Monday, June 27, 2011

Self Made Millionaires?

http://finance.yahoo.com/news/Financial-Advice-Gleaned-From-nytimes-3488361631.html?x=0

PAUL SULLIVAN, On Friday June 24, 2011, 1:03 am EDT
WHEN I started writing this column almost three years ago, one of my goals was to figure out what the wealthiest Americans knew and pass along those lessons to middle- and upper-middle-class readers.

Recently, I put that idea to the test, spending the afternoon in a Manhattan town house with eight wealthy men who are all members of an investment club called Tiger 21. I was there to hear an unvarnished critique of how my wife and I save, spend and think about money.

Each of the 180 members of Tiger 21 has a net worth of at least $10 million, pays $30,000 in annual membership fees and commits to spending one day a month with other members. Nearly all of them made their money — they didn’t inherit it — and most are men.

I had asked to sit in on one of the group’s signature sessions, the portfolio defense, but a few weeks ago, the members invited me to be in the hot seat. I jumped at the chance. Beyond looking at how money is invested, the portfolio defense is intended to force members to discuss their wealth in the broadest terms.

I had heard horror stories. One member was told he needed to lose a lot of weight if he was going to get people to invest in his new fund. Another was chastised for telling his children that he had lost his money in the financial crash so that he would not have to talk to them about his immense wealth.

Michael Sonnenfeldt, the founder of Tiger 21, used the term “carefrontation” to describe what happens in a portfolio defense. The assessments are meant to be direct, unsettling and possibly painful to hear, Mr. Sonnenfeldt told me. But the goal is to get members to think differently about what they are doing with their investments and about everything in their lives that is affected by their wealth, from their family to charities.

“It’s not meant for the faint-hearted,” Mr. Sonnenfeldt said. “This is a process that some people could clearly find offensive or discomforting.”

What I experienced was rough, but it was also thought-provoking. The value to me — and to anyone given a similar opportunity — was that the members challenged everything about my assumptions on saving and spending. Here’s some of what I took away.

OUR MISTAKES In the week leading up to this, I worked with Joel Treisman, an executive coach and the chairman of one of Tiger’s 17 groups, to gather up all of our financial reports.

I was confident that the group would think my wife and I were in good financial shape. We save a good percentage of our income. We don’t have any debt beyond mortgages and a car payment. We probably spend a bit too much on food and pet care, but we don’t run up credit card bills to do it.

The members were warm and welcoming as we filled our plates with poached salmon, grilled asparagus and buffalo mozzarella from the buffet. But as soon as we were seated, it was all business. And I was immediately on the defensive. There were two big surprises but also blunt advice and some thoughtful questions about our portfolio.

First, the surprises. The group agreed that we did not have enough life or disability insurance. We both have insurance that would cover about three or four years of earnings if one of us died. This seemed sufficient to get past a few years of sorting things out. The group disagreed. Going from two incomes to one would mean a radical rethinking of our life.

We needed more sizable policies to give us the freedom to sort through things. Though we both carry disability insurance, the policies are old and do not reflect our current income. They would also cover only 50 to 60 percent of our old base salaries. The members thought we should buy individual policies to add to this.

The second surprise was about our savings. We have been saving about 15 percent of our post-tax income. Alan Mantell, a lawyer who made his money in real estate, development and investment, said the issue was not how much we saved but how we thought about spending.

“You need to ask, ‘What can I afford to spend versus what do I need to spend?’ ” he said. We could be saving more money for retirement — or in case something bad happens — if we cut back on things we did not really need, he said.

All the members agreed that we should sell our vacation condominium. “You need to become more liquid,” said Thomas Gallagher, the former vice chairman of CIBC World Markets. “If something bad happens, it’s easy to get rid of a dog walker; it’s hard to get rid of a house in Naples.”

Florida real estate is in a sad state, so I asked what they would do with an offer that was less than our mortgage?

“Take it,” Mr. Gallagher said. “Write the check and be done with it.”

As for our portfolio of stocks and bonds, the questions were more basic. Leslie C. Quick III, whose money came from Quick & Reilly, the discount brokerage firm, looked at our investments — 50 percent in equities, 34 percent in fixed income, 12 percent in commodities and real estate and 4 percent in cash — and wanted to know how our investment manager had done in the bear market. He also thought we should ask our adviser how he balances the risks in our jobs against those in our portfolio.

OUR SOLUTIONS Because I had parachuted into Tiger 21 for one meeting, I was taken aback by the group’s brutal honesty. I walked out after three hours in a daze. Over the next couple of days, though, I concluded that the members had made some great points.

Some solutions were simple. We can increase our term life insurance for comparatively little money — $1 million of term life costs about $700 a year. Individual disability policies cost more. Barry Lundquist, president of the Council for Disability Awareness, said the yearly premium would usually be 1 to 3 percent of a person’s salary, but the payout would still be limited to a percentage of that person’s income.

As for our portfolio, I put the questions to our adviser, K. C. King of Emerson Investment Management. I liked that he did not sidestep the bear market question: Emerson’s portfolios did better than the benchmarks in 2008, but they lost value like everything other than cash, gold and Treasuries.

Where I took comfort, though, was in how he thought about our portfolio. “We’re very mindful that what we’re managing for you and most of our clients is their core portfolio,” Mr. King said. “If someone said from the Tiger group that this is fairly conservative and you’re not taking big swings, we’d say you’re right. This is the portfolio that we’re trying to keep for your daughter’s education and into your retirement.”

The issue that Mr. Mantell raised about spending is the thorniest one. My wife and I are under no illusions that having a condo in Florida makes financial sense. Trimming spending in other places is easier: Walking the dogs ourselves, for instance, would save $100 a week or $5,200 a year.

In the end, though, there are such radical differences between the wealth of the Tiger members and most Americans that some of their advice could not apply.

Mr. Sonnenfeldt estimated that 90 percent of Tiger members had paid off the mortgages on all of their homes.

They also tend to view money as something to preserve rather than accumulate. Mr. Sonnenfeldt said members spent about 3 percent of their wealth annually, which allowed the principal to continue to grow. But at the $10 million entry level, this would mean $300,000 a year.

Perhaps most important, none of the members became rich by eating out less. They became rich by working in industries that paid extremely well or by building businesses that they later sold.

Still, what was best about the session was that no one pulled any punches. Their honesty forced us to think hard about the assumptions we were making. Yes, it was difficult. But really, who wouldn’t want advice from those who have made it?

Tuesday, June 14, 2011

Funny Thoughts?

I had some thoughts about the Amway opportunity this morning and it made me chuckle as I was thinking. Imagine going to the bank for a loan and when asked for income verification, you show the loan officer a copy of a check you received a year ago. Or better yet, show the loan officer a picture of your home or your car and ask the bank to consider that as proof of collateral. You would likely be escorted out of the bank by a security guard. Or imagine showing the loan officer the 6-4-2 plan when applying for a business loan. You'd be laughed out of the bank.

But IBOs are recruited with these tactics. They are shown pictures of mansions and fancy cars. It implies that the upline diamond has attained these trappings with income they receive from Amway. Then the 6-4-2 plan or a similar version will be shown as a very simple and manageable way to achieve these pipe dreams. Looking back, I fell for it and believed it could be done. I also believed that my diamond was free when the evidence suggested otherwise.

I always wondered why the diamonds were always out showing the plan to people and why they could walk away from their businesses and live in luxury, but none of them opted to do so. Since the thought of doing nothing while money rolls in is a dream, why doesn't anyone choose that option? Of course, the IBOs will claim that their upline diamonds choose to work and help downline out of the goodness of their hearts, but now I can see that it is far more likely that diamonds keep working because they have to.

The attrition rate in Amway is significant, thus anyone who would choose to walk away might have income for a while, but attrition would turn the business into nothing very quickly. A diamond's stability is only as solid as are his platinums. We know that it is very very common for platinums to drop out of qualification or to quit altogether. And if platinums can drop out in a blink of an eye, so too can a diamondship. I believe my former diamond doesn't have any of his originally qualified platinums who still qualify, and I believe most of them have quit. Try taking that to the bank.

Anway, just sharing some of the funny thoughts I had this morning. Hope you have a good one!

Thursday, June 9, 2011

Amway Is Number One!

I saw this anonymous comment today on another Amway forum and could not resist reporting it. Absolutely hilarious! (Bold emphasis mine)

http://www.unhappyfranchisee.com/will-amway-make-you-annoying/

Anon on June 9th, 2011 7:00 am

“I don’t really want to debate just throw some things out there”

In other words, I don’t really want to have to consider another viewpoint, you should just drink the Kool aid like I did

“1. Why should shekhar tell you how much he’s making”

Shekhar is promoting Amway as a moneymaking opportunity but he’s never made a profit. We just want to see how much we can lose each month like you and Shekhar”

“Amway is the #2 in making millionaires. (#1 is microsoft)”
Amway is #1 at making up bogus claims and getting naive Ambot zombies to repeat them as fact. Seriously, where did you get that bs.


98% of all amway products are purchased by their Ibos and the other 2% by their mothers. According to research the average ibo has an IQ just 12 points above clinical retardation. 10% of all ibos are killed each year by irate neighbors, exfriends and spouses who just can’t take it anymore.

See how easy it is?

Wednesday, June 8, 2011

Time To Fire The Coaches?

Every time a professional sports season ends, we see losing coaches fired. It's very common as the goal is to win, especially when team owners expend millions of dollars to achieve the goal. If a new coach takes over a really poor team, he is ususally given some time (a few seasons) to effect positive change. Eventually, that coach is expected to win or at least be competing for a championship. If not, that coach will also eventually be fired as well.

In Amway. there are many diamonds and above who have been around for more than ten or twenty years. They have been selling their systems for many years. making handsome profits which they use to fund their "diamond" lifestyle. But where are the success that make it a worthwhile investment? There are fewer new Amway diamonds in North America than there are powerball lottery winners. While Amway is not a game of chance, it seems that a game of chance with overwhelming odds produces more success than the Amway business opportunity.

While Amway zealots and supporters like to cite all the new platinums, keep in mind that platinum is the level where you break even or make very little profit. Only a platinum who is not on the system is likely to have a nice profit. A fully dedicated system platinum expends so much to run and maintain the group, plus their own system expenses that it's easy to conclude that platinums do not make enough where it's worth all the time and effort. A platinum couple would likely net more money working part time minimum wage jobs. And even with the emergence of new platinums, unless Amway is growing by leaps and bounds (not likely in North America), then new platinums are more than likely simply replacing old ones who do not qualify anymore. With such instability at the platinum level, how can anyone "walk away" and collect income while sitting on the beaches of the world?

So is it time to jettison some of these upline leaders/teachers? Millions of IBOs come and go through the business within a handful of years but the number of new diamonds (North America) can be counted on my fingers. It is not possible that all the motivated and ambitious IBOs end up lazy and incompetent to the point where notable success is a tiny fraction of 1%. Surely the system mush be broken of ineffective. A coach cannot continue to lose and blame the players. Sooner or later, someone must examine whether the coaches are effective or not. In the case of the Amway business, I'd say the coaches (diamonds) are miserable failures. The facts are there, it's a matter of whether you believe the facts or not.

Thursday, June 2, 2011

The Diamond Illusion?

One of the things I noticed after walking away from the Amway business was how IBOs and higher pins try to create an illusion of wealth. They are told to wear suits to all of their meetings, act as if they are already successful in Amway, as if acting the part will make it so. Some IBOs are taught to fake this success, or "fake it till you make it". I suppose this is taught so prospects will be enticed into looking at the business or possibly joining because they see success and want a piece of the action. It is why many aspects of functions are about attaining wealth, quitting your job and showing off the diamond lifestyle.

But as time passes, more and more evidence has become available which shows that the diamond level (and higher) may not be all it's promoted to be. There are stories of diamonds quitting the business, diamonds fighting and suing each other over tools income, diamonds having homes foreclosed or going bankrupt. A book written by Ruth Carter about a diamond who was her former employer showed a diamond with a gross income of over a million dollars, yet this diamond apparently was broke, living in debt but continuing to portray success while on stage. The diamond was appearing to be financially successful but had overdue taxes, credit card debt, and littelt equity in their (mortgaged) home.

What many IBOs and prospects see on stage are pictures of the easy life, early retirement, no job, fancy cars and homes, fancy vacations and exclusive things in life. All of these can be achieved by joining Amway and going diamond right? Amway reports that the average diamond earns less than $150,000 and that is before taxes and business expenses. When you sit down with a calculator, it is easy to see that it is virually impossible for most diamonds to have what they portray. Amway apologists will claim that their groups don't do this, but basically, the function that is currently called "dream nite" is where the theme was the lavish goodies that diamonds have, and you can have, if only you will build the business.

So why do the diamonds put on this show? Simple, because it's a recruiting tool. People won't want to join if you tell them to work hard, achieve diamond and live a middle class lifestyle. Unfortunately, I believe that a diamond income will mostly provide a middle class lifestyle and not that of a jetsetter. Do the math and it's very clear. Also, one should note that much of a diamond's $150,000 income is in the form of a one time annual bonus, thus a diamond's monthly income might be quite low. Many people don't know this and believe the illusion they see on stage.

This blog and this post is to clear up some of the illusions behind a diamond lifestyle. It is very likely not what you think it is.