Chapter 1

Two Tracks, Two Heavens

When you finally decide to abandon the road to Financial Hell, you have the choice of two distinct and very different financial heavens and a distinct and different route to get to each one. You can choose either Safely Prosperous Heaven or Really Rich Heaven.

SAFELY PROSPEROUS

The road to Safely Prosperous Heaven is risk-free though unexciting, and smoothly paved with old-fashioned virtues. In fact, it's hazard-free, although sometimes downright dull. At the end of the road, you will be debt-free, financially secure, and able to enjoy your golden years without worries about money. Safely Prosperous Heaven is the place where most readers of this book should go, because it is secure and virtuous. It's the place the first half of this book is about. You will have a comfortable retirement with most of the pleasant things we take for granted we are entitled to—a Winnebago, visits with grandchildren, a nice home in a retirement community, an occasional cruise on a nice ship, weekly dinners out at a nice restaurant. It's the American dream, and not to be sneezed at. All it takes is old-fashioned character and a willingness to postpone some gratification. It's the way to get rich slowly but surely.

The operative principle on this road is to be aware of and avoid several common stupid money mistakes made by most Americans.

REALLY RICH

Then there's the road to Really Rich Heaven. It's very different. It's strewn with rocks and pitfalls; 70-hour weeks on the job; worried, sleepless nights; humiliating failures that test your resolve as it has never been tested before; and marriage-threatening temptations. But it's downright exciting. At the end of this fast track is financial freedom beyond your wildest dreams. You will be able to fund your favorite charities generously and help down-on-their-luck friends and relatives. You will probably be honored by your community and asked to serve on various boards, because, as Tevye sang in Fiddler on the Roof, “When you're rich, they think you really know.” You'll be able to buy anything you want without thinking about it or counting the cost. But the tough road on the way there will test your character and principles like nothing else in life can. It will be a tough route through a minefield between the transitory temptations that Mammon brings and the eternal happiness that comes from having a loving spouse and family to honor your name, and beneficiaries of your generosity that will rise up to call you blessed.

When you succeed, you will be the target of envy and the class warfare that paints all rich people with the political brush of unworthy selfishness and tries to use the coercive taxing power of government to take away your hard-earned money to give to the voting masses who want what you have but don't want to pay the price you did.

I will teach you how to exploit the principles and techniques that have created millions of fortunes. I have carefully mapped these two roads so you can follow whichever one you choose. They are both within your reach, and you do get to choose.

This started out to be a book called The Ten Stupidest Things People Do with Their Money, things I had done and observed others doing that kept them from becoming prosperous. It was to be my legacy to my numerous posterity. But as it unfolded, I realized that I knew about a lot more than just prosperity. I had been rich twice and lost everything twice, and The Ruff Times was really the perfect laboratory for watching thousands of others become not just Safely Prosperous, but Really Rich as well. So the book grew into more than just a prosperity guide. It was now also a how-to-get-rich guide, born in the real world of people who become Really Rich. This could really have been two separate books, one about prosperity, and one about real riches, so I have subdivided it into Book I and Book II.

Book I, “The Safe Road to Prosperity,” is for those who really just want to be Safely Prosperous, which I define as living comfortably and then some, with no financial worries and a secure future even after retirement. It's in two sections.

Section I of Book I, entitled “The Dumb Mistakes Almost Everyone Makes with Their Money,” is for the tens of millions of Americans who always have too much month left at the end of their money. It's about the foolish things they did with all the money that went through their hands day after day without sticking. It tells you why you aren't financially secure, and why some of your neighbors are, even though they may have no more income than you.

STARTING BELOW SCRATCH

Most stock-market or get-rich-quick books assume that you have money to invest, and ignore the crucial question of how to get it in the first place—and keep it.

Some years ago, on a promotional tour for my book Making Money, I found myself at a Chicago radio station that had a mostly black—and presumably poor—listening audience. After the usual opening pleasantries, the interviewer said, “Your book seems to be written for investors who already have money. What about those who are poor or barely making ends meet?” I responded weakly—but, I thought, cleverly—“I haven't yet designed an investment program for those who have no money to invest, and neither has anyone else.”

Since I have grown much older and a little bit wiser, this book starts with the expensive mistakes you can avoid in order to accumulate a serious nest egg. It's about how to have a truly independent retirement, even if you're late starting and only a modest earner. It's about how to lay a nest egg out of current income, regardless of how small that is!

These expensive mistakes are well-nigh universal, and most readers, even those who are fairly well off, will at least catch a glimpse of themselves here.

In some cases, these strategies will take a few years to pay off, but don't write them off by telling yourself that you're too old for this sort of thing. The average life span in America has risen to 75 for men and 81 for women, so most of you have a few years to build an estate or add to yours to leave to future generations. Ten years is plenty of time.

Section II of Book I is entitled “Blowing Your Money in the Investment Markets.” After you have eliminated the first six foolish mistakes and finally accumulated some money, I will teach you what I learned from some spectacular losers about the foolish things they did with their money that caused them to lose it in the market, especially during the current bear market. Most amateur stock-market investors have lost money, and I will tell you how they did it. These time-tested and infallible failure techniques have been implemented by millions of losing investors—usually without them even knowing what they did and why they did it.

I wrote Book I for truck drivers and young married couples, small businessmen and Fortune 500 executives, retirees and their children and grandchildren, housewives, schoolteachers, and clerks, rich and poor. This is especially for all those who are struggling for survival every month and think it is because they didn't buy “a winning ticket in the lottery of life,” as Bill Clinton said in one of the lower rhetorical points of his administration. Clinton meant that the rich were merely lucky, which is a crummy piece of class-war rhetoric. Luck had little to do with it.

BOOK II: THE REAL SECRETS OF THE REALLY RICH

Book II is a quantum leap beyond prosperity. It's about the most important things rich people have always done to get rich. This section teaches you how to leap the gulf between the Safely Prosperous and the Really Rich. One way to get rich is to choose your parents very carefully, but it's too late for that now. The rich really are different, and it's not just how much money they have or how smart they are, it's their attitude toward risk and fear, their understanding of when to break the rules of Book I, and their knowledge of a few simple capitalistic principles. It's also having the rich person's mind-set.

How do you define “Really Rich?” For the purpose of this book, I define it as having secure wealth that is way in excess of your real wants, with lots of discretionary cash flow produced from the assets on your balance sheet. You can afford to buy anything you want without a second thought, or to give away big chunks of money to causes you care about. It's a giant leap beyond Safely Prosperous. The truly rich can spend money or give it away whenever they want to without worrying about it and can give money to causes they care about without sacrificing any of their personal wants.

How do they measure their tangible wealth? Not by the cash in their bank account, but by their balance sheets and the passive income their assets spin off.

The Safely Prosperous are disciplined and make few mistakes with their money, but they take no risks, even calculated ones, live well within their means, and are very comfortable with a riskless lifestyle. That's OK, God bless 'em. But the Really Rich usually got rich by taking risks all the time and make a lot of mistakes along their journey. They aren't gamblers, except with a small part of their fortune just for the fun and excitement of gambling. They are comfortable with risk, but it is always calculated risk with the odds heavily on their side, usually where they can determine the outcome, and it has to return many times more than market rates. They are often driven—sometimes just by greed, sometimes to show someone they are someone too, sometimes by grand ideas. But most of all, they see risk as measurable and controllable, and they enjoy the game. And, ironically, they are usually heavily in debt. Their road to wealth is usually paved with failures, but their debts and failures aren't stumbling blocks, they are stepping stones.

In the parable of the talents, Jesus told about three servants who were given some money to care for by their master; one was given five talents (more money than a man could earn in a lifetime), one was given two talents, and one was given only one talent. When the master returned and asked for an accounting, the men who had been given five and two talents had both doubled their money, and were praised and promised great rewards. However, the man with one talent, knowing his master was a hard man, had buried it in the ground, and had no increase. The reward for his no-risk strategy? The master gave his talent to the man who had had five. Today's rich people go even farther than either of the first two; they earn 5-fold or 10-fold!

Book II teaches you the things rich people have always done to get rich that you don't do. In good times or bad—no matter how bad—smart people still get rich, and this book contains their secrets.

I'm not one of those ivory-tower experts in three-piece suits who say things like, “Given the inverted yield curve and rising GDP . . .” That is usually just gobbledygook that conceals the fact that they really don't have a clue. I love the English language, and it is most elegant when it is plain, simple, and direct.

Most people foolishly think the pursuit of prosperity or wealth is a sprint, not a middle-distance race or a marathon, so the get-rich-quick idea is very seductive, and get-rich-quick seminars draw big crowds. Is it possible to get rich quick? Sure, many have done just that, but the unvarnished truth is that no one magic secret will get you rich both fast and struggle-free.

“But,” I hear you cry, “rich people are different from me; they're special.” That may be so, but are millionaires especially talented? Are they all inventors or brilliant entrepreneurs? Are they financial geniuses? Are they NBA stars? Did they get rich quick? Not usually, although it often came faster than they expected. Most of them were just like you—no smarter, no luckier, and no more talented. They didn't do anything you can't do. But they understood and consistently and patiently practiced some old-fashioned principles of wealth growth year after year.

FORECASTING

I have made my living for a quarter century making financial and economic forecasts. Forecasting is not easy, but it made a lot of sense to me; if you can accurately forecast the direction of interest rates, you can make a lot of money in bonds and utility stocks. If you can forecast the direction of the dollar versus other currencies and the direction of inflation, you can make a lot of money in gold and mining stocks. If you can accurately forecast an imminent recession or recovery, you can make a lot of money investing in the stock market.

However, the techniques described in this book will work no matter what happens to the economy or interest rates or the stock market or the gold price, so you can achieve your objectives regardless of what the world around you does. However, for the record, I will tell you how the future looks from the perspective of late 2003.

First, we have been in the longest bear stock market seen since the 1930s, and despite the year-long burst of optimism from Wall Street in 2003, it's a long way from over. As this is written, the huge bubble of the 1990s is not yet fully deflated. The traditional standard measurements of value are actually higher than they were at the peak of the last bull market in March 2000. The price/earnings ratio (PE) on the New York Stock Exchange is now around 32 to 1. It was around 30 to 1 at its peak in 2000. No bear market in U.S. history has ever ended with such high evaluations. Not one! The PE at most bear market bottoms is about 7 to 1. That means that the Dow Jones will not bottom out until it falls below 4,000, or possibly 2,500. The Nasdaq doesn't have as far to go on the downside because it is already down more than 60 percent, so my downside target for the Nasdaq is below 1,000. There will probably be at least one more down leg to new lows, and it may take a few years.

This means the business environment will be chancy at least until late 2004, and possibly for several more years, with false rebounds in between.

But none of this matters much! The techniques I will teach you will work despite these uncertainties, and perhaps because of them. If I'm unduly pessimistic, I'll lead the cheering, and the techniques described herein will just be easier to implement.

DIFFERENT TRACKS

There are generic differences between the two tracks and those who abandon the road to Financial Hell to follow them:

• Mistakes: The reader who wants to be Safely Prosperous will have to avoid the most common mistakes and exercise some self-discipline and self-denial. Readers who want to be Really Rich must be willing to make mistakes as they launch their programs, some of which will fail and teach them much of what they will learn—but they are not the same mistakes prosperity seekers should avoid. To the Safely Prosperous, mistakes are stumbling blocks to be avoided. To the Really Rich, other mistakes are just stepping stones and business lessons along the road to real wealth.
• Risk: The prosperity seeker will be risk-averse and settle for modest but sure compound returns over the years. The wealth seeker must be willing to take calculated risks and sometimes shoot the moon.
• Debt: Prosperity seekers must avoid debt, and, indeed, liquidate the debt they now have. Wealth seekers will have to learn to use debt as an essential tool. In fact, they probably can't become rich without owing a lot of money under carefully controlled conditions.
• Outside versus inside: The prosperity seeker will always be a passive outside investor, buying the opportunities created and controlled by market forces and other businesspeople. The wealth seeker will be an insider, buying or creating investments at wholesale prices and selling them at retail to prosperity seekers.
• Opportunity versus security: The prosperity seeker has modest goals for financial security and values that security highly. The wealth seeker has little interest in security and is opportunity-oriented.

In summary, these are two different animals, and you could be either one of them. By the time you have heard me out to the end, you will have a lot better idea which one you are. It's too soon to decide.

WHO CAN BENEFIT FROM THIS BOOK

In the past, my financial newsletter, The Ruff Times, was most useful for upper-middle-class or wealthy families who already had cash to invest. Our surveys have told us that 49 percent of them were balance-sheet millionaires. They have tended to be personally and politically conservative and have seemed to enjoy my political commentary from the conservative/libertarian political side of the public debates. However, this nonpolitical book has little or none of that kind of content. It is conservative only in the sense that conservative financial principles cut across all political and philosophical lines. Money acts the same for Republicans and Democrats; liberals, conservatives, and libertarians; rich and middle-class.

Book I will be especially useful for young adults just starting their financial lives, and for the Baby Boomers and Generation Xers with 10 to 35 earning years ahead (30 to 55 years old). Many of them likely saw their paper profits decimated in the stock market crash of 2000 to 2002. While they are still in their peak earning years, they can most effectively use the long-term strategies herein to start now to prepare for their inevitable retirement—or for possible hard times while they are still over the horizon, if they are willing to face reality and stop spending money they don't yet have (borrowed money) so they can pretend they are already rich.

In the interest of full disclosure, I feel compelled to tell you that as a practicing Mormon, I intend to keep practicing until I get it right, but this is not a pulpit or a missionary tract; I save that for my Sunday-school class. However, Mormonism is not just a theology. It is also a classic nineteenth-century American culture with its roots in the old-fashioned self-sufficiency attitudes of that century, and those universal values have been planted in my bones and strongly influenced the content of this book. There is no overt or covert attempt to preach the unique Mormon theology here. Tens of millions of non-Mormon middle-class mainstream Americans share these values down deep in their guts and will be comfortable with them.

Some of what you will read, especially in Book I, is very old-fashioned and probably politically incorrect. Successful people have practiced these principles for hundreds of years, and, in my opinion, they will never really go out of style, even if they periodically go out of favor.

I wrote this book to educate you, but as I have already paid your tuition, you now have a scholarship for only the cost of this book. Those of you who hire financial advisors to do the heavy lifting should make sure they read this book first so you can be sure his or her decisions don't undercut your newly honed guidelines. After you have read this, you will probably be smarter than your financial advisors are now!

All of these rules are very precious to me, and I hope they will be to you. They should be—I paid several million dollars in tuition to the school of expensive mistakes to learn them.