The best way to get rich is to turn funny money into real assets. By turning funny money gains into real assets, you increase your chances of holding onto your gains. But what is funny money?
Funny money is money that is built upon far out assumptions that may never come true. Funny money is money you earn by just doing something you love. Sometimes people call funny money, lucky money. Funny money is also money made in highly speculative assets like Bitcoin and growth stocks that have no utility.
The equity you have in public or private stocks is considered funny money because it is intangible. One day its value may be up a lot. Another day its value may be crushed due to a slight earnings miss. Stock valuations are just want you see on a screen. Funny money investments have no utility.
By regularly converting some of your funny money into real assets, you help ensure your wealth will continue to grow for a longer period of time. Otherwise, it might just go POOF one day and disappear!
Stocks As Funny Money
One of the biggest funny money assets is equities. Equity valuation is based on future earnings projections that may or may not happen. While you wait, you receive zero utility from equities. Growth stocks, an investment favorite for younger investors, has been fantastic funny money.
The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable.
Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.
Then when things really started getting good again in 1999, the NASDAQ decided to collapse in the Spring of 2000. Such a shame to only experience one brilliant year of mega exuberance after college before the floor fell out.
Many people in finance lost their jobs. Then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months. It then lost about $40,000 in a couple weeks when B2B stocks and internet stocks started imploding.
I remember thinking: Where does all the money go? It's all funny money!
Paper millionaires who exercised their stock options early and didn't sell not only lost everything, they also owed huge tax bills as well. Remember, the government always wins in the end.
The Best Way To Get Rich
Most people start off investing with the simple goal of making more money with money. Eventually, your financial nut grows to the point where you start getting tired of the idea of just making money for money's sake.
Instead, you want your capital to produce enough passive income so you can enjoy life and stop having to think so much about money! With real assets that have utility and generate income, you will rest better in retirement.
You want to use your money for something good – mainly to live a better life. Money should be earmarked for specific purposes e.g. kid's tuition, early retirement, more free-time, charity, a home with panoramic ocean views, etc. Otherwise, there's no point investing.
When you make a profit on an investment and then use your profit to pay for a better life, you are double winning. Always be winning.
When a stock you are long goes from $10 to $100, you feel like a genius. Everybody is a genius in a bull market. Don't confuse brains with a bull market. Bear markets happen every so often, destroying years of progress if you are not properly diversified.
Don't Confuse Brains With A Bull Market
The trick is to not really believe you are a genius. Instead, believe that you are simply a financial engineer who carefully asset allocates his or her money in the most optimum way possible.
By developing a methodical habit of re-investing your savings into your preferred asset allocation model, chances are high you will have more winners than losers over the long-run. Your tailwinds are continued savings, inflation, and ever-rising demand.
Easy Come Easy Go
When I saw $40,000 of my paper profits disappear into thin air at the age of 23, I came up with a promise. That promise was to regularly turn funny money into something tangible. Funny money can also be called vaporware or any type of lucky break or windfall.
The only way I could make the tangible thing disappear would be to set it on fire or blow it up with a grenade. Even then, insurance may cover some of the damages.
Funny money is the medium by which one makes something from nothing. It is up to you to then turn that something from nothing into something tangible. If you don't turn the money money into a real asset, then at least use the profits to buy wonderful experiences.
Vaporware refers to companies who make nothing tangible, but who have hefty valuations due to high future growth expectations. Many vaporware companies are unprofitable. They are just expecting investor sentiment to continue buoying them along until they can stand on their own two feet.
Funny Money Still Disappears Today
In 1Q2020, the S&P 500 declined by 32% from its peak. One of my favorite stocks, Tesla, declined by over 60% from its peak. Now, the stock is up 10X during the middle of a pandemic. Then it declined by 50% in 2022! Absurd!
Tesla is valued based on earnings decades into the future. Whether the earnings materialize, momentum investors don't care. Note: I do have a $180,000 position in Tesla at the time of this update. However, I converted $50,000 of shares into a home remodel.
These tech gains are considered funny money because investors are predicting the most optimistic earnings assumptions imaginable. I'm getting e-mails from strangers left and right asking me whether they should buy these big winners now.
Maybe the market is right. Maybe everything will quickly go back to the way things were before the pandemic. Funny money companies will sell more widgets than ever before!
Or maybe these funny money companies will lose their massive gains as the economy relapses. Sitting here in San Francisco, it sure felt like one surreal bubble after the NASDAQ went up 42% in 2020 and +20% in 2021.
So sad private tech company valuations and tech stocks ended up imploding in 2022.
Funny Money Is Back Thanks To AI
Thankfully, funny money is clawing its way back in 2023 thanks to artificial intelligence mania.
Personally, over the next three years, I'm going to build ~$500,000 worth of exposure to private funds that invest in artificial intelligence. I know investing in AI is funny money, but I figure, I want to ride the wave if AI becomes life-changing for billions. If it does, in 20 years, I should make a healthy return. In addition, my kids won't bother me for not investing in AI.
If you want to invest in private growth companies, check out the Innovation Fund. Roughly 35% of its fund currently invested in AI companies such as Databricks. Here's also an hour-long conversation I had with Ben Miller about AI, private growth companies, and the future.
Cryptocurrency And Regional Bank Funny Money
The collapse of FTX, the formerly second-largest cryptocurrency exchange in 48-hours is an example of vaporware funny money. FTX was once worth over $30 billion. It's founder, Sam Bankman-Fried was once worth over $20 billion. Then FTX and SBF's net worth collapse to a negative value in 48 hours. The sheer amount of wealth lost so quickly is amazing.
If only Sam Bankman-Fried converted some of his wealth into tangible assets. But even if he did, he might face more serious allegations from the SEC.
Then in 2023, regional banks such as Silicon Valley Bank and First Republic Bank collapsed. You would think these well-capitalized banks with long histories would withstand the test of time. But due to ill-timed investments in long-dated Treasury bonds, these banks lost money and clients withdrew their deposits in a hurry. Equity shareholders got wiped out as a result.
Nobody knows the future, which is why regularly converting funny money into real assets is so important. The last thing you want to do is give up all your gains and then some after such a strong rebound. So many individual stocks such as Peloton, Zillow, and a bunch more have round-tripped since the pandemic began.
Real Assets To Buy With Funny Money
The best way to get rich is to turn your funny money into a real asset that continues to provide value. Not only does the real asset provide utility, a real asset can also generate valuable income.
The value of income has gone way up becomes interest rates have come way down during the pandemic. As a result, these income-producing assets are also much more valuable.
Here are some of my favorite real assets.
1) Real Estate
Real estate is my favorite asset class to build wealth for most people. It is easier to understand, tangible, provides shelter, and can generate income.
The people who got rich after the 2000 dotcom bomb all took some profits and bought real estate. For over 20 years, these people have not only enjoyed their homes, but they have also seen their real estate values go up.
Property is the most logical real asset to buy with funny money when you first start out. Unless the Bank Of Mom And Dad buys a property for you out of school, you are likely renting. Your goal should be to get neutral real estate by owning property as soon as you can afford to. If you have funny money gains, then buying real estate should be your top choice.
I do believe the best time to buy property is when you can afford it. Once you've bought your first property, you can consider investing in other income generating properties.
2) Precious Metals
Gold and silver can grow in value and act as a hedge against a decline in the U.S. Dollar. Given the Federal Government and the Federal Reserve are providing $3+ trillion in stimulus in 2020 and probably more in 2021, there is a fear that the U.S. Dollar will decline in value. After all, the more there is of something, the less valuable it is.
Unfortunately, precious metals provide no tangible value. They don't produce any income either. Precious metals are only fun to own if you have precious metal jewelry or fine watches.
We can laugh at the people buying rose gold Patek Philippes and Audemar Piguets over the decades. But they are seriously laughing at us now because these watches have soared in value. That said, luxury watches are finally fading in price post pandemic. Time to go watch shopping again!
The below chart shows that Gold (yellow) started outperforming stocks and silver after 2007 when the Federal Reserve started flooding the system with cash. Silver (gray) has unfortunately been a dog since December 2012. But let's be frank, silver isn't really that precious!
3) Valuables & Collectibles
Classic cars, coins, and stamps have all outperformed the MSCI World Index over the past 10 years according to The Economist's chart below. The prices for Van Goghs, Warhols, and Vermeers have done well thanks to fixed supply and a massive creation of the newly rich from countries such as China.
Once you buy your mega mansion, you've got to decorate the walls. Besides insurance, there's little maintenance costs for fine art, just the initial frame, setting, and security details. When you can visibly enjoy your investment everyday and make money from it, what a joy.
Not buying fine art is one of my biggest regrets because I thought I couldn't afford it. I was naive to think that buying fine art meant just buying an original. The reality is that the entire chain of fine art from originals to third edition prints have rose in value.
The two things I collect are ancient Chinese coins and stamps. But I collect coins and stamps because I enjoy them. I love to flip through my collection and attend coin and stamp fairs when I have time. There's just something about owning a piece of memorabilia that's so fascinating.
As China, India, and other emerging superpowers open up, there will be even more wealth chasing precious metals and valuables.
Another real asset to buy is rare books with autographs. As a Wall Street Journal bestselling author of Buy This, Not That, my in-person signing events got eliminated when my book came out in 2022. I didn't want to do in-person events out of fear of catching COVID and spreading it to my two young children.
Think about how many fewer rare books are there without signatures thanks to over two years of the pandemic. If there wasn't the pandemic, I would have easily signed over 500 books. But now, there are less than 60 signed copies of my first edition book in the world.
4) A Cash Cow Business
Owning a cash cow business not only generates an additional income stream, it also allows you to deduct your ongoing expenses. Relevant travel, lodging, transportation, electronic equipment, and meals can all be expensed. Your tax bill gets reduced as a result.
Of course not all businesses are created equal, and there is plenty of risk in buying a business or building a business. Always do your due diligence. I'm currently scooping up some lovely businesses to bolster my online real estate portfolio.
When buying a business think about potential for margin expansion, sustainability of earnings, defensibility of the business model, and payback period to name a few.
I believe everybody should start a website today. In my biased view, running an internet business is the best business in the world due to high margins, low capital expenditure, a huge potential demand curve, scaleability, defensibility, and good flexibility.
In a world where an online business cannot be shut down due to a pandemic, the value of online businesses have gone way up. I would convert some of your funny money into buying online real estate.
Can't Get Rich Depending On Luck Alone
Getting rich is nice. Most people with extraordinary wealth got very lucky in their lives. However, it is not wise to depend on luck alone. The best way to get rich is to be very diligent about your finances. Don't take your luck for granted.
How many times are you really going to inherit $500,000 from your Aunt Sally? Maybe once. Probably never.
How many times are you going to make large year-end bonuses until you burn out? Maybe only a handful of times.
How many times are you going to buy that lucky multi-bagger stock? Never if you're just investing in passive index funds. Hence, you should probably allocate a portion of your investable assets into individual stocks.
How long will you enjoy an incredible bull market before there's another violent correction? Based on my investing experience, these “once in a lifetime events” seem to happen every 5-10 years.
Your Luck Will Eventually Run Out
If you've ever gone to a casino and gambled, you've likely experienced two things:
1) The stupidity of making a lot and then losing it all.
2) The absolute joy of walking away with a profit and turning the funny money into something that lasts.
We can't get lucky all the time. Even for those of us who work obscenely hard to try and create our own luck, our luck will run out. Therefore, when we get extremely lucky with our investments, we must practice converting some of our gains into hard assets.
FTX's luck ran out in a very big way with the collapse of his exchange. So did the fortune of many tech founders, employees, and investors during the 2022 bear market. Me being one of them.
How I Plan To Stay Rich
Although it took thousands of hours to create Financial Samurai, the revenue it generates is considered funny money. When you can make money doing something you love, the income doesn't feel real.
Due to my beliefs, I'm regularly using my online revenue to buy as many passive income investments as possible. The #1 real asset on my list is pandemic real estate. I'd like to further upgrade our living arrangements if we're going to be stuck here for a while. Then maybe I buy an original masterpiece by some unknown artist to decorate my walls.
One day, I'd like to look back and say grandad's real estate empire was all paid for by online business funny money. Just in case I run my online business into the ground, at least my grandkids have somewhere to live.
I'm buying rental properties for capital appreciation and rental income appreciation. Property prices are down due to 17-year high mortgage rates and low affordability. However, I think real estate will rebound in the future.
Big city real estate will come back, which is why I'm also actively looking at commercial office properties right now. Valuations have gotten crushed, but new firms are moving back in. OpenAI, for example, is leasing 485,000 square feet worth of office space in downtown San Francisco.
Buying Sunbelt / Heartland Real Estate
I'm also diversifying my real estate holdings in various real estate crowdfunding deals across the country given valuations are cheaper in the heartland. Further, there are solid demographic trends towards 18-hour cities, which is why CrowdStreet has an appealing inventory of deals.
For a more diversified way of investing in real estate, check out Fundrise. Fundrise has over 400,000 investors and manages over $3.5 billion. It creates diversified funds for investors to gain exposure. The investment minimum is just $10, so practically anybody can start investing. For most people investing in a diversified fund is the way to go.
I've personally invested $953,000 in private real estate in the Sunbelt / Heartland. I believe in the long-term demographic shift towards lower cost areas of the country to save money. Technology is only going to get better and work-from-home is now ubiquitous.
Hold On To Your Funny Money Gains
As far as I'm concerned, all the money we've recently made during the pandemic is funny money. Very few of us would have expected to make so much with so much of the economy shut down, but we have.
Therefore, the best way to get or stay rich is to convert funny money into something real. The second best way to get rich is to not be delusional.
If you start thinking too highly of your investing acumen, you may take excess risk and blow yourself up. The third best way to get rich is to never take your luck for granted. Always try to recreate more luck.
Real assets are a great way of diversifying your good fortune into something tangible. If you can enjoy your real assets while they also appreciate in value, all the better.
Manage Your Finances In One Place
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There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
The Best Way To Get Rich: Turn Funny Money Into Real Assets is a Financial Samurai original post. All rights reserved. Sign up for my free newsletter and subscribe to my weekly podcast to build more wealth.