By Philip Wik




The following is a revised excerpt from my book How To Buy and Manage Income Property, published by Prentice-Hall in 1987.




Make no little plans.  They have no magic to stir men's blood, and probably themselves will not be realized.  Make big plans, aim high, and hope, and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with growing intensity.

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't care where--,"said Alice.
"Then it doesn't much matter which way you go," said the Cat.

Lewis Carroll



All great religions have their Ten Commandments, their Five Pillars.  Capitalism isn't a religion, but it is a moral imperative, for, I believe, it promotes individual freedom of choice and the greater good better than any existing ideology.  Here is your Eightfold Path to prosperity:

1. Take stock of yourself.
2. Plan.
3. Nurture your career.
4. Eliminate personal debt.
5. Determine your annual net-worth.
6. Save.
7. Diversify your investments.
8. Buy income property.

Many have walked this path.   Some, like myself, started out with nothing materially.   Your pilgrimage may end in a Manhatten penthouse, a North Shore mansion, a Main line estate.   But, in the scheme of things, the trappings of wealth are peripheral.   What counts is the joy you'll see in those close to you.   By providing for them, you can shield them from some of the problems of life.   If you buy income property, you'll also get satisfaction from knowing that your efforts bring shelter and employment to people with families and goals, that without your spirit of enterprise, their housing would be less adequate, their prospects less certain.

  Step 1:  Take Stock of Yourself

"Know thyself," the ancients Greeks said, and "to thine own self be true," the Poet responded.  Before starting your investment program, do some soul searching.   Honest answers will help you from falling into the trap of mindlessly striving out of compulsion rather than for positive reasons.   Before you reach for that brass ring, make sure that the ring really exists.
Ask:  What do I value?  What is important to me and my family?   What do I really want out of life?   What do I want to be?   You're not getting any younger.  The clock is ticking.  Focus your goals.  Seize the moment.   The time to act is now.
To the question "What do I want?" many people respond: "To be happy."   But is happiness the goal or the residual of working towards that goal?   Happiness, in my view, is like a cat.   If you try to coax or call it, it will avoid you.  But if you pay no attention to it and go about your business, you'll find it rubbing against your legs and jumping into your lap.   So forget pursuing happiness.   Pin your hopes on work, on family, on learning, on knowing, on loving.
But if happiness is a questionable goal, what about wealth?   The little-engine-that-could spirit for many is a mirage.   Hard work may yield riches as well as broken marriages, loneliness, desperation, and collapse, as the lives of Howard Hughes and John Paul Getty suggest.  Money won't solve your problems.  It will only pay the bills.   But those who have fought their way out of the projects or the barrios know that it is absurd to question the legitimacy of the pursuit of wealth.   For poverty is the enemy of the human spirit.   Wealth is more than an idle dream.   It's a practical possibility, particularly for those who shun the image of wealth-- the fancy cars, the pretty clothes, the social swirl.   That's less important than the freedom it offers.   If you have money, you have options.  Riches becomes a side effect of personal achievement, a grade bestowed by capitalism for excellence, the payoff for winning the great game.  ; A century ago, the Reverand Russell Herman Conwell went about this nation delivering a popular speech.  He praised not only the virtues of hard work, but its rewards as well.   "To secure wealth is an honorable ambition," he said "and is the one great test of a person's usefulness to others.   I say, get rich, get rich!"

  Step 2:  Plan

Unwilling or unable to plan for the future, most people let others plan their future.   This refusal to decide is in itself a decision.   Passivity in the face of a troubled economy threatens your security.   Both countries and corporations give planning the highest priority.   Planning provides the basis for rational management.  Planning checks impulsive actions and provides a map for future growth.
Most people think of a budget as a one-year plan for managing money.  You set up an income-outgo (expense) ledger with a year's worth of monthly totals and revise your plan at the end of the year.   But budget planning should look ahead in blocks of five years.  Many investments take at least that long to germinate.   Some people have trouble anticipating what they'll be doing next week, much less five years from now.   To others, such planning comes easily.  With practice, everyone should be able to methodically plan where he or she is going and what he or she will be doing five years hence.  Investment records, tax receipts, insurance policies, pension plans, and mortgage amortization schedules are examples of information on which to base these projections.   Nothing is written in stone.  You can deal with uncertainty by reviewing and modifying your plans.  The best time to update is on the first of the year, the traditional day for making resolutions.  Unlike the somewhat frivolous New Year's custom of making vows for the future, you should approach this task more analytically and critically.   In the last year, pinpoint the causes of your successes and failures, especially in regards to making money.
Here's an example of a personal five-year plan:

FINANCIAL FIVE-YEAR PLAN

  Updated:  January 1, 20xx
  Years:  20x0-20X5

  I.  Objective:  To achieve financial security.
 II.  Goals:
      A.  To systematically increment my net worth by a minimum $x,000 yearly.
      B.  To put discretionary capital in investment vehicles that will overcome my tax liability and the inflation rate.
      C   To diversify sources of income (salary, interest, dividencds, rent) and sources of investment (money markets, bonds, stocks, real estate).
III.  Aims:
      A.   To assure myself continuing income:
           1.   By not shortchanging my career.
           2.   By keeping myself healthy and motivated.
      B.   To maintain a perfect credit record.
           1.   By meeting all financial obligations without error.
                 a.   Loans must be paid on schedule.
                 b.   Credit-card bills must be paid when due, not on installment.
           2.   By not borrowing more than 25 percent of my net income, exclusive of investment property mortgages.
      C.   To maintain a low-risk investment program:
           1.   By consistently saving $x00 a month in a bank money market fund.
           2.   By reinvesting all interest and dividends.
 IV.   Tasks:
     A.   To determine my net worth, update my resume, prepare my budget, and evaluate my five-year plans every year on January 1.
     B.   To let reputable professionals handle my tax, accounting, insurance, and legal needs.

You should also draft five-year plans for other areas of your life that could use strategic planning.   These include educational, vocational, social, physical, or spiritual areas.   You're a totality of interests and values, not just a money machine.   Finally, integrate all plans into a comprehensive long-term master plan.   This plan can be as short as ten years or as long as a lifetime.   It will give you a bird's-eye view of where you're heading and at what velocity.

  Step 3:   Nurture Your Career

Your job provides the seed capital for investing.   You must cultivate on-the-job competency. This will assure a continuing flow of money.   Job security is the foundation to financial achievement.  If you aren't a civil servant, tenured teacher, member of a strong union, or sure about the staying power of your job, you must protect yourself against layoffs.   Don't depend on unemployment or welfare.   These programs are inadequate and debilitating.   To protect yourself, be prepared to put in long hours, save as much as you can, and job hop when necessary.  Ideally, your job should pay well, require little or no travel, and offer long-term growth and security. Such jobs are often found in the service sector, such as banking and insurance.   Avoid industries that are subject to swings of fortune, such as the automotive and construction industries.   Consumer behavior in a recession is to retrench.   People postpone luxuries and major purchases, such as a car and home.   The long-term trend is toward service and information-oriented work and away from blue-collar, smokestack toil.
You cannot always choose for whom you'll work and where you'll work.   But our system lets you move from firm to firm and industry to industry as you like.  In mobility lies opportunity.   I don't minimnze the difficulty in finding satisfactory work.  It's hard.  If you have children, impress on them that nothing good--including a career-- comes without work, knowledge, courage, and sacrifice.   If you're young, now is the time to start planning for your future. Let's say you're a high school dropout working at a gas station changing oil and tires.   If you view yourself as a failure, you could be sandbagged in that dead-end job. But if you see yourself as a management trainee on the first rung of one of the most important industries in the world-- the petroleum industry-- and if you make an aggressive effort to learn all you can aboiut that industry, you'll rise.   Your future will be as bright as any college graduate.  In fact, some college graduates are floundring in their careers.  Why?   They fail to see that upward mobiliity is the product of relentless self-assessment, self-improvement, and self-promotion.  Education doesn't end with a sheepskin.   Attitude is the key.   There is no failure, save from within.

  Step 4:   Eliminate Personal Debt

Borrowing to invest can accelerate wealth building.   If the return on investment is such, it makes sense to borrow. But accumulating debt to gratify emotional or egotistical impluses is irrational.   It will ruin hope of long-term gain. So avoid egorupotcy and embrace solvancy.   Loans and credit-card debts (excluding mortgages) shouldn't exceed 25 percent of your take-home pay.  How do you get out of debt?   Pay off all high-interest credit card bills as soon as possible. Pay cash for consumer durables, such as appliances, furniture, and clothes.   After you pay off your car loan, keep your car for at least five more years.  Avoid using unsecured lines of debt.  Avoid bill consolidation loans.  The use of such loans is an attempt to treat the symptom, not the problem.  The problem is the accumulation of debt by overspending.  If you simply lower the payments by extending the term, it may help temporarily.   But if your spending habits continue, your financial problems will persist.

  Step 5:   Determine Your Annual Net Worth

You should work up a personal balance sheet at the start of every year to let you know if you're moving ahead.   Although your obligations may be heavy at one point, if your net worth is solid and at least ten percent ahead of the previous year, you're doing well.   If your net worth starts to stagnate or decline, you should reassess your investment strategy and spending habits.
Net worth is simply total assets minus total liabilities.   Assets are things of value owned.  Liabilities are creditor's claims.   Your net worth is the excess of the value of your assets over your liabilities or your liabilities over your assets.   The balance sheet is a statement of assets, liabilities, and net worth, as expressed in the following equations:  assets - liabilities = net worth or assets = liabilities + net worth.
There's a tendency to exaggerate the value of your nonliquid assets, such as your house and cars.   Make an effort to be as precise as possible.  A broker will give you a range in which he thinks your house will sell.   Choose the low end of the range.   In theory, the value of an unexpired lease that you hold is an asset.   But since this is virtually impossible to convert to liquidity, I ignore it.  I also ignore house furnishings and furniture, stamp and coin collections, sports equipment, and jewelry.  The principal due on all loans, including mortgages, must be included as liabilities.


  Step 6:  Save

Saving is the capacity to forgo consumption.   Investing is using savings to create producer goods.   To invest, you must save.  Even when you invest the savings of others, you must first show you can handle money responsibly by saving.   The iron law of financial success is to retain a surplus of your earnings.   To accumulate capital, you must live beneath your means.   The time will come when you can buy furs and boats.  But, until you've built a working investment program, you should adopt a spartan lifestyle.   This will take discipline, but there's no other way.   Hard work and planning isn't enough.   You must also save.  By saving more than you spend, you start the process of converting income to capital.  From this dynamic springs all the great corporations and fortunes.  If you make ten dollars and spend nine, you're on your way.  "Money can beget money, and its offspring can beget more, and so on," Benjamin Franklin wrote.   "He that kills a breeding sow destroys all her offspring to the thousandth generation."   Save!   Our society revolves around easy credit and easy living, so it will be hard.   But still you must save until it hurts.   Save, though you suffer hunger and cold!   Save, though the heavens fall!   For by so doing, you'll forge the foundations upon which your future will be built.
Commit yourself to a specific figure or percentage of your monthly take-home pay.   Stick to that amount throughout the year.   Some firms will deduct some of your pay to buy savings bonds or company stock.
Before investing in real estate, you shuld save at least six month's income.   Even with no money down deals, your lawyer and insurer will still bill you.   Unexpected vacancies could cost you hundred of dollars, deferred maintenance thousands.   Without this cushion, such investments as real estate don't make sense because they'll put your capital at risk.   A classic mistake by real-etstate investors is to underestimate costs and overestimate rentals.   They often look at just the morgage payment and property taxes, forgetting such costly but necessary expenses as management, furnishings, repairs, utilities, replacement, and insurance.   In real-estate parlance, the investor has an alligator-- negative cash flow-- a rental property in which the expenses could gobble the property's owner.   The usual result-- foreclosure.


  Step 7:   Diversify Your Investments

All investments must be characterized by prudence, research, discipline, and diversification, and be judged on the basis of safety, liquidity, and yield-- in that order.
If all investments involved the same degree of risk and gave you about the same opportunity for reward, it would make little difference how and where you invested your money.  But, of course, different investments have sharply different risk/reward relationships.   In general, no-risk or low risk investments offer a small but guaranteed return, such as money deposited in an insured savings account.   Moving up the risk ladder, various types of bonds pay an interest rate that reflects in large meassure the level of risk they are thought to involve.   Similarly, the degree of risk is one factor affecting the beta or volatility of common-stock values.   You've a limitless range of alternatives.   It's axiomatic that what may be the best investment for you may not be the best--or even suitable-- for someone else. Most people aren't in the financial poosition to make any high-risk investments, no matter how high the possible rewards.   But others may want to consider the opportunities by increasing their returns by placing some portion of their capital in investments that involve larger but affordable risks.
No hard rules govern who should consider speculative investments and who shouldn't.   But there are some useful, time-proven guidelines.   These guidelines are best depicted in the form of an investment period.   Everyone, regardless of his or her financial status, should give first priority to foundation investments-- adequate insurance, savings earmarked for specific purposes, and sufficient liquid funds for family emergencies.   Such investments should involve a minimum of risk and should constitute the largest part of your overall portfolio.  For those who have adequate core investments, the second tier on the pyramid might best be termed growth investments.  Included in this category are such investments as good grade common stocks or investment real estate, which can appreciate and produce a reasonably prediictable income. These investments involve somewhat greater risks.   Common stocks can go down as well as up.   Real estate is subject to a variety of both physical and economic hazards and is often illiquid.   However, they generally offer a greater reward potential than lesser risk investments.
At this point, the answer to the question "Should I speculate?" becomes clear.  Until you have sufficient foundation investments to meet your family's needs and sufficient growth assets to accomplish your long-term financial goals, you must avoid speculative forays.  Never speculate with money you cannot afford to lose.  I won't dogmatically say that you should never trade hog belly futures. But you should have a clear appreciation of the risks of such speculative activities before you do so.
In creating wealth, we should consider that the counterpoint to diversification is concentration.  Once you've established your foundational investments, a valid tactic in achieving rapid wealth is to now focus your investments-- to put all your eggs in one basket but watch the basket like a hawk.   The returns are far greater (along with the risk), if you buy 10,000 shares of a single ten dollar stock then if you bought ten different stocks for a total of $100,000.  This, of course, presupposes that you have strong technical and fundamental grounds for buying that single stock and that you're prepared to take decisive action, no matter what the outcome.   See Elements of Trading for principles in speculation that came from my years of aggressive day trading.
I get angry when I hear folks promote their shortcut systems to wealth, which usually involves equal measures of flatulence and fraudulence.   Despite valiant efforts by consumer watchdogs, suckers continue to pour their savings down these ratholes, often in the name of evading taxes.  It seems that they would rather hand their money to a swindler than the government.   Those who lose so much money are our social elite-- doctors, lawyers, entertainers, and businessmen.   Perhaps because they're so smart in their careers, they despise first principles in investment.   They are so much in love with their plans and deals, they lose sight of the fundamentals:  Look before you leap.   Trust must be earned.   There's no free lunch.   You can call these aphorisms "bromides" or "cliches."   But what are cliches but distilled common sense-- which apparently isn't so common.
Here is some more common-sense to help you avoid getting stung by a bad investments:

  1.   Don't let yourself get rushed into anything.  Never sign anything hastily.   Few deals cannot wait until tomorrow.
  2.   Always know with whom you're doing business.
  3.   Beware of steals.   You cannot get something for nothing.
  4.   Don't listen to high-pressure sales talk.  We're most gullible when we are most happy.
  5.   Beware of promises of spectacular profits.
  6.   Be sure you understand the risks.
  7.   Don't buy on tips or rumors.
  8.   Get all the facts.
  9.   Tell the broker to put the information in writing and mail it to you.
 10.   If you don't understand what is going on, consult a person who does.

These rules of conduct have stood the test of time.   Every year, millions of dollars are swindled from people who fail to keep these principles in mind.   All these rules can be reduced to one rule: Buyer beware.
Don't let anyone manage your investments unless they understand precisely what you want and you understand precisely what they are doing.   These rules should prevent account churning or unauthorized transactions from clobbering your foundation investments.   Inside information, estoric financial jargon, and silver-tongued flattery are tools of the pin-striped crook.   Old-line, blue-chip brokerage houses do employ and encourage such people.  Greed, vanity, ignorance, laziness, sentimentality, impatience, and dishonesty are the investor's seven deadly sins.   If you find you've been cheated, ask yourself which one of those traits best describe you.

  Step 8:   Buy Income Property

Steps one through seven can be done at roughly the same time.   Step eight should be done only after you've done the previous steps.

The rules for success won't work unless you do.  Discipline, delayed gratification, and sweat are the engines of wealth.   To enjoy a better future, you must forgo the pleasure of the present.   This runs contrary to our society's pleasure ethic, but there's no alternative.  Although your eyes are on distant shores, you cannot lose sight of this shore.  It's easy to dream of some magical rose garden over the horizon while ignoring the blossoms that are blooming outside your window.  Despite your temporary poverty, life can still be vital, joyous, and full.
Psychologist Alfred Adler believed that the great motivating force behind all achievement is insecurity. In fact, most people of attainment lost a parent early in life through divorce or death.   Such a loss possibly breeds a sense of insecurity that drives him or her to pile up wealth as a buffer against further blows.  The prevalence of parental absence in the histories of tycoons was copnfirmed in a Small Business Administration study of 110 company founders:  "The picture that comes through the interviews is one of a lonely child, grubby first in tear-filled eyes, accepting the loss and facing a dangerous future." From such beginnings, it's not hard to see how such people were forced to develop independent judgment and self-reliance.   Having no one else to guide them, the looked within themselves for guidance.
Wealth means the farewell to dunners, lien servers, and repossessors.  It's the shortest, speediest route to self-esteem and security. But what you start to learn once you've reached your financial goals is that there is no security, save what you've got between your ears and in your heart.   Let's not confuse self-worth with net-worth.   Security ultimately comes from who you are, not what you have.
To succeed as an investor, you must form a winning team.   It might consist of your lawyer, accountant, brokers, and contractors.   The most important member of your team is your family.  It's both the goal toward which your efforts are focused and the mainspring behind those efforts.   Even if you don't buy income property, you should get your family involved in your finances.   They should know what you make, how you made it, and where it's going.  Money is the last taboo, a subject not to be whispered among the well-bred.  But none of us is born with money sense.   From you, your children will learn how to work, save, invest, negotiate, and consume.   There's nothing a banker or broker does that cannot be learned by any ten year old.   It's a mistake to shelter your kids from money considerations.  An early grasp of practical finance will give them an edge in our increasingly competitive and materialistic world.

Whatever your financial goals, you'll need the support of your spouse and children.   If you're getting a negative or lukewarm response from them, perhaps you should reconsider your intentions.   You must decide that your success must nurture your family.   To succeeed at anything, you must support your family and have the support of your family.   Any view that neglects the family is a jaded view.   You cannot succeed-- no matter what you accomplish-- if you lose your family.   "For what shall it profit a man, if he should gain the whole world, and lose his own soul?"   The greatest success is the success that nourishes your family.
These rules aren't meant to handcuff you into patterns of behavior that go against your interests.   Rather, they're meant to provide a framework within which you can make sound decisions.   All things being equal, these rules have proved their values.   Not just in my experience, but in the experiences of others from around the world and in the past.   As you get more experience as an investor, you'll know when its right to break these rules to your advantage.   Rules are just guideposts, showing you that well-trod path to financial security.   But you must walk that path.  "Knowing is not enough," said Goethe.   "We must apply.  Willing is not enough.   We must do."  And the choices and actions you'll make on life's journey will require flexibility, common sense, and courage.   Keep learning, keep striving, keep trading, keep buying and, in the words of the Psalmist, "the earth shall be yours and its fullness thereof."