The best way to get rich is to turn funny money into real assets. Funny money is money that is built upon far out assumptions that may never come true. Funny money is money you earn by just doing something you love. Sometimes people call funny money is lucky money.
By converting funny money into real assets, you help ensure that your wealth will continue to grow for a longer period of time. Otherwise, it might just go POOF one day and disappear!
One of the biggest funny money assets is equities. Equity valuation is based on future earnings projections that may or may not happen. While you wait, you receive zero utility from equities. Funny money.
The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable.
Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.
Then when things really started getting good again in 1999, the NASDAQ decided to collapse in the Spring of 2000. Such a shame to only experience one brilliant year of mega exuberance after college before the floor fell out.
Many people in finance lost their jobs. Then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months. It then lost about $40,000 in a couple weeks when B2B stocks and internet stocks started imploding.
I remember thinking: Where does all the money go? It’s all funny money!
Paper millionaires who exercised their stock options early and didn’t sell not only lost everything, they also owed huge tax bills as well. Remember, the government always wins in the end.
Most people start off investing with the simple goal of making more money with money. Eventually, your financial nut grows to the point where you start getting tired of the idea of just making money for money’s sake.
You want to use your money for something good – mainly to live a better life. Money should be earmarked for specific purposes e.g. kid’s tuition, early retirement, more free-time, charity, a home with panoramic ocean views, etc. Otherwise, there’s no point investing.
When you make a profit on an investment and then use your profit to pay for a better life, you are double winning. Always be winning.
When a stock you are long goes from $10 to $100, you feel like a genius. Everybody is a genius in a bull market. Don’t confuse brains with a bull market.
The trick is to not really believe you are a genius. Instead, believe that you are simply a financial engineer who carefully asset allocates his or her money in the most optimum way possible.
By developing a methodical habit of re-investing your savings into your preferred asset allocation model, chances are high you will have more winners than losers over the long-run. Your tailwinds are continued savings, inflation, and ever-rising demand.
When I saw $40,000 of my paper profits disappear into thin air at the age of 23, I came up with a promise. That promise was to regularly turn funny money into something tangible. Funny money can also be called vaporware or any type of lucky break or windfall.
The only way I could make the tangible thing disappear would be to set it on fire or blow it up with a grenade. Even then, insurance may cover some of the damages.
Funny money is the medium by which one makes something from nothing. It is up to you to then turn that something from nothing into something tangible.
Vaporware refers to companies who make nothing tangible, but who have hefty valuations due to high future growth expectations. Many vaporware companies are unprofitable. They are just expecting investor sentiment to continue buoying them along until they can stand on their own two feet.
In 1Q 2021, the S&P 500 declined by 32% from its peak. One of my favorite stocks, Tesla, declined by over 60% from its peak. Now, the stock is up 2X during the middle of a pandemic. Absurd!
These tech gains are considered funny money because investors are predicting the most optimistic earnings assumptions imaginable. I’m getting e-mails from strangers left and right asking me whether they should buy these big winners now.
Maybe the market is right. Maybe everything will quickly go back to the way things were before the pandemic. Funny money companies will sell more widgets than ever before!
Or maybe these funny money companies will lose their massive gains as the economy relapses. Sitting here in San Francisco, it sure feels like one surreal bubble.
Nobody knows for sure, which is why regularly converting funny money into real assets is so important. The last thing you want to do is give up all your gains and then some after such a strong rebound.
The best way to get rich is to turn your funny money into a real asset that continues to provide value. Here are some of my favorite real assets.
Real estate is my favorite asset class to build wealth for most people. It is easier to understand, tangible, provides shelter, and can generate income.
The people who got rich after the 2000 dotcom bomb all took some profits and bought real estate. For over 20 years, these people have not only enjoyed their homes, but they have also seen their real estate values go up.
Property is the most logical real asset to buy with funny money when you first start out. Unless the Bank Of Mom And Dad buys a property for you out of school, you are likely renting. Your goal should be to get neutral real estate by owning property as soon as you can afford to. If you have funny money gains, then buying real estate should be your top choice.
I do believe the best time to buy property is when you can afford it. Once you’ve bought your first property, you can consider investing in other income generating properties.
Gold and silver can grow in value and act as a hedge against a decline in the U.S. Dollar. Given the Federal Government and the Federal Reserve are providing $3+ trillion in stimulus in 2021 and probably more in 2021, there is a fear that the U.S. Dollar will decline in value. After all, the more there is of something, the less valuable it is.
Unfortunately, precious metals provide no tangible value. They don’t produce any income either. Precious metals are only fun to own if you have precious metal jewelry or fine watches. We can laugh at the people buying rose gold Patek Philippes and Audemar Piguets over the decades. But they are seriously laughing at us now because these watches have soared in value.
The below chart shows that Gold (yellow) started outperforming stocks and silver after 2007 when the Federal Reserve started flooding the system with cash. Silver (gray) has unfortunately been a dog since December 2012. But let’s be frank, silver isn’t really that precious!
Classic cars, coins, and stamps have all outperformed the MSCI World Index over the past 10 years according to The Economist’s chart below. The prices for Van Goghs, Warhols, and Vermeers have done well thanks to fixed supply and a massive creation of the newly rich from countries such as China.
Once you buy your mega mansion, you’ve got to decorate the walls. Besides insurance, there’s little maintenance costs for fine art, just the initial frame, setting, and security details. When you can visibly enjoy your investment everyday and make money from it, what a joy.
Not buying fine art is one of my biggest regrets because I thought I couldn’t afford it. I was naive to think that buying fine art meant just buying an original. The reality is that the entire chain of fine art from originals to third edition prints have rose in value.
The only thing I collect are ancient Chinese coins and stamps. But I collect coins and stamps because I enjoy them. I love to flip through my collection and attend coin and stamp fairs when I have time. There’s just something about owning a piece of memorabilia that’s so fascinating.
As China, India, and other emerging superpowers open up, there will be even more wealth chasing precious metals and valuables.
Owning a cash cow business not only generates an additional income stream, it also allows you to deduct your ongoing expenses. Relevant travel, lodging, transportation, electronic equipment, and meals can all be expensed. Your tax bill gets reduced as a result.
Of course not all businesses are created equal, and there is plenty of risk in buying a business or building a business. Always do your due diligence. I’m currently scooping up some lovely businesses to bolster my online real estate portfolio.
When buying a business think about potential for margin expansion, sustainability of earnings, defensibility of the business model, and payback period to name a few.
I believe everybody should start a website today. In my biased view, running an internet business is the best business in the world due to high margins, low capital expenditure, a huge potential demand curve, scaleability, defensibility, and good flexibility.
Getting rich is nice. Most people with extraordinary wealth got very lucky in their lives. However, it is not wise to depend on luck alone. The best way to get rich is to be very diligent about your finances. Don’t take your luck for granted.
How many times are you really going to inherit $500,000 from your Aunt Sally? Maybe once.
How many times are you going to make large year-end bonuses until you burn out? Maybe only a handful of times.
How many times are you going to buy that lucky multi-bagger stock? Never if you’re just investing in passive index funds.
How long will you enjoy an incredible bull market before there’s another violent correction? Based on my investing experience, these “once in a lifetime events” seem to happen every 5-10 years.
If you’ve ever gone to a casino and gambled, you’ve likely experienced two things:
1) The stupidity of making a lot and then losing it all.
2) The absolute joy of walking away with a profit and turning the funny money into something that lasts.
We can’t get lucky all the time. Even for those of us who work obscenely hard to try and create our own luck, our luck will run out.
Although it took thousands of hours to create ONIG Financial Blog, the revenue it generates is considered funny money. When you can make money doing something you love, the income doesn’t feel real.
Due to my beliefs, I’m regularly using my online revenue to buy as many passive income investments as possible. The #1 real asset on my list is pandemic real estate. I’d like to further upgrade our living arrangements if we’re going to be stuck here for a while. Then maybe I buy an original masterpiece by some unknown artist to decorate my walls.
One day, I’d like to look back and say grandad’s real estate empire was all paid for by online business funny money. Just in case I run my online business into the ground, at least my grandkids have somewhere to live.
The best way to get rich is to convert funny money into something real. The second best way to get rich is to not be delusional. If you start thinking too highly of your investing acumen, you may take excess risk and blow yourself up. The third best way to get rich is to never take your luck for granted. Always try to recreate more luck.
Real assets might not last forever. But at least they are a great way of diversifying your good fortune into something tangible. If you can enjoy your real assets while they also appreciate in value, all the better.
The best way to get rich is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success.
There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
Updated for 2021 and beyond.