Access Wealth Strategies

(Author note: I wrote this post at the beginning of 2010 but it got lost in pending status until now.)

Every year, I see magazine articles or major websites that offer their best tips and strategies for the new year. Thus, I’ve decided to share my thoughts as well.

During this global “Great Recession” and related credit crunch, there are historic numbers of distressed assets on sale, and that includes more than just real estate.

Warren Buffett was talking about how great an investment distressed assets were back in 2008. In fact, he would buy them because he knew the long term value was higher than the current impared pricing. Listen to Buffett talk about what he would buy as much as he could in this video below.

The options available to Buffett are one thing, but what options are available to the rest of us?

• Perhaps you are a business owner who currently lease your store or shop space, then there are likely buildings you could purchase that could cost less than your current rent payment.
• If you want to invest in real estate, there are a variety of options. Certainly buying homes from wholesalers or the trustee sale auction is not too difficult.
• A more complicated deal would be to gather some investors to buy performing or non-performing real estate loans at a discount. The numbers I’ve seen are that non-performing loans are selling for 30% of face amount and performing ones are selling for 60%. If the loan ends up performing then you get a good return. If you have to foreclose, you may end up with a great return.
• Paper assets are also on sale. Earlier in 2009, stocks certainly crashed down to levels not seen for a decade. They could fall again.
• How about buying a business from an over-extended owner who needs to raise cash? Make sure it’s a business you know very well and want to own.

A very experienced businessman once told us he’d seen 3 different real estate cycles in the Phoenix area over 30 years.  During the prior cycle he saw people who drove in to town in a pickup truck and a decade later, flew out in their personal Lear jet. They had made millions from buying and selling real estate assets during the market downturn and subsequent rebound.

That’s the cycle we are in now.  What do you think about it? How are you going to capitalize on it?

In the first part of this series, How to Invest Like Warren Buffett: Fear and Greed we looked at when Buffett makes his purchase. He does so at the opposite time of most amateur investors, when an investment isn’t the most popular and in fact when it is probably out of favor.

One good example was Buffett’s multi-billion dollar investments in Goldman Sach and General Electric during the market meltdown in late 2008. At a time when it wasn’t clear that the financial system would survive, he invested billions of his cash in quality companies that were unpopular at the time.

After looking at when to buy, the next logical question is what to buy.

Warren Buffett has some simple principles that he uses to determine what to buy. The first is to buy quality and in fact a quality company that he could hold forever (he says his favorite holding time period is forever).

So, what are the components and characteristics of a quality company?

1) A simple business model that Buffett says that he can understand and that will be roughly the same in 10 years or more.

• This business must have an economic moat of some sort that keeps out a plethora of competition. This moat allows the company to earn a high return on equity.

2) The company must produce consistent cash flow — this characteristic follows from the first above. Buffett is talking about real cash flow, not just theoretical earnings based upon extending generous terms or loans to the customer to buy the product or service.

• An example of “faking” cash flow would be Lucent Technologies, which, during the tech bubble of the late 1990′s, inflated their book earnings by selling to customers through credit terms which the customers could not repay. They also manipulated their financial statements to report better numbers than were true.
• Buffett would reject investing in a company like Lucent because the business requires constant innovation, it was sufficiently complex that the true financial health could be hidden by financial chicanery, and there was not cash flow, just paper profits (which never materialized).

3) A management team that can be trusted.

“When hiring, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”

• A management team without integrity is very likely to put their personal priorities ahead of the business’s which will ultimately lead to disaster for the company.

A summary for the concept of what to buy is contained in Buffett’s quote below:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” because “time is the friend of the wonderful company, the enemy of the mediocre.”

As Bill Gates’ mother wisely reminded him, with great wealth comes great responsibility (and complexity). While we all aspire to creating more wealth (whatever your definition of it is), it’s important to understand the impact of our wealth for our own sake and for future generations long after we’re gone.

Perhaps you have a successful family business built over a lifetime of hard work that you’d like to someday pass on to the next generation. Maybe you have a significant asset base to transfer to your children and give to charitable causes.

We’ve all heard that teaching a man to fish for himself is preferable to giving him fish for a day. So how about transferring your financial assets to the next generation? Do you have a plan to transfer your values as well?

Traditional financial planning is woefully lacking in addressing the need to transfer more than just money to the next generation, especially when the succession of a family business is involved.

Listen to my recent interview with my friend Korbett Roberts from Benefit Concepts, Inc. as he explains what “values based integrated wealth planning” means, and how his firm helps clients navigate the plethora of choices for business succession planning and inter-generational wealth transfer based on their individual values.

Note: the interview is about 34-min. long.

You’ll hear some great examples from Korbett, including why one family rejected a $1.6 billion cash offer for their family business and sold it for $400 million less!

You’ll also learn about:

• The 3 most common threats to inter-generational wealth planning
• The issue of equitable vs. equal transfer of wealth to the next generation
• What your “financial independence number” means
• Some strategic and unique uses of life insurance policies, including one that leverages your tax deduction and charitable giving

Please add your comment and let me know which parts of the interview you found the most helpful and what topics you would like to learn more about.  I will do follow-up interviews to cover these topics in more detail.

You may remember my recent post “Should You Own a Laundromat?” where I briefly mentioned the merits of owning a coin laundry business.

If you are intrigued by the prospect of owning a cash flow business like a coin-operated laundromat, you might want to listen to this recorded interview of Brian Brunckhorst, a friend of mine who owns several laundromats and has developed a system for acquiring, operating, and optimizing the performance of a coin laundry business.

Click below to listen to my interview of Brian Brunckhorst on the in’s and out’s of the coin laundry business and why you might consider it as a “wealth vehicle”.

Note: the interview is about 45-min. long.

For more information on how to acquire, operate and optimize a laundromat to create income and wealth, please visit: www.LaundromatSecrets.com.

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