How I became obscenely rich

My latest theory of the economy

The other day I had an epiphany about the economy. I was laying in bed and half dreaming. It goes something like this:

We exist as we do now because of millions upon millions of seemingly random chances happening over millions of years. The things that happen to improve our adaptability or suitability to the environment, improve the chance of survival. The individuals, whose changes improve the adaptability or suitability to survive, live on, and those that decrease the adaptability, die out.

This is the Darwinian theory of evolution; Survival of the fittest.

In the beginning one celled organisms floated around, they just survived. When two cells bumped into each other and stuck, they found they could survive better, so more two celled organisms appeared because they didn’t die so easily. Then four cells, then more. Each cell is a living thing. It can make decisions on its own. I believe thoughts come from that fact we have trillions of these cells in our bodies and they don’t always reach a consensus, and have to discuss the way forward. These are our thoughts.

As the system becomes more complex, it seems that a kind of intuition appears and then awareness and then eventually awareness of awareness. The system starts to consciously choose the best path for survival.

 It works so well that one can safely say that at any given moment, a particular species alive is the best version suited to the environment they found themselves in previously. This means that had we developed say 5 limbs, we might not be here now as four limbs were better for us to survive. This is why we don’t have five limbs. There is nothing to say five limbs won’t be best for us in the future or even now. But four limbs were best up until now.

Each iteration or generation of a species improves upon he last, even in a very small way.

So how does his relate to the economy?

One person can’t trade. Two people can. However, without a monetary system, they can barter. This system is the best system for a small group of isolated people. Eventually more people (cells) join the system. A more complicated system of trade is created. Markets or centres of commerce appear.

In a large group of people, bartering is no longer the best choice. It is too inefficient. A common form of value is required. So an abstract concept of money is created. This works well for a much larger group of people with more diverse needs.

As the people in the system grow, more complex systems come and go. Those systems that make trade easier and make people richer, stay, while those that restrict, die out.

Eventually you arrive at complex system like the stock exchange. Only a few decades ago, only a few hundred thousand trades were done a day. As a result, a fairly basic exchange was needed. Now with many, many more people involved, with billions of transactions, a much more complex system is used.

The economy itself acts like an organism, in the sense that is evolves, grows and changes to be the best vehicle for humans to trade. Now, the people who participate can communicate at the speed of light, just as fast as an electrical signal between cells. As the system becomes more complex, with so many participants, a sort of flexibility and intuition starts to emerge. The markets respond to things that have not happened yet.

After the September 11^th attacks, some suspicious market activity was investigated before the attacks happened. However, after the investigation, it was proved that nothing untoward happened but the market had somehow intuited something was going to happen.

(Read Alan Greenspan’s book for more details)

Most investment books I have read say if you get your stock market info from the news, you’re too late.

Have we reached the point where we have created a system that has enough cells (participants) that the system itself (which is the summation) of the participants is becoming intuitive. Can it ever become self aware?

Do the individual cells in your body know you are self aware? Are they aware of the bigger picture?

The fact that money doesn’t really exist in any real sense and that we are trading this non real entity around the globe at light speeds with people we will never meet, in order to survive as individuals and to survive as a race, sounds very much like cells firing electrical information around the body to survive and to keep the body in a healthy state. Cells and people can survive on their own but do so much more effectively when part of a complex system.

The entity called the economy is made up of billions of participating humans. Each one has a vested interest in it being healthy. (or perhaps there are some cancerous cells??)

Perhaps something as physical as the economy which some people shy away from as being too materialistic is actually a completely spiritual idea. The joining of all mankind into a common entity that benefits us all, that has some possible greater intelligence and intuition; The combination or summation of all of its parts.

Any notion that pursuing wealth is somehow shallow or unseemly, should be set aside. It is vital to our very survival. Especially when that wealth is gained with the above idea in mind and then put into philanthropic projects.

Looking at the economy and money like this, makes me think it must be fairly easy to become rich. I just need to tap into the entity of the economy, understand it, tune in and watch the money come in.

Having moved house recently, I have been sorting out the last boxes and came across a box of ‘memories’. This is a battered old cardboard box, held together by many layers of gaffer tape that contains bits and bobs from my life.

I am not a hoarder of things, but I do indulge myself this one box of items that bring back memories. Every few years I come across this box and spend several hours looking through its contents. It contains everything from school books, to certificates, poems, tickets, love letters and small gifts and post cards from the people of my past.

The reason I mention this here, is because I found two things of interest and relevance to this blog.

The first was an old piece of paper, with a hand written contract on it. It details that I and my business partner will divide up the profits equally from our car wash business, it details what happens if one of us doesn’t turn up for work and a few other points and what should happen. This was my first contract I created, I was 10 years old. My business partner was my best friend Andrew Bentley.

The second was a portfolio of a cafe I started up after University. I took over a rundown old greasy spoon cafe and turned it into a multicoloured chill out cafe. My friends and I turned it into a co-operative business. We did not make very much profit, but we did get into the paper and also expanded the cafe to include an art shop next door and got an allotment to grow food.

These two items reminded me that I have always had an entrepreneurial spirit. I just thought I would share that here.

I recently read Alan Greenspan’s book, ‘The age of turbulence’. I would highly recommend this book for those who want to get a better understanding of the economy of the world. It is a bit dry in places, but on the whole very interesting. He is the sort of person, I can imagine, that is extremely interesting, has some amazing stories, but you wouldn’t want to sit next to him at a party.

Greenspan advised US presidents and guided the US economy since Nixon and has been involved with economy in general for over 60 years. He retired last year and wrote this book.

The first part of the book is about the history of the economy, especially the US and also about his earlier life. He then goes on to talk about the current state of the world and finishes with some predictions of where we might be in 2030.

During his time as Chairman at the Federal Reserve, he had access to more information and more top people than almost anyone else alive. As a result his insights are quite profound.

The main things I got from the book were:
That the key to a prosperous economy is the right to ownership of property, which relies on a non-selective legal system and the ability to enforce the law

That business is entirely based upon trust. The legal systems would not cope if even a fraction more people went to court to settle disputes.

The free market raises that standard of living for most people, but has a tendency to increase the gap between the rich and the poor
A centrally controlled economy has the tendency to lower the standard of living but keeps the gap small
The gap between the rich and poor can be closed by education

Capitalism and the free market is a self balancing and correcting system with built in resilience

Capitalism and the free market replaces the old with the ‘new and better’ at an ever increasing pace, this has two effects: a) to increase the standard of living, the scientific knowledge, decrease the amount of resource we use for a specific use and provide better gadgets etc, and b) increase people’s anxiety about jobs, and stability because everything changes so quickly
This results in a deliberate part of the capitalist system being centrally controlled to limit the growth of the economy in return for stability, e.g. welfare, NHS etc.

That the essential difference between different countries political and economical outlook and actions are the degree to which the culture demands stability of growth, in the form of a centrally controlled economy verses the free market.

That a purely centrally controlled economy does not work as it cannot react quick enough to the changing supply and demand needs of a country. It is simply too slow and inefficient.

So, in conclusion: out with socialism, in with capitalism.

My next steps after reading this book, are to find out more about Adam Smith and the invisible guiding hand. Also to read more about socialism to get a different view, although, I am not too bothered with that as I dont believe it will help with my goal.

I started the process of changing my self employed business into an asset today. Having worked out the amount of expenses, the cost of replacing myself with a contractor and the risk involved in cash flow, I worked out how much of an increase in the daily rate I would need to charge my clients to make a profit.

I have started making contacts with recruitment agencies to see what they can offer me and how fast I can find the right staff.

I have looked at all the extra things I would be able to offer my clients if I wasn’t snowed under all the time doing the day to day work. Some things could be included within the service and some could be added extras.
I have begun work on putting together a contract and initial offering of what these might be and have discussed the idea with my largest client.
The idea has gone down well and although there is still much to work out, the transition hopefully will go smoother than I thought.

More work and projects may well be put my way, now that the clients know I will have more capability by taking on additional staff.

I need three staff to cover my expenses; there is enough work for at least one possibly two people, so I will need to win another client to make up the rest.

I will continue to write here with my progress.

Doing the income statements and asset and liabilities accounts

As detailed in my previous posts, it was recommended to me by various books to complete an income / expense sheet and an asset and liability sheet. I have done one for my personal finances and one for the business.

Personal Accounts

I have now gone through all my expenses and made a budget that I am going to try to keep to each month. I have broken this down into different types of expenses and have built a spreadsheet to record how much I actually spend next to the budget.  

I have added up how much cash I have in the bank and have put aside exactly 6 months of cash that would be required to live if I did not have any income. I am going to leave this aside as easy to get to cash so that if for some reason my income stops, I always have this for emergencies and to pay the bills. (I generated this cash by saving the money from working in my business over the last few years).

That leaves a small amount left over of personal cash to invest.

Business Accounts

I have done the same thing for the business accounts; I have gone through all the business expenses and have created a budget based upon the last two years of expenses. I will try to keep the business expenditure for fixed costs within this budget.

I have worked out the wages and the optimal dividend amounts to make sure my personal expenses are covered in the payments the company will make to me. This is how much my business asset will need to generate to cover my expenses.

I recently read an excellent book called ‘The richest man in Babylon’ by George S Clason. In the book he recommends saving at least 10% of your pay check every month. This 10% is put aside to use as investment. This should be used as personal investment for long, or very long investments for the long term security plan.

I have therefore added 10% onto the total amount of money I would like to take from the company each month. I will invest this 10% personally.

Any money left over, I will invest through the business, to buy any other assets or income generating investments.

Summary

The overall idea is this:

Business income -Business Expenses - Tax = Total Business cash flow

If total business cash flow is greater than personal expenses you are financially free

Next steps

The spreadsheets will hopefully allow me to keep a check on both business and personal expenses. I will then focus on increasing the value of the company and its ability to generate revenue (Cash flow)

I only intend to take out of the cash from the business that will cover my personal expenses + 10% for investment. I can then invest the rest of the money back into the business or other assets.

Note

An excellent way to learn about Income / Expenses and Asset and Liability sheets is to play the CashFlow101 board game. You can buy this from the Rich Dad, Poor Dad website.

Different types of stock market analysis

I have learnt that there are two different types of stock market analysis. These are:

1.       Fundamental analysis and

2.       Technical analysis

Fundamental analysis looks at the details of a specific company; these are things such as; who the directors are, what market the company operates in, what the chairmen statements are and other highly specific things about the company.
By analysing a company, it’s history, current status, reviewing it’s income and balance sheets, it is possible to derive some expectations of the future and therefore predict which direction the company’s share price may go.

Technical analysis, on the hand, is about looking at the company’s stock value only over a period of time on a chart. By comparing the stock price against it’s moving average and other calculated chart lines, it is possible to see trends and patterns in the stock which help to predict the future value. The theory behind technical analysis is that the price at any given moment in time, is the sum total of all the investors’ knowledge that have bought or sold the shares, which is likely to be more accurate than one persons predictions.
As all the investors are subject to human nature, especially desire for more and fear of loss, the charts show predictable patterns.

I know more about technical analysis at present as I have finished two books by Clif Droke, ‘Moving Averages’ and ‘Technical Analysis’. These are both very good books, and I would recommend anyone interested in stock market analysis reading both of them.

Next steps

I intend to read up more on fundamental analysis to complete the picture. Heather, my wife, also found a very good course on stock market analysis which covers both technical and fundamental analysis. There is a three hour free introduction seminar which I am going to go to. The course itself is £3K + VAT. It is also recommended that you need at least £2K to invest to make it worthwhile.

I need to complete more of my plan before I am ready to commit any money yet. I am looking to gain as much advice as possible and put together my master plan. However I am going to go to the free seminar and if it looks really good, I might sign up.

The course can be found at: http://www.knowledgetoaction.co.uk/

If anyone has been on this course, please let me know what you thought of it. Thanks

After a quick search on the web I have found an exhibition called ‘A place in the sun’ (http://www.aplaceinthesunlive.com/) that is on at the Excel centre next weekend.

The seminars include:

How to build an investment portfolio
How to finance your investment property abroad
What to look for when making an investment
Making your investment pay for itself through rentals
Measuring risk and making returns
Protecting your investment

This seems like a perfect start. There are also articles for download about buying property abroad for investment which I shall read.

I’ll write here again with more info when I find out more.

Building a plan

If I am not going to work for money, then I need a plan; the plan to build assets that generate revenue. I don’t feel I am anywhere near educated enough to invest in the stock market. I have been reading some interesting books on Technical Analysis with moving averages and trends, but at the moment, this must remain a learning experience and not a short term plan. Currently I am £86 down on my silver investment J

It is too risky, because I don’t know what I am doing yet.

In Robert Kiyosaki’s third book, he suggests having three plans; a plan for survival, a plan for being comfortable and a plan to be rich. The first two plans should be automatic and not require too much thought.

The first two plans he recommends seeing a financial advisor and the third plan is up to the entrepreneur inside.

 I decided to seek a financial advisor who specialises in building plans for people. I booked an appointment with Paradigm Norton’s MD Barry Horner. (http://www.paradigmnorton.co.uk/). I was interested in seeing them because they seem to specialise in helping business owners and have a philanthropic approach.

Unfortunately Barry’s secretary or PA, called me to cancel the morning we were supposed to meet. I have a feeling they think I am too small time. Their initial starting recommendations are that you have at least £500K in assets. So now I am on the lookout for a smaller advisor who can help me get to the entry point of Paradigm and Norton’s half a million.

So, at the moment no further forward on that front, but I thought I would look at the third plan for getting rich until I found a suitable financial advisor.

The two ways of making money that are asset based are as a business owner and / or investor. Ultimately an investor invests in a business, and as I already have a self employed business, I thought this was a good place to start.

If I can build my own asset as a business, then I would surely know exactly what to look for when investing on someone else’s.

I decided to read a couple of books recommended to me, ‘E-Myth’, by Michael Gerber and ‘Think and Grow Rich’ by Napoleon Hill. Both these books detail much of what is required to build a world class business as an asset. I would recommend reading both books immediately if you are following this blog with the intention of becoming rich.

See ‘Buy the books’ link on the right hand side to get your copies!

The first thing you need is the entrepreneurial spirit which I already have. The next is the determination to succeed, which I also have. The next is an idea. Well I already have a self employed software company that I work in, so I have a starting place. I know the internet industry extremely well, so it seems natural I should start my company ‘a fresh’ as a business owner.

Another requirement or recommendation that all of these books give is to build a team of people around you who know more than you do.

I think it will be too easy for me to think I can do this alone. This is the tendency of a self employed person. A tendency I wish to shake and lose. I decided I needed a mentor, someone who has done this before, someone who can look from the outside at what I am doing and make suggestions based upon experience.

Many years ago, when I first moved to Cambridge to soak up the entrepreneurial vibes, I attended the Cambridge University’s one week ‘Summer school for Entrepreneurs’ at the Judge Institute. I would recommend this course to anyone who is starting out in business. Attendees are split into groups depending on their type of business idea and allocated an appropriate business mentor. The business mentor I was allocated was extremely good and helped me a lot.

I decided to seek him out once more and see if he would be interested in some ‘one to one’ mentoring regarding the new business. I did manage to find him and we met up a few weeks ago. Again he was very helpful and has suggested some things I do before I meet him again.

I am due to meet again in early May, so I now need to focus on the tasks set before me, these are:

1.       Create a vision statement (where we want to be in 3 years)

2.       A one minute pitch

3.       Core values of the company

4.       A database of existing contacts

I have not done these yet, as I have been spending so much of my time finishing of the last project promised as a self employed person.

Next Steps

The tasks I have set myself for my wider goal are as follows:

1.       Complete a budget based upon the expenses I drew up from my bank statements and try to stick to a set expense outgoing per month. This will then be my initial target of getting out of the rat race, and freeing my time to spend on generating more assets.

2.       Complete tasks assigned by my mentor

3.       Draw up a rough business plan based upon the idea for running the company

4.       Find out more about different investment opportunities such as buy to let of holiday homes abroad.

As the saying goes, ‘There is no such thing as a free lunch’.  I had thought Einstein had first said this, referring to the fact that there is no such thing as free energy; work always has to be done to get a result. Apparently, he didn’t. See http://en.wikipedia.org/wiki/Free_lunch.

However, the principle is sound. After watching a set of excellent videos by Keith Cunningham, (you can see his web site in the list of links on the right hand side), I have realised that you do have to work for money, no matter what.

However, the type of work and the amount of effort involved is very different depending on whether you are employed, self-employed, a business owner or investor.

He uses a phrase which I like and will use from now on to describe income from assets rather than income from hard work done in a job or as a self employed person.  The term is ‘leveraged income’.

The idea as Archimedes so succinctly put it thousands of years ago, is that using a lever, or leverage, you can do massive things with a small amount of work.

‘Give me a lever and a place to stand and I will move the earth’

That is the type of work I want to do in relation to money I receive.

I thought I would write a bit about me so you can see where I have started from and what experience I had had so far. This may put some of the blog posts into more focus.

I left University in the second year whilst studying physics. I felt the physical laws too constricting for my free spirit!

I started my own cafe business and ran this for about 9 months. It was the first ‘chill-out’ cafe with a fixed location in the UK. The cafe was based in Norwich.

I studied and passed my exams in reflexology and started giving treatments for money, and this went OK although I could not make enough to live on.

I moved to London and tried my hand a dispatch riding on a motorcycle delivering parcels to businesses. After several near death experiences and realising that I wanted to be the one sending and receiving these important parcels in nice chrome and glass offices rather than merely delivering them on my tatty old bike, I left and, reluctantly due to having no money, got a temporary office job at GlaxoWellcome.
The internet was becoming more popular, so I was sent on a two day course on how to build basic web pages using MS Front Page.
Given the tools it was a miracle I found a fascination for the web, but I did a left GW and went to work as a project manager at an ‘up and coming’ new media agency called the hub.
This was a big learning curve, with all the madness of the .net boom, I started managing hundreds of thousands of pounds worth of projects with no training or support.

I quickly realised I preferred development over project management, and left to be a developer for the car rental company Hertz.
After making some money, training and learning more, I bought a laptop and moved to Quito in Ecuador.
I spent 3 months travelling the country and learning to program web sites on my laptop.
After South America, I came back to London and did various full time jobs working my way up to a senior developer and ran many big projects creating the websites for Sony, One2One, Tetley, Mars, Fiat and many other big corporate web sites.

As part of all my developer roles, I had maintained a level of project management and client facing skills. It was always important for me to see the business I was working in as a whole and not just as a developer nerd in a backroom.

I realised I could do this much better than any of the many agencies I had worked for, so I set up my own company. I decided with my partner, Heather to move to Cambridge where the entrepreneurial energy was at its peak.
We both built up the company as self employed people and moved back to London once we had out grown the small business of Cambridge.
We then took on bigger clients and started hiring other contract developers to help complete the coding work as the projects are now too big to complete on our own.

During the last year, I married my long time girlfriend Heather. She is now my wife and pregnant with our first child who is called Thomas.

This is when I read Rich Dad, Poor Dad and started this blog.