“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” ― Robert T. Kiyosaki
What do world heavyweight champion Mike Tyson ($400 million), Rapper 50 Cent ($155 million), Icelandic billionaire Bjorgolfur Gudmundsson ($1.1 Billion), Sean Quinn, richest man in Ireland ($6.5 Billion), tennis champion Boris Becker ($35 million), Hollywood actor Nicholas Cage ($150 million) have in common? They all went bankrupt despite having a net worth of millions/ billions of dollars at some stage in their life.
Why did that happen? If you read the stories of these famous and rich people, you will find a common trait. They lacked the financial intelligence that was needed to keep what they earned. They simply forgot “The best way to make money is to avoid losing it in the first place.”
Shakespeare rightly said, “Fool and his money will be soon parted.” Fools trust others with their money and make little or no effort to educate themselves to be financially wise.
The most important part of long-term wealth creation is to learn how to control risk. The process of wealth creation involves taking risk; there is no success or growth without it. The enlightened wealth creator knows how to control risks. Generational wealth is created and sustained by implementing correct risk control methods in business and finance.
Preserving wealth throughout your lifetime and passing it onto future generations entails protecting what you have created in times of political and economic turmoil, changing technology environment, investing in assets that are resistance to inflation etc. It involves not only withstanding external turmoil but also internal turmoil of stake holders. The greatest risks to wealth preservation are future generations that are not prepared to sustainable wealth.
Let us examine in depth on how some of these problem can be overcome.
Nature of Financial Risk
Only fools think that there is no risk and take no measure to protect them against risk. Simply look at the world around you – it is constantly in a flux and change. Even as you read this book, galaxies are collapsing and new ones being created. Days turn into nights and seasons change, empires come and go and our bodies grow from young to old and finally go back to dust: our whole universe is in state of constant change. Everything around us is changing even as we breathe. Therefore, it is unwise to think that any business or investment on which our financial well-being depends will last forever.
Life Cycle of Businesses and Investments
Every business and investment has a life span – some have longer lifespans whilst others have relatively shorter lives. Eventually, even the best businesses and investments will die … you have to protect yourself from this eventuality!
For instance, land as an investment may have a long lifespan as compared to improvements on the land. Buildings or improvements don’t last forever but give higher cash flow when compared to bare land. Similarly, businesses like education, health, hospitality, energy have longer lifespan when compared to technology companies.
In the past 70 years, we have witnessed a transition of the music industry from records, LPs, tape recorders, CDs to downloadable music on your iPhone and iPad. Even iPods, after their short glory, have become extinct. Although it must be said that high-tech companies that are known for shorter lifespans have higher profitability margins.
If you invest and sleep over your investment thinking that it is long-term then one day, you will wake up and find that your money is gone. To succeed financially, it is important to be aware of what is happening in the world around you and how it is changing. Regularly monitoring your investment is important.
It is matter of your strategy and temperament on where to invest. Some people like to make quick gains and invest in high technology businesses and stocks. On the other hand, Warren Buffet likes to invest for long-term into blue chip brick and mortar companies with solid and recognizable products with longer lifespans.
Both investment strategies are fine as long as you know what you are doing. A good investment is a function of focus and your financial intelligence. No one individual can master everything. One of the functions of financial intelligence is to understand risk and your capacity to deal with the risk.
Entry and Exit Strategy
Having understood the life-cycle of business and investments, it is important to plan entry and exit strategies. The best entry point is just before a business is about to mature and exit once it hits the peak and starts to roll off, it is easier said than done and needs deep understanding of the company, industry and economic climate.
We tend to get impressed by stories of how someone had invested only a few thousand dollars in Google or Apple in the early Eighties that are worth millions of dollars today. What people forget are numerous failures when investing in new start-ups.
There is nothing wrong in investing in new start-ups if you know about the company and the additional cash that you can invest long-term without any returns. Investing in new start-ups is not only risky but also requires specialized knowledge. The rewards can be huge if you are willing to risk and wait.
Smart investors have an exit strategy in place even before they invest. Let me give an example: a friend of mine was building a resort in a popular holiday destination, which was his first venture into the tourism sector. His previous experience was in residential and commercial property investments. He had done his calculations but was not completely sure because of a lack in experience in the hotel industry.
He planned his hotel development around two bedroom apartments with dual keying system. The two bedroom apartment consisted of a single room studio unit with a small kitchenette (sleeping two) and one bedroom apartment with a living room and full kitchen (sleeping four) with an inter-connecting door. The two units could be rented out separately or as a single unit for larger families when run as a hotel. His exit strategy was to sell individual units as two bedroom, one bedroom or studio apartments to owner occupiers or investors if the hotel did not provide the forecasted returns.
Financial Intelligence and Human Factor
In the constant flux and change in the universe, only one thing is permanent and that is your financial intelligence. It is intangible and therefore less susceptible to destruction. If you have the intelligence, you will always find an optimal solution to a problem. Each financial situation is different and only a well-educated mind can find the right solution to the problem. In times of economic collapses, when others find themselves helpless, people with financial intelligence make fortunes.
Financial intelligence is like riding a bicycle once you know how to ride it, you never forget. A person with a high FI can be down and out but will always bounce back – Donald Trump went bankrupt but within a decade he was back to become a billionaire.
There is a saying: ‘It is never the investment that is a risk but the investor.”
This is very true because most investors are driven either by greed or fear. When people are driven by greed, they tend to become oblivious to the risks involved in an investment. They will either not do proper research or turn a blind eye to the signals indicating risk. On the flipside, fear freezes people into not taking action when an opportunity presents itself – they will focus only on the dooms day scenario.
To protect and grow your wealth, there has to be a level of emotional detachment when making financial decisions – it requires mental discipline to develop this attitude. Awareness is the key. One should be aware of external opportunities and threats and also monitor emotions of greed or fear within. As your awareness grows, you will instinctively recognize risks and rewards in a deal.
One simple way is to avoid taking hasty decisions: let the moment pass and take a pause. Don’t be rushed by sales people into taking a hasty decision that you will regret later. Take time to think and analyze. Discuss with knowledgeable experts regarding possible upsides, risks involved, tax implications, legal issues, government regulations, future trends, financial accuracy of reports; seek proofs of data presented to you etc. Keep seeking information till the time you are fully satisfied. If you do your due diligently in a methodical manner, chances of making mistakes will greatly reduce.
Creating and preserving wealth is not only a function of financial intelligence but also fair measure of emotional and spiritual intelligence. You have must constantly look after your physical, emotional, mental and spiritual bodies. If you fail to balance these critical aspects of your well-being of your wealth will suffer.
Diversification of Wealth
“Diversification may preserve wealth, but concentration builds wealth.” -Warren Buffet
When you are young and starting out, mastering one process of wealth creation and focusing your effort on that process is the key to your success. However, in your later years when you have amassed wealth and do not have the luxury of time to start all over again, it is wise to diversify your portfolio to preserve wealth.
Every investment and business has a lifespan as discussed earlier – this problem has become more acute with rapid changes in technology. It is therefore wise to diversify your portfolio when it becomes too big or as you grow older. As one ages, it becomes difficult to keep up with the changes. Diversification will help you protect your wealth even if few of your investments go wrong.