punkwalrus (punkwalrus) wrote,

The workings of the rich...

A few years ago, I was studying how rich people worked. It's kind of funny, but once you make over $200,000/year, the rules start to change. I am not talking about tax laws, although that's part of it, but how investments change. There are some laws, for instance, that prevent you or me from investing in schemes that involve a large amount of cash up front. The laws are designed to protect "the common man" from fraudulent schemes, and although they don't always work, if you want to invest in proven legitimate investments, some are totally off limits.

There are some investment programs that have a minimum requirement of how much you make a year, for instance. Say you have $1 million dollars from some rich uncle who died, but you're still employed as a video store clerk. Your best bet would be to hire a proven financial advisor, like Merrill Lynch or American Express, and for a scant few hundred bucks, they would analyze your money, figure out what tax laws you need to worry about, and give you a plan that would make good use of that money. You can also hire them to worry about the money for you and invest it, if you trust them to do so. But suppose you know of some Canadian Oil Field investment that you have on good authority will pay off threefold in 5 years. The investment group that owns that, assuming they are ethical and want to stay legal, won't touch your money. They aren't even allowed to under many Federal laws. You cry, "Unfair! Some guy named Nuzul Ubagani in Nigeria will take it, how come?" Well, Nuzul is a criminal, that's why. The legitimate group does not know your future as an investor, they don't know if you'll put in $800,000 and then in 2 years want it back (when the plan is for at least 5), and they don't know if you'll sue if you change your mind. They see what you make, and they go, "This guy does not know money from a hole in the ground!" Now, say your $1 million is wisely invested, you did your research, and for the last ten years, you have increased profits, rubbed elbows, and proven yourself as a guy who can take risks and not act like a spoiled child. THEN they come to you.

The guy who was our legal council for the two refinancing deals we did for our home loan was a guy named David Albanese for Albanese and Associates, in Tysons Corner. He was telling me about how some people made the business of starting companies, making a profit, and then selling them for even more profit. Can you imagine what life is like for these people?

1. Bob Rich decides he's going to start a support company for government networks. He knows people in the government, he's built businesses before, and he knows how these things work. He starts BRiGENT (Bob Rich's Government Emerging New Technologies). But he needs capital (starting money).
2. Bob goes to Mr. Albanese and says, "Hey, I need $3 million to start a company. here's my plan, here's how I guess it will turn out, and here's what investors would get out of it."
3. Assuming Mr. Albanese trusts Bob, he goes to some investors, and says, "We need $3 million for this guy. Here's his record. Here's what he's investing, and here's his investment proposal."
4. Investors (hopefully) do research. They trust Bob and Mr. Albanese, so they pool together $3 million. Legal contracts are signed, Bob gets the money, and starts the company.
5. Bob does his thing. It could fail. It could succeed. The investors always take that risk, and if Bob legitimately fails and they lose all their money, there is no recourse (unless stipulated in the contract). But Bob could also run off with the money to Pango Pango. You hope he wouldn't, but it happens. Look at Enron. Hell, I worked at a Savings and Loan where one of the three CEOs ran off with half the company profits and fled to "an undisclosed South American country."

The rules change for the rich. They are designed to make the rich richer. You would be stunned how many advantages they have over you. Tax dodges, fail-safe investment strategies, rollover profits... all perfectly legal. Stuff most of us "common folk" think of making money is peanuts. Piddling street change. Savings accounts? Never. The percentage is too low, but I guarantee if you wanted to set one up, and tell the bank you'll put in $1 million, they will up the percentage for you. We put in $1000, get 1.2% annual return (if that) on a 10 year CD, they put in a million, they can demand 5, 8, maybe even 10% annual return (but that's not done often, because a wise millionaire would not simply put $1 million into savings when the FDIC will only insure $100,000 of it anyway). Banks also have "special deals" for people with lots of money. Some of those "deals" are responsible for banks being richer than you or I could comprehend, but it also can result in total financial collapse, like all those Savings and Loans that went belly-up in Texas in the late 80s and early 90s. Billions were lost, but not by rich people, I can assure you.

Money at that level is not just profit and loss, credit or debit. It's more complicated that calculus, and has to do with sliding ratios of transfers and making an imbalance work for you instead of against you. Is the Euro low against the dollar this week? Make your investments in Euros. Hopefully, when you get your money back, the dollar will be low against the Euro. Or vice versa.

Another level of confidence is losing it all. Some billionaires have lost it all several times over. They are not scared of losing it all, they play the odds, do their research, and know what risks yield the best results. And educated rich man knows even if he loses it all, he can always rebuild his empire in a few years or sooner.

Can you imagine saying, "Yeah, when the Asian markets fell, I lost over $3 billion, but I made it back by rolling over my losses into some real estate, and while I only have a few million in liquid assets, I'll probably be at $5 billion by 2008." Well, that's a commoner's way of thinking, because a rich man would never boast about his money or say what his financial status was. He doesn't have to.

The right people will know...
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