The Case for Gold

One of my favorite asset classes is Gold. Old Element 79 is pretty interesting for many reasons; it is highly ductile, an extremely good conductor, and it has proven exceedingly difficult to create or destroy over time. But probably my favorite characteristic of gold is that it has been intrinsically linked to stored human toil (value) for over 5,000 years. In fact, Warren Buffet's father in 1948 wrote an excellent piece on this very subject. If you read one thing today (besides the ILAF blog of course), I highly recommend Howard Buffet's speech to Congress entitled: "Human Freedom Rests on Gold Redeemable Money."

A company I recommend and personally use to buy and store Gold for a flat 1% of spot pricing is aptly named Goldmoney. You can chose where you'd like to vault your gold and it can be redeemed for physical gold on demand. They've essentially reinstated the Gold Standard after an over 80-year absence.

As the world watches the Olympics in Rio this summer and the economic fallout from the United Kindgom's Brexit vote, it is interesting that once again all eyes are on timeless Gold as the metric of excellence and value.

Dynastic Wealth

Described as "monetary inheritance that is passed on to generations that didn't earn it," dynastic wealth gets a bad rap. It is so "burdensome" that most billionaires feel compelled to increase it and disperse it via a number of nonprofits controlled by their heirs to maintain it without having to "pay their fair share." Please. Let's be honest, dynastic wealth is an enviable goal and one which most investors strive to obtain, if not fully in their lives, then at least in the lives of their children and grandchildren.

Dynastic wealth, in terms of monetary abundance, offers many significant advantages to poverty; better access to health care, education, safety, etc. It has, and will always be, one of the primary goals of our species. It is fundamentally Darwinian. In many ways, dynastic wealth is the American Dream; an increasingly better quality of life for generations to come with the ability to pursue one's own happiness.

Those who wish to Invest Like A Farmer are particularly well-suited to accomplishing this goal. It is a worthy goal and one that is obtainable. Here are the basic elements that I have seen succeed:

1) Longevity is key as both time and health are vital assets to establishing dynastic wealth.

2) Self-Discipline to repeatedly contributing to compounding investments, rarely taking distributions.

3) Financial Savvy; a lifetime hunger for knowledge about investing in a number of asset classes.

That's the quick 3-step process; there are undoubtedly thousands of ways to become wealthy. But mastering the above elements are always a significant part of the equation when establishing initial education, income, passive income, starting a business, owning equity, leveraging equity, tax-advantaged investing, developing multiple cash flow streams, strategically passing along assets to heirs, and ultimately establishing dynastic wealth.

Very few of us (suspiciously enough, probably around 1%) have privileged connections. And although that definitely matters, particularly the influence which can be wielded by those connections, almost anyone can lay the seeds for dynastic wealth in his or her own generation. 

There is an old adage of "From shirt sleeves to shirt sleeves in three generations," implying that many a family struggles, builds a some wealth, and it is subsequently lost by the third generation. There is a flip side to that coin though, dynastic wealth creation that is lasting. Strive for the latter.

Privileged Access

For those traveling home for the holidays and busy shopping, it was probably quite possible to miss a fabulous article in the Wall Street Journal on November 26th, page D6 entitled "The Bruiser and the Billionaire."

If you are new to investing, download it, print it, and keep it handy. For those old hands who have mastered the fundamentals, download it, print it, and keep it handy. It details one of the most important life lessons; the higher you ascend in life, the higher circles of access you can obtain. Football player Ndamukong Sun is taking advantage of this wholeheartedly, and so should every individual who hopes to Invest Like A Farmer; leverage your contact base and increase your knowledge exponentially.

Very few of us have direct access to Warren Buffet, Elon Musk, Tony Robbins, Mark Cuban or any of a number of gurus; this is not to say, however, that you cannot learn from them indirectly via their direct writings, interviews, and commentary. Barring a direct line, for the 99.9% of "average people" the best method is going to be getting your hands on derivative works.

Along those lines, some of the best financial books on the market now include: Berkshire Hathaway Letters to Shareholders, Money Master the Game, and Rich Dad Poor Dad.

Don't let anyone fool you, even in America it is difficult to transcend your economic class. Difficult, but not impossible; although economic mobility in this country has remained the the same (about 50% of Americans born into the lowest economic spectrum stay there for life), there are definite steps that one can take which make a significant difference.

Privileged Access is indeed one of them, but one which many of us can take advantage of at least indirectly via building our own resource rich knowledge base. I encourage readers of this blog to pick up copies of the above-mentioned books and read about the techniques and learn the core thought process of how, what, and why investment decisions are made.

Repeal the 16th Amendment

Citizens of this republic deserve better than the 16th Amendment. Repeal it and start over from scratch with a new approach. A flat tax on annual income similar to the Revenue Act of 1861 that Congress introduced to fund the Civil War, with an added asset component, would serve this nation better.

No citizen of this great country should be virtually required to hire a professional accountant to complete a civic duty as simple as voting. Unfortunately, as President Reagan once said, "a government bureau is the nearest thing to eternal life we'll ever see on this earth."

To help ease the growing civil unrest in labor inequality, and hence income inequality, this country can quell brewing class warfare by simplifying the tax code. It should be transparent, simple, and easy to understand. America is, and should be, known for her innovation, democracy, and compassion not for the complexity of the tax code. We shouldn't be proud as Will Rogers said "...of not getting all the government we pay for."

The good news is that many ultra wealthy liberals and conservatives agree that now is the time to act. Warren Buffet is a great example of a liberal who wants to change the law so that his secretary isn't taxed at a higher rate than he is. But as Mr. Buffet, and all ultra wealthy well know, income is a switch that can be turned on and off; it can be delayed, reclassified, or gifted. If this country truly wants a "fair" taxation system, then an individual asset tax needs to be considered as a component to the tax code.

A flat income tax of 10% for individuals with less than $10M in assets and a flat asset tax of 10% for individuals with assets over $10M should work just fine. This reformed civic approach would alleviate the tax burden on the middle class (this country's lifeblood), ensure even the poorest in our nation are not marginalized by rhetoric claiming that they don't contribute, and it would fulfill the wishes of the ultra rich like Mr. Buffet who want to pay their fair share.

Berkshire Hathaway Annual Letter to Shareholders

As we endeavor to Invest Like A Farmer, there is probably no better example of an investor who has successfully invested like a farmer than Warren Buffet. Once again, his annual letter to shareholders proves to be a seminal work on investing experience, strategy, and lore.  Enjoy!

"Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm."

--Warren Buffet

I couldn't have said it better myself! In CNBC's recent interview with Warren Buffet, he identified three of the most important concepts in investing. Namely, he suggested ignoring the chatter, keeping costs minimal, and investing in stocks as you would a farm. We've been discussing this approach for several YEARS now and it is truly refreshing to see such prominent investors such as Mr. Buffet reiterate what he considers to be THE fundamental elements of successful investing. The braggarts and hotheads seem to get the airtime and ink, but the those who Invest Like A Farmer reap the profits.

Broke Billionaires

In regards to "The Coming Global Wealth Tax," the silence heard from the IMF's proposal was in actuality a collective gasp from billionaires worldwide. As even a cursory reader of "Rich Dad, Poor Dad" knows, the way to wealth is through ownership of corporations that use advantageous tax rates on capital versus income derived from labor. A certain oracle of Omaha is first in line to popularly endorse an eponymous rule championing higher incomes taxes, but it is truly the audacious billionaire indeed who would step forward to pay a wealth tax. Consider the consequences, nearly every "non-profit" would shutter, "giving pledges" would be upended, and generations of dynastic privilege would have to find meaningful employment. If anything ever so draconian as a wealth tax were to occur, just make sure to do it retroactively, otherwise the food banks will be filled with broke billionaires.

Building the Next Berkshire Hathaway

Frequent readers of this blog well know that one of my favorite "books" is in fact the collected annual shareholder letters of Berkshire Hathaway run by investing legend Warren Buffet. For $20 you can pick up your very own copy here. This should be standard reading for high school students, college students, and anyone else interested in creating a proverbial wealth machine.

Invest Like A Farmer's goal is to help identify macro economic trends that can be implemented by the average investor to potentially garner exponential returns. Mr. Buffet has essentially laid out the entire blueprint in an orderly, step-by-step process. There are, however, several caveats that the average investor should be well aware of; mainly the starting block in this investing marathon is slightly to significantly skewed in favor of those who have either tremendous political or economic advantages. These two factors help push them along the time (x-axis) discussed in yesterday's post anywhere from a decade or more. They have the ability to fabricate time on a scale the average person does not. Those are just the facts, nonetheless is quite possible for an ordinary person with interest in investing, a hunger for education, and a decent salary to build his or her very own wealth machine. This is how Mr. Buffet did it, and I think any reasonable financial farmer can also create a sizable wealth machine over time too.

One of the key tenants in creating a wealth machine is how it is structured. Mr. Buffet ran in all respects a successful precursor to today's hedge fund; it was an investment partnership that netted the manager a hefty personal return. This investment partnership then purchased a publicly traded company that became the investment vehicle which purchased many, many other assets over the ensuing years. The average investor does not and probably will not run a hedge fund, and that's just fine.  The lesson to learn from this initial "start-up" scenario is that rather than draw personal taxable income, the investor runs a company that becomes a wealth machine. That's the first step, buy or create an entity that will house your potential compounding wealth. The genius in this is the compounding effects generated by "saving" unrealized gains that compound themselves. Let me repeat that because it is vital; the genius is not taking passive, unrealized gains. The business or businesses themselves are bought or started for a reasonable price; they hopefully increase in value (passive gain) and increase earnings (taxable income) to the owner(s) over time. 

After creating the correct "housing" structure for the wealth machine, the next step is either creating, buying, or otherwise acquiring additional business(es) that generate significant cash flow, and ideally profits. The insurance business was Mr. Buffet's big coup; it allowed him to control large swaths of capital, termed "float," which in turn let him invest in multiple other assets. Essentially the company became an asset grabbing machine that acquired and successfully integrated winning businesses, product lines, and additional market share in the respective existing businesses.

The effectiveness of this business model cannot be overstated; proper execution, however, is vital. It requires excellent management and diligence, but creating the next Berkshire Hathaway is completely possible, even for an average investor. I encourage readers of this blog to pick up a copy of the annual shareholder letters and read through them. What you will see unfolding is probably one of the greatest wealth creation systems ever successfully executed. What's really cool about this process is that it is repeatable. For $20 you get the proverbial receipt for success, and that's tough to beat!