing firm The Harrison Group (
HarrisonGroupInc.com
), only 10% of penta-millionaires (net worth $5 million) report that their wealth came from passive investments. Age data was not provided but you can guess that none of the 10% were under 30.

Think about it. Have you ever met a college student who got rich investing in mutual funds or his employer's 401(k)? How about the guy who bought municipal bonds in 2006 and retired in 2009? I wonder if that guy driving a $1.2-million car can because of his well-balanced portfolio of mutual funds?

These people don't exist because the youthful rich are not leveraging 8% returns but 800%! Has your wealth ever grown by 800% in one year? Probably not, but guess what? MINE HAS because I'm not shackled to the Slowlane wealth equation. My wealth acceleration vehicle doesn't come from the stock market!

Yet, you've been domesticated to believe that these tools accelerate wealth. Mutual funds, stocks, bonds, 401(k)s, dollar cost averaging, and compound interest are perfunctory stratagem for wealth acceleration in the Slowlane. Unfortunately, without control or leverage, they're impotent wealth accelerators.

Buy-and-Hold Is Dead

In college, I was taught “buy and hold” was the safe investment strategy that made millions. Buy stocks in solid companies, sit back and wait decades, and voila, I'd be awash with millions. They'd shove that graph in your face and say “A$10,000 Investment in XYZ Company in 1955 would be worth $5 million today!” Thankfully, I ignored it.

In 1997, I opened a Roth IRA with $1,000 and invested the monies in a growth mutual fund at a major investment firm. Yes, I let the “professionals” manage it for me. For the next decade, I didn't touch it. Essentially, I forgot about the account.

In the 10 years that followed, I made over $10 million dollars by following a Fastlane roadmap and leveraging Fastlane strategy. And what about that Roth IRA opened years ago? I never touched it and let it ride the ebbs-and-flow of the Slowlane.

Today that account is worth $698.

$698! With inflation, the real purchasing power is $500. My spare change bucket on my kitchen table was a better investment. Had I invested $1 million, I'd have lost more than $400,000. And this is the Slowlaner's anointed weapon of wealth? Hilarious!

Millions worship the Slowlane roadmap with “buy and hold” as Main Street, a Main Street that is decades long, imperiled by hazards, and rarely routes to wealth.

I recently heard a Slowlane prognosticator proclaim the effectiveness of “Get Rich Slow” by citing this tasty factoid: If at the end of 1940 you had invested $1,000 in the stocks of the S%P 500 you would now have $1,341,513. So let's examine this fact, assuming it is fact.

1. It's 1940 and assume you are 21 years old.
   
2. It's 1940 and you somehow got your hands on $1,000, which in today's dollars is about $15,000.
   
3. You took that $1,000 in 1940s money and did as above.
   

Congratulations! It is NOW 2010 and you are 91 years old, rich with $1,341,513. Or if you were lucky to get your $1,000 ON BIRTH, you'd now be 71 years old! Yes, folks, it's time to get excited! “Get Rich Slow” is going to make you rich! Just ignore your 74-year life expectancy and make sure your wheelchair comes equipped with chrome rims. Seriously, how does anyone get excited over this crap?

The Slowlane's Traitorous Relationship with Time

Compound interest and a job have the same disease: the sinful and gluttonous consumption of your time while forsaking control. Both variables within the Slowlane wealth equation are anchored by time-time traded in a job and time traded in market investments.

Time becomes the lynchpin for wealth that congenitally ties to the mathematical handicaps of mortality: 24 hours in a day and a 50-year work-life expectancy. Yes, “getting rich” is a function of time. Unless you plan on living forever, this relationship is dubiously foolhardy. Why?
Because to trade your time away is to trade your wealth away.

Examine these pathetically common examples. Assume a 5% savings rate on gross salary and an annual investment yield of 8% per year. We'll exclude taxes and inflation.

Salary @ $25,000/yr, save $1,250/year, invested over 40 yrs @ 8% = $362,895
Salary @ $50,000/yr, save $2,500/year, invested over 40 yrs @ 8% = $725,791
Salary @ $75,000/yr, save $3,750/year, invested over 40 yrs @ 8% = $1,088,686
Salary @ $100,000/yr, save $5,000/year, invested over 40 yrs @ 8% = $1,451,581
Salary @ $150,000/yr, save $7,500/year, invested over 40 yrs @ 8% = $2,177,132

Don't get enamored with the numbers. Keep in mind this is 40 YEARS from now. If you are 20 years old, you will be 60 years old. If you are 30 years old, you will be 70 years old. If you are 40 years old, you'll be dead. Sorry, but that's beyond life expectancy.

So at these ages, does this money and the freedom it buys sound appealing? Also, do you realize that this money will have 50% of today's buying power? Forty years ago you could buy a car for $3,000 and a loaf of bread for 20 cents. Lest we not forget the other lofty assumptions, gainful employment and a robust economy that behests a safe 8% per year. In 2008 the markets lost 50%. I guess the gurus forgot to mention these anomalies.