It is only appropriate that we return to the trails of the Wild Wild West every now and then, since that is where we started this series. Although this series deals with investment basics, you might get the idea that we are like Indians doing a dance around a fire. Constantly circling the core subject matter, but never really touching it. Before we get into the swing of things, let me share an Indian joke with you.

Way back, Armstrong and the boys were practicing for the first moon landing in the Nevada desert. They had the Apollo Lunar Lander out there and were all kitted up in their moon gear. (Some believe this is where the actual moon landing was filmed, but let's not go there.)

An old, wise (obviously) Indian Chief rode up on his horse and inquired what on earth they were doing. They explained that they were off to the moon. The Indian Chief promptly asked them to relay a message to the folk on the moon. He made them practice the message in his Indian tongue, but refused to translate. He just laughed and said they must pass on the message. Some days later a young Indian approached the aspirant moonwalkers, who desperately wanted to know the meaning of the message. When they asked him what it meant he just laughed, but refused to translate. After some heavy bribery and days of prodding they finally got it out of him. The message the Old Indian Chief sent to the folk on the moon was,

DON'T TRUST THESE PEOPLE, THEY'LL TAKE YOUR LAND!!!

Anyway, before anybody gets all worked up, let's get back to the subject at hand. This is not a case of me avoiding the core subject matter of investment basics, e.g. return on equity, cash flow, management etc, I just wish to stress the importance of what is mostly treated as peripheral to investment. Frequently, the issues I outline below are not addressed at all. This is akin to wanting to become a professional polo player and not knowing that it helps to have a trust fund. Sure, that is not the only way, but it certainly helps.

You should know by now that the first question any investment advisor or broker should ask you is, 'Do you have any debt?' or 'Do you have net liabilities or net assets'? It is critical to square off your debts first - before you start even thinking about investment. The only debt permissible is mortgage debt and only because there are other very important advantages (not necessarily financial!) to owning your own home. If you ever want to feel like a king, start by getting a castle. Some argue that you should gear (i.e. borrow) around 20% your total assets. I accept up to 20% leverage in companies I invest in, so it should be O.K. to apply it on an individual level. Personally, I don't even do mortgage debt. There is something I can never understand about people who speak about getting rich, yet are sitting on a pile of debt. Yeah, right! You want to get rich by paying other people for the use of their money? The logic escapes me. The best investment you will ever make is to pay off your debt. That includes your mortgage, car HP, credit card (every month!), budget plan, overdraft and personal loans. Trust me, it is worth doing just to experience the day that you don't owe anybody anything.

So, get a life! Stop buying all that junk and start paying off those debts. It is not that difficult. Then, and only then, can we start talking about investment. Oh, by the way, NEVER NEVER NEVER borrow money to purchase an investment.

DON'T TRUST THOSE CREDIT CARDS, THEY'LL TAKE YOUR MONEY!!!

For your information...

The average wealthy American has $1m in assets and $200k of debt, for a net $800k. 80% have their $200k of debt on property. Oh, and only 1% of the average wealthy American's debt consists of credit card debt.

To be able to invest you have to possess free assets. Then you need to have the mental equipment. Luckily, in this department you only need to be average. Very importantly, in my view, is that you bring the required discipline to the table.

From next week we will stop dancing around the fire and get straight into walking across the coals!

Hey, Ho, Silver! We have a sunset to catch!

Whatever you are up to, I hope it is profitable and ethical!

Mr. B

mail_mrb@yahoo.com

Posted: 2002/10/07 11:59 View Archive