Image source: Arek Socha / Pixabay
August 2021 Myth Buster
Part 1 of this series looked at the successful executive and his or her image as a person of wealth. Perhaps we should refer to those individuals as apparently wealthy.
Part 2 looks a more enterprising group of wealth seekers, who claim to have found a secret means of gaining wealth. We have all run into them. At parties, they tell their private insights on getting rich. Here are a few of the most irritating claims such people make:
- Buy low income housing — There are plenty of tax breaks!
- Solar energy and windmills — The wave of the future!
- Invest in gold — The ultimate hedge and a sure thing for wealth building!
Despite recent events with Game Stop, we will not dignify day trading and market manipulation with an entry in this list.
To be fair to the successful executives discussed in part 1, at least they work and earn a salary. The get-rich-quick group typically emphasizes passive income, bolstered by secret knowledge for turning it into quick cash. “Leverage” is a word used in every sentence when they get rolling.
While investors will recognize that passive income can offer good opportunities to make money, the pretenders exaggerate the value of the worst kind of passive activities.
A Slum Lord? Me?
Consider slum lords. The sophisticated term is "owners of low income housing." Proponents claim it is a way to take in a good deal of rent and to shield it through depreciation. After a closer look, the problems outweigh the benefits. Rent is hard to collect, and it is almost impossible to evict bad tenants, even if they fail to pay rent for a year, even if the home in question is in the Hamptons. Repairs are frequent. Restrictions such as rent control may prevent a rise in rent.
Low income housing is also caught in an endless trap of regulations, fines and inspections. That makes this particular road to riches time consuming and unpleasant. For example, New York City hosts a hotline to report problems in rental property. Ambitious politicians know that going after slum lords makes a popular way to gain a good public image. Reports of fines for slum lords run frequently in local newspapers, possibly opposite news of which movie star got drunk or was arrested for cocaine use. Fines keep getting bigger. Just imagine the army of lawyers one would need to combat the pro bono and paid lawyers standing in line to represent tenants.
The New York Daily News ran this story: “Slumlords in Manhattan and the Bronx are facing nearly $400,000 in penalties from the city for a massive 650 violations accumulated in just six buildings…” What looks like easy passive income can turn rapidly into active loss of capital.
Go Natural
Windmills stand out as a way the government feels good about energy policy. Even though the price of oil, the once precious commodity, fell by 50% in recent years — ticking up more recently with OPEC deciding to cut production — and the US outproduces Saudi Arabia and Russia in oil, the government stands firm on the benefits of wind power.
According to the Department of Energy, “The Production Tax Credit (PTC) provides 1¢–2¢ per kilowatt-hour for the first 10 years of electricity generation for utility-scale wind power. The alternative Investment Tax Credit (ITC) provides a credit for 12%–30% of investment costs at the start of the project and is especially significant for the offshore and distributed wind sectors because such projects are more capital-intensive and benefit from the up-front tax benefits.”
While this set up works for a large company that already operates a successful energy business — probably oil or gas or even coal — it is very difficult for an individual or a new company to succeed with a business enterprise of this kind. In addition, there is so much oil around that wind generated electricity only pleases angry politicians.
The Ultimate Hedge
Finally, there is gold. Through the pandemic, gold sellers stepped up their advertising. That is fine, but as the virus scare subsides, the hedge factor also disappears. You also have to have great timing for this wealth approach to work. The purchaser must get out of gold quickly before it loses its luster. A ten year gold price chart shows massive ups and downs. A successful gold investor should have a good deal of cash on hand combined with a great sense of timing. If — and this would take long-term planning — someone bought gold at a low point and sold it at a high point, they could do well on that trade. As with the other get rich quick schemes, however, success remains a challenge.
The keepers of big secrets have an answer to the boom and bust aspect of gold investing: silver. A recent Wall Street Journal headline announced that silver had dropped precipitously — showing silver to be a hedge knock off trying to compete with gold but failing. Seasoned investors know that silver has never really rivaled gold’s investment capability.
None of these secrets works very well. None of them is a secret either. Here is a better idea: Invest in oil right now. This argument uses the buy-low, sell-high, approach and takes into account the worldwide oil glut. The glut will not last forever. At some point, demand for oil will pick up and the glut will recede. Prices will move up.
This argument stands up better, however, than gold, windmills or slum housing. Of course, it will take a good deal of time to play out. Get-rich-quick advocates hate to wait.
Next month, the series looks at those who possess real wealth.
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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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Equities News Contributor: Michael McTague, PhD
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