Dirty secrets of filthy rich. Part 2.

Dirty secrets of filthy rich. Part 2.
http://dazko.com/dirty-secrets-of-filthy-rich-part-2/

Dirty secrets of filthy rich. Part 2.

The lower and middle class foolishly assume that the capitalist class is merely lucky or cheats to get ahead. What they don’t realize is that the capitalist class is constantly working, studying, and creating opportunities.
Think of it this way: The average person very rarely takes risks or chances. They often get up, go to work, and come home. With the capitalist class, they are researching investments, building shopping centers, finding investors, launching new products, or going after big clients every single day. When only one of these activities pays off big, it’s enough to be set for life. To the outside world, it looks like mere luck.
I encountered this in my own life. Several of my family members actually asked what I was going to do with myself after I had graduated from college because I didn’t get a job. The fact that I had been obsessed with investing since I was ten years old, and had saved nearly every penny to build my investment portfolio, wasn’t visible to them, even thought they knew it, the same way a job is because that’s how the middle class is trained to think. They didn’t see me as a freshman in college buying shares of companies for spin-offs that I thought were undervalued, or trading derivatives through my SEP-IRA. Then, out of nowhere (to them), I bought my starter house for more than $300,000, my first car (an upscale Jaguar), and somewhere north of $30,000 in new furniture. How? Years ago, I set aside a very large percentage of my assets in shares of AutoZone because of the repurchase program that had begun when ESL investments got control of the firm. As I went about starting my company, those shares continued to grow and I was able to use them to pay for the personal side of my life without hurting my companies and taking money out of them. I knew that accounting rules required the reported EPS to be based on weighted average shares outstanding. AutoZone was repurchasing so much stock so quickly that the actual shares outstanding, which could be found in the 10K, were far lower than the reported figure. This let me have a decent idea of how much “safety” was built into the next quarterly earnings release. The shares had an unbelievable run from $25 to more than $150 over an eight year period.
I read several thousand 10K reports each year for companies that most people don’t even know exist. I spent years studying accounting. That’s what led me to that investment. Yet, there are some members of the middle class who will always believe that those outcomes were due to luck. What they don’t seem to realize is the truth in the old saying if you do something once, you’re lucky. If you do it twice, it’s skill.
Perhaps Oprah Winfrey summed it up best when she said, “What looks like luck to most people is when preparation meets opportunity.” The capitalist class is constantly out there looking for, and creating, opportunity.
One of the favorite questions of the middle class is, “What is the stock market going to do?” or “Where do you think real estate prices are going?” You’ll very rarely hear this asked by a member of the capitalist class. Instead, the questions will be more along the lines of, “What do you think the Burlington Northern Santa Fe deal will do to Berkshire Hathaway’s earnings five years from now on a per share basis?” or “Do you think we could get tax credits by purchasing those properties and opening low income housing rentals?”
The middle class is looking for someone to hold its hand and tell them whether to buy or sell. The capitalist class is trying to calculate the value of specific assets and then makes a decision to buy or sell based on that calculation. The former requires total guesswork, whereas the latter is entirely based on conservative mathematics and sound business.
That is one of the major reasons its rare to see capitalist class investors panicking when the market collapses. Through the credit crisis that started in 2007 and extended into 2009, as the Dow Jones Industrial Average plunged from 14,000 to nearly 6,000, the news was filled every day with stories of Warren Buffett, Goldman Sachs, or JP Morgan buying up everything it could afford.
The capitalist class credo could best be summed up as, “The market may go up, the market may go down, but there will always be intelligent things to do.”
The average person doesn’t bother to read the tax rules or pay to have good accountants. It is more than possible to save substantially on taxes by learning the regulations the IRS makes available in easy to download documents on the official website.
Imagine you know a member of the capitalist class who invested $10,000 in Wal-Mart Stores, Inc. back in the 1970′s. Today, those shares, with dividends reinvested, are worth more than $10,000,000 and pay out cash dividends of approximately $210,000 each year. If he wanted to come up with money without selling any shares, he’d likely know his options included:
•Depositing the stock into a brokerage account and borrowing small amounts on margin against the underlying shares. The debt could be withdrawn without triggering the capital gains taxes. As the dividends were received into the account, they would lower the margin balance.
•Using the shares to fund a limited liability company or a limited partnership and then gifting equity in this partnership below the gift tax levels to children and grandchildren. If he is married, between him and his spouse, he could give up to $26,000 per year to each person without triggering taxes. If he had 4 children and 16 grandchildren, this could result in a transfer of $520,000 annually. Over time, he’d be able to get a lot of wealth into the hands of his family without capital gains tax consequences.
•He can setup a charitable remainder trust funded with the shares. The trust document will call for a certain percentage, say, 5% annually, to be paid out to a beneficiary of his choice (a child or grandchild), with instructions that when that person passes away, the remaining money in the trust will go to a charity he has defined as the death beneficiary. He gets a tax write-off for donating the shares, his child or grandchild gets a regular “paycheck” to help them build their life or purchase a home, and later, the charity benefits from a large donation because it’s possible the account has grown in value through compounding.
These are just a few examples of how the capitalist class is able to achieve its objectives, support charity, and still end up with more money in its pockets by knowing the tax rules.
The average person doesn’t bother to read the tax rules or pay to have good accountants. It is more than possible to save substantially on taxes by learning the regulations the IRS makes available in easy to download documents on the official website.
Imagine you know a member of the capitalist class who invested $10,000 in Wal-Mart Stores, Inc. back in the 1970′s. Today, those shares, with dividends reinvested, are worth more than $10,000,000 and pay out cash dividends of approximately $210,000 each year. If he wanted to come up with money without selling any shares, he’d likely know his options included:
•Depositing the stock into a brokerage account and borrowing small amounts on margin against the underlying shares. The debt could be withdrawn without triggering the capital gains taxes. As the dividends were received into the account, they would lower the margin balance.
•Using the shares to fund a limited liability company or a limited partnership and then gifting equity in this partnership below the gift tax levels to children and grandchildren. If he is married, between him and his spouse, he could give up to $26,000 per year to each person without triggering taxes. If he had 4 children and 16 grandchildren, this could result in a transfer of $520,000 annually. Over time, he’d be able to get a lot of wealth into the hands of his family without capital gains tax consequences.
•He can setup a charitable remainder trust funded with the shares. The trust document will call for a certain percentage, say, 5% annually, to be paid out to a beneficiary of his choice (a child or grandchild), with instructions that when that person passes away, the remaining money in the trust will go to a charity he has defined as the death beneficiary. He gets a tax write-off for donating the shares, his child or grandchild gets a regular “paycheck” to help them build their life or purchase a home, and later, the charity benefits from a large donation because it’s possible the account has grown in value through compounding.
These are just a few examples of how the capitalist class is able to achieve its objectives, support charity, and still end up with more money in its pockets by knowing the tax rules.
The middle class often has an almost perverse relationship with money. From the time students leave college, they are told to get a good, “secure” job with benefits, fear stock market fluctuations, and spend their money on assets that depreciate such as cars and consumer electronics. For the capitalist class, business and money are merely tokens – tangible proof that they have succeeded. Some capitalist class members have described the balance sheet as the “score card” by which they can compare themselves to their competitors.
My own office is filled with framed Carl Barks artwork of Scrooge McDuck, reproduction Monopoly properties, and hundreds of books including some as old as 80+ years. The walls are lined with stock certificates and my first dividend checks. The Wal-Mart stock, for instance, has a collectible die-cast Wal-Mart truck next to it in the display. This is because I love playing the game of business. I want to see how large I can grow the company. For my retail subsidiaries, I want to see just how many sales we can generate. I love turning on television or going to the movies and seeing products that we sold to the movie studio on the screen.
This approach to business, and life, makes it easier to take risks. It removes a lot of the fear because you know that if you lose money (which, of course, you always avoid at all costs), you’re only one idea away from rebuilding the asset.
A defining characteristic of the capitalist class is that they treat money as a fungible commodity. This manifests itself in several ways.
•Members of the capitalist class don’t care if they earn their profits from non-sexy businesses such as trash hauling, storage units, or plumbing services. The middle class often does care by treating family members that are lawyers or doctors with more respect because of how they earn their money.
•When raising capital to start or expand a business, members of the capitalist class don’t care where the money comes from, only the terms and cost of the funds. They will often approach banks, private equity groups, or even insurance companies! The middle class heads to one, or maybe two, local banks and if the answer is “no”, simply stops trying.
•The capitalist class doesn’t compartmentalize money like the middle class does. Members of the middle class who are drowning in credit card debt will often use unexpected bonuses or tax rebates for vacations or other perks. The capitalist class sees every dollar as a dollar and puts it toward its greatest use.
So, now that you know some of the secrets of the capitalist class, it might be useful to see who the average member of the capitalist class. According to government and private research data, the capitalist class:
•More than 90% of capitalist class households consist of a Caucasian married couple where both spouses work and have children.
•More than 90% did not inherit their money – they are entirely self-made.
•Most own their own business and have lived in the same town for more than a decade. These businesses are unglamorous and include things such as HVAC, commercial plumbing, self-employed lawyers, accountants, and real estate investors.
•More than 90% own their own home and have lived in it for years. Fewer than 7% rent or lease.
•More than 90% graduated from college, but grades had no correlation with their financial success. In other words, students with a C- average were just as successful as those with an A average.