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The Hierarchy Of Wealth Unpacked

TWS FF 1 | Hierarchy Of Wealth

 

This is a replay of the presentation Patrick gave at 2018 Cash Flow Wealth Summit about the hierarchy of wealth. When you look at the hierarchy of wealth, there is always a starting place which is the foundation. There is a process that you go through step by step. Patrick ranks these different levels or categorizations of wealth based on the degree of control as well as risk. Patrick created The Hierarchy of Wealth to help him as well as the clients that he works within the personal advising space to prioritize investments, financial decisions, and opportunities. Learn this simple model so that you can position certain assets in different places as well as their priority and sequence.

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The Hierarchy Of Wealth Unpacked

It is an honor to be able to talk about financial strategy with you in the 2019 Financial Fridays season. This is going to be the first episode. Instead of me going into a diatribe of my financial philosophy, I’m going to replay the presentation I gave at the 2018 Cash Flow Wealth Summit. Some of you are familiar with it and some of you may not be familiar with it but for more information, you can go to CashFlowWealthSummit.com. We also have a podcast, the Cash Flow Wealth Show, but I’m going to just introduce the topic that I spoke of in the Cash Flow Summit relating to my financial philosophy. For those of you who have listened to The Wealth Standard for a long time, you probably came to an idea of what my philosophy is in general. When it comes to my financial philosophy, I believe it’s very similar if not the same.

TWS FF 1 | Hierarchy Of Wealth

Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream

The presentation is one way in which I like to explain it. I thought this out quite a bit for the book that I came out with, Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream, and it’s what’s called the hierarchy of wealth. The inspiration behind it was the nature of an investment and how investment is evaluated by an individual. I don’t think it’s evaluated in the exact same way. I look at the Maslow’s Hierarchy of Needs as well as the framework in which I built the hierarchy of wealth. Maslow has a hierarchy or a process by which humans meet their needs starting with physiological ending with self-actualization. There’s a number of them in between, but there is a process where you go step-by-step. You don’t necessarily skip steps. I look at the hierarchy of wealth and I believe that there is a starting place which is the foundation.

I ranked these different levels of wealth or categorizations of wealth based on the degree of control as well as risk. There’s a different way of looking at something depending on the person looking at it and that’s where the control on risks come into play. Looking at the hierarchy of wealth, it starts with a foundation of tier one. That tier one has certain characteristics of wealth and a certain percentage of your overall financial strategies that should be in that foundation. Then there’s tier two where you progress to which has a good degree of control and perhaps slightly more risk associated with it. Tier three, which has less control and more risks. Finally, tier four which has very little control, if any control, and very high risk. Looking at the financial strategies, the typical financial plan, it’s an inverted pyramid. People start with the riskiest whether it’s mutual funds or stock market-based investing where they don’t have much control and also take on a tremendous amount of risk as it relates to the performance of their overall strategy. I believe that that is the opposite way to look at it.

You are going to learn quite a bit in this presentation but throughout the Financial Fridays, I’m going to be talking with who I consider experts. Some I know very well and some I don’t know very well. The nature of the questioning is around the financial strategy that is in their business. These are individuals who offer their services to investors and you’re going to see that I take two angles. The first angle is the actual service and product and what they do. What I believe why a business succeeds or fails is the other angle that I take, which is around their business operations. It’s an angle that most people don’t know how to take. It’s the most important because financial failures and investment failures come from the operations and not the product itself. A good example of that is a Wall Street model where they have an incredible business and operational system and a lackluster, poor product that has not performed. I look at why they’ve been so successful. It’s not because of the product and it’s very similar to the McDonald’s and the quality of their hamburger. They’re so successful because of their operations. It’s not because of the quality of their food.

If you look at alternative investments, I believe there are gems in the alternative space whether it’s a rental property or other alternative investments. However, there’s a tremendous risk and that risk may not always be the actual product itself and the offering of the investment. It’s the actual people behind it and their operational structure, their background, and their experience. That tells you a lot about what they will do when it comes to challenges in the economy or challenges with their business, which is an inevitability. I hope you enjoy this first segment of understanding the hierarchy of wealth so that you can figure out the ways in which you position where your wealth is, where your money is allocated, where you focus your attention and your time and what you decide as a pursuit of expertise when it comes to understanding certain investment categories. I hope you enjoy the rest of the season where we’re going to be talking on Fridays about financial strategy.

I wanted to acknowledge you for being here and the time you have been willing to invest in listening to what my expertise is. This is what I do outside of being the co-host of the Summit as well as the co-founder. It’s something I’ve dedicated my life to and it does mean a lot to me that you are investing time and you’re investing attention and I don’t take that lightly. Thank you for doing the things that I believe are necessary to accomplishing financial freedom and achieving your goals. Thank you for being here.

My topic is called the hierarchy of wealth. The hierarchy of wealth is something that I created to help me, as well as the clients that I work within the personal advising space, to prioritize investments, financial decisions and opportunities. Priorities are very important because there are so many choices. We’re adding to these choices and adding to the opportunities just based on what you’re learning at the Summit, but where do those opportunities fall in your specific strategy and your specific path to those end goals that you’re seeking? I believe that the hierarchy of wealth is a simple model so that you can position certain assets in different places as well as their priority and in sequence. This is something that I use personally and it’s helped me personally to stay focused. Before I get into the meat of the presentation, I wanted to introduce myself to those of you who may not know who I am.

Priorities are very important because there are so many choices. Click To Tweet

I am the author of the book Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream. It’s something that took me a couple of years to write and it’s been well-received. It has a lot of my stories and my experiences over the years and also a lot of details in regard to the financial strategies that my firm specializes in. I’m also the host of The Wealth Standard Podcast, which has been out there for years. It started about 2007. Something I love doing is interview a lot of people and talk about things that are of interest to me. The topics range anything from financial strategy to financial products to economic issues and theories to investing and business. I do get into a lot of personal development topics as well. If you haven’t listened to the podcast, I would encourage you to do so. It means a lot to me to support me and it’s something I love doing and I’m passionate about. This is getting into my expertise and my firm. I was honored by Investopedia as one of the Top 100 Most Influential Financial Advisors. It comes down to the influence that we’ve had in the marketplace by putting out what our financial strategies are and how they are benefiting the lives of our clients. I do that through my firm, which is Paradigm Life.

In Paradigm Life, I am the President and CEO. I also still do some personal advising, but we specialize in certain financial strategies that help people achieve financial independence. In addition to that, I’m active on social media. I’m relatively active on social media and I would love to connect with you out there. I share a lot of information and other resources that you may find valuable. Let’s get into the hierarchy of wealth. The hierarchy is something that didn’t necessarily just spawn one morning. It’s a conglomeration of the experiences that I’ve had with individuals and their unique financial situations. We do business with people all over the country and Canada and even outside of the United States. I have had the tremendous privilege to see where people are in their finances, what they’re trying to do, what are some of their challenges, what are some of the things that keep them up at night.

Maslow’s Hierarchy Of Needs

I’ve been able to position certain strategies to help them. In addition to that, I’ve experienced all of the investment opportunities, ideas, and innovations that are out there. It gets confusing sometimes and I get excited about certain things and become unfocused on others, so the hierarchy of wealth is something that helps me. It’s a simple model where you can position and prioritize your wealth building by essentially adding a label to the different opportunities that you have. The model and the pyramid and the word hierarchy was originated from Abraham Maslow and I was participating in a business event and the training was around the Maslow’s Hierarchy of Needs. As I was learning about that psychological model that outlines our instinctive behaviors to pursue the certain thing that’s called human needs, I made a connection between that and finance. What I’ll do first is just explain what the Hierarchy of Needs is for those of you who are unfamiliar with it. Abraham Maslow was a very famous psychologist and this is a very famous model that has been used in a number of publications and a number of contexts. The model essentially illustrates the sequence of needs that we have as human beings and also the order in which we seek those needs.

The first is the foundational level of the pyramid, which is physiological. The physiological is food, shelter and clothing. Ultimately, we seek those instinctively before we seek anything else. Once we have established food, shelter and clothing, we seek to establish safety. That could be the safety of our community, our neighborhood, the country that we live in, the state that we live in. It’s seeking a safe environment. We naturally seek that once we have established our physiological needs. As you’ve established physiological and safety, then once those two are established, the next need that we seek are relationships. Those relationships could be friendships, family or community but also our intimate relationship with a partner. That is something that comes after our basic foundational physiological needs are met and our safety needs are met. We pursue those relationships. Once those three sets of needs are established, the next thing we seek is self-esteem. Our identity, our meaning in the world and our self-concept. There are a number of ways to explain it, but we seek to separate ourselves from others. We seek to magnify who we are and, in our uniqueness, compare to others.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: Financial education and having a financial statement are foundational elements upon which rest all the other investments that you have as well as financial decisions.

 

The Hierarchy Of Wealth

Once you’ve established all of these others, physiological, safety, relationships, self-esteem, you pursue what Maslow called self-actualization. Self-actualization is pursuing something outside of you. It’s a common altruistic idea where you’re seeking not for personal gain but you’re seeking to provide ultimate value for people. What does this have to do with anything? For me, it is a very famous model that makes sense. I believe as human beings, we like models to create a context for us which we organize, help us understand, give us direction or simplify. What I did is I connect the dots between the Hierarchy of Needs and how to position investments and financial decisions and that’s where we created the hierarchy of wealth. This correlation is important for you to understand and I’ll try to make it as simple as possible. The first arrow going down is control and influence. I’d also say it corresponds to the nature of certainty. If you go to the red side, it is uncertainty and then risks, the probability of loss. The idea is on tier one, tier two, tier there and tier four. These are different types of investment decisions and investments themselves. Financial decision could be considered here.

The bottom tier is where you have the highest degree of certainty and it’s because of an element that you possess or control and influence. The higher up you go, the more risk you take on because of the uncertainty. It’s the categorization of assets. Tier one is your financial foundation. The easy way to explain that is your reserves, your sleep well at night account, the money that’s set aside when things don’t go the way in which you had planned. I would say financial education is a big part of tier one. Insurance, insuring against those events that you may not be able to adequately prepare for. Organization skills, your business and how your business is set up and your overall financial strategy. Having a financial statement is also part of tier one. These are these foundational elements upon which rest all the other investments that you have as well as financial decisions.

Tier two is investments where you have more control and influence. In tier two, you can identify yourself as an asset or something that produces cashflow. I believe we are our number one asset because there is the greatest rate of return based on the money that we put into ourselves whether it’s a financial education or professional education or just maximizing our ability to create value. I’d also say that there are some other investments that would fit in here that have collateral that produces cashflow where you have control and influence. I’m trying to get the general concepts across. Tier three are investments that you have less control over. It’s money that you will give to another person. When you do give money to another person, you have a level of education where you can ask the right questions and you understand what the money is doing. There is cashflow associated with that investment. That investment is where you’re able to ask the right questions, do the right due diligence, understand the mechanics of what is going on and potentially also have collateral associated with it. It’s an actual tangible asset of the underlying investment and the money that you’re putting in.

Tier three is not where you have the ultimate control and influence, but it’s where there are investments that you understand, and you hand your money over to somebody else to make a return. Tier four are assets that you have the least control and influence over and it’s where the highest risks exist. The education that you possess is not adequate to understand the underlying investment. Tier four is where most people have their money. If you were to flip the pyramid around, the typical financial mindset and typical financial plan are to start with your mutual funds and your 401(k) assets that are in something where you just hand your money over to a money manager or an investment bank. You trust that they’re competent enough to make a return for you and give you the end result that you’re looking for way down the road. I don’t think that’s realistic. I think that’s irresponsible. If you look at establishing foundation and building on that foundation, that is how I look at wealth-building. That’s how I have looked at success based on the numerous experiences that I’ve had with individuals and their personal finances.

It's important to establish your foundation first which creates an abundant mindset that allows you to make better decisions. Click To Tweet

The Hierarchy Of Wealth Unpacked

It is almost the complete opposite of how we as a society are taught to manage our money and what we’re supposed to do with our money and how to invest. That’s the basics of the hierarchy. I’m going to dive a little bit deeper into the story of how this was created. There was an event back in 2013 that touched me deeply and it helped me start to put some of these elements together. It was an investment conference where I was speaking and a number of Rich Dad’s advisors were speaking. Robert Kiyosaki is the author of Rich Dad Poor Dad. He spoke on our Summit and his wife has also spoken a few times, Kim Kiyosaki. The Rich Dad’s advisors are specialists in a particular field that Robert Kiyosaki has chosen to have as his personal advisors as well as those who have written books underneath his brand. I get Andy Tanner and Tom Wheelwright, the other Cofounders of the Summit. Andy Tanner is one of the co-hosts. they are Rich Dad’s advisors in particular areas and very intelligent and very giving people.

I’ve learned a tremendous amount from all of them but this particular time in 2013 was very simple but I had not connected the dots. This is what I was taught by Ken McElroy, Josh and Lisa Lannon. It came down to a continuum or an order of focus to create the most amount of wealth. It started with producing money as a business. It’s where your business is going to produce the most amount of wealth and cashflow. I would also add to this, it’s not just your business. If you don’t have a business, it doesn’t mean that it’s not going to produce cashflow. It’s the business of you. It’s your ability to educate yourself, figure out ways to be more valuable to others and in return, receive compensation for that value. The idea is to produce as much of this cashflow as possible. Once you’re producing that cashflow, it’s setting aside a certain percentage outside of your lifestyle to capitalize on investment.

If you haven’t read the book Rich Dad Poor Dad, the definition of an asset is something that puts money in your pocket. An asset according to that definition is also producing cashflow. The idea is to build your cashflow to the point where it’s passive. There’s not much time or effort on your part which allows you the mental wherewithal to produce more money as a business or as an individual. Here is where there are infinite possibilities associated with you learning something and being a value to other people. The financial decisions I make and the investments that I position is to be an infrastructure for me to figure out a way to be the most valuable to others. You taking on this mindset, you first have to consider yourself your most valuable asset because you are. Once you have established that belief or that idea, now it’s figuring out ways to educate your assets so that you are more valuable to other people. It’s a model or a continuum that’s simple but it connected so many dots for me.

It doesn’t matter how big your business is or no business. If you’re an established business owner or you’re just out of college in your entry-level job, it doesn’t matter. When you identify yourself as an asset, you figure out ways to maximize it. It requires education but also requires leverage. It requires insights by others, coaching, being in the right environments and these right social groups. There are so many different ways in which you can figure out how to take who you are and be a value to somebody else and have a financial remuneration for that exchange. There’s no barrier to entry to understand yourself as an asset. The equation that you do want to understand is here you are and if you improve your education and education I would say, the definition is to improve your capacity to be valuable to somebody else. Increasing education increases your value and an increase in value gives you more money. There are infinite possibilities there. There’s something you can always work on. As you establish passive cashflow, that enables more of this. Hopefully, I’ve established that point.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: Start to look for opportunities to increase your cashflow to make more money.

 

I’m going to expand off of that continuum. You have your specific business or the business of you and you produce value, you get money in return and then you make an investment. This is where it comes down to the hierarchy of wealth where you are able to categorize the priority of what you established first, second, third, and fourth. I’m going to break down some of the assets and give you some examples. First, as you are producing cashflow and that you are investing that cashflow, tier one is what gets filled up first. Tier one is assets but they’re also financial decisions. Some of these decisions may not be an investment that is a stereotypical investment or something that puts money in your pocket. It might be an organization. It might be a financial team. Whatever dollar amount allows you to sleep well at night and not have to worry about losing the primary income and having six or twelve months to figure it out, that is some of the most valuable money ever. Getting rid of bad debt, if that’s the situation that you’re in, is a good decision in tier one. Your financial team is important to establish. Asset protection falls there as well as your business structure.

There are numbers of other things that relate to the specific situation of the individual, but this is your foundation. This is a foundation that may not produce any return, but it is a foundation that will ensure that wherever tier two, tier three or tier four investment goes, you are protected. Whereas I see most people when one of these goes wrong, it crashes the entire house of cards. It’s important to establish your foundation first which creates an abundant mindset that allows you to make better decisions to focus more on where your strengths are and how you can use those strengths to produce massive value for others. Establishing that foundation is paramount. This is where my team and I and our expertise falls. We feel and have used it over the test of time in thousands of clients that we’ve worked with, but there is one fundamental tool that should be in your tier one arsenal. It is a specific type of life insurance policy and it is a life insurance policy that isn’t your stereotypical life insurance. It’s a life insurance policy that when you design it, it acts as a growth vehicle that has a liquid cash value as well as a number of other benefits.

As we’re talking about the foundational asset, as you are producing cashflow and you’re filling up your bucket as far as reserves are concerned, we encourage that you systematically save and put aside a certain percentage of your income. That percentage first builds whatever your reserve requirement is in six to twelve months, but then beyond that, is where you start to get into other investments. Even in the six to twelve months of reserves, the account that we encourage which we have defined as the wealth maximization account, which is this specific type of life insurance policy designed in a specific way, meets the criteria of this tier one asset. It’s something that you have control and influence over but it’s also something that you can’t lose. There is a contractual guarantee backed by some of the strongest institutions in the world, but you have a higher amount of interest that’s earned on your reserves. You have a level of protection as well, but you also have the ability to take a loan against the growing value in this account. That is important when it comes to making investments in tier two, tier three and tier four.

The wealth maximization account is something that we designed based on what your situation is. We designed it first to establish the reserves that help you sleep better at night. Once that is established, the money beyond that will become your opportunity fund. The opportunity fund or opportunity amount is what you identify as the amount of money to invest and that investment is going to be in tier two. I’m going to get into something that may seem somewhat complex. The idea of establishing your reserves is paramount than getting into money above and beyond that reserve amount as your opportunity fund. At that point, as you start to acquire tier two investments, it also produces cashflow. As you use the loan provision that is afforded to you by the insurance company, the cashflow from that asset is paying back the loan that was taken to capitalize it. It will keep you disciplined to continually save and be disciplined to payback and then capitalize more investments. Every time you make a loan payment, that money is available to make another investment.

Ask questions based on your expertise or education around an investment instead of blindly giving money to people. Click To Tweet

As you establish your reserve amount, the six to twelve months of your comfortable living expenses and you have money that is available that’s above and beyond that which we are calling the opportunity fund, it’s when you start to look for opportunities to increase your cashflow to make more money. This might be first as far as tier two is concerned. These could be personal development type of investments and that’s basically investing in yourself. It could be a certification for the career that you’re in or the profession that you’re in. It could be learning leadership and management skills. It could be to invest in a paid mastermind group. Kyle Wilson, that’s one of his primary businesses is establishing these high-level paid mastermind groups in different parts of the country. These are groups of people that get together. They’re in different professions, different ages, different goals, and different priorities, but they get together and exchange ideas, brainstorm and mastermind so that you can get insight. Have your own board of directors in a sense to gain insight into what your biggest and best opportunities are. If you’re interested in that, pay attention to Kyle.

These are investments that you control and have influence over. It may not be a personal development course. Maybe it is purchasing a property, a property that you hold title to, a property that you control, or a property that you have influence over. If you are a business owner, it also could be to capitalize on hiring somebody or a marketing strategy or ways in which you can improve the cashflow of the business. Tier two assets are vast, but the idea is that as you acquire those, you acquire them by using your opportunity fund which is a loan provided by the insurance company. Once you capitalize it, the discipline over whether that investment is working or not is the cashflow that it’s producing. The loan payback acts as a disciplined way to ensure that it was a worthwhile investment.

I’ve personally analyzed hundreds of different types of investments ranging from real estate investments to commodity type of investments to training investments. I would never say that I’ve heard them all, but I’ve heard about lots of different types of investments. This is where I would say it’s important to realize that it’s all subjective. These aren’t just absolute rules because you may know a certain field better than another field. That may for you be a tier three or tier two investment. For me, it might be tier four investment because I don’t have that background or education. As you’re positioning where your investment opportunities are, a great thing to ask yourself is how much you know about the mechanics of an investment? How much control do you have? How much influence do you have? What’s the liquidity?

If you don’t some of those variables, then it kicks into tier three and you are now asking questions based on your expertise or education around that investment instead of blindly giving money to people. That’s what I would consider a tier four investment. The idea here is to have a way in which you categorize your investments. From a percentage of wealth standpoint, I have broken them down into different ranges as far as how much of your total wealth should be in tier one, tier two, tier three, and tier four. Here are the ranges that I’ve found to be the most successful. Your foundation which is your tier one investment is 30% to 50% of your wealth. Tier two is 30% to 40% of your wealth. Tier three is 10% to 30% and then tier four, I put 0% to 5%. I believe that a focus on just the first three can get you to the point where you have achieved financial freedom in a short period of time, but it’s establishing a foundation and going in the right sequence.

TWS FF 1 | Hierarchy Of Wealth

Hierarchy Of Wealth: The hierarchy of wealth is a great way to set the foundation of a context that could give you the direction of what to focus on first.

 

As this whole ecosystem is working for you. The idea is to focus the financial returns from the investment as a means and as a medium to discover what is truly the best thing that you can do with your time to create value for other people? I would consider that as an infinite type of investment that you should always be focused on. What I wanted to do is to teach you about this in the context of a story. It’s a client that I believe represents the story very well. It’s also a client that is stereotypical of those that we work with and how the concept of the hierarchy of wealth has helped them to be more organized, have more certainty and have more direction associated with their finance.

Paradigm Life

I’d want you to meet John and how we do business at Paradigm Life which is virtually where we don’t meet with people face-to-face in person. We do meet with some, but 95% plus are those that we connect with and do business with virtually. We meet through a video conference and John was one of these relationships. I met John years ago and he was one of those driven guys that were excited about life. Similar to my four-year-old who has an on switch and he has an off switch. He’s on switch is all out all the time and that was like John. He was excited. He was motivated, and he was driven. He was excited about life. At the time, he was in a high paying government job which was difficult for him to leave especially with the carat of a pension that he had now. It was in California but regardless he had put a lot of time into this profession and he wanted to stick it out for a certain period of time where he became invested in his pension.

He had money in the stock market. He had a 401(k) on his pension but he discovered this entrepreneurial drive inside of himself and started to pursue those types of investments. He had a few real estate investments, a couple of single-family homes. He also had a handful of individual mobile homes. His master plan was to leave this particular municipality once he achieved his tenure or his vesting which is twenty years. His dream was to open a hospice franchise for a variety of reasons. I knew a lot of this before I even met John because of the team that I work in and how they do some discovery to see if our services are the right fit for people. I was excited to meet him because of how driven he was and the interactions that took place before I was able to meet with him.

How I usually start my meetings is by asking a very simple question which is, what keeps them up at night? I asked John this question and that’s when he unloaded. He described this drive within him and this frustration that his job was creating to pursue what he wanted to do. He talked about his investment experience and also talked about some of the investment losses that he had. He also went into his time is spread thin where he’s not able to focus because he’s going to conferences and he’s going to events. He had a financial coaching thing he was doing. He had his job and he had his family as well. He started to drop balls and he made some bad decisions with some investments. It started to run up credit cards. He was using credit cards to purchase the mobile homes and the thought that he would be able to get enough cashflow to pay them off before the 0% phase was done which didn’t happen.

How I usually start my meetings is by asking a very simple question which is, what keeps them up at night? Click To Tweet

He had his finances all over the place and everything was disorganized. It was keeping him up at night and the level of uncertainty that he had was at an all-time high. As I took his story and then took some of the concerns and challenges that he was facing, I sympathize with him. I had seen those similar financial situations with other people that I’ve met with. This is where I started to explain to him how the hierarchy of wealth worked. It was a model that was so simple that we started to talk about all the different things that he was involved with and it started to place him in those different tiers. We found out that most of what he was doing was in tier three and tier four and it was putting his entire life in jeopardy. The first milestone was to figure out a way with some of his budgeting and cashflow to set aside 10% of what he was currently making into a wealth maximization account. He committed to me to not make any other investments or made investments decisions until he had established his sleep well at night account. We wanted to achieve twelve months of his expenses because it wasn’t just him sleeping well at night, but it was his spouse who was also not sleeping very well at night.

The first order of business was to set aside a systematic way in which John could save into a wealth maximization account. We started to establish reserves at the same time we were paying off some of his high-interest credit card debt which required selling a couple of his properties. One was sold at a loss, but we felt that this was something that made sense because of the high interest that he was paying. Also, the fact that two of the properties were not performing at what he was anticipating. Those are the first couple of priorities. The fourth priority and milestone was to start to establish in his opportunity fund the down payment for that first franchise, but something else occurred during this whole process. It was the fact that with this franchise that he wanted to open up. There was a team involved, a team of experienced nurses and licensed people which he was not. I can’t remember what the minimum number of people was, but it was just under a dozen and John hadn’t had much leadership or management experience. This was one of those overlooked things. Because he didn’t have that background or experience, he was now going to have to rely on those skills which he didn’t have to operate a franchise.

We came to the conclusion that this was something that he should not invest in until that experience or that understanding of leadership and management was in place. The plan was his idea. He found some opportunities within the municipality to do a lateral move which would have put in jeopardy anything that he had established as far as benefits were concerned. It was being over first and the second-year employees to the municipality. It wasn’t a two-year plan. It ended up being a little bit longer than three years, but he established an idea of how to run a team. He started to study management. He started to study leadership. He felt he was adequate at being able to provide a good office environment, a good team and business environment to make this franchise work. That mindset was paramount, and everything changed. His priorities changed, and some other opportunities presented themselves. The idea behind the hierarchy of wealth that it helped to create context and focus of what he had and how that related to what his goals and the things that he wanted to achieve with his life were.

It was an amazing experience for me and for him as well. As I look at John’s situation, your situation and the countless others that I’ve been fortunate to meet with, this is a model that is subjective. It is based on your situation which could be having a lot of money but still not being able to sleep well at night to having no money. The hierarchy of wealth is a great way to set the foundation of a context that could give you the direction of what to focus on first. This is something that I’d love to talk about. I love finance and I love seeing people succeed. I’ve seen a lot of success over the course of my career and it’s something that is inspiring to me personally, but I also see a lot of failures. That failure is preventable and at the same time, there are only so many things that we know. I’ve failed a lot at investing and business as well in the past and I’ve discovered ways in which I can take those lessons and use them to empower me and achieve better things for myself. From a financial perspective, I’m confident that this is a model that could benefit you and can help you. It could allow you to position your investments in a way that gives you a degree of certainty that is part of the mindset of financial freedom and it’s impossible to be financially free without it.

Thank you for being here. I hope that you found value in this. As far as learning more about this mindset, this philosophy, these strategies, the best direction to give you is through the audio and PDF that talks about the hierarchy of wealth as well as the wealth maximization account. There’s a whole study guide that’s online that has dozens of videos in there and you can access it even without the book. You can go to HeadsOrTailsIWin.com and you can register for the study guide and also subscribe to the podcast. This is where I’m always talking about these ideas and talking about the ways in which you can improve your life and finances. I would be honored if you subscribed. Thank you so much for spending this time and for investing in yourself. I wish you the best when it comes to your investing and on your road to financial freedom. I hope to hear from you soon or at least hear about your success. Thank you.

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Seeing Opportunities For Development with Mike Cobb

TWS 15 | Opportunities For Development

 

There are so many opportunities in the world. All we need is a discerning eye that knows how to make something out of what we see. Mike Cobb, CEO, and Co-Founder of ECI Development and President of Gran Pacifica, talks about opening doors for development. Sharing his background and uprooting his family living outside of the United States in Nicaragua, he talks about the many opportunities the world has to offer for investors to grow. Mike discusses the emerging markets, most especially in Central America, as well as traveling to developing countries and creating environments where people could have experiences. Taking something and creating a business opportunity out of it, Mike engages us in a teak conversation about how this wood works and what opportunities it offers as far as how it is used.

Listen to the podcast here:

Seeing Opportunities For Development with Mike Cobb

I was fortunate to be in Southern Florida at an incredible event put on by Tony Robbins called Date with Destiny. It’s my third event with Tony and I’m with my wife as well. I’m going to save this experience for another day. We’re going to do a bonus episode with my wife. We have the second to final episode of season three. I hope you had enjoyed 2018. I didn’t plan for this fifteenth episode with my guest, Mike Cobb, but it worked out perfectly. I have known Mike for years. He wrote an article at the beginning of 2018 with the topic of what we’ve been discussing on here, which is by John Locke. It’s, “Life, liberty and the pursuit of property.” I met Mike a few years ago on an investment cruise that we were both speaking at. What a stellar guy. The energy level he has, the knowledge he has, the experiences that he has gone through.

I’m going to add one of the variables that are the most unique and certainly the most valuable, which is the understanding of principle and understanding of history, understanding of humankind and our capacity to take this human experience and learn how to take our knowledge and our intellect and our talent and our ability and the material world around us and create an incredible life. You’re going to read some cool stories and you’re going to read about something that you didn’t know about before, which has to do with a very long-term time of investment in the forestry space.

You are in for a treat. My guest is Mike Cobb. Mike is the CEO and Cofounder of ECI Development and President of Gran Pacifica. Mike and I met a couple of years ago on The Real Estate Guys Investors Summit at Sea. We also connected at another event in Bermuda. Mike’s an awesome guy and you’re going to hear a little bit about his background. Mike, welcome to the show. Thanks for joining us.

Thanks, Patrick. It’s nice to be here.

You were passionate about uprooting your family and living abroad outside of the United States over a decade ago. Can you give us a little bit about your background and what led up to that?

I grew up in Western Pennsylvania north of Pittsburgh. I graduated college in ‘86 and unfortunately it was a depressed area of the country. I moved to the DC area. I worked in the computer business for several years on the PC side of things. In ‘94, I went to Belize for my first trip on vacation to have some fun with a buddy of mine, the Cofounder, Joel Nagel. We bought a couple of condos and started to rent them out. What we saw interestingly was that there was no mortgage money for North Americans in Belize generally. The bank up in the States or Canada would not lend money on collateral in Belize and the bank in Belize didn’t want to lend money to foreigners. You had this weird hole in the marketplace. We started a little mortgage company in 1995. I went out to a bunch of my buddies in the computer business, raised some money. Joel went to a bunch of his clients, we put the other couple of million bucks and we started buying mortgage paper all over Ambergris Caye. It was a phenomenal business. The paper was usually two to four years to mature, 12% to 14% interest rates. We were buying for $0.80 on the dollar.

It was a great business. Joel was the deal guy. He’s the money, finance side of things. I’m the more boots on the ground guy. What I did was I ran around and looked at the collateral. I would go and look at these condos and these homes that had been bought a year to four years. What I saw was incredible. You’d walk into a living room and there would be an outlet on the wall. There’d be two outlet strips, one going each direction. With extension cords plugged into the outlet strip running around the edges of the wall so that you’d have power all the way around the living room or a bedroom. They had one outlet in the living room or one in the bedroom. The door handles are at different heights and kitchen countertops too high, too low, whatever it was. We started to put our heads together and we said, “To fix this stuff is almost free.” Put all the door handles at the right height, to get the countertops the right height, put the mirror centered over the sinks, simple stuff.

TWS 15 | Opportunities For Development

Opportunities For Development: The time machine is an imaginative concept. The more technical word is path of progress.

 

We started the development company in 1998. We bought a small resort in Belize. I moved to Belize with my new wife, Carol. We didn’t have any kids at the time. We lived in Belize for a few months. We turned the property around and then move back to the States. In ‘98, ‘99, I did a lot of work in Panama on a tea plantation. In 2000, we bought a giant piece of property in Nicaragua one hour west of Managua, the capital. I say giant. It was three and a half miles of Pacific beachfront and the property is a mile deep. It’s a 2,500-acre property. In 2002, it was time to get down there. We’d done the initial permitting and master planning. My wife, Carol, my daughter, Amanda, who was two at the time, we literally picked up and left Shepherdstown, West Virginia where we own a home. The same home, we kept it. We moved to Nicaragua for what we thought would be two to three, maximum four years to get a company started. We did. We went down there and we hired architects, engineers, a chief operating officer, accounting people, IT, marketing and the whole thing. We put all the team together.

About three and a half years into it, my wife and I go out to dinner one night. We took a piece of paper. I know you’re a big Tom Hopkins fan. I’m a big Tom Hopkins fan. We took that piece of paper, we drew the line down the middle and we did the old Ben Franklin. Stay in Nicaragua, go back to the US. The list to stay went down the front and onto the back. The list to go back to the States was a third of the way down one side. We ended up staying in Nicaragua another several years by choice. It was an incredible quality of life. The cost of living was silly cheap but the quality of life was higher, which is paradoxical. How can you have a higher quality of life with a lower cost of living? It’s possible in the developing world and we did. We moved back to the States a couple of years ago. One of my daughters, my eldest, Amanda, was fifteen. She got accepted into a ballet program in New York City. Mama bear was like, “We’re not living in Nicaragua with the baby bear in New York City.” We came back to Shepherdstown and we’ve been here for the last couple of years.

Your perspective on what’s going on in emerging markets is intriguing. My wife is from Mexico originally and grew up there. I grew up in the Northeast. The differing perspectives helped me. I had a bigger view of the world and how people live. We see innovation all around us in the US. Oftentimes because of how big the world is, we’re seeing what’s on TV as far as how to determine what type of growth is occurring or what’s going on outside the US. Why don’t you talk briefly about what you saw in emerging markets, specifically the Central America markets? What are you seeing? You raised your kids in Nicaragua. You say that to a normal person they look at you funny, which I’m sure people have looked at you funny in the past. Talk about that and what your experience is versus the stigma that’s out there.

The best concept I can put around this is a time machine. Going to a country like Costa Rica, Panama, Nicaragua, Belize, anywhere in Central America is literally like getting in a time machine. In my presentations, I sometimes will ask this question. I say, “If HG Wells stopped in the middle of this room with this time machine and we could all jump on it. Take one check and go back twenty years. We could all make one investment. How many of us would come back to this moment wealthier?” Everybody puts up their hand or a few people are a little slow and they don’t know. The hindsight’s 20/20. What we see in the developing world, Central America specifically in this case, is we see the time machine concept. That’s the more imaginative word that I use, but the more technical word is the path of progress.

A country like Costa Rica and Panama are pretty far up this curve. Panama because of the Canal and we’ve had US military presence there for 100 years. Costa Rica because many years ago they jumped on the bandwagon of tourism and promoted themselves as a tourist destination. They have moved up this popularity curve, the path of progress curve. Whereas a country like Belize is a little further down and a country like Nicaragua is far down. If folks want this curve, I’ll send it to you and you can forward it onto folks. It’s a pretty powerful visual tool because here’s how I put the countries on it. What I said to myself was, “Where do people from Utah or Midwest America or wherever take their honeymoons?” Pacific Coast to Costa Rica, absolutely. People going to Costa Rica for their honeymoons, there’s a Four Seasons or Westins. It’s fully on. Panama is almost there too. There are lots of people taking their honeymoons in Costa Rica, but not a lot of people taking their honeymoons in Nicaragua.

It is amazing how much the person can create with their minds when they have the freedom. Click To Tweet

I know a lot of your audience is cashflow people. What you’ve got to understand is that where you have popularity, you have cashflow. You have people coming and renting. Where you have less popularity or somewhere in the middle, fewer renters, less cashflow but it’s priced into the marketplace. You get into a country like Nicaragua, it doesn’t cost much. For example, an oceanfront condo on one of the ten best surf breaks in Central America. It’s been on the cover of The Surfer’s Journal, Kelly Slater films there. This is world-class surf break, empty. Oceanfront condo, $129. Will you get the cashflow you would get in Costa Rica? No, you’re not going to get the same average daily rate. You’re not going to get the ADR. You’re not going to get the occupancy rate yet. As Nicaragua climbs the curve, what’s your cost basis? Your cost basis on that’s $129. That same condo in Costa Rica costs you $350. You start to run those numbers. I’m a big fan of diversification. You should have a little bit of both. Plug either place real hard. Get some across that whole spectrum. The path of progress is to be the single most important takeaway at 30,000 feet, time machine. I’ll give your audience the best tip. The first person who puts that Dairy Queen in Nicaragua is going to clean up. We have McDonald’s, Quiznos, Subway, TGI Friday’s, all these chains but there are no Dairy Queen.

Countries or destinations, there’s a brand. In and of itself, it’s a brand. If you think of Costa Rica, something comes to mind. If you think of Nicaragua, something comes to mind. If you think of Guatemala, something comes to mind. If you think of Mexico, something comes to mind. I look at Costa Rica and how beautiful it is and it’s a supply and demand issue. The reason why you can get a beachfront condo there is because there’s only so much beachfront and it also has brand recognition. When you have more people going, which is increasing because of the older population retiring and wanting to travel and go on cruises and so forth, that’s when essentially at some point doesn’t make sense because there’s only so much beachfront.

That’s where you look at similar destinations. Case in point, who knows where Belize is? Most people know where Mexico is. Most people know where Panama is because of the Panama Canal, but where’s Belize? Most people don’t know that, but it’s coming online because it embodies some of the characteristics of some of those popular destinations. There are others, Nicaragua is one. I have some friends that are in Guatemala and they’re doing these pictures of these huge mansions that they’re staying in. How beautiful they are for the cost of a hotel room in Costa Rica. It’s one of those things that Central America specifically, despite its issues which are in the headlines, is coming into its own and appeasing the demand that’s out there for beautiful places to travel to.

Belize was the first place I did business. I still do business there. Belize on that curve is in the sweet spot. It’s not as mature as Panama or Costa Rica. It’s not as unpopular as a country like Nicaragua. It’s in the middle, so it’s got cashflowness now. Southwest started flying in. They’ve opened up some new routes coming from Denver, they’re from Fort Lauderdale now and they’re in from Hobby Houston. WestJet in 2017 opened up from Toronto. They’re opening up from Calgary. You have these discount carrier airlines coming in, bringing the more mainstream tourists to a country like Belize. We’d been working there since 1994. When I moved to Belize with my wife, we lived in this little tiny resort on Ambergris Caye. A few years ago, we bought the property next door. We’ve since signed a franchise agreement with Marriott Corporation and we’re in the development phase. We’ll be into construction Q1 of next year for a Marriott Resort and Residences on Ambergris Caye. The market is ready for it. Years ago, the market would not have been ready for a Marriott-class hotel.

The folks you’ve talked with on your program before, they’re working with the Curio Hilton product there on Ambergris Caye. There’s a Marriott Autograph under construction as well. We’re seeing this interesting transformative moment in time in Belize. I wrote an article on this concept of the timing of that sweet spot of the marketplace and how the market has transformed over the many years since I’ve been working there. It’s neat to watch these things happen over a couple of decades and be a part of that transformation as well. To help folks like your audience to see these opportunities. Understand what these opportunities are and how they might best fit depending on their investment goals are. Some people like cashflow, but they’re willing to take less percentage cashflow but a more certain cashflow. People want to take a little riskier, buying in it cheaper and other people want the sweet spot. Knowing this big picture concept allows people to put themselves in the spot that best fits their investment goals, which is what you’re all about and what we’re all about. It’s all about the client. How can we help the client get what they are looking for in terms of an investment and a return type?

TWS 15 | Opportunities For Development

Opportunities For Development: At the end of the day, what businesses are all about is the client.

 

This is where I talk to you about the theme that we’ve been using in 2018. It continues to fascinate me because there’s a saying that we’ve used. John Locke was a philosopher in the 1700s, “The pursuit of life, liberty and property,” in which ultimately became part of the Declaration of Independence. Back then, we’re losing in Europe, which is still under the semi-authoritative rule. Talking about how a person can use their mind when they have freedom and essentially develop the property into something that’s valuable to other people. Those such as yourself who see the beauty in these different countries whether it’s Nicaragua, Costa Rica, Panama or any other beautiful place and figured out ways in which you can create a resort. Create an environment where people could have experiences.

It’s profound and that’s where I look at. You’ve opened the doors and others have opened the doors of development, which has allowed bigger brands to come in. Those bigger brands don’t need to take those types of risks. They essentially look for opportunities to piggyback on the risk that has already been taken. I look at the development of Central America and those beautiful places all year round and how desirable they’re going to be for the growing population of travelers and vacationers. You can make any comments you want in regard to that. I wanted to talk about something that I find fascinating with what you’re doing in regard to teak, which plays into this whole idea and whole theme too of taking something and creating a business opportunity out of it. Maybe speak to the comment I made in regard to the development of these beautiful places in the world then we can get into the teak conversation.

I wrote an article for the National Association of Realtors. I was the Director with the National Association of Realtors and now serve on their Global Business and Alliances Committee. I wrote an article about that whole part of why real estate is an incredibly powerful foundation for the United States. Jefferson tweaked it when he changed it to happiness, but the property was the foundation for that concept and private property specifically that allows people to take and find the highest, best use and then serve clients. I’ve been a student of the development process and I’ve given some presentations on a Semester at Sea about this exact topic. There are a lot of great books out there. One that is powerful and you’re probably familiar with Hernando de Soto, The Mystery Of Capital. It’s a phenomenal read that in my mind encapsulates the development process or the development challenges in Central and South America or the developing world.

Companies like ours come in, we address the risk factor. We bring technology. It’s a mental technology. It’s a process. It’s a system of development, but it’s also a philosophical construct in the sense that we bring the idea that the pie can get bigger. A lot of the developing world is zero-sum or the pie is big. If you get any, I get less. There is no bigger making of the pie. Curio Hilton, the Marriott Autograph, these are my competitors. We understand as North Americans that the McDonald’s on one corner does okay. You stick a Burger King, KFC and a Wendy’s on the other three, all four do better. All the car dealerships are on that same highway somewhere. These are philosophical constructs that we bring. It’s a technology that we bring as foreigners into the developing world and probably as much as our money. Certainly, our money’s important because capital is an issue as Hernando de Soto draws out well in his book.

Capital is important, but intellectual capital is equally vital to the process of progress and development as we would define it in the United States. It’s what gets me up in the morning. This is what motivates me. We want to make money. We’re a company. We’re in business to make money and serve our shareholders and clients, first the client and then our shareholders. At the end of the day, that’s not what gets me out of bed and gets me excited. It’s this ability to come and be transformative to a developing country with both the money and the intellectual capital as well to change how it’s viewed and how things are done.

In business, it is the team that translates an idea, business plan, and concept into reality. Click To Tweet

That’s what Locke meant. He understood this internal drive of humankind to create. Once you have that lens, you can see. I was watching The Jungle Book with my son the other day. Mowgli, what separated him from the animals? It’s his ability to think and come up with solutions. Locke understood that. He also understood the restriction is going to be the environment in which it takes place. Where if you do have a monarchical rule, they’re dictating how you live therefore that part of your drive is going to be suppressed. When there is freedom, when there is an opportunity and then you combine capital with it and property, that’s when there are some amazing things that can be created from it. There are examples of it everywhere.

Going to your business, development of actual real estate property is a feat in and of itself. I don’t think most people understand or value what goes into effective development of something that could take six months, nine months, a year and how all the different parts and things need to be orchestrated. There’s much beauty in how you take something that doesn’t exist and turn into something that does exist or at least exists at a fundamental rudimentary level and then turns it into something that’s a desirable place to go visit and create memories. It’s fascinating to think through. Let’s talk teak. Teak fits into the same idea. When people think of teak, it’s like, “Wood or is that a stain?” Tell us about your passion with teak.

There is one answer to that question. The answer is people. The answer is your team. The team is what translates an idea, business plan, and concept into reality. It’s all about the people and we’re fortunate to have an incredibly powerful, sophisticated and dedicated team on the ECI company. Teak is cool because I didn’t know anything about it. Back in 1998, we read an article by Kathy Peddicord. She wrote an article about teak as a reforestation product. Both Vietnam and Panama had a reforestation program. There were a group of six guys. We all got together and said, “Let’s throw in some money. Let’s do this teak thing.” We flew over to Vietnam for several days. This was ‘98. This is early Vietnam changing. What we realized was it was way too far. The timezone was exactly twelve hours or whatever opposite East Coast. It would’ve been a real nightmare to manage.

We also went down to Panama and we saw that the reforestation center programs there were pretty strong as well. Being the boots on the ground guy, it was my job to go and begin to figure this out. The other guys all had jobs. Joel was a lawyer, I’m boots on the ground guy so, “Go figure it out.” This is the long before Google, ‘98. I live about an hour and a half west of Washington DC. I live in the Shenandoah Valley. Back then, I did a couple with that many years in the middle of Nicaragua. I went down to the Library of Congress and I got a bunch of books on teak. What I found was teak has been raised in the plantation by the British starting a few hundred years ago in India, what was then Burma, Myanmar now, Indonesia. These books that I was referencing were incredible because they had a few hundred years of statistical record keeping of soil conditions, weather, rainfall, altitudes, on and on. I got smart enough to be able to go to Panama and interview forestry companies about taking on our project. Helping us find a piece of property and then managing. I knew I scratched the first layer of the onion, but I needed to at least understand if somebody was blowing smoke at me on their answers to some of my questions.

TWS 15 | Opportunities For Development

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

The company we ultimately selected is a company called Geoforestal. One of the principal reasons is they answered all the questions. They’ve been in business well. They were the company that grew the seedlings that most of the other forestry companies in Panama used to plant plantations. They were getting into the management side of things. We took a little chance on them, but they’d been in the nursery business for a long time and the genetics side of the teak. We hired them and we bought 100-acre cattle pasture. It was grass and brush and we cleared it. The forest company planted some number of teak trees and sat back for the last many years. The forestry company manages it. They thin it, they take care of it. This would have been ‘99. The trees went in the ground in July and August of 1999.

I’m in the Rotary Club. I live across the street from the Bavarian Inn. It’s right on the Potomac River. They have the Rotary meeting there every Tuesday morning. I’d slip across the street at 7:00 and eat breakfast until 7:30. The bell rings. You have your Rotary meeting. From 7:00 to 7:30, there’ll be a table of eight or ten folks and like, “Mike, you missed the meeting last week. Where were you?” I said, “I was down in Panama.” They said, “What are you doing in Panama?” I said, “We bought this farm. We’re going to plant these teak trees and in 25 years we’re going to cut them down and we’re going to make a lot of money.” The heads would shake and they’re like, “Your crazy, Cobb. What are you doing? Panama? 25 years?” The answer I got finally after a couple of weeks of hearing this nonsense around the tables was like, “In many years, I’m going to either need this money and be glad I did this or in many years I’m not going to need the money and I’m going to be glad I did this.”

Many years later, I’m glad I did this. Our trees are big around. They’re fourteen to eighteen-inch diameter and they’re 60, 70-feet tall. Our trees are average. They’re doing what they’re supposed to do. They’re growing. In a few more years, we’re going to harvest them and make a ton of money and we’re going to replant. In fact, I’ve got a guy headed down there to look for a new property. We’re going to pick up another 250 acres and plant another plantation in Panama. We’re doing the same thing in Nicaragua. We’ve planted about 60 acres of our Gran Pacifica property. We’ve surveyed off another 45 to plant this year. We’re continuing to plant teak because teak is one of those incredible investments.

You’re a Kiyosaki fan. I’m a Kiyosaki fan and the rental and the cashflow and that stuff are important. When we think about cashflow periods, most of us think about maybe it’s every two weeks we get a paycheck. Every month we get a rent check from somebody if we’re doing the Kiyosaki cashflow thing or we have stocks and bonds and we’re not a day trader. Maybe we’re moving in and out of those annually or every rate. Our periods tend to be a couple of weeks to maybe a couple of years. The thing about teak that I love and it’s not something you would do a lot of your money with. A small piece of your assets goes into what I call the 25-year cap flow period.

There’s nothing in the middle. They grow and you cut them down. You create this huge asset. You cut them down, you plant them again. In 25 years, you come down for the next generation. One of the tabs on your website is legacy. Teak specifically for us because we liked the region of Central America and teak grows exceptionally well in those latitudes of about ten to twelve degrees. Panama sits at 9.86, it’s right there at ten. Perfect rainfall, perfect soils, it works well. I have stocks and bonds. I have a 401(k) and I’ve got other investments. I’ve got properties at that two-week cashflow, one-month, two-year cashflow. We all need that in our lives.

Someday when I die, if I died now, my kids would be fourteen and eighteen. Hopefully, they wouldn’t go sell off all my stocks and buy Ferraris and Lamborghinis. I won’t be around. I don’t know what they’ll do. The nice thing about teak is even in a few more years, they’ll be twenty and 24. They’ll be more mature. Even if my two daughters had blown the money on Lamborghinis or whatever it was they bought, it gets replanted. In 25 more years when they’re in their 50s, they’re going to get another harvest to proceed and presumably they’d be a lot more mature and be able to steward that money better then. It gets cut down, it gets replanted and maybe the next ones for their kids. It’s a powerful generational wealth stewardship tool precisely because it’s not liquid. Everyone’s always, “Liquidity.” It’s important. I get it like most of your portfolio. If you can take 5% or 10% of your portfolio and lock it up and make it illiquid, I personally believe you are doing future generations an incredible favor. You’re locking it up and keeping it out of the hands of late teen, early twenty-year-old kids.

Sometimes we’ll classify these types of assets as perennial assets, which are assets that ultimately last forever. Sometimes it doesn’t appease the short-term intrigue people have with regards to investment. It doesn’t mean that they’re not valuable. In a sense, they’re even more valuable. What it does is it plants this one investment that will have consistent dividends which will require probably little to no increase in operational expenses, barring inflation and cost of living increases. It’s not to say that’s an asset that’s boring. When you compare it to a lot of the investment that has been made over the last many years, which is mostly in real estate and markets where there is good rent to value ratios, that’s where you have a lot of opportunity for short-term gain, but yet they’re not perennial assets.

The example I gave to you is if you buy fifteen homes in Columbus, it’s going to outperform a teak investment in the short-term. 25 years from now, I’m not sure how valuable those homes in Columbus will be without massive amounts of operational costs and improving expenses. The idea is it’s a different type of investment. This is more of a legacy perennial type of investment, whether it’s a farmland or timber or another mineral type of investments. There are lots of opportunities there. What I found fascinating is you’re intrigue getting into the research at the Library of Congress into the nature of teak and why it’s desirable. If something takes that long to harvest, that’s an asset that you are not going to have much competition in because of how long it’s going to take to play out. Talk about how teak works and what that opportunity is as far as how it’s used, what the demand is and so forth.

That is one of the things. If all of a sudden in 2019 or the year after teak becomes even more in demand, you can’t rush out and make it. You had to have planted them many years ago. It takes foresight and it takes the ability to understand that these products should. It’s a future event. We all understand the investment concept of a future event. Who knows? Nobody can predict the future. The nice thing about teak with a 350-year track record, it’s been in the plantation, it’s been in demand for a few hundred years. Teak has increased in value by about 5.50% a year on average for 100 years. It’s got its ups and downs, it’s a commodity. It moves up and down. 5.50% per year growth in the value of teak, we’re talking about the growth of the tree. We’re talking about lumber sold as lumber, 5.50% a year. You have the actual growth of the trees. The kinds of IRRs when you run those numbers are double digit.

It’s 10% to 12% IRRs over 25 years. You’re talking about compounding over 25 years at that rate. It’s huge and the easy numbers. $50,000 turns into a little over $1 million round number things. The idea is that it doesn’t take much to get in now, but the legacy you leave for the kids, grandkids in 25 years are significant. Teak is a unique wood in the sense that it’s impervious to rot, fungus, molds. It’s a hardwood and it has high oil content. In fact, for centuries they used teak for dominant wood in the oil industry because it didn’t spark. It had some curious industrial uses. We’re most familiar with it with boats. The chairs on the Titanic as well as the decks were all teak wood. Teak furniture weathers well, it holds up to the environment. Teak is an incredibly long-lasting product that has a centuries-old track record of being in demand for its natural properties for the most part.

My parents live on Cape Cod but my uncle has been there forever. He bought this Grand Banks, which are these old iconic trawlers. The majority of the value is in the wood and it’s all teak.

Teak is exceptionally valuable.

Are there other ways in which people can follow you or learn more about you?

ECIDevelopment.com. Info@ECIDevelopment.com or MCobb@ECIDevelopment.com will find its way to me. That’s our property website. If you’re interested in that popularity chart, it’s part of our Consumer Resource Guide. We publish a consumer resource guide. It’s not a sales document and it’s got the fifteen questions that every property buyer should ask when they buy property overseas. Questions that we as North Americans wouldn’t necessarily think to ask. If any of your folks are thinking about a property overseas, this Consumer Resource Guide is great. Send an email to Info@ECIDevelopment.com and write Consumer Resource Guide or something in the subject line. If they’re interested in the teak, write teak in the subject line and we’ll send something out about that. They’re separate businesses, but that’s probably the easiest one-word answer to be able to get to me. I would love to provide some articles as well. It’s good stuff for folks if they want to dig a little deeper.

Mike, thanks so much for your passion and for sharing it with us. It’s been an awesome conversation.

Thanks for having me and I’m glad we got locked in there. That was fantastic.

It was fun. Take care, Mike.

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About Mike Cobb

TWS 15 | Opportunities For Development

In 1996, Michael K. Cobb and his business partner formed a company, Exotic Caye International, to provide loans to North Americans purchasing properties in Belize, Honduras, Costa Rica, and throughout the region. With a strong focus on consumer need, Mr. Cobb accurately predicted the growing demand for high quality, residential product for North American “baby boomer” retirees in the region. He led the group into real estate development and created a holding company called ECI Development for several properties, including a resort on Ambergris Caye, Belize. Michael speaks at dozens of international conferences annually about offshore real estate finance, development, and ownership. He was a consultant to The Oxford Club, hosted a weekly radio program, contributes regularly to overseas publications, sits on the board of several international companies, gives counsel to various real estate projects throughout Central America, and serves on the Board of Directors and the President’s Advisory Group for the National Association of Realtors.

 

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