Investment 101 - Property

One of my favorite courses at Harvard was the introductory class in Economics, which could have been labeled Economics 101. It was fascinating and I got an “A” with ease. Later, I passed the intensive financial training program at Chase Manhattan Bank on Wall Street in New York with high marks as well. But neither of these excellent courses taught me what I most needed to know about handling my personal finances. That I learned very slowly in the “school of hard knocks”.

I have already written about handling money well with frugality, saving and generosity. Now I want to tackle the question I am most frequently asked: how to invest money wisely? (This will involve more than one post.)

For young people starting out, the most important financial principles are:

saving a minimum of 10% of your income (starting today!)

avoiding debt, particularly high interest credit cards.

Once you have some savings accumulated, the main question usually becomes whether to buy your own house or apartment. Although for most people that has been their best investment ever, my advice is not to rush in too quickly. The recent global boom in property has nearly run its course, and prices are already falling in many places, although still rising in other parts of the globe.

This recent property boom was all about interest rates. When interest rates fall and stay low for a few years, property soars. But the old adage still applies: whatever goes up must come down sometime.

The reverse also happens typically in economics – so there is a risk that interest rates could go back up at some point (due to inflation reappearing) and cause a quick property tumble.

In my view, buying your first house or apartment should never be done for getting rich quick, because the opposite could happen just as fast, particularly if you borrow a huge amount. In that case, you would be vulnerable to both interest rates rising considerably and suddenly losing your job (which happens to most people sooner or later).

However, the tax laws in many countries make owning a home very advantageous, due to capital gains exemption or interest deductibility. If you have 20 – 25% saved for a down payment, steady income and no other debts, buying property is good for the long term, no matter what the real estate market does this year or next. But don’t buy with the intention of selling in a year or two, because you may get caught!

I once worked with a group of graduate students who presented me an interesting concept on buying up houses in lower-priced areas throughout British Columbia. As the value of their real estate portfolio would rise, they intended to buy still more houses by borrowing more and more. I rejected their investment thesis, because it assumed that property prices could only rise, and never fall.

This got me into an argument with their professor of business. Sadly, circumstances proved me right. This professor himself bought 4 or 5 houses with high debt and then lost them all in the property crash of 1982 in Vancouver. His dream of financial success was ruined.

(There is a solid strategy for a sophisticated investor to buy more and more property based on steady cash flow that covers all of the debt. This requires long leases and fixed rate debt. However, a property market reversal could still bankrupt this method, unless there is geographic diversification and lots of financial flexibility to withstand sharp market corrections.)

But I like home ownership for two other reasons, beyond the pride of owning you own place. First, it is a forced savings plan, which for many people is almost the only way they will actually save. Second, it avoids the immense pitfalls of buying stocks and other hazardous investments, which I will deal with in a future installment: Investment 102.

Leadership: Oppressive or Inspired?

Some of the most monumental influences in our lives are the leaders we encounter, whether at school (the teacher or principal); at work (the boss); in religion, government, family, sports, and in any other social organization.

Our leaders create a strong atmosphere around them, for good or for ill. Their attitudes and outlook frequently dominate the context in which a group operates. Leaders often exert such a strong influence over our feelings and perceptions that we can virtually drown in their emanations.

I have enjoyed inspiring leaders and also suffered under oppressive bosses. Recently I woke up from dream vividly remembering how it felt to work for a brutal boss, “William”. I still recall the depression, the revulsion, and the anger in the pit of my stomach, although I haven’t seen William for more than a decade. Perhaps you have felt the same about some leader you have known.

I remember by contrast the pleasure of working with “Harry”, a senior executive who was continuously inspiring. Everywhere Harry traveled, he left behind waves of pleasantness, confidence, and optimism.

Both of these leaders were required to make tough decisions, however their fundamental attitudes towards life, people and leadership were as different as heaven and hell.

Oppressive leaders work to satisfy their own ego. Everyone who gets in their way is an obstacle to be removed. They are controlling, hierarchical, and money dominated. They are usually mean, stingy and impossible to please. They find fault no matter how excellent the work. They have poor ethics and a cynical mindset. They often have a very short term outlook.

Inspired leaders put people and the work to be done ahead of money. They are kind, generous and tolerant. While they hold people accountable for performance and can see through excuses and deception, they are not paranoid. They are visionary and creative in their leadership. They encourage constantly and stimulate passionate achievement. They are highly ethical and have a much longer term perspective.

Obviously, most leaders will fall somewhere between these two extremes of oppressive and inspiring. However, we hear lots of stories about both kinds.

Surprisingly, both types of leaders flourish and they sometimes appear to receive nearly equal acclaim. But in terms of the people they influence, they are worlds apart. The longer term impact of the inspiring leader is immensely beneficial, whereas oppressive leaders cause continuous harm.

We cannot always avoid working under oppressive leaders, but where we have a choice it is good to steer clear of them. When there is no option, it is better to take a positive attitude toward them rather than being drawn into hostility and conflict. Conversely, a chance to work for an inspiring leader should be grasped quickly.

Not everyone aspires to become a leader, but for those who do, beware! You could find yourself gradually becoming like the leaders you have disliked, because there may seem to be no other way to succeed without sacrificing your legitimate self-interest.

Indeed, an inspirational leader needs to sacrifice their own needs to help others. They will need to put their people first, ahead of immediate profits, efficiency, and popularity. Developing and nurturing your team is very hard work, but it pays off in the longer term.

To do that, we need to value each individual person, not just seeing them as an impersonal resource for organizational gain. We need to give up absolute control and share power and authority with our team. We need to share rewards and applause, not just to maximize our own.

Finally, inspired leadership requires enhanced vision and constant creativity. Leaders must welcome new ideas and stimulate new approaches. Our people count on us to find a way ahead despite the innumerable obstacles we inevitably face. It can be tempting in times of stress to demand more or to blame others, but doing that harms the team spirit.

Practice fairness and ethics. Leaders are expected to make choices on behalf of their entire organization, but not just to advance their narrow selfish interests. Our people sense when we follow consistent moral principles. They will trust us more and work harder to achieve our common goals.

Leaders who do these things will always inspire. People respond with heartfelt gratitude to great leaders. Success (defined as getting more money, power and fame) is not inevitable, no matter how cunning or ruthless we might become. Both oppressive and inspiring leaders seemingly succeed at times, and fail at other times. No one succeeds 100% of the time.

However, if success is defined by the lives we impact, the happiness we bestow, or in people nurtured, only one kind of leader can truly succeed.

Why not inspire?

 
 
  

Handling Money Well – Frugality

Frugal – dictionary definition

- economical in use or expenditure; prudently saving or sparing; not wasteful: a frugal manager.

- entailing little expense; requiring few resources; meager; scanty: a frugal meal.

My own practical definition of frugality is “consistently spending less than you earn”.

I have not found a good way to become rich quick, or how to spend money freely. But I can tell you some slow, reliable ways to ensure your future financial success.

Frugality is crucial to success with money. The richest people I know (which include multi-millionaires and even one billionaire) are careful and frugal with their money, or else they would soon lose it all.

Many people with much lower incomes are also frugal. They save, avoid debt, and live very happy lives, free from financial stress.

Frugality should apply to all expenditures, both large and small. I grew up relatively poor and have gradually become successful financially, but my spending habits have not changed much.

I try to avoid spending money wherever I can. I always search for lower cost alternatives, even for lunch or coffee. I try to buy good-quality and long-lasting products, if they are not too expensive.

Take cars for an example. When my wife met me in 1974, she was surprised that a young banker would travel by bus or bicycle, and not even own a car, though I could easily have afforded one. Later on, I bought older cars which I could buy for cash in the bank, and thus avoid any debt.

Now, I usually buy demonstrator cars or else last year’s model, which saves me anywhere from 10 – 40% off of new car prices. Then I keep the car for 10 years which also saves money. I could afford to drive a very expensive car, but I live modestly, as do most millionaires. People may laugh at my cars or clothes, but they would envy my resulting wealth.

Kathy (my wife) buys most of her food and clothes at discounts. She loves to shop at thrift stores. Maybe someone might say it is a shame to buy second-hand things when you can afford new luxury products, but fortunes can change quickly, particularly if you become loose with your money.

Virtually anyone who works energetically (every day and every year) and who is constantly frugal will soon reach some basic level of financial success. But if they ever change these important habits, success may just get up and walk away!

There are other important aspects of handling money well, but they all start out with frugality.

Handling Money Well – Saving and Generosity

Beyond frugality, saving money steadily and giving money away generously are the prime financial virtues. Working energetically to earn money and then using your money well are indispensable for both success and happiness.

I read an interesting quote from Nancy Astor, who said: “The only thing I like about rich people is their money”. (Nancy was a very rich woman from the 19th Century.) However, rich doesn’t have to mean stingy; it can also mean philanthropy, like in the tale of St. Nicholas.

Some people say they would like to earn enough money so they will have enough left over to save, and also enough money to share. In my experience, virtually anyone who earns money can already save some money and also share.

It is strange that people living in North America have nearly the highest incomes but also the lowest savings rates. By comparison, people living in Asia save 10%, 20%, or even 30% of their salary, even though their base income is much lower.

Anyone can also become generous, however low their incomes. My wife Kathy noted as a young girl that when she sold Girl Scout Cookies in wealthy areas, people often refused to buy them, whereas people who lived in poorer houses were more generous. Sadly, I have also noticed that pattern. But there are notable exceptions of rich folks donating most of their wealth to others. That is far better than redistributing wealth by taxes.

There are countless good reasons to save up money, such as to buy a house or car, to finance education, to guard against unemployment, or to plan for retirement. Regrettably, too many people learn about these reasons for saving too late to help themselves, when they are already old and poor.

We all believe in generosity for the rich, but not necessarily generosity for ourselves, just yet. We don’t want to sacrifice our hard-earned money for others. However, our family and community well-being require regular sacrifices by all those who are able. Government is unable to meet more than a small number of the needs of a community; the rest must be met by concerned citizens.

Ultimately, how we use our money and our possessions define the type of person we become. Being rich and stingy is not a happy way to live.

My advice to my children and to other young people is to start saving and donating their money in roughly equal amounts. Some people might be able to save 5% of their income and also to donate 5%. Others may be able to save 10% or 15% and still donate a similar amount to charitable causes, both in their own community and around the world. Starting these important habits early in life is advisable because spendthrift habits are hard to overcome.

Saving must be long-term and permanent to bring lasting success. We need to build up lots of assets before retirement, to avoid poverty in old age.

Saving and sharing should become our lifetime habits, along with frugality. If everyone worked hard, lived frugally, saved, and were generous, think of how many of our financial and social challenges could be soon overcome?