Notes from the USA (Sep 2010) – a guest post

In this month’s guest post from the USA, Kiran asks a fundamental question: What is the real purpose of our investing? If your answer is: To make a lot of money, have you really thought it through? How much is a lot, and do you have the plan, attitude and discipline to achieve that goal?

Kiran provides some interesting insights. He would love to get some feedback from you.

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What is the End Goal of Investing?

There are a lot of investors in the world out there, but do they have an End Goal of Investing? A lot of investors invest because they just have a positive cash flow, and need to achieve higher levels of returns; others invest to make a living out of it at some point in their lives; and yet others invest to multiply their investments to become wealthy. Of course, there are many more permutations of this, especially in the under-developed countries where inflation is eating away the value of the currency and creating a huge loss in valuation of the underlying investment. Mexico, Zimbabwe are countries that come to mind instantly, since they have done the revaluations affecting the lives of many people in a direct manner. Is the US heading for the same destiny? I don’t think it should happen in my lifetime, but anything is possible when a country keeps printing money as if paper and ink are free! The joke in the US is that at the rate we are going, we will run out of paper!

End-State of Being a Millionaire

Well, when it comes to the primary reasons for investing, the most common goal that comes to mind is ‘to make a lot of money’. So, let’s look at some of the traits of people who have achieved a common end-state of being a millionaire (lakhopati or now, carodpati as commonly labeled in India). What are the most common characteristics of a millionaire/lakhopati/carodpati?

1) All millionaires have a totally unbelievable work ethics and a deep desire to succeed in their life. It is all about working smart, putting in long days, working 6-7 days a week and having a hand in many ‘cookie jars’ simultaneously. Millionaires work about fifty-nine hours a week (not including commute time) whereas the average Joe (or Pyarelal) works less than forty and shows exhaustion after the 3^rd work day of the week! Ask anyone who works as an investment analyst for one of the big 6 firms like UBS, ING, Fidelity, Citi etc. They hire young dudes and work them 6-7 days a week, and give them big bonuses ($20K to $300K per year), on and above the salary.

2) All millionaires understand the power of leverage. They leverage other people’s time, talents and money for wealth accumulation.  A real estate investor has multiple sources looking for great deals for them. An entrepreneur spends a fair amount of time having people look for their next business idea. In general, all of them leverage the power of networking, by meeting with a wide range of their own contacts, and picking their brain for their own benefit. It’s simply leveraging. Just watch movies like Wall Street or Guru to understand this well (my two favourite movies).

3) All millionaires are passionate about what they do. They create and continue to create a dynamic level of activity around their passion, improving their skills constantly and as a result their outcomes. They are successful because they put in the time, energy and effort into their businesses, more than the average Joe.  It is easy for them to do because it doesn’t seem like work to them, and it does not exhaust them either. The movies Guru and Wall Street portrays this the best.

4) All millionaires have multiple strategies working for them, all at once. We have all heard the term multiple streams of income.  Well imagine multiple strategies working for them at the same time that brings in small to large incomes at any given point in time. Many streams are making a profit for them at any given point in time.  Most have several businesses and many millionaires just don’t tackle one project at a time. Most people should deploy this strategy in life since there are many choices available to an average person (especially in the US). Warren Buffet owns 50-60 companies under his empire, and Mukesh Ambani creates his wealth by having his hand in many different businesses.

5) All millionaires are surprisingly conservative in their actions. They make and keep their money and resources with a long term plan behind them and hence achieve success. They tend to spend way less than they earn, living well below their means, mainly because of lack of time to spend it, or lack of motivation to show off.  Don’t confuse conservative attitudes with an inability to take risk. They are definitely risk takers into ventures that they investigate or get expert advice from their leveraged resources. My Dad’s friends circle was all of this and more, although outsiders would never know it. Investors taking risk in US Real Estate today will be called tomorrow’s new millionaires – I know a few who have already reached there!

6) Now a big group of them have become automated millionaires, based simply on their day to day actions. They pay themselves first, even before they pay the government.  They may take 10-20% of their multi-source-income and have it automatically withdrawn from their income to invest into a retirement bucket or for a future goal and therefore, they never miss that money. They learn to live with this lifestyle for a lifetime, and as a result have become an automated millionaire. Millions of NRIs around the world are already doing this well, and this might also be happening in India.

7) Millionaires around the world love to give. A new generation of wealth has been created since mid-1990’s and, yet, they still fall in the category of giving to many needy projects. Many millionaires are giving at least 10% of their income to a charity of their choice. This helps enrich their lives and the lives of many others.  It also helps them manage their money. Warren Buffet and Bill Gates will be names that everyone remembers when it comes to giving, but Tatas and Ambanis are doing their share also.

8) Millionaires are people who have very high family values, and pass their ideals to the next generations. This comes from having a strong family, beginning with their parents, and sometimes, even living with/close to their parents. This includes putting their kids through a higher level of education, maintaining a higher value system within the family, raising them successfully, and also putting a lot of focus on religion. It is this higher value system that virtually guarantees that the kids will continue their legacy to also become millionaires, even without the wealth of the previous generation. A lot of my family members have shown this trait to be true.

9) Above all, every millionaire has mentors. Yes, all successful people seem to have mentors that have helped them avoid the pitfalls and, the trial and error technique they may experience on their own.  They love to learn from those who have been there before them and save time and money learning from the mistakes of others. Real estate millionaires are out there in bundles, and have achieved this level of success simply due to having mentors. Today’s inter-networking with Blogging, Yahoo/Google Groups and Social Networking is creating a new way of creating mentorship for the young generation, although the original technique has tons of merit by being taken under the wings of ‘the successful’.

10) Finally, “millionaire” is a mind-set. It comes with a high level of commitment, accountability, responsibility and a sense of achievement that one enjoys, however small the achievement. It grows over time, compounds with each achievement, and finally, given a time-line of successful events (with many temporary set-backs), turns into one big success, called being a “millionaire”. My analyst friend in Mumbai is a huge example starting from failing 5 times to get his CA (Accountant), to currently paying 100% cash for multiple Mumbai Apartments from stock market gains.

Today’s Wealthy

Based on the success that our world has seen, the word Millionaire (achieved $1 Million) is slowly changing to a Penta-Millionaire (achieved a net worth of a minimum of $5 Million). This is almost synonymous to Lakho-pati being a word of yesterday, replaced with Carod-pati. This is a level that becomes a goal of many, especially, after achieving the millionaire status. Ten years ago, the high net worth category (commonly called HNI in India) was a niche demographic bunch, clustered around a handful of wealth centers in westernized (developed) countries. Today, the very wealthy are spread around the world and are growing most quickly in new emerging markets such as India, China, Brazil, Russia, Philippines, Africa, Israel, Mexico - countries where they barely existed just 10-20 years ago. Brand new industries have come up recently to service their needs, and their influence can be felt strongly in the world of investment, real estate, consumer goods, property and philanthropy. Just look at the top 100 wealthiest individuals in the world at:

http://www.forbes.com/lists/2010/10/billionaires-2010_The-Worlds-Billionaires_Rank.html

The most important factor of all is that wealth has never been so openly democratized as it is today. I think it is simply due to the globalization, and the fact that the Internet has made it openly available for the common investor to invest far and wide. Investors all over the world are reaping the benefits of a well diversified portfolio of businesses or investment vehicles. As a result, there are millions of people that have amassed a level of net worth today that they have to pinch themselves to believe it!

Still Wondering

As an avid investor, I often ask myself the question, of what the end goal is with the time and energy spent for my global investing. Portfolio goes up, comes down, moves sideways, and then returns back to the lofty levels (India’s Sensex back above 20K). But, where is all of this going? One then comes to the conclusion, that we are all trying to achieve the Millionaire or Penta-Millionaire levels, regardless of whether this gives us a status symbol, or fame, or even higher level of comforts. When the goal is achieved, the goal then changes, and when those levels are achieved, once again our minds play the trick and change the goals. Now, what if the portfolio or business exceeds all of those goals. Then what?

In Conclusion

Assuming that most readers of this blog are Indian, I can say that we all have the Indian value system deep inside ourselves, which bring forth the concept of family. Creating a higher level of comfort for our immediate and extended family is the ultimate goal of many. Adding charity work for the betterment of society and mankind also sets in as the gray hair comes to show its true colors. At one point of achieving senior citizenship, we move away from the ‘passion of achieving’, moving closer to ‘enjoying the finer moments of life’. Satisfaction, joy and peace sets in next, as we watch the success of our kids and, then grand-kids. And, eventually we will all join the angels in the sky leaving behind a legacy of thoughts, innovations, and achievements, for others to embark on, in an even more intriguing level of mentorship through the new open social channels of the net. I recently lost a legendary investor (my Dad) and there is not a day that goes by when I don’t ask the question “What would he have done” or “How would he have accomplished it”.

When you reach the point in your life where you can celebrate the freedom to work, instead of the freedom from work, that’s true success, or even an end goal.

So, what is your end goal?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.