Money from nothing
It takes money to make money right? Sure but you don't have to be a millionaire to make a go of it. AMANDA MORRALL talks to the Australian Julian Dawson about how ordinary people can create extraordinary wealth.
There is a perception that investing is for the rich and that you need truckloads of cash to make it grow.
One's ability to multiply money is unquestionably aided by having large quantities of it but just as wealth is no guarantee of staying rich, neither is it a perquisite to making a fortune.
Self-described "ordinary guy" Julian Dawson is proof of it. He grew up poor in South Africa and vowed as a child he'd never go hungry as an adult. Better yet, he wanted to be a "success". Through sheer grit and determination he achieved that, eventually climbing his way up the corporate ladder at Hewlett Packard. While the money he earned was rewarding, the life he built was impoverished, he reveals.
"I was working 70-hour weeks and it was all I had," says Dawson, during a phone interview with Good Living from his home in Byron Bay.
He did the maths and came to the conclusion that unless he found a way to make more money, he'd be miserably married to his job for life. That's when he got into investing. After studying every investment book he could find and trialling the various methods with mixed results, Dawson says he came up with a strategy of his own that worked with a high degree of success.
Not long after, he was in a position to give up paid employment. Envious friends and family turned to Dawson for advice and he happily obliged. Word of mouth quickly spread and demand soon grew to the point where he decided to start offering seminars. He says writing a book was the logical next step. While Wealth Wisdom is geared to "ordinary Australians", Dawson says the advice is pretty much universal. He explained some of his ideas and methods to would-be Kiwi investors:
The downturn has depressed capital markets and property and yet that has created opportunity for investors. With most people having missed the pick-up from the bottom, what opportunities do you think exist right now?
The downturn in the market has created some great buying opportunities in quality blue chip companies that meet our selection criteria as covered in my book. The best part about fundamental investing is we never try to pick the bottom of the market. We are only ever looking for quality companies/ opportunities currently undervalued. That being so, there are still many opportunities available to investors today.
You promote the idea of a Holy Trinity: Wealth, growth and income. To what extent is discretionary income necessary to get this off the ground?
Obviously we need a small amount of discretionary income to start investing, however the great thing about my Trinity of Wealth concept is it does not matter where the investor is starting out, how much they have to invest or how much experience they have. By combining the three facets - wealth, growth and income - the investor may start with the income strategy, which only requires limited funds to get started, and creates the discretionary income to put into the growth and wealth category over time. It's a great way to kickstart the wealth creation journey.
You strongly recommend CFDs (contracts for difference) to kickstart investment. In NZ we have only one vehicle for that and yet they're very popular in Australia and elsewhere. Why are CFDs so attractive and what kind of risk do they hold for entry-level investors?
CFDs are merely a good vehicle for creating cashflow, but they are not the only strategy. There are others like options, or the trading of other financial instruments like futures and forex. Nevertheless my particular experience is in CFDs, which is a great vehicle to generate cashflow when starting out to help with your discretionary income. The benefits of CFDs are that the investor does not need much money to get started, and can use a large amount of leverage to compound their result. All highly leveraged products carry high risk so we need to control the risk using guaranteed stops and a technical analysis methodology (using charts) to help us minimise our losses and maximise our profits.
You encourage a mix of property and stocks and yet those starting from zero will find it hard to get into one let alone both. What's a good starting point and how much do you think is necessary for a point of entry into the market?
Again, trading for cashflow is a great way for someone to get started. For example, one can comfortably get started trading CFDs for around $5000 to $10,000. Smaller amounts can be used, but there are some disadvantages with using smaller amounts. Yes, when starting out, to do all of these strategies at once would be difficult but I recommend mastering one strategy at a time before moving on to the next and that is why I have written a book that does not just focus on one investment vehicle, but shows the reader how to grow a diverse investment portfolio.
For those carrying debt, is it advisable to borrow to invest? With banks having tightened lending criteria, how realistic is that?
Using Cads for income, you only need to come up with as little as 5 per cent of the underlying share so that's a great way of using leverage without the need for banks or loan applications.
Alternatively, if the investor prefers to focus on investing in straight shares, my system is about only investing in undervalued stocks. This somewhat reduces the risk of investing quite considerably because by investing in good quality profitable companies that carry low levels of debt, at a time when the share price is low in comparison to the company's earnings, creates a greater likelihood of that share going up in value. Yes, good shares can go down in value, and we see that occurring regularly as a result of external factors. However, when one develops the skill and understanding of the science that drives markets, one is more attune to accumulating stocks while they are special. This is a lot less risky than only buying stocks in good times - when they may be overvalued.
You claim to have a leak-proof strategy for property investment and lay out nine criteria. In the absence of one, will the rest crumble?
In my own research I regularly come across properties that meet all of my criteria, that I see no point in creating a greater element of risk by ignoring any of the criteria. Every criterion is there for a reason, so it's best to always apply all the conditions to a potential opportunity.
What is a reasonable time expectation in which to grow one's wealth, and how do you measure success, particularly when in a sluggish economic period?
I always recommend setting reasonable expectations when starting out, as there are so many variables that will affect your investments. Wealth is created in years, not days. I have seen many people get drawn into risky fast money investments. Successful investing is about "time in the market" not "timing the market". Good quality investments go up in value over time. How long that will be is related to our economic cycles. For example, my minimum expectation in real estate is a seven to 10-year timeframe because that is how long a typical economic cycle takes.
You emphasise the importance of goal setting. Why is that important and what advice do you have for people who struggle to know what they want?
Unless you know what you want, how do you know what to do to achieve it? And if there are roadblocks along the way, without a plan, you won't be able to find the alternate route. There is a great saying, "if you do not have a plan of your own, you automatically become part of somebody else's".
What is the most common mistake you see made in property investment and the stock market?
1) Paying too much: This is because without a solid plan or strategy, and a means of assessing the value of an investment, people tend to buy on emotion. This gives them no basis for what the opportunity is currently worth, and even worse, what potential value it could become.
2) Not having a strategy. One has to follow a strategy. That strategy must also be proven, be clear, simple and concise, and the reasons for it must be clearly understood.
3) Buying on emotion
4) Relying on hot tips
5) Being greedy
6) Doing too much, too quickly, with not enough skill
7) Not having a clear plan of what one is trying to achieve.
Most people struggle to make the monthly payments, let alone set aside a bit for retirement, education savings and emergency funds. Investing seems a luxury and yet it could be a way to meet all those targets. What's the rate of success for those who follow your formula?
I always tell people they have two choices - take the easy road now, but end up on the hard road later, or take the hard and disciplined road now, and end up on the easy road later in life.
Rule No. 1 I learnt when I was getting started was: "Spend less than you earn, and invest the difference in assets that go up in value". This has been the cornerstone to my investment success.
Today people spend money on things like cigarettes, coffee, fancy meals, alcohol, and the latest gadgets. Money could be better invested in assets that will create an income that could pay you a passive income to more than cover these habits. However, the trick is to do it in the right order. And for many people this means delayed gratification.
By following some basic key principles consisting of a combination of defining one's goals clearly, creating a plan for its achievement, then following a regular procedure of discipline, and applying a proven and consistent strategy of investing, anyone can achieve financial success. Investing is the easy part. The hardest part is the psychology and discipline to doing all the preparation work, and also making the sacrifices - especially in the early days.