How to be a billionaire

 

Section II: How to be a billionaire

Instructions on how to make a billion?

 

Most likely this book will not make you a billionaire. I’m not one myself. If I were one, do you think I have the time to write a book?  It is used to catch your attention. The title “How to be a 10 millionaire” does not sound too appealing. When a child wants to be a president, most likely he will end up at least a good citizen. Aim high.

 

However, if you’re young, 10 million (in 2020’s money) is very doable. I separated this book into 4 stages. If I had this book or a similar book when I started out, I could have made over 10 million by now.

 

When you become a recent college graduate, buy this book and start with Stage 1. They do not teach you how to become rich in college. It makes the ideal gift for a recent college graduate and they will thank you forever. It is truly a gift that keeps on gifting.

 

There are more important objectives in life than seeking wealth such as happiness, health, relationship, etc. With wealth, a wise man can make the other objectives easier to obtain, but an unwise man can do the opposite. When you lose a lot of money and you’re still smiling, you’re a winner; the winner knows it is a temporary setback.

 

My friend died of worrying about losing most of his life saving in the stock market. Eventually the market returned, but he was dead already.

 

Most of my friends making at least 2 million are investors in stocks, real estate or both. First we should be thankful as there are fewer wars than our parents and grandparents. It is easy to accumulate 2 million to retire in my generation.

 

Stage 1

 

Unless you work in the investing industry, you do not want to spend a lot of time in investing. You have a life too I hope! At this stage, concentrate on your career. Accumulate cash for an emergency fund to support you for at least three months and a down payment for a house. Invest fully in a Roth IRA (if you’re eligible), at least the matched part of your 401K if it is available to you and then ETFs for funds left over. 

 

Do not marry someone who likes to spend money like there is no tomorrow. Contrary to the current popular belief, you should attend a good college even the monetary payback may not be good initially. You have a higher chance to find a compatible spouse.

 

I have designed a simple plan on how to invest in ETFs and a simple way to time the market. It takes about 10 minutes on investing on the first (or any specific) day of each month.

 

Stage 2

 

Learn how to invest in the market. Begin with using paper trades. I provide you with all the tools. Depending on your time, learn stock investing, but do not use real money initially. Knowledge leads to success. However, little and/or any misinterpretation could cost you money.

 

Stage 3

 

Invest in the market with real money. Start in small ways and increase your positions gradually. It is the gut of this book covering most areas in profitable investing. Stay away from the risky day trading; most newcomers lose money in day trading. Even many experts in day trading have their huge losses periodically. Value investing with market timing and trailing stops is the turtle way to make money in the long run. There is no substitution.

 

Stage 4

 

Protect your profits and donate some to the poor. There are more topics covered here. You should be very wealthy at this stage, if you have followed the book. Do not take extra risk on risky stocks. This is the time to enjoy your fruits in life.

 

Billionaires among us

 

Every generation has its opportunities to produce billionaires. In our generation, we have Bill Gates, Warren Buffett and many others. I prefer to set a ‘modest’ target of 10 million (in 2020’s money). Actually I know many folks with about a million dollar enjoying a happy retirement. You do not need a billion to enjoy your retirement or have a happy life at least financially. Here is why:

 

Jesse Livermore, considered to be the greatest trader, made millions and bankrupted several times. Finally he committed suicide. It is better to be a turtle, boring investor. It is easy for the mind to make millions, but tough to lose millions. Examples abound.

 

I know four billionaires personally. The first two have something in common: Participated in IPOs in Chinese companies. It is once-in-a-life-time opportunity to build bridges between the US and the Chinese businesses. It is similar to Walton family making billions by importing Chinese products. What a simple idea and why I missed it? The other one is my high school classmate making movies in Hong Kong. Another classmate worked in MIT’s post-graduate program and became one of the earliest employees of a famous drug company in the U.S. 

The objectives in life

We come to this earth with nothing and leave with nothing. Why do we fight for wealth, prestige and power? However, if we do not have the objective for wealth, prestige and power, it is a life without meaning for most.

Money should not be our primary objective in life and happiness and health have to be earned and cannot be bought with money. When you’ve accumulated enough wealth to have a comfortable financial life, you may want to pursue other objectives in life besides wealth.

I have seen many successful men and women who are not wealthy using financial yardsticks but they are wealthy in working in jobs they love, good friends, good families, good health and/or fulfilling their own objectives in life such as helping the poor.

Check out the wealthy singers, movie stars and athletes. Are most of them really happy with all the broken marriages, drug and alcohol abuses? I rest my case. Many of them do not have basic investing knowledge (most likely they have not bought this $10 book and lose millions), and many end up bankrupted.

I do not believe most authors on investing are rich. Unless they do it for fun, the successful ones do not want to reveal their secrets. As of this writing, I’m financially sound especially with my age and my frugal life style. I do it for fun and I read my own books to remind me of my mistakes in investing. The best trader in our generation committed suicide losing all his money and called himself a loser. Learn from his failure: 1. He did not practice what he preached and 2. Risky bets.

One of my friends accused the 1% (I do not belong in this group) of altering the tax laws to reduce their taxes. It is partly true and Buffett should not pay less than the tax rate of his secretary. However, many rich folks donate their wealth to charities.

Unfortunately only 60% in this country pay Federal income tax. We should encourage the other 40% to work. The current system takes away their benefits for taking a job. I contribute by paying income taxes when I make money in the stock market. A good market allows me to help the poor more.  Investors buy stocks to finance new products and services and hence boost employment. Capitalism is not evil.

The six pillars of success

They are hard work, persistency, innovation, honesty, passion and social responsibility, in random order. Why luck is not one? Most successful folks do not attribute the success to luck.

Also successful folks also are humble in learning how and why others are successful. Successful folks do make mistakes, but they try hard not to repeat their mistakes. They also learn from others’ mistakes. Now, you are ready to set your objectives and enjoy your road to wealth.

 

Until you retire, you should spend most of your time / effort in your career / business and NOT in the stock market. The swing in your portfolio would tempt you spending too much time in investing and that’s not profitable in the long run.

 

Why you want to gift this book

What should you tell your children about why you did not buy him/her this book 30 years from now? Colleges do not teach them how to achieve financial success but this book does. If you’ve achieved financial success after 30 years, do not thank me but thank the one who bought you this book. Pat your shoulder if you bought this book for yourself.

 

The book “How to be a billionaire” is a perfect gift for college graduates. My other investing book for beginners is “Investing for Beginners”.

1          Stage 1: Starting out

 

Why invest?

 

This is the only way to make money for the average person. Our capitalistic system punishes us for not taking risks (i.e. investing). It is easy to confirm when you compare the average returns of stocks and CDs in the last 30 years.

 

This stage requires you to spend minimum time by timing the market in its simplest form and buying ETFs that do not require a lot of knowledge and time to evaluate stocks.

Basic education / Simplest investing advice

 

Read basic investment articles for beginners. Both Fidelity and AAII (both require being a client or a subscriber) have excellent articles. Refer to “How to Start” in Section I. After you have funds for down payment of a house and emergency fund, I recommend buy ETFs such as SPY. When the market is plunging, sell the ETFs to accumulate cash. Move back to ETFs when the market recovers. For more aggressive investors, buy contra ETFs such as SH when the market is plunging.

 

Why market timing

 

Before 2000, market timing was a waste of time. However after that, we have had two market plunges with the average loss of about 45%. It sounds harder to time the market than it actually is. We have a simple technique to detect market plunges and when to reenter the market. Our objective is reducing the loss to 25%. Before you start Stage 2, practice what you have learned. Buy an ETF such as SPY that simulates the market when the market is not plunging.

 

Links

1 %: https://www.youtube.com/watch?v=ds5LQXBKtQg

 

 

 

2          Stage 2: Find & evaluate stocks

 

My steps to trade stocks

 

1.       Search for valued stocks (from the proven screens).

2.       Evaluate the screened stocks by:

a.       Fundamental Analysis.

b.      Intangible Analysis.

c.       Qualitative Analysis.

d.      Technical Analysis.

3.       Sell stocks.

 

As with everything in life, there is no guarantee that this book will always make you money. However, the chance of success will be substantially improved especially when you practice all the ideas presented in this book. Start with paper trading first in this stage.

 

Screens (used to search stocks) are better than others in certain market conditions. You should have several screens and keep track of their recent performances. I prefer value stocks especially for beginners.

 

Learn about investing and test out some of the basic concepts. This stage gives you a foundation to the next stage that will use real money in trading stocks.

 

Continue market timing and trading ETFs as described in Stage 1. You’re not ready to compete with professionals in trading stocks, but trading ETFs with market timing is fine.

 

Beside stock research

 

In this stage, you should enjoy the better things in life such as owning your own house and taking nice vacations. A trip to Washington DC should not cost a lot, but it is fun, memorable and a great learning experience especially if you have children. Buying a fancy car is consumption, and buying a decent house is an investment. Stick with investments.

 

3          Stage 3: Invest in stocks for profit

 

This is the gut of this book. I introduce long-term swing trading (i.e. keeping the stocks more than 6 months) as the first strategy.

 

In addition to Market Timing, Technical Analysis and Trade are included in this stage. You may want to start with mutual funds and/or ETFs. However, about one third of them cannot beat the market after fees. Depending on the time available, you may want to move a portion of your investments into portfolios managed by yourself.

 

4          Stage 4: Protect your wealth

 

Jesse Livermore, the best trader I believe, lost most of his fortune and committed suicide. Professor Irvin Fisher, the father of Wall Street, did not predict the 1929 crash and lost a bundle including most of his own life savings. Recently, the legendary Kirk Kerkorian’s wealth reportedly reduced his portfolio from $16 billion in 2008 to $3.3 billion in March 2013. Examples abound.

 

This Stage introduces the following strategies: Sector Rotation, Insider Trading and Dividend investing. We should monitor our trades. Why are they are big winners or big losers? Learn from both and trade accordingly. The rest is investment advice.

 

If you need a financial advisor, try to use the paid-for service. There is no free lunch and try not to buy their over-inflated services. When they try to sell you an annuity, run as fast as you can towards the exit door. Most annuities are written by the providers for their benefits. Very few have low-maintenance fees. However, the annuities before the market crash in 2020 perform better than the market. Do not attend any free seminars with fancy meals. Remember if you are the only one to buy their services, you have to pay the meals for all the attendees.

 

#Filler: War-like or war-addicted

 

We have 16 years of peace out of 242-year history. The price is too big to be the big brother and the global police. Some wars such as Vietnam and Afghan were just wrong wars for us. This is the U.N.’s job, not ours. We have so many problems to fix at home such as homeless, drug / alcohol addictions, disaster control, shooting…

5          For Retirees

 

The following describes my own experiences and yet everyone’s situation is quite different. Check the current tax laws and consult your tax professional on any related topic. Also check my Disclaimer in the Introduction section.

Will and estate planning

They will lure you to their presentations by giving you meals at expensive restaurants. If your estate is small (such as below the Federal exemption), a simple will signed by a notary public and the assignments of beneficiaries in your broker’s accounts may be sufficient. Gifting at the maximum limit allowed by law is a common and easy way to pass your estate to your children before you die.

Check the estate tax requirements in your state. Some investors move to another state that has more favorable estate tax treatment or even some people give up their US citizenship.

Many people transfer their houses to their children to avoid long-term care expenses. Check how to do it right with a professional.

I had several ‘free’ meals before I settled for my lawyer. He put my house into a joint trust. He advised me to put my largest taxable account into a trust account.

Taxes

I am lucky (or unlucky in considering how much taxes I pay) to have a higher tax rate in retirement than my working years due to my good investment return so far. Hence, it would be better for me not to postpone taxes during my work years. At 70 ½, we are required to withdraw our retirement accounts (except Roth IRA under the current tax law). Before 70½, I had converted some Roll-over IRA (used to be 401K during work) into Roth IRA as allowed under the tax law then. I paid taxes but it could be less at 70 ½ and/or if I start to annualize my annuity. Again everyone’s tax situation is different and the tax laws may change.

Market Timing

Concentrate more on conservative investments such as CDs, Treasury bonds, safe corporate bonds and diversified ETFs. Save your emergency fund for at least three months after your retirement incomes.

From 1970-2000, the average annualized return is about 10%. Market timing may not help at all. However, since 2000, we had two market plunges (2000 and 2007) with an average loss of about 45%. For simplicity, read the chapter on “Simple market timing” and “Rotate four ETFs”. For more detailed description, check out the chapter on Market Timing which shows you how to detect market plunges. To summarize:

·         Do not invest during a market plunge.

·         Invest aggressively in the early recovery phase of a market cycle.

·         Invest conservatively during other phases with stop losses.

Make your money last

You may never run out of money if you withdraw 4% of your total asset every year.

http://moneyover55.about.com/od/RetirementAccountWithdrawals/a/What-Is-The-4-Rule-In-Retirement.htm

Health

I highly recommend the book China Study by Dr. Campbell. In short, eat more whole grains, vegetables and fruits particularly with different colors and avoid meats / dairy products. Replace milk with soy milk. Avoid cakes, cookies and potato chips. Exercise regularly. Maintain both good physical health and mental health. This is a start on health and I am no expert.

Enjoy your retirement life with hobbies and travelling as long as you are healthy.

More information

This book concentrates on investing and it tries not to duplicate the financial topics for retirees from many well-written books. I obtained the following books in Kindle format for 99 cents each from Amazon.com.

Retirement Financial Planning for Baby Boomers by Whitney Smith.

Retirement Solutions: Financial Strategies for Today’s Retirees by Michael Dallas, CFP. More related articles:

Retire overseas. http://www.marketwatch.com/story/5-reasons-not-to-retire-in-the-us-2014-08-07

Managed Accounts. http://blogs.marketwatch.com/encore/2014/08/05/managed-accounts-too-pricey-for-retirees/

 

 

6          Billion dollar ideas

 

Being good in your profession normally leads you to a rewarding life. Being good in investing would make you financially wealthy and that is what this book is about. Starting a business would make you very wealthy or make you very poor. The pandemic of 2020 bankrupts a lot of businesses.

 

Three out of four new businesses fail in the first few years. Jobs, Gates and Zuckerberg are good examples of success stories. However, they are the exceptions. After watching the Million Dollar Idea from the History Channel, I conclude:

 

·         You need to have an innovative idea to start and it has not been used before.

·         Every generation has its own opportunities. The three mentioned have their opportunities in the new PC. Internet has made a lot of billionaires.

·         The clip-on lens inventor from the TV show has the opportunity of add-on to the successful iPhones. Clipping on others’ success is not a bad idea, but it may not last long for profits without future products.

·         Very few starters can afford advertising. Market share does not mean profit. Many advertisers of internet products in the Super Bowl 2000 went bankrupt.

·         Invest with minimal cost such as at a trade show gains publicity.

·         TV shows and magazines will knock on your door if your product is innovative. It will help them to attract viewers. It is free and effective advertising.

·         Need to protect your product by patenting and keeping secrets during early development. You cannot save money in this area.

·         Most inventors are not good businessmen. You want to let professionals run your business, but you have to keep an eagle eye on it.

·         Be prepared to make a budget during early development, and plan to secure extra financing when the budget is exceeded – it usually does.

·         Prepare for hard work.

·         If your spouse does not join you in your venture, you have to choose between fulfilling your dream and keeping your spouse. That’s why so many successful entrepreneurs are single while starting their ventures.

·         Prepare for failure and how/when to exit.

·         Most new products have to go thru many milestones before they become marketable products.

·         Ensure your product is not a fad after its initial success. Follow-up products should be planned.

·         Face the reality.

To illustrate, do not allow your bias on China to cover your eyes on business decisions. Many businessmen such as Walton and Apple contribute part of their successes to China. For some products, assemble them in South China as they already have component manufacturer’s close by, cheap labor, fewer regulations and a large internal market. After the pandemic of 2020, it may change.

 

My own experiences

 

You may be thinking I’m giving advice from others’ experiences. I did run a one-man company named Micro Architect selling software for over five years. My opportunity was that there were few or no software for the first (arguable) personal computer, the Tandy computer. What was driving me to work hard was my dream to think big and my passion was to make good money.

 

I wrote about 10 software programs. I spent money on two ads and gained a lot of publicity via press releases. I attended PC computer shows once a year in Boston. My wife’s insurance covered the entire family. Larger companies have a team of more than 10 programmers developing a program compared to one person writing 10 programs. My exit strategy was looking for a full-time job when I found out my new programs did not sell well. I used a blanket to watch TV in the cold wintry days more than 10 years before they invented the blanket with sleeves. My friend thought about the won-ton making machines long before any such machine was available. If we only dream without actions, we will have to bring our regrets and ideas to our graves. Even if we fail, we will have no regrets.

 

# Filler:

In any business, we can learn a lot from Bill Belichick. It is the same for stock research, we need to have knowledge, leave no stone unturned, work hard… Luck has nothing to do with success for most successful folks.

 

 

7          Billionaires’ errors

 

Many millionaires (with assets over 10 M) I know have made fatal mistakes. Many should take good care of their health, enjoy their family and protect their wealth or forget their objectives in life. That’s why most big lottery winners are not happy.

 

·        With the millions, some eat and drink carelessly. Some do not exercise enough. Many die early.

·        Many always work more than 100%. At least one person I know died early during playing tennis, so know your limits.

·        Many ‘smart’ investors end up bankrupted. One more zero added to your net worth does not mean anything to them, but losing all will.

·        Many famous singers and athletes die early or end up bankrupted. Many are drug addicts and some pass their problems on to the next generation.

·        When it is time to retire, enjoy life and do not start a new business.

 

 

How I retired earlier

I retired in early 50s. My wife’s insurance covered us for life. I am spending most of the time learning and testing investing strategies. Here are my comments with others on this topic.

 

·         Do not borrow money and/or max out your credit cards except for the primary residence.

·         Have an emergency fund up to at least lasting for 3 months.

·         You do not need fancy stuffs to make you happy.

·         Invest in a weighted ETF for large companies such as SPY and spend a few minutes in market timing as described in this book.

·         Invest your time and knowledge in maintaining good wealth.

Marry your spouse with same objective in your financial life.