Lazy Man and Money

The 5-Minute Guide to Being Billionaire Rich

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Hope all the fathers out there had a great Father’s Day. For my first Father’s Day, I, appropriately, go the gift of a hammock. The better gift though was that my son learned to crawl. It’s more of an inch worm-like scoot, but it is super cute. I almost want to set up some baby barb wire above him, because he looks just like a little soldier. (Mental Note: I need to get video of crawling in his camouflage pants.)

cheeseburger driving a car
I want to go back to baby land where cheeseburgers driving cars makes sense

The other thing we did for Father’s Day was go some of the mansions in Newport, Rhode Island. Specifically we went to The Elms and The Breakers. We went in that order, which was great because The Elms, while being extremely impressive is just not up to par with The Breakers. For those lacking the history, there was a time where the big players in the Gilded Age built these tremendous mansions along the ocean and threw tremendous balls and parties. It’s a lot like the Hearst Castle.

It’s hard for me to describe these mansions. The Breakers is 65,000 square feet, or around 20 times the size of the typical “McMansions” that people were talking about a few years ago. Wikipedia points out that it cost $12 million to build at the time, but that’s $331 million in today’s dollars. That’s enough money to buy Detroit (just kidding). Aside from its size, the ornate carved marble, gold, and platnum that was used throughout the house is incredible. Having shopped for a new fence lately, I can’t imagine how much the majestic gate and fence must have cost in those times – especially since we have better manufacturing nowadays.

Throughout this tour it made me think, “What would you need to do to get this rich today?” In order to tackle that question, we need to define what “this rich” is. It’s one thing to spend $331 million on a house, but it is quite another to maintain it. These mansions typically had around 40 servants (as they were called at the time) working for them. These people had to be paid at least reasonable wages, so let’s put at $30,000 a year. That comes out to about 1.2 million dollars today, but let’s round that up to 2 million. It’s becoming clear to me that going through this step by step is going to be a little too involved fort this article, so let’s just say that you need around a billion dollars to pull this off. It’s worth noting that the family that owned The Elms only stayed there about 8 to 10 weeks of the year.

A billion dollars is more than Tom Brady or Peyton Manning have. You’d face long odds in acting your way to a billion dollars as Mel Gibson and Jack Nicholson seem to top the list around $450 million dollars. (Side Note: Julia Loius Dreyfus proves you can be doubly rich with her Seinfeld fortunes and inheriting billions from her father’s energy company, just like those in the Gilded Age.)

So how does one go about becoming a billionaire? That isn’t the kind of money you are going to win on Survivor or any other reality TV show. Nowadays, if you get extremely lucky and are the lone winner of one of the top lottery jackpots in history, you can expect to get at most $200 million after taking the lump sum and paying the taxes on the winnings. You’d still need to do some shrewd investment or business planning to grow that to a billion. You can’t plan on inheriting this kind of money (well if you can and you are reading this article contact me). Good luck into marrying into a billion dollars – I wouldn’t hold my breath.

What about the stock market? There’s certainly money to be made, but to earn a billion dollars that way, you’d have start with around $132,000 and invest in such a way that you make 25% consistently for 40 years and pay no taxes on it. That might actually sound a lot easier than it seems. If it does, take note that I doubt there’s anyone on Wall Street who has a record of making 25% for 40 years. Oh and after 40 years, you might be too old to really enjoy it.

In the end, the only way I see to get to a billion dollars with any kind of reliability is to start the next great technology company. Gates, Jobs, Ellison did with Microsoft, Apple, and Oracle. Google and Facebook have it’s billion dollar people. You can surely start other kinds of companies, but it isn’t like you are going to compete with Exxon or major airlines in a couple of years.

Hope that I didn’t burst your bubble with 4 minutes of history to just learn the obvious. If it makes you feel any better, these people from the gilded age were not always looked on fondly. They weren’t like Buffet (or even Gates) who have signed on to give most of their fortune back via charities. Nowadays it’s not exactly a great PR move to spend a couple hundred million dollars for a house that you live in only part of the year. Still don’t feel any better? How about this… almost all of the gilded rich ended up giving their money to various heirs and had it either diluted or wasted over the years to the point that these great mansions need to be preserved with funds by tours like the one I went on.

I’ve come to terms that I won’t be leaving the “gilded age” wealth to my son. That’s fine, there’s a lot more wealth below that. Perhaps just as importantly, there’s the kind of wealth that buys you a shirt with a cheeseburger driving a car… and that’s only $2.50.

Is Social Security a Ponzi Scheme? (Part 1: Ponzi History)

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As we head toward the 2012 election, you’ll probably hear more politicians echo the thoughts of Texas governor Rick Perry and call Social Security a Ponzi scheme.  The mouth of a politician isn’t always the best source of accurate information.  Is Rick Perry’s assessment correct?

Before determining whether or not Social Security is a Ponzi scheme, we need to cover a little Ponzi scheme history and understand how it works.

Who was Ponzi, and what was his scheme?

Charles Ponzi was a career criminal who stumbled upon his bright idea in 1919.  In theory, he was investing in international reply coupons.  International reply coupons were redeemable for first class international postage in any country that was a member of the universal postage union.  The international reply coupons bore different prices in different countries, due to differences in the underlying international postage rates.

Ponzi claimed to be making a profit by buying coupons in a country where the cost was low and selling them where the cost was higher.  In theory, it was definitely possible to generate a small (and legal) profit via arbitrage.

If you’re having trouble with the concept of international reply coupons, let’s use an analogy.  Imagine that Al’s car wash and Bob’s car wash use identical tokens.  Al sells the tokens for $3 and Bob sells them for $4.  You could make a profit by buying Al’s entire supply of tokens and selling them to Bob’s customers for $3.50.  Now, imagine that Al is Spain, Bob is Argentina, and the tokens can be used for international postage.

Ponzi claimed to need outside funds to get the ball rolling, and promised a 50% return on investment in 45 days – or 100% in 90 days.  (Skeptic question: if it was so easy to make a profit with international reply coupons, why didn’t Ponzi have competitors?)

What Ponzi was really doing, of course, was simply taking money from each new round of investors and using it to pay off the previous investors.  Most of the early investors didn’t even want their money back – they preferred to let it ride and continue to rack up huge amounts of paper profits.

Finally, Clarence Barron (yes, the guy the magazine is named for) analyzed Ponzi’s financials.  For Ponzi’s story to be true, the number of international reply coupons making their way through the Ponzi organization would need to exceed the actual number in circulation – by a factor of several thousand.

Oops.

Down came Ponzi’s scheme, a short nine months after it started.  In the nearly 100 years since Ponzi’s scheme, others have tweaked his initial design and run successful versions of their own.

You’ll often hear that a Ponzi scheme will quickly collapse, because the number of investors needed to perpetuate the scheme will quickly exceed the number of people on earth.  This is not exactly true.  The new investments don’t necessarily need to come from new investors – they could be from current investors doubling down on their “investments”.  The life span can also be extended if the operator isn’t actually paying the investors, but is simply crediting their account for the earnings.  Set the interest rate high enough and nobody will want to pull their money out.

In part two, we give an example how Social Security works. Finally, in part 3 we put the two pieces together to answer the question and determine whether Rick Perry was right or not.

Weekend in Reno

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I spent the weekend in Reno meeting a friend’s uncle (we’ll call him Uncle Ted). He’s doing some inventing and that’s something that’s always interested me. I had thought about getting patents a couple of times, but I’ve never had the $10K that the lawyers have always asked for. In talking with him, it seems as if a little leg work can cut $7K from that estimate.

Ted’s wisdom didn’t stop there. He’s working with China to manufacture his invention. It’s no surprise, but it would be a whole easier to invent things if it were possible to manufacture in the US or a country where the first language was English.

I have to say, it’s good to be back. I didn’t enjoy the 10-hour round trip drive – especially as much of it was traffic.

Confession Time: I used to be a day trader…

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I have a little time until I start my new job, so to fill some of that, I’ve been watching CNBC. With news that the Dow is at nearly a 7-year high, it’s starting to bring back some of that old enthusiasm.

Economically things are looking good in several areas. Oil prices might test $60 a barrel soon. As I mentioned earlier, Mortgage rates seem to be dropping. The consumer confidence is up.

So naturally, I’m going to have hop back into the market and start trading stocks like I did in the past. I’m joking, that would be the worst idea, I’ve ever had. I’m going to continue to sock money into my Prosper account, Vanguard’s mutual funds with it’s low expense ratios, and ETFs.

Save Money or Grow Money… How about Both?

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The timing couldn’t be better for Moomin Valley’s “Reflections on PF Bloggers” (via Adventures in Money Making). When I started this blog, I realized that I had two very different influences. On one hand, I just finished Rich Dad, Poor Dad which is about making money. On the other hand, I grew up in household where Sunday morning was for clipping coupons.

So maybe that will be the niche that makes this blog successful. One can dream, can’t he?

[Update: I misjudged Aventures in Money Making a bit. I had figure them to be largely about the growth of money, but on further review there are a few tips on how to get the most of your income.]