When I finished my training and figured out that I had to invest money somehow, the hardest thing for me was figuring out who to trust. The first apartment building I bought was a 14 unit building in the southern suburbs of Chicago. I would now characterize that as a C- to D+ area. My broker was the guy who sold me my house and I trusted him. The idea of specialization on the broker side never occurred to me at that time. Nevertheless, he was still a guy I could trust which meant a lot.
I ended up buying this building because the numbers looked fantastic. I got out my spreadsheet and got two years of tax returns from the seller. It looked like a home run. Many of you know this story and know how it ends. To make a long story short, I got bamboozled by a crafty and dishonest seller who owned many buildings in the area and was stuffing the rent roll. Lesson learned.
The first time I invested in a fund, I got fooled by a fast talking salesman who told me he could teach me how to create my own fund while I invested in his. He would make me a “partner”. This guy was everywhere on the Internet and seemed to be on a lot of podcasts so I trusted him. When I started listening in on these weekly calls with other “partners”, It became very clear to me in a short period of time that this guy cared nothing about investors and his whole business model revolved around collecting fees from investors with very little intention of making them any money. In fact, he doubled down and actually had minority partners who would pay him even more. I quite the group shortly thereafter but I still had money stuck in the fund. That was four years ago. I’ve never seen a penny in returns. In fact, it has become sort of a joke with my CPA who refers to it as the fund with no returns. Although the guy never sends me any money, he is religious about sending me a K-1 every year to file taxes. By the way, I am more than happy to reveal the identity of that shyster to anybody who wants to know.
The reason I bring these experiences up is that as much as education has to do with successful investing, you also have to eventually figure out who you know like and trust. If the task seems daunting, it is. Especially for someone like me coming out of surgical residency, I had no connections in the financial world and I was a lame duck for the sharks that enjoyed praying on young trusting doctors with six-figure salaries.
Over the years, however, I learned a concept that has served me well and has, frankly, kept me from losing money since that first apartment building and that dishonest fund manager. The concept is simple–net worth= network
You see, eventually I met people who are like-minded and I started to invest with people with whom they invested. Eventually, this turned into a community of investors and opportunities–sometimes going back and forth. The close knit nature of the group also served to be a very good way to keep checks and balances on everyone. Don’t get me wrong, just because you know somebody and trust somebody doesn’t mean that you are going to make money in an investment. What it does mean, hopefully, is that you won’t get purposely screwed by someone from day one—this is 90% of the battle in investing. Everyone can make a proforma look good and anyone can make an executive summary look like a gold mine. However, when I look at an opportunity these days, my main question these days is, “who is the sponsor?”
This concept relates to any kind of investing really. Some of you new to real asset investing have expressed concerns about the idea of moving away from traditional equity markets because you don’t know who to trust. I get it. However, did you ever ask yourself why you trust stocks bonds and mutual funds so much? Why do you trust your financial planner so much? The answer is because that is what you were taught. It’s like religion to you. When you stray from what that religion it feels like you are doing something wrong. Even your friends and family criticize you for thinking outside of the orthodoxy. Taking your finances into your own hands requires guts.
What makes it easier to make a move like this is community. Going back to the parallel of religion, once you find a group of people with whom you share a common set of beliefs and values, it is comforting. Why? It’s because the people that you are around believe in what you do and that reinforces your own belief system. At the end of the day, we are social animals. We need community and we need things in which to believe. My mission with Wealth Formula Podcast has been to help create that community for you. I am an evangelist for hard asset investing.
Some of you have become ardent believers already. Others are still in the process of changing their mindset and their paradigm. That’s OK too. When you are ready to move forward, I am happy to invite you to my world of network based real asset investing.
A great example of network based investing is my guest today. Before today’s interview, I never spoke directly to Ken McElroy. Yet, I know many people who know him and who have invested with him. That’s why I am on his investor list. It also helps that he is a Rich Dad advisor to Robert Kiyosaki and that he wrote the books from which I first learned the language of real estate. I hope you enjoy the show!