2012-01-12

Making Money

I've been having my own, private Rich Dad, Poor Dad internal dialogue lately, thinking about how best to make a lot of money. Not being much of a mini-JP-Morgan, financial advice from me is probably not worth much. So, take this with a grain of salt, but here's how I see it...

The person at the end of the chain always fares worst. Think about land development:
  • The farmer who sells his huge field to a land developer makes the most money for the least effort. All he has to do is sell it, and he makes a pile of cash.
  • The developer makes the most money overall, but has to do a little work. He has to sub-divide the lot, which takes time and often involves politics with the zoning board.
  • The construction company makes a good amount of money, but also does the most work. Measuring effort against gain, they only do okay. 
  • The consumer who buys the house makes no money, over-pays for the lot, provides all of the ongoing repairs and maintenance, ends up with a lot much smaller than the farmer had, and only makes a profit years later, when the true ROI is difficult if not impossible to calculate.
Conclusion: You want to be the farmer, or at least the developer. There is no point to being the construction company because you can make the same amount of money with far less effort, and you basically never, ever want to be the end consumer unless you have to be. (If so, don't expect to make any money.)

You can apply the same principle to cars. The buyer of a used car pays all the costs and reaps none of the benefits. Buying a new car is at least one step better. You might be able to unload it for $3K-$5K once you've paid it off, which is a little better than $0.

You can also apply the same principle to personal banking. The reason investing is more lucrative than saving is because you're not the endpoint of the chain. You're somewhere in the middle. You won't make as much as a the bank, but you'll make a lot more than the humble penny-pincher with a savings account.

At least, that's my philosophy.