August 27, 2022

JF2914: Why Your First Million Is So Hard | Passive Investor Tips

Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

If becoming a millionaire was easy, everyone would do it.

In this episode, Travis explains why it is so difficult for new commercial real estate investors to make their first million dollars. He identifies four obstacles that hinder the process and what you can do to overcome them. 


1. Financial Education

Financial education is rarely taught in schools, or even by friends and family. If you want to learn, you’ll need to read books, find mentors, and listen to podcasts that can help create the foundation you need to build your financial education and reach your end goal.


2. Self-Discipline

Have you ever made a New Year’s resolution only to break it within a month or two? Anything in life that’s long-term is difficult to sustain. Whether it’s a diet, an exercise routine, or financial education and investing, achieving your goal will not be possible without self-discipline. 


3. Understanding Assets vs. Liabilities

According to Robert Kiyosaki, an asset is something that puts money in your pocket every month whether or not you work, and a liability is something that takes money out of your pocket every month. For example, your house is not an asset unless you can rent it out and achieve positive cash flow. 


4. Understanding the Fundamentals

This year in the stock market, we’ve seen the most speculative assets take the steepest and deepest nosedives. The most profitable companies, on the other hand, have held their weight. Investors who review the fundamentals of the companies they invest in will be able to tell if they are getting a good deal. As Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”



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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis watts. In this episode we're talking about why your first million is so hard. Disclaimers, as always - never financial advice; not telling you or anyone else what to do. For educational purposes only. So let's get started...

A lot of investors, myself included, when you first get rolling, or you're in your first few years of investing, start with a goal in mind. A lot of people say "Well, I want to be a millionaire, or I want to have $10,000 a month in passive income." And while goals are great, and I'm a big advocate for goals, I talk about them all the time, you also need to have a plan. So in the last episode, we discussed the Four Pillars of Financial Independence, which are basically an outline or a guide on how exactly you can get from A to B. If you haven't checked out that episode, I highly encourage you to do so. So make a note of it. And as I always say, it's simple, but not easy.

So you might wonder, why is it that three quarters of all millionaires in the United States are over the age of 55? Or why is it that less than 10% of Americans are deemed accredited investors? I was recently reading a national survey conducted by Chris Hogan in affiliation with the Dave Ramsey team... This is a survey that they conducted on 2,000 millionaires nationwide, as well as surveying the general population. When they asked the survey participants "Do you have to be lucky in order to get rich?" 51% of the general population said yes, while only 22% of actual millionaires agreed with that.

Also, they asked, "Do you think that the majority of millionaires inherited their wealth?" and 62% of the general population said yes, while only 31% of millionaires agreed with that statement? And the reality is if becoming a millionaire was so easy, then everyone would do it, right? So in this episode, I'm gonna outline a few reasons why your first million is so difficult. And the first reason is pretty short and to the point. It's financial education.

Financial education is mostly a self-study. It's very rarely, if at all taught in schools and by your friends and family. So you're gonna have to get out there and read books, potentially find mentors and listen to podcasts like these... So I applaud you for tuning into today's episode, because that really is part of the foundation to building financial education, and getting yourself to your end goal. So number one is pretty self explanatory.

Number two is self discipline, often not talked about nearly enough, at least in my opinion. And I think of it this way - have you ever made a New Year's resolution, just to find yourself a month or two later breaking it? I know I have. And that's because anything in life that's long-term is difficult to sustain. It does take a lot of self discipline. So we could talk about diets, we could talk about exercise, and financial education and investing is no different. It still falls within this category. Funny little side story on this... So when I used to work in oil and gas, I had a co worker; I was flipping homes and doing some long term buy and hold rentals and vacation rentals. He was seeing the results of that, and I would naturally want to talk about that and educate others. And he goes, "Look, you be my mentor. You just tell me what to do. I want to have results for myself." Which is noble, and which is fine. And I was more than happy to be his mentor. And I was. So I taught him what I was doing, how to do it... We were both living in the same local market.

So the first house that he ends up selling probably netted him in the ballpark of $100,000 in profits. But here's the problem. You know what he did with the money? He bought a brand new truck; a brand new truck. A gas-guzzling trucks. So that's a liability, which we're going to talk about here in a minute. Then, as he gets to his second property that he sells - I don't know what he made on that property, but it was probably pretty good. You know what he did with that money? He quit his job, and he lived on the profits for one or two years. I can't remember the exact timeframe. But he ate away all the profits.

So you fast-forward two years after starting his financial journey - he was no better off than he was from day one. In fact, he had fallen behind a little bit. So he had less assets, he still had his truck (as a liability) and he was no closer to his goals. I don't know what his goals were, whether it was be a millionaire, have X amount of passive income... He had none of it.

Break: [00:06:58.23] to [00:08:45.13]

Travis Watts: That brings me to my third point, which is understanding assets versus liabilities. Probably nobody more quoted, more famous than describing assets versus liabilities as Robert Kiyosaki, the owner of the Rich Dad company, author of Rich Dad, Poor Dad. He says quite simply, an asset is something that puts money in your pocket every month, and a liability is something that takes money out of your pocket every month, whether or not you work... See, that's the caveat - whether or not you work. So he's talking about passive investing.

So Robert Kiyosaki says that your house is not an asset, unless you can rent it out and have positive cash flow. Then it becomes an asset. And a car, for example, is just a car. It doesn't mean that a car is an asset or a liability. It depends on its usage. So in the case of my buddy, he bought a brand new car and he used it only for personal use, so it became a liability. He had to pay insurance, he had to pay maintenance, he had to buy the car up front, and it was going down in value the whole time, and it certainly wasn't generating him any money. But let's say you took a vehicle and you rented it out. There's a lot of third party sites now where you can rent vehicles... If you could make more money by renting it out than what you have to pay or owe on the vehicle, it now becomes an asset.

Or you could think of it like this - if you owned a construction company and you purchased a vehicle for business purposes, you were able to depreciate that for tax purposes, and that pickup or that vehicle actually made you a profit, in other words it was essential to making money with your business, that could then be deemed an asset in that situation; whether or not it's an asset or liability depends on if it puts positive cash flow or passive income in your pocket every month, or it takes money away from you.

So that's a quick rundown on assets versus liabilities 101. Unfortunately, a lot of people have difficulty distinguishing between the two. But again, we weren't taught that in school. Were you? I know I wasn't.

So that brings us to number four, which is understanding fundamentals. Warren Buffett's probably the most famous and quoted under this category as being a value investor. He doesn't trade stocks actively. He doesn't read headlines and buy into hype and look at speculative assets. He's looking at the fundamentals of companies, so that he knows when he's truly buying something or investing in something at true value or below value, so he knows when he's getting a good deal.

This year in the stock market we've seen the most speculative assets take the steepest and deepest nosedives; you've seen things like crypto and digital currencies and NFTs and tech stocks and unprofitable companies take massive, massive pullbacks and retractions, as we potentially head towards recession. And you've seen the most profitable companies - the blue chip stocks, the dividend-paying companies, positive cash flowing real estate really hold their weight in an environment like this. And that, my friends, is all about the fundamentals.

I love the quote by Benjamin Graham. He says "In the short run, the market is a voting machine. But in the long term, it's a weighing machine." And that is simply a quote about fundamentals.

One last story I'll share with you is the story of Michael Jordan; probably no one more famously quoted or known for talking about fundamentals. Michael Jordan would show up early to practice, he would work his days off, he would be doing very simple and routine things all through the offseason, like working on simple movements, dribbling the ball, taking very easy shots, just working on his form... And Michael Jordan's quote goes like this. He says, "You can practice shooting eight hours a day, but if your technique is wrong, then all you become as very good at shooting the wrong way." Get the fundamentals down, and the level of everything you do will rise. I love that.

So I want to thank you for tuning in. This has been a very short episode of Passive Investor Tips. If we haven't connected on LinkedIn, Facebook, Instagram, BiggerPockets, look me up Travis Watts, or @passiveinvestortips on social media. I'm always happy to be a resource for you or anyone you know that could find value in these episodes or in this content. I give my time away for free to all of you. So I'll see you next week in another episode. Have a Best Ever week, everyone!

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