“Just copy exactly what I’ve done and get rich…”
So says super spruiker Donald Trump in an ad for his Trump University (an invisible institution pedalling expensive and largely useless get-rich-quick property courses).
Taken literally, here’s how you would copy Donald’s strategy: be the son of Fred Trump, a real estate tycoon. Lose all your money. Shave your noggin (except for the right hand side, which you should grow really long). Apply fake tan liberally. Tell everyone you’re a billionaire. Fire people on a television show.
This week the New York Attorney General announced it was suing Trump University for $40 million, claiming the organisation engaged in “persistent, fraudulent, illegal and deceptive conduct.”
Apparently around 5,000 students signed up for a three-day seminar (at $US1,495 a pop) that promised to teach them everything they needed to know about becoming a successful real estate investor.
So, what did they get for fifteen hundred bucks? Well, they got baited, and up-sold.
Trump’s course borrowed a strategy from Robert Kiyosaki’s “Rich Dad Poor Dad” coaching program. Students were instructed during the class to call their credit card companies and request an increase in their credit limits. Trump’s instructors even provided written scripts for students to use in their phone calls, which allegedly encouraged them to fib about their current income so they could be allowed to borrow more.
Students were told that the reason they were doing this was because property is all about leverage – using other people’s money to do deals – and that learning to creatively finance was the way to get rich in property.
However after they’d successfully hoodwinked the banks into increasing their credit card limits, the hard sell began. They were hit up for Trump Elite Mentoring, which costs anywhere between $US10,000 and $US35,000.
For that money people thought they’d at least get to meet the comb-over king, but instead all they got was their picture taken in front of a life-size cardboard cut-out of Donald (which you could argue has just as much substance).
At the end of the day though, should punters really be surprised? Kiyosaki and Trump did, after all, co-author the book We Want You to Be Rich. In their footnote they warned: “A word of caution: if you believe that working hard, saving money, and investing for the long term in mutual funds and diversifying is good advice, then this book may not be for you.”
There endeth the lesson.
Question of the Week
Where have you been all my life?
I sincerely wish I had known about you a long time ago, I started reading your column 3 weeks ago and the penny has finally dropped!
My situation is this: I’m in my early 40’s, I have $80K left on my mortgage, about the same in super, two kids at university and one in secondary college.
Eight years ago my financial advisor recommended I invest $15,000 into something called an OM-IP fund. He had years of experience with these types of funds and stated it was common to double your money.
But it’s done nothing. I’m now wondering whether I should open up two First Home Saver Accounts for my kids, unless you have any other ideas?
First, your financial advisor was a rolled-gold moron.
Any financial advisor who sells you on a short-term strategy that’s “common to double your money” has about as much credibility as those doctors who appear in ads selling rugs to bald blokes. Yeah, yeah.
I looked into the OM-IP funds, and hit three red flags:
First, they run a bunch of expensive hedge funds that invest in alternative assets. The guy who manages the money goes by the title of “Chief Scientist”, and he uses a lot of acronyms. Most of them I didn’t understand.
Second, they offer a capital guarantee. That’s always a bad sign. Why? Because it means: (a) you’re being sold something risky, (b) they’ve designed the product to appeal to unsophisticated investors, or (c) all of the above.
Whenever you’re offered a capital guarantee (in the real estate world it’s called a rental guarantee), make no mistake – you’re paying for it, usually in the form of lower returns.
Third, they’re charging roughly 2 per cent a year to manage your investment, which doesn’t sound like much. But think of it this way: if the market goes up 10 per cent a year, you’ve just kissed 20 per cent of your return good-bye.
And they also whack you with a 20 per cent “outperformance fee” if they manage to outperform the benchmark index they’ve chosen.
Bottom line: I wouldn’t let my mother-in-law invest with this mob.
I know it sounds very old fashioned, but I’ve learned over the years that the key to making money (and sleeping well at night) is to work with people who have your best interests at heart. And I can tell you that’s not your financial advisor, nor your current fund manager.
So here’s my advice:
Open a couple of First Home Saver Accounts (FHSA) for your older sons. Explain to them that this is the first step towards them owning their own home. It’s a teachable moment (and an effective insurance policy against them living at home with you when they’re thirty).
Second, simplify your financial situation. Think of pouring all your money into one of three buckets: a blow bucket (for living expenses, and debt repayments), a mojo bucket (for short-term savings goals and security), and finally a grow bucket (for long-term security, including superannuation).
And when it comes to my grow bucket: at the core of my portfolio are holdings in the Australian Foundation Investment Company (AFIC), and Warren Buffett’s Berkshire Hathaway. Both investments have been around decades, charge rock bottom fees, and are run by people with integrity – and who treat their investors as “partners”.
Stock Of the Week: Woolworths (WOW)
The three major players of the supermarket business: Woolworths, Coles, and IGA Metcash, control around 75 cents out of every dollar Aussies spend on groceries. Nowhere else on earth do three companies have such a stranglehold on their market (which is what makes them such attractive businesses to invest in).
Case in point: if you’d purchased $1,000 of Woolies shares when they first floated in 1993, it would now be worth $22,800.
Some suggest that it’s now a mature business, and its best days are behind it. My view is that Woolies is the 800-pound gorilla of the retail market, and overtime it will continue to swallow up industries like it has petrol, with sights set on chemists, optometrists, and even financial services.
Coles may be winning the marketing war right now, but Woolworths is more profitable. BUY.
Stock Hound Rating: Kelpie.
Universally known as the “top dog” for years of steady performance. Is just as motivated by a hatred of its arch rival as it is pleasing its master. Has been known to bite farmers.
Feedback from a happy Barefooter:
We earn A LOT of money, but we never seemed to have enough, living from one pay packet to the next. Thanks to you, Scott, we woke up to ourselves and now we not only found our Mojo but also owned our home in 3 short years. Now Westpac is a slave to us!
How can I look after Mum?
Mum’s partner recently passed away unexpectedly and, long story short, this has completely changed her financial security. If I am aiming to improve our combined wealth, should I be helping her pay her mortgage or getting my own investment property? I feel responsible for my family. I am 24, have a bit of savings and want to use that to make sure Mum doesn’t have to work until she’s 80.
You’re a good loving son – and you’re also in a tough position.
If your mother gets into a spot of serious financial trouble I’d certainly do whatever you can to help her out, at least till she got back on her feet. That’s what families do.
However I wouldn’t be signing what is effectively a blank cheque to pay her bills from here on – which is essentially what you seem to be contemplating.
That may go on for years – decades even – and that’s dangerous. After a while she may just come to expect you’ll always help her, and feel entitled to the money, and that may change your relationship.
I want you to do everything you can to build wealth for your own (future) family. If you pay down your debts and build up your savings and your investments, you’ll be in a better position to help everyone in the future.
HELP debt onto the mortgage
I’m the main breadwinner and I’m contemplating having my hubby stay at home to mind the kids (I’m thinking this will be better than Childcare). However to have enough cash to do so, our financial planner has told us to put my HECS debt of $40k on to our mortgage.
I am concerned that we have been sold a pony where the $40k debt will work out to be about $100k after we’ve taken 30 years and copped the full mortgage interest rate (instead of CPI) to pay it back! Is this right, or do you agree with the financial planner?
You only have to pay back your HECS-HELP loan after you begin earning $51,000. The more you make, the more you pay back – but it caps out at a maximum of 8 per cent per year.
Right now, if you make a voluntary repayment of $500 or more you receive a 5 per cent discount, but that’s being abolished from 2014. You’re turning a government debt into a commercial loan, and you’ve clearly identified the biggest risk – that you don’t pay it off for 30 years, and get whacked with interest over that time.
Presumably your financial planner did the sums and has worked out that it’s better for your cash flow to make repayments while interest rates are low, but I’d want to see the figures.
Help me help my daughter
Our 22-year-old daughter is soon to graduate, and she will earn approximately $55k when she gains full-time employment (higher if she goes to a regional centre).
She currently has $20k in her FHSA (not enough for a deposit) and would also like to live overseas at some stage. Should she continue to put money into her First Home Saver Account (FHSA), invest in shares, or is there another option?
You must be proud of your daughter. I’m proud of your daughter! I’d suggest she continues saving at least $6,000 each year into her FHSA, as this will give her the best return on her money (roughly 21 per cent per annum). I’d then suggest she simultaneously begins salary sacrificing a set amount of her wage into an online savings account (which will give her security, and a buffer if she decides to head overseas) as well as starting a small investment portfolio of shares.
In A Fix
About two years ago my husband had a hunch that interest rates were going higher, so he decided to fix our home loan for the longest he could (five years). Interest rates have been dropping ever since. What can we do to get out of it?
I’m sure your hubby was doing what he thought was best for your family at the time. However the important thing here is that he discussed this with you before locking the interest rate. Unfortunately, the bank will whack you with a break fee, so there’s not a lot you can do. Focus on other areas of your finances that you can control and save there.