Over the last few weeks, I've been blown away by the biggest "Ponzi Scheme" to hit Wall Street. On December 11, Bernard Madoff admitted that he ran a $50 billion dollar fraud. Thousands of investors have lost millions of dollars. In addition, many charities have been destroyed from turning their money over to Bernard Madoff.
A "Ponzi Scheme" occurs when the money manager uses the funds contributed by new investors to pay existing investors. The scheme can continue for years, as long as new investors are investing new money. When new investors stop investing, as they did with Bernard Madoff, the Ponzi Scheme quickly folds because funds are not available to pay to existing investors.
I have preached many times over, within the Income for Life monthly newsletter, that investors should always control their investments. Control is extremely important in wealth building for many reasons. The investors who lost money with Madoff had no control over their investments. They had no idea where their money was actually being invested. Yes, they did receive account statements showing them where their money was supposed to be invested. However, these account statements were fake.
The one major lesson every wealth builder should take from this situation is that you must control the investments you make. Controlling your investment gives you the ability to have a direct impact on the investment's performance. In addition, it protects you from loss through fraudulent money managers. As an example, consider these different investment opportunities:
1) Investing $20,000 into a mutual fund.
2) Investing $20,000 as a down payment to buy a single family investment property.
3) Investing $20,000 to buy stock in a large company.
4) Investing $20,000 to start your own "side" business.
You can ask yourself many questions to compare these different investment opportunities. In fact, most investors ask themselves the following 3 questions when evaluating different investment opportunities:
Which investment offers the best return on investment?
Which investment contains the most risk?
Which investment is the easiest?
Notice that the majority of people don't even consider "control" of the investment as part of their decision making criteria? The only two investment choices presented that give you 100% control are the single family rental property and the "side" business. These two investments, in my humble opinion, are the safest.
The problem is that most investors are typically attracted to investments that are easy. In fact, they prefer to turn their money over to someone else and then do nothing. It's these 100% passive investments that carry the most risk.
Take some time to study the people who have acquired significant wealth. Look to see if they controlled their investments. I'll bet you'll find that in the majority of them do. Consider the following:
Bill Gates: Bill's wealth came from Microsoft. Did he control Microsoft?
Warren Buffett: Most people believe that Buffett is a passive investor who simply buys shares of stock in good companies. This is not true. Buffett typically owns businesses outright whereby he has 100% control. In the investments where he doesn't own 100%, he typically acquires enough shares to participate in management.
Sam Walton: Sam's wealth came from Walmart. Did he control Walmart?
I could go on and on with many more examples of wealth people. Each example would have the same commonality - CONTROL OVER THE INVESTMENT. This also means that each wealthy person was "active" with their investments. They didn't build their wealth through passive investments.
As we head into 2009, please add one question to your criteria for selecting investments. The one question you should add is:
Do I control the investment?
Happy Holidays!
Rob Minton
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