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Creating WEALTH

Wealth -- what is it and how do you get it? Perhaps one of those home business franchises that sell cleaning products, housewares, or perfume can be your source of financial independence. And, as evidenced by those late-night infomercials, the always lucrative area of real estate investment is almost certain to turn you into a gadzillionaire by next Thursday. Or perhaps tinkering in the financial markets with penny stocks, gold futures, or silver options is more your cup of tea. (My personal favorite is the Darling Donna's Chimney Sweep outfit that gives you the opportunity for a meaningful career in the high-profile field of chimney maintenance products.) The question for today is: Are any of these get-rich-quick schemes better than buying a lottery ticket?

What it Means to be Rich

Before we can get a handle on the best ways to acquire wealth, we had better decide what it is we're trying to acquire. As a first stab at defining wealth, think of it as your material possessions, like a house, car, clothing, and other assorted stuff. In other words: it's the things that you own.

There's two things to note about ownership and wealth:

  • First, owning a lot of stuff doesn't necessarily make you wealthy. What you need to own is a lot of valuable stuff. For example, owning 349 distributor caps from 1949 Fords is NOT likely to place you high on the list of wealthy Americans. However, owning 349 precious jewels, passenger airplanes, or Fortune 500 companies is a different story. The ownership translates into greater wealth if society places a high value on the stuff. As we saw in Fact 3, Our Unfair Lives, J. D. Goodluck become very, very wealthy because society placed a great value on the petroleum resources under his farmland.

This further means that wealth arises not just from owning valuable stuff, but also from having the ability to produce valuable stuff. In other words, part of your wealth includes not just ownership of valuable wants-satisfying goods, but also ownership of productive resources -- labor, capital, and natural resources. We'll ponder this difference between goods and productive resources in a few paragraphs.

  • Second, it's not just want you own that makes you wealthy, it's the difference between what you own and what you owe. For example, if you borrow $100,000 to buy a $100,000 house, then you're not really any wealthier. Sure, you "own" a $100,000 house, but that's canceled out by the $100,000 that you "owe" to the bank. As such, wealth is best thought of as the difference between assets -- what we own -- and liabilities -- what we owe. If you want to be truly wealthy, then you have to own a great deal more than you owe.

A little side note: Assets, like houses, cars, and such, are typically more apparent to outside observers than liabilities, like mortgages and car loans. That means, many people have the appearance of wealth because they give lavish parties in expensive mansions and tool around town in sporty cars. This wealth, however, may be totally superficial because of unseen liabilities. A word to the wise: If you're trying to keep up with the Joneses, make sure than you're aware of both sides of the Joneses wealth -- assets and liabilities.

Now that we know what we're after, let's turn to a few get-rich-quick schemes and their promises of wealth.

A License to Steal?

First, let's point out right from the beginning that almost every get-rich scheme involving real estate, financial investments, home product sales, or many others CAN make you wealthy. They can expand your assets well above your liabilities such that you not only have the appearance of wealth, you actually are wealthy. The same can also be said for a state lottery or a rich, but dearly-departed relatives. There is, however, an important feature that must be noted: These deal with the transfer of wealth and not in the creation of wealth.

Let's consider the prospects of becoming a gadzillionaire in the stock market. The task is simple, buy some stock at a low price then sell it for a higher price. Sounds simple. It is simple, if you can find someone else who is willing to buy the stock for more than you paid. With one exception (that I'll note in the next paragraph), the extra wealth that you get is given up by the sucker, er, investor who buys the stock from you. A lot of the wealth acquired from the stock market and other assorted financial markets are really acquired from others. If you're good (or lucky), you win and they lose.

The exception is wealth that results from the long-run growth of the economy. A long-term rise in the stock market occurs from the long-term growth of our economy. An increase in wealth resulting from this long-term growth does not come from anyone else. It is truly created.

The stock market aside, other short-term, get-rich-quick schemes usually work in this madcap, wealth-transferring way. Many fortunes were made during the 1970s by buying land then reselling a short time later for a big profit. However, while some made out like bandits, others lost their shirts. No wealth was created, only transferred.

Let's Hear it for Pyramid Power

Here's a particularly appealing wealth "creation" scheme -- home marketing systems. A good example is offered by Darling Donna's Chimney Sweep products. A Darling Donna's Chimney Sweep distributor has a two-fold mission in life: (1) to sell valuable Darling Donna's Chimney Sweep products to those in need of clean chimneys and (2) to entice others to become Darling Donna's Chimney Sweep distributors. While, providing chimney products to consumers is a noble service worthy of reward, this usually isn't the hook that attracts wealth seekers to the Darling Donna's Chimney Sweep products family. The big bucks lie in the prospect of becoming a Darling Donna's Chimney Sweep distributor and getting others to do the selling for you.

However, this "chaining" of Darling Donna's Chimney Sweep distributorship is a little on the suspect side. Here's how a wealth-creation system like this tends to work. Joe, our number one Darling Donna's Chimney Sweep distributor, entices five other people to become Darling Donna's Chimney Sweep distributors by holding rooftop chimney sweep "parties." Joe, then supplies these five new distributors with Darling Donna's Chimney Sweep distributor starter kits. Joe makes a tidy sales commission on the starter kits, and the Darling Donna's Chimney Sweep company makes a profit for producing the kits.

Now, if each of these five distributors entices five more rooftop party goers to become Darling Donna's Chimney Sweep distributors, Joe, the first five distributors, and the Darling Donna's Chimney Sweep company can sell twenty-five additional starter kits with all of the sales commissions and profits that go with them. Joe and the Darling Donna's Chimney Sweep company can really get into some big bucks if each of those twenty-five distributors get five new distributors, who then get five new distributors, who then get five new distributors, in an ever-growing pyramid.

In the fifth level of this pyramid, there are 3,125 people trying to sell Darling Donna's Chimney Sweep products. In the tenth level there are close to 10 million distributors, giving Joe tons of commission on 10 million Darling Donna's Chimney Sweep starter kits. The Darling Donna's Chimney Sweep also made piles of profit on these kits.

Moreover, Joe can be used as an example of the wealth to be had by participating in the Darling Donna's Chimney Sweep distributor program. His participation has "created" incalculable wealth -- for him -- including expensive sports cars (an OmniMotors XL GT 9000), housing, and other highly-valued assets. Your own path to riches is a Darling Donna's Chimney Sweep distributorship. Right?

There are some problems with this:

  • All of Joe's wealth was "created" without the need to clean a single chimney. Joe didn't make his wealth from cleaning chimneys, nor from selling chimney cleaning products to people who cleaned chimneys. His wealth came from selling chimney cleaning distributor starter kits. Not a single productive, consuming-satisfying thing was accomplished for Joe's wealth.

  • Ten million Darling Donna's Chimney Sweep distributors are likely to have chimney cleaning starter kits stored in their basements. Each prospective distributor spent a few bucks on a starter kit hoping to accrue the mind-boggling wealth displayed by Joe. If the dream didn't materialize, then, well, it was only a few bucks. No big deal.

Here's the bottom line on Darling Donna's Chimney Sweep system. Wealth is transferred from the bottom of the pyramid up to the top. Those at the top, by getting a few bucks from a bunch of people, accrue massive fortunes. Those at the bottom, however, get nothing. The secret to wealth in this sort of pyramid is to make sure that you're very close to the top with a whole bunch of other people beneath you.

Most get-rich-quick schemes do little more than transfer wealth from one person to another. If a Darling Donna's Chimney Sweep distributor grows wealthy without any chimneys cleaned, then someone else grows poorer. If an astute financial investor buys low then sells how, then some other not-so-astute financial investor is selling low and buying high. If there's no production, then the wealth accumulated by one must be lost by someone else.

The Road to Productive Wealth

The only true key to wealth lies in production. While you can increase your own wealth at the expense of others, we all become wealthier when productive resources are increased. Greater wealth for our economy lies in increasing the quantity or quality of productive resources -- labor, capital, and natural resources. This is done by investing in education, capital goods, research and development, and technology.

What works for our economy, can also work for each of us. You can acquire wealth by education, buying productive capital goods, inventing a new product, and assorted other improvements in productive resources.

This suggests a few notable tips on wealth creation:


Wealth-Creation Tips

  • Many get-rich-quick wealth creation schemes do nothing more than transfer wealth. On a personal level that may be okay if you're the recipient of the transferred wealth. In general, however, there tend to be more people on the losing end of the transfer than on the winning end.

  • A lot of people get their wealth by selling dreams. Financial brokers get their commission on transactions. If they can convince you that untold wealth is to be had by taking the plunge, and you take the plunge (plus paying their commission), then their wealth is ensured whether or not you get yours.

  • Productive resources are the ultimate source of wealth for our economy -- everything else just transfers it around. If you want to be truly involved in creating wealth, then invest in productive resources.

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