HALF A MILLIONAIRE

Last Tuesday, a retired man in South Carolina won a $260 million Powerball Jackpot. If he takes the prize in one lump sum, he would pocket about $88 million. Luck was on this man’s side because his chance of winning was 1 in 195 million. If one drives 15,000 miles a year for 50 years on American roads, one’s odd of dying in a car accident is about 1 in 100. In the U.S., the odd of being struck by lightning is about 1 in 600,000.

For me, I have never caught a fish before in my life. On the other hand, my wife has won the slot machine jackpot twice in Las Vegas. Because she believes that luck is always on her side, she likes to play Megamillions. She argues that the reason why I will never win a lottery is because I never buy the ticket. Therefore, my chance of winning is zero. Although her chance of winning is small, it is still greater than zero. Like all loving husbands, I skillfully avoid the argument–which I know I will lose regardless of what I say–by replying, “I believe I will never win a jackpot because I used all of my luck on you.”

I am not against playing the lottery. If one participates for fun once in awhile, it is alright to spend a few bucks to buy some hope. However, I am interested in pointing out that hope sometimes is a very dangerous concept. To me, hope is like a poison that can kill a man if he indulges himself in it.

In The Shawshank Redemption, one of my favorite movies, Andy Dufresne warns his fellow prisonmate that “hope is a very dangerous thing, my friend.” Wrongfully accused for killing his wife, Andy has always dreamed of freedom. However, he does not just hope for it to come. Instead, he takes matters into his own hands and plans his escape. And, he succeeds.

A few years ago, in the middle of a snow storm, a man and his family were trapped in their minivan because he had taken a wrong turn into the wilderness. After having saved his wife and two kids, the rescuers found his body a few miles away in a creek. There was a big debate about whether it was a good idea or not that he left his family behind in the minivan to seek help. I truly believe in my heart that he did it out of love. He could not sit and hope for the rescuers to come. What if they would never come? He did not want see his children die because of his mistake. He sacrificed himself to give his family some hope. Even at this very moment while I am writing this article, I am feeling a chill running up my spine as I think about his lonely death. I know for sure his last thought was to wish that someone would save his family.

In 2008, President Obama won the election by employing the concept of hope. He knew that poor and middle class Americans were thirsty for change, so he gave them hope. Like hungry fish looking for food in the morning, they all took the bait. They voted for him because they hoped that he would save them. They voted for him because they hoped that he would give them a better life. They put too much hope in a man who did not think twice before he made his promises. In 2009, many are still hoping that one day he will fulfill his promises.

Hope is beautiful, but it becomes dangerous when one only hopes and does not want to take action. Everyone can hope or dream, but only a few can deliver. If one wants to become a millionaire, one must work for it. Personally, I believe that it is easier to make a million dollars by investing than by winning a lottery. And, the fastest way to be poor is to sit and wait for a politician to fulfill his promises. Finally, I am not telling you to stop hoping. However, I hope that you all approach life in a way that you will rarely have to rely on hope.

Reality 1: A mother giraffe gives birth to two calves. After a few attempts, the first one is able to walk on its four legs. However, Wolly, the second calf, cannot stand up because he has a deformed leg. His mother becomes worried, so she pushes Wolly to keep on trying. With his mother’s encouragement, Wolly stands up and falls down multiple times. And, even though he is tired, he does not give up. However, his mother’s patience is running out because she senses that a pride of lions is approaching. To save herself and Wolly’s newborn sister, she must leave him behind. As the mother is leaving, my eyes are welling up with tears. That’s right. I cry while watching the Discovery Channel. I watch the lions eat Wolly. I cry and comfort myself, “it’s life”. I do not hate the lions because I understand that they must eat to live. I wonder if the mother giraffe and the surviving calf will remember Wolly. I wonder if they will hate the lions. I wonder if they will tell other giraffes about Wolly. I wonder if they will be happy without Wolly. I wonder if the lions feel guilty about eating Wolly.

Reality 2: When you invest, you must leave your emotional feelings behind. You must understand that everyone wants to win. No one wants to be Wolly. The investment institutions are like the lions. They will mercilessly eat you up even though you only have several thousands in your start-up portfolio. There is Uncle Sam who always wants a piece of your profit. The stock brokerage firms take money from you via fees. The CEO and CFO can steal money from the company, and you will end up with a worthless piece of paper. Certainly, you do not want to be one of the last passengers to jump off a derailed train. Therefore, you must do your homework. More importantly, you must have a strategy that allows you to keep on  playing the game. 

My strategy: My goal is to accumulate enough money so that I can spend more time with my loved ones. Therefore, I invest in companies that I believe will continue to generate cash for a long, long time. For example, I believe that we will keep on brushing our teeth for years to come. I believe that alcohol will always be part of our society. We will continue to wear clothes and shoes. We will always need to eat. Our energy demand will always increase. 

The next step is to choose my entry point. I believe that now is the best time to buy stocks because the market is correcting itself. Sometimes I wish for the market to go down more because I want to get more shares for my money. And, because I am a new investor with a long-term goal, bear market becomes the best entry point.

To add some fun, I also do short-term trades. I follow about fifteen solid companies whose stocks move sideway, meaning it goes up and down within a price range. If I see one that is currently at the low end and its business is still the same, I will buy and wait. After 9 to 12 months, it will go back to or near the high end, and I will sell. Sometimes, it will take longer than a year, but I am not worried because I know that the company will not suddenly disappear on the face of the earth. Again, I only invest in companies that I can understand. 

In my opinion, investment is more about mentality. I treat it like a game. The money that I make is the score. And, I love the idea of making money while I sleep because I know that my investment is growing. Although I love to have a lot of money, I do not allow it be the center of my life. I spend almost all of my free time with my loved ones because they are the reasons that I exist. And, because I place my life upon the foundation of my family, life becomes very simple. Therefore, I am able to love both, Wolly and the lions.

According to the Department of Labor’s latest survey, the average U.S. consumer annually spends about $49,638 on housing, transportation, food, healthcare and others (www.visualeconomics.com). On average, his income before taxes is about $63,091. The average federal income tax rate is 17%, so he will pay about $10,725 annually. Because each state has a different income tax rate, ranging from 1-9%, I will use 5% to calculate his state income tax, which is $3154. Let us assume that he does not live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming where there is no state income tax. His total tax is $13,879. His take home income is $49,212 ($63,091 - $13,879). Therefore, annually, the leftover money is -$426 ($49,212 - $49,638). Where does he find $426 to keep the household afloat?  

We, Americans, love materialism. It is in our blood. We love shopping. And, our excuses are Halloween in October, Thanksgiving in November, Christmas in December, New Year’s Day in January, Valentine’s Day in February, Easter in March and April, Memorial Day in May, Independence Day in July and Labor Day in September. In between, we add Mother’s Day, Father’s Day, birthday and back-to-school day. We also decide among ourselves that Saturday and Sunday are also shopping days because they start with “s”. Our leaders love us, so they always find ways to spoil us. In 2001, after the 9/11 tragedy, President Bush and Alan Greenspan lowered the interest rate to put more money in our hands because they believed that our spending played the key role in economic recovery. As a consequence, we produced one of the most spectacular economic events–the financial crisis.

Undeniably, the world’s economy depends on our spending. We buy products made in China. We buy cars from Japan and Germany. We buy oil from the Middle Eastern countries. In return, they buy computers, air planes, and many other goods from us. Therefore, our leaders always ask us to spend more of our money to keep the economy going and ultimately to create more jobs. When we have jobs, we will make more money. And, when we have more money, we will spend more. In 2008, President Bush publicly asked us to be patriotic by spending the extra tax return money to stimulate the economy. In 2009, President Obama put some money in our pockets by increasing our take home money per paycheck in hope that we would spend it to revive our economy. 

Obviously, no one can totally escape the current system because we all belong to the human society. Therefore, we must play the game, regardless if we want to or not, because we all need food, clothes and shelter. I am not asking you to stop spending completely because it is impossible. However, I am asking you to be mindful of the game. To win it, you must have the courage to swim against the current. When others are being patriotic, you choose to be unpatriotic. When they spend, you save. And, when they spend, you find ways to make money off of their spending. In other words, instead of following them, you define patriotism on your own terms.

Scenario 1: It is June, 2004. Mary sells her house in California and makes $250,000. She wants to multiply her money quickly, so she purchases ten brand new houses in Texas and rents them out. Each house is priced at $120,000, so she puts down $20,000 and finances $100,000 at 6.25% for 30 years. She and her family also decide to move to Texas, so she uses the leftover money ($50,000) as a down payment to purchase a $250,000 homestead house. She has to finance $200,000 at 6.25% for 30 years. she does not have any problems finding a new job in the new state because she is an experienced manager. However, her husband does, so he stays home to take care of their kids. She brings home about $4000 per month.

Calculations for Mary’s real estate investment: The monthly rent per unit is $1200. The mortgage payment for each unit is $615. The property tax is $200 per month per unit. The property management cost is about 10% of the rent or $120 per month. The insurance cost is $65 per month per unit. The total cost per rental unit is $1000 ($615 + $200 + $120 + $65). The positive cash flow per unit per month is $200.

Calculations for Mary’s personal expenses: The homestead mortgage is about $1200 ($200,000 at 6.25% for 30 years). The monthly combined cost of property tax and insurance is about $400. The total cost of other personal expenses including food and utilities is about $1400 per month. Therefore, every month she has about $1000 leftover from her take-home money ($4000 - $1200 - $400 - $1400). Let us assume that her ten rental units are “always” occupied, so she would bring home about $2000 per month ($200 per month per unit x 10 units). Her monthly total take-home is about $3000 ($1000 + $2000).

Scenario 2: It is June, 2004. John, a more conservative investor, has $250,000 in cash. He pays $200,000 for a brand new house to live in and puts the $50,000 leftover money in an online saving account that offers a 3% annually compounded interest. Let us assume that John and Mary are in the exact situation. He works. His wife stays home with their kids. Therefore, John’s monthly total take-home is $2200 ($4000 from his job - $400 cost of property tax and insurance for his house - $1400 cost of food and utilities). I would like to point out that John’s homestead house is cheaper than Mary’s, but to avoid complex calculation I am using the same number, $400, for the cost of property tax and home insurance in both scenarios. John probably pays less for utilities because he owns a smaller house, but I would like to use the same number of $1400. Also, let us assume that John will not touch his $50,000 emergency money in the online account for 30 years. It will become $121,363.

To be a successful investor, one must foresee future risks. Let me reveal several things to you and you will understand my points. What if I tell you that in order to finance the ten rental units at the same time Mary has to use 5-year adjustable rate mortgages. Now, it is 2009. Will she be able to refinance them in the current situation? What if I tell you that currently five of her ten rental units are vacant. Where can she find the money to cover the mortgage payments? What if I tell you that she loses her job in 2009. Of course, she can always find another job, but it will take several months. How can she take care of her family during these months?

I am like John. I believe that wealth is accumulated gradually over a long period of time. To become wealthy, one must understand two concepts: cash flow and the value of time. Although Mary’s monthly total positive cash flow is higher than John’s ($3000 vs $2200), $2000 is produced by her real estate investment, which is not very stable, because it is based on the assumption that all of her ten units must ”always” be occupied. For John, he can invest his $2200 in the stock market, which of course has also gone down in the past couple of years, but his overall financial situation is still more stable than Mary’s in 2009.

Time can be a very difficult concept to understand. However, for me, time is life. One’s time starts when one is born, and it ends when one is dead. During this period of life, one must decide what is most important and what is not. Each person has his or her own perception about life. Therefore, each person assigns a different value to his or her time. Some believe that eventually they will die anyway, so why not live for the present. Others love to plan for the future even though they know that death is inevitable because they enjoy the feeling of being in control of life. There is nothing wrong with living for the moment. And, it is not always right to have a plan for everything in life because sometimes it is fun to just go with the flow. In other words, one must be fully aware of one’s past, present and future. What does it have to do with making money? When one understands and loves life, one will have an endless source of energy to pursue one’s financial goal. Gradually, as one becomes financially richer, one will understand that money is not the winning prize, but the quality of life is. I know that not all rich people are happy, but I also know that rich people do not have to worry about housing, healthcare, food and clothes. Because they have fewer worries, they spend the extra “time” seeking new ways to make more money. On the other hand, the poor spend their “time” working at minimum wage at fast food restaurants to cover their basic needs. I am not going to waste my time to explain why there is inequality in this world. However, I would like to point out that to win the American game one must understand the value of one’s time. One must have the desire to be wealthy because wealth will give one more “time”, not just money, to be with one’s family.

The poor cannot afford health insurance. The rich are afraid that the government will take their money to pay for the poor. Ruthlessly, insurance companies seek new ways to deny claims because they want to make a profit. Healthcare providers charge high fees to cover their malpractice insurance. How do we solve the healthcare problem?

We can make health insurance more affordable by introducing new competition to the industry. To compete with the powerful insurance companies, the government must become a player. Of course, we do not want the government to control how we take care of our health, but we do need it to step in because we must think for our poor fellow Americans. We must create a law to force the insurance companies to cover everyone, regardless of pre-existing conditions, but we must choose our method carefully because we do not want to kill the industry with governmental overregulation. We have to hold everyone accountable by creating a functional managed care system that will provide checks and balances. We must utilize technology to make our healthcare system more efficient because it will lower costs. We must focus more on preventing diseases, in lieu of just treating them. In short, we must be proactive when it comes to reforming our healthcare system.

Personally, I do believe that we all must have a choice when we take care of our health. However, the current healthcare system eliminates that choice for the poor because they can no longer afford health insurance. And, I know that many are ready to point out the reasons why they are poor in the first place. Please hold your thoughts. I used to be poor. For more than a decade, I lived without health insurance. I told my roommates that “if I fall sick, do not call 911 or take me to the hospital because my family will not be able to pay the bill”. When one knows that one has no options, one must adopt the “I have nothing to lose” approach. Because I used to be one of them, I must advocate for healthcare reform. For those who are afraid that the government will take away your money to help the poor, I would like to offer an alternative view.

Poverty will never disappear in our society because our free market economy is based on competition. And, competition produces losers and winners. However, our society shall not lose compassion because it defines our American culture. Life is a circle. The rich shall help the poor. And, when the poor become rich, they shall help the other poor. And, unfortunately, there will always be poor people in this world. Therefore, the rich must be willing to take on the responsibility of pulling the imperfect circle of life.

Honestly, I am not afraid that the government will take away my money to improve social structures and our standards of living. However, sometimes, I am doubtful that it is capable of doing as good a job as we expect it to do. I know for sure that the healthcare reform will not be perfect for everyone, but I also know that it will improve the lives of many Americans. When everyone is healthy, everyone will be happy. When everyone is happy and healthy, productivity will increase. And, America will be prosperous, again. We all will be better off.

We all can dream and hope. Therefore, I hope that the Obama administration and current Congress know what they are doing. I hope that they will not bury our nation in debt. I hope that their healthcare reform will not put us in a worse situation than the one that we are in now. I hope that these patriots do care for the American people as they say they do. 

Just having the audacity to hope sometimes is not enough because one must face reality. For me, I will continue to pursue my goal of accumulating $500,000 because I know that in reality I am the one who will help me and my family.