- Investing philosophies need to be grounded in history.
- We look at how wealth was created through the ages.
- Today, your brokerage has an agenda on how it presents its data. Does it align with your investment philosophy?
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »
Co-produced with Treading Softly
Today, I want to take a step back and look at why we do what we do. As many of you know, we focus on what we call "historical wealth generation." This is a return to how wealth was generated or created many years ago. I'm constantly surprised with how often old ideas are "rediscovered" or "recreated," but in essence, we learn that this "new idea" is not so new.
I love to say that our Income Method is unique. It truly is. However, it has its foundation firmly planted in the past and the history of how economics and wealth generation were formed.
For some of our more seasoned followers, this is going to sound familiar, but it's always important to return to the basics and ensure your thought processes haven't slipped away subtly from the foundations laid on why we do what we do. This is going deeper into the why and philosophy of our methods, rather than telling you the how or what to do.
A Firm Foundation Is Essential
Have you ever tried to build something solid and stable on sand? It's hard to do. Sand is not a stable or sturdy foundation. It shifts easily, destabilizing anything above it. The wind can pick it up and carry it off. The waves of the shore, or floodwaters, can move large amounts of it.
Growing up, we often sang a song about two men, deemed wise and foolish, who were building something. You might have sung it yourself or know the underlying story behind it.
The wise man built his house upon the rock, and the foolish man built his house upon the sand. When a storm came and battered the homes, the wise man's home stood firm on its rock-solid foundation. Meanwhile, the foolish man's house went splat!
The issue with building your foundation on the new or revolutionary is that rarely has it ever been tested. Those quick to jump to the new are forced to rebuild their structure often. Anytime a storm hits a building built upon a weak foundation, disaster is sure to follow.
So what did we do? We did exactly what I think so many investors and retirees need to do. We looked past the last few decades of economic thought. We skipped over 100 years of investing perspective. We went back to the beginning. How was wealth created originally? We kept asking and digging.
You see, our economy is not revolutionary or new. It's built upon centuries of development. It's been formed and informed by trials, successes, and disagreements. Before people could sit down and discuss how much a baseball card was worth, we had to ensure that food was available and the basic necessities were available.
Principles are timeless. Applications are timely. We need to travel backward in time to understand the foundational principles of wealth generation so that we can apply them practically today.
A Long Long Long Time Ago... In a World Not Too Far Away
We need to take a trip down history lane for a second, leaving our city and sedentary lifestyles behind, taking a turn past the beginning of agriculture societies, and landing firmly in the hunter-gatherer stage.
During the hunter-gatherer era, wealth was not determined by the size of your rock horde or the ability to storehouse goods. The miracle of refrigeration was not discovered yet, food rotted quickly, so they were forced to constantly be looking for more. The ability to hunt and gather effectively wasn't a one-off skill, you had to be able to do so repeatedly. Beginner's luck didn't allow you to live like a king for decades, and there weren't really any kings back then anyways. Like a recurring income stream, wealth was determined by those able to continuously use their skills to generate the needed results.
As cultures moved into farming and agrarian societies, the ability to hunt and gather diminished in perceived value, but the ability to plant crops and raise animals rose. Here again, storehousing vast amounts of grain or meat were not the principal determiner of wealth, nor was owning vast swaths of land. It was the productivity of your land, crops, and animals that separated a subsistence farmer from a wealthy one – the functional ability of those assets.
Now the wealth-producing asset was not just your abilities, skills, and talents, but also the ability of your assets – your land and animals - to produce more. As time and technology improved, so did the output of those farms and lands.
Over time, the focus has shifted from generating recurring products to storehousing "riches." This largely occurred as towns developed and trade became important. We attributed value to coins, bills, and precious metals. Then we viewed those people with an excess of those items as "rich." Over time, riches were accumulated by those who had an excess in the functional production of their assets. The landowner with productive land could have the excess income stored in those items attributed with value. As time went on, that successful landowner saw his idle assets grow, and his functional assets grow as he bought more land and farms.
Consider the works of Jane Austen for a moment. In Pride and Prejudice, suitors for the main character were evaluated by their recurring income. Mr. Darcy received 10,000 pounds vs. Mr. Bennet's 2,000 pounds. Even at this time, wealth was evaluated by a recurring income stream, not idle cash. Now Mr. Darcy was from a family owning various income-producing assets built up over generations and passed down from one to the next. Creating what is commonly referred to as Old Money.
Jumping years into the future, we saw the concentration of those riches more and more. The successful ones with their hordes of idle cash were using them to buy more assets to generate more cash. Those without cash or assets started to confuse which came first, thus the way we measure wealth changed its meaning. It's not defined as owning assets that accumulate wealth, but it's simply having an excess amount of them. The focus was taken off of the process and moved to the secondary outcome.
Consider Your Brokerage Account
Over time, we moved from the focus on the functional, repeatable income or production to viewing the placeholder of riches as the source of wealth. By design, brokerage accounts cater to those with a high net-worth – aka excess assets vs. debt.
Those with a high Static Wealth – riches, assets, etc. – are the desired clientele, especially since they need to storehouse their money. Newly rich individuals have been trained from childhood by banks that the money should sit idly and earn little interest.
With this group in mind, the brokerage account uses colors to denote good and bad from a Static Wealth mindset. You get rewarded with green numbers when your balance rises. You get red numbers when it drops. Red screaming, stop, do not enter, all wrong!
These colors are carried through our entire life experience. Red light, stop. Green light, go. Red denoting risk, green being all clear. The list goes on.
Yet without a means to replenish this stockpile, the rich are only rich in assets that they can't use lest they lose that "rich" title. Being rich is a state of being, like being ugly. You can change your state of being, but that should not be an end-goal itself when it comes to life and investing.
Retirement is a span of time in which you will have opportunities, risks, and life events. Your amount of idle cash does nothing for you if you cannot spend it or replenish it. Being rich gets you nothing, no pin, no hat, no special fan club.
Consider bank and other "safe" deposit account options, the interest rate they pay has dropped over the years. It's supply and demand. The more retirees keep in their savings accounts, the fewer incentives banks have to pay a higher interest rate. A simple glance at bank yields reveals this trend.
Return To The Historical Wealth Generation
If you're rich already, congrats! Way to go! It's something no one should ever be ashamed of, and it provides you tools to see even stronger income growth.
If you're like 99% of individuals, you're not rich. That's OK! Most of us aren't.
If you are rich, switching to focusing on recurring income generation greater than your expenses will continue expanding your riches and allowing you more breathing room in your portfolio and budget.
If you're like 99% of people, focusing on generating income exceeding your expenses as a target will bring you better in line with history. The vast fortunes of most of the world's wealthiest were not generated by stockpiling coins in a bank account. The Elon Musks and Jeff Bezos of the world did not get rich by stockpiling wealth. Like farm owners of old, they created their riches and wealth by becoming entrepreneurs and built companies that generate vast amounts of recurring cash flow. Their Functional Wealth – the money their assets earn for them – was the profits of their businesses.
As investors, we're not starting new companies. We're investing in established ones. We demand they pay us for that ownership, that's a dividend. I created the Income Method to help determine which companies and securities to invest in so my hard-earned money keeps earning me more. Nothing makes money like money does.
When we look back in time, we see that wealth is not a result of riches. Riches are the result of wealth. Wealth is simply an excess supply of income over expenses. The more, the better. As that excess supply rolls in and is reinvested, our riches increase. We have more net asset value.
When we approach the market with this mindset and perspective, we can cut through the noise of get-rich-quick schemes or gambling short-term investments. Down days become opportunities to reinvest dividends into companies that are producing recurring income. Up days are days to celebrate the success of our income portfolio. You become in charge and empowered to have a portfolio centered on the key historical tenant of wealth generation. You can establish a multi-generational trend of wealth being passed from one to another and allow new opportunities for your children and grandchildren, should you choose to do so or choose to have them.
At the end of the day, I want you to succeed. To do so, we must know what we are working towards. High Dividend Opportunities is designed to increase your wealth so you can have more flexibility and the best life possible. Becoming rich is the byproduct of a well-run income portfolio, not the goal.
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This article was written by
Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities. Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.
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