This Is How the Fed Steals from You... and Gives to the Very Rich

This Is How the Fed Steals from You... and Gives to the Very Rich By Porter Stansberry Wednesday, December 18, 2013

On December 23, just five days from now, we "celebrate" 100 years of a currency system controlled by a select few private corporations. In 1913, a bill passed through a poorly attended Senate session… and was rushed to the White House, where Woodrow Wilson signed it into law that same night.  It established the Federal Reserve… which is not technically owned by the federal government, nor does it have any actual reserves.  Today, the Federal Reserve is a fixture in our economy. It controls the quantity and frequency of currency issued by the United States. Take a dollar bill out of your wallet and notice what it says on the top, "Federal Reserve Note." That currency is what we use to transact business in our lives. It is also what we get paid in when we work hard or take risks.  The Federal Reserve enjoys a great reputation. Every few months, the chairman visits Congress. He gives a speech on the condition of the nation's economy. Markets wait patiently for his statements and hang on his every word when the Fed issues policies. (This afternoon, you'll see the chairman's latest pronouncement.)  When it comes to the Fed, people assume that the experts are handling things. They forget that the Fed is a cartel, and the purpose of forming a cartel is to protect its members…  The Fed primarily relies on two tools to drive its monetary policy. First, it can adjust the "federal-funds rate," which is the short-term rate banks pay to borrow funds from each other overnight. Nearly all interest rates – mortgages, corporate debt, etc. – are linked either explicitly or implicitly to the federal-funds rate. So when the Fed lowers rates, the cost of borrowing drops for everyone. When rates are low, folks build more cars, buy bigger houses, and start new businesses.  The Fed can also manipulate the economy by purchasing or selling Treasury bonds. The Fed has to create new money to pay for Treasury purchases. And conversely, when the Fed sells these bonds, it essentially takes currency out of the system.  Recently, the Fed has been buying Treasury debt like crazy… about $85 billion worth a month. To fund these purchases, it is creating vast sums of money out of thin air. The Fed doesn't like the phrase "creating vast sums of money out of thin air"… It sounds reckless and irresponsible. "Quantitative easing" has a much more academic ring to it. But don't be fooled… When the Fed announces quantitative easing, it's about to print money out of thin air and drop it on the economy.  Money for nothing might sound like a good idea. But both of the Fed "tools" are inflationary. They make every one of your dollars less valuable…  When the Fed lowers interest rates, it is essentially bribing people to spend more money. When more people have more money to spend on the same goods and services… they will inevitably bid prices higher.  This is what happened with the recent housing crisis. With rates low, banks were encouraged to lend at a record pace. Suddenly, everyone could borrow money for record-low rates and buy "more house." Real estate prices soared around the entire country. Of course, we later learned the banks had been loaning to folks who couldn't repay. The inevitable slew of defaults drove home prices down and sent our country into a deep recession.  Since December 2008, the Fed's nominal interest rate has effectively been 0%. Since the Fed can't lower nominal interest rates below zero, the only tool it has left to manipulate the currency is "quantitative easing." So for the past several years, the Fed has been printing money in an effort to "ease" our way to prosperity.  Has it worked? As we explained in October, quantitative easing has been a godsend for some:  [Federal Reserve Chairman Ben] Bernanke permitted and encouraged the largest housing bubble in history. Its inevitable collapse allowed me to buy rental real estate paying yields in excess of 20% and trophy properties in Miami Beach for prices last seen 15 years ago… And for the very, very rich… Bernanke did even more, God bless him. Bernanke dropped real interest rates well into negative territory. That allowed the world's wealthiest capitalists – like renowned investor Warren Buffett and Stephen Schwartzman, head of the private-equity firm Blackstone Group – access to unprecedented amounts of capital at rates of interest that literally paid them to borrow. They did the only logical thing… they responded with a wave of leveraged buyouts that dwarfed every other private-capital cycle in history… This was a massive aggregation of wealth. Almost none of these deals would have been possible without Ben Bernanke's policies… Yes, for rich people all around the world, Ben has been a living saint. Thank you, Ben! We couldn't have done it without you! None of us ever thought we'd be quite this rich… or end up owning all of those incredible assets. Newly printed Fed money tends to find its way into the pockets of those who need it least…  The same thing is happening with businesses. People like to debate whether quantitative easing has helped small businesses. But it has clearly helped the "too big to fail" banks get even bigger. Last month,Forbes made a list of 29 banks that were "too big to fail." And topping the list… JPMorgan, the namesake bank of the man who helped drive the Federal Reserve's creation 100 years ago.  Along with Citigroup, Goldman Sachs, and other big banks, JPMorgan is one of the Fed's "primary dealers." These dealers act as the Fed's agent at Treasury auctions and in other markets. Under the current system, once the dealers buy the government bonds, they sell them to the Fed – for a slight profit, of course.  Not only do they profit from every Treasury bill the Fed purchases… but many people believe that their "seat at the table" offers the Fed's primary dealers insights into – and even influence over – our nation's monetary policies. The Fed has become a cartel with membership privileges.  Quantitative easing has re-inflated the entire banking system. The chart below tracks the balance sheets of the Federal Reserve. Notice that assets (the black line) have ballooned from around $900 billion to nearly $4 trillion.  Meanwhile, JPMorgan has seen its assets grow from $1.6 trillion in 2007 to $2.5 trillion today. That is 58% in just a little more than five years. It has also seen earnings per share (the gray line) grow by 43% over the same period.  Meanwhile, Federal Reserve manipulation of the dollar has undermined the lives of millions of Americans. It has driven down the standard of living for the average American in two key ways. First, the average household is earning less money at a time when prices are increasing.  Second, it's nearly impossible for people to protect the value of any extra cash they can save. The cash that is left in bank accounts will buy less next year than it does today.  The Fed has set interest rates so low, it's impossible to earn a decent return. Remember, all interest rates are tied – either directly or indirectly – to rates set by the Fed. This is great for the banks that own the Fed. They get to borrow for 0% and lend to the rest of us at 4% or 5%. But it's terrible if you're trying to hang onto your savings for retirement 15 or 20 years down the road.  In short, the Federal Reserve has changed the markets. It has also changed how we invest. There are considerations today that we would never have imagined 20 years ago. It is no longer enough to study business cycles and company fundamentals. We have to consider the unintended consequences of quantitative easing…  Tomorrow, I'll show you the results of a study we just conducted on what will happen when the Federal Reserve begins to rein in its quantitative-easing bond-buying policies. This is what people refer to as "tapering."  We looked at how the Fed's previous exits from the bond market have influenced every sector of the stock market – and how "tapering" could affect our recommended stocks.  Specifically, we studied more than 2,000 stocks across 39 industry segments. We spent dozens of hours on this analysis (which we've seen nowhere else, by the way).  We found there wasn't a single sector of the stock market that had gone up, on average, during the last three Federal Reserve "taper" periods.  But we did find a "window" of opportunity. I'll show you exactly where in my next essay…  Regards,  Porter Stansberry Source: Daily Wealth Follow us on Twitter: @blacklioncm

An Easy Guide to Shareholder Letters: Look for These 3 Things

An Easy Guide to Shareholder Letters: Look for These 3 Things By Dan Ferris, editor, The 12% Letter Wednesday, November 27, 2013

It was an unusual research project… Not one in 1,000 investment advisors or newsletter writers would ever consider it. Over the last month, my research partner and I read every shareholder letter issued by companies in the S&P 500 index. I got the idea from billionaire super investor Warren Buffett. A couple years ago, Buffett talked about a one-page fax he got from the CEO of a potential acquisition: The quality of the business, he said, "jumped off the page." During our project, we found a few shareholder letters that were that good… And if you study what I'm about to teach you, you, too, will be able to identify companies that "jump off the page" as wonderful investments you'd like to own one day. You won't have to pick stocks anymore. They'll pick you! And it's easier than you think… I found three valuable types of insight in the best shareholder letters…  1.   How the company spends the excess cash it earns.   2.   How to keep the company accountable and measure its success.   3.   How the CEO describes the company and what makes its approach to the industry different and better than other competitors. The first and most important insight a great shareholder letter will give you is about the company's approach to cash…  It's great to own a piece of a profitable company… but if the management team squanders the profits, they'll destroy shareholder value instead of preserving and growing it.  Take Wall Street mega-bank JPMorgan Chase (JPM), for example. It is the only S&P 500 company that says growing its dividend is the most important thing it does with excess cash… even more important than growing the business!  Here's the relevant passage from the 2012 annual shareholder letter by CEO Jamie Dimon.  Our fortress balance sheet… provides us with excess capital to invest, and we always are thinking way ahead about the best ways to deploy it. As we have said in the past, after steadily increasing dividends, our favorite deployment is in growing our businesses. After investing in the growth of our businesses, we look at other ways to use the remaining excess capital. One use we consider is buying back stock – but only at a price we think is good for shareholders. The priorities for investing excess cash couldn't be clearer. First, JPMorgan will grow the dividend. Second, it will consider ways to grow the business. Third, it will look to spend cash in other ways, including buying back its stock.  When you find the companies that allocate excess capital wisely – like JPMorgan has – well, I can't stress enough how highly valuable that is to you as an investor. It's like knowing who's going to win an Olympic gold medal before the event begins.  Second, great business leaders want to be held accountable. They want to give you, the shareholder, an objective benchmark for measuring their success.  Consider 3M (MMM), a conglomerate that produces everything from Post-It notes to welding goggles.  Its shareholder letter provides investors with a crystal-clear set of financial benchmarks they can refer to in the future, to make sure management is performing well.  Here's what 3M Chairman and CEO Inge Thulin said in the 2012 shareholder letter:  Finally, we set out financial goals for the next five years. We now have targets that are both realistic and aggressive, and that provide a real possibility of upside. The five-year goals are as follows: •   Grow earnings per share 9-11 percent per year, on average •   Grow organic sales 4-6 percent per year, on average •   Maintain return on invested capital above 20 percent •   Free cash flow conversion of 100 percent Shareholders can note these objective benchmarks and know in five years if management is performing up to speed or not.  Most shareholder letters don't do this. They aren't crystal clear about how to gauge success because they fear they won't measure up. But great managements believe in what they're doing. They want to be held to an objective standard.  Humans are ego-driven. They want recognition. But they like their recognition to come with as little effort and commitment as possible. So it takes a special kind of person to draw a line in the sand and let the world know that's the point from which his future progress will be measured.  There's one more big idea you'll find in many good shareholder letters. Simply put, you want a manager who can explain the industry he's in and what makes his company's approach to it different and better… For example, here's a clear explanation of how and why apartment REIT Equity Residential (EQR) changed its business…  Approximately ten years ago, we made a monumental shift in our company's investment strategy away from two- and three-story walk-up garden apartment properties with surface parking in suburban locations across the 50 largest cities in the country, towards higher density, urban properties in a handful of gateway cities in the northeast and West coast… We also wanted to invest where the construction of new housing would likely continue to be constrained, such that demand would exceed the supply of all forms of housing. Letters like this – that explain the company and the industry in plain English – provide a free, high-quality (and sometimes entertaining) financial education that will take very little of your time.  Those are just three examples of several great shareholder letters we read during our project. We found 79 that show the companies are dedicated to paying out their excess cash to shareholders… keeping themselves accountable… and explaining their business and industry in plain language.  Of course, there are great companies that don't have great shareholder letters. But it's hard to find the opposite – a really great shareholder letter that isn't written by a great CEO of a great business.  I've never heard about anyone undertaking a project like we did… But I believe in those kinds of "manual" methods of stock screening. It's easy for computerized screening tools to miss things an experienced human being carefully poring over the same data would find.  To be a great investor, you have to be willing to look at the stock market in ways most other people don't.  Reading the shareholder letters of the companies you invest in is invaluable when it comes to understanding the business, the industry, and what you can expect from your management team. Especially when you find one that's sending the right message in a clear, credible way.  Good investing,  Dan Ferris Source: Daily Wealth Follow us on Twitter: @blacklioncm

The 30-Second Balance Sheet Test

The 30-Second Balance Sheet Test By Dan Ferris, editor, Extreme Value Thursday, September 26, 2013

How much cash would it take for you to feel "secure"? What if, after paying all your expenses every year, you still had nearly $200,000 to spend however you wanted? Would that make you feel financially safe? Or what if you had enough cash to cover your mortgage five times over? Would that be enough? There aren't a lot of folks who are that cash-rich. There aren't a lot of companies like that, either. But I've assembled a short list of high-quality companies that have "fortress" balance sheets. They either have so much cash… or generate so much cash every year… there's very little chance they'll ever run into any financial problems. And these "sleep at night" companies still have tremendous upside potential… The third clue I look for when choosing a great investment is: a great balance sheet. The balance sheet is a financial statement that shows a company's assets and liabilities. Assets are what it owns, and liabilities are what it owes. There are two kinds of great balance sheets we look for when finding a company that could potentially double or triple your money. The first is a company that has an enormous amount of cash and relatively little or no debt. You can recognize a company like this in 30 seconds or less. The best example is Apple, the company that makes iPhones and iPads. Apple has more than $147 billion in cash. And it has $17 billion in debt. That's a lot of debt, but it's nothing compared to the amount of cash Apple has. Apple could pay off all its debt and still have $130 billion in cash left over. Imagine having almost nine times as much cash as the debt you have on your home, car, and credit cards. You'd feel pretty secure with that much cash, wouldn't you? Well, that's how Apple shareholders ought to feel right now. They can rest assured Apple will never have a financial problem with that much cash on hand. Microsoft is another great example. It has $77 billion in cash and less than $15.6 billion in debt. In other words, it has almost five times as much cash as debt. Then there are companies like Expeditors International, the Seattle-based shipping company. It has $1.4 billion in cash… and zero debt. Debt isn't always a deal-breaker, though – which brings me to the second type of great balance sheet I look for… In short, sometimes a company has more debt than cash… but the business is so good that it earns enough to easily cover the debt payments. Wal-Mart is the best example of this. It has $8.9 billion in cash… and $47.8 billion in debt, over FIVE TIMES more debt than cash. That's a LOT of debt. But remember, Wal-Mart is an enormous company. It does more than $460 billion of annual sales. It's got more than 7,000 locations around the world. It's bringing in tons of cash every second of every day of the year. The fact is, after Wal-Mart pays all its expenses, taxes, and debt payments, it has enough earnings left over to equal eight times its debt payments. How good is this? Well, suppose you have $2,000 per month in debt payments. Then suppose that after paying all those debt payments, plus all your other living expenses – income taxes, everything – you still have eight times $2,000 left over. So you'd basically have $16,000 a month left over after you paid all your expenses. That means you'd have an extra $192,000 per year you could spend any way you wanted. You'd be pretty secure financially. And that's how Wal-Mart shareholders should feel. Procter & Gamble is like that, too. It has less than $6 billion in cash and more than $31.5 billion in debt. But its earnings cover its debt payments more than 17 times. So why do I care about this so much? Well, in Extreme Value, we've logged gains of 103% on Berkshire Hathaway, 131% on Automatic Data Processing, 77% on Intel, 105% on Philip Morris, and over a dozen other double- and triple-digit gains. And every single one of those companies had a great balance sheet. I've lost count of how many e-mails I've received from Extreme Value readers who tell me they sleep better at night, knowing each business we find is so financially strong. So to sum up: •   Look for companies with great balance sheets.   •   Some companies have a lot more cash than debt. That's a great balance sheet.   •   Other companies have more debt than cash, but because they earn so much money, their debt payments are easily covered. This, too, makes for a great balance sheet. Tomorrow, I'll show you another important "clue" I look for in a great business… The laws of economics make it difficult for companies to have this quality. And companies that do are very rare. But I've used it to find some of the highest-returning investments of my career. Good investing, Dan Ferris Source: Daily Wealth Follow us on Twitter: @blacklioncm

This Simple Number Tells You If the Shares You Hold are Worthless

This Simple Number Tells You If the Shares You Hold are Worthless

By Dan Ferris, editor, Extreme Value

Tuesday, September 24, 2013 Over the past decade, I've received dozens of e-mails from folks who write in to ask me: "Dan, how do you analyze the stocks you recommend? Is there a secret to finding great investments?" Well, it's a difficult process… but the answer is yes. If you know what to look for, there's a definite secret to finding what we call "slam dunk" great investments. The kind of stocks that could make you a fortune – with very little risk. Often, these are such good investments, you can pass your stake on to your children or grandchildren. It all boils down to what I call "The Five Financial Clues." And today, I'm going to share the first clue I look for… This clue led me to stocks like Prestige Brands Holdings (PBH) – currently up 422% since I recommended it in my Extreme Value newsletter. Or Constellation Brands (STZ) – up 169%. And right now, it's tipping me off to another great opportunity… So what's the first financial clue I look for? Simply put, I want a business that gushes with free cash flow. Free cash flow is all the excess cash profit left over after a business pays all its expenses and taxes and after it reinvests enough cash to maintain and grow the business. When you buy a stock in your brokerage account, you're buying a piece of a business. It's not a debt interest, and it's not a preferred stock interest. It's equity. And equity is a "residual claim" on the earnings of a business. "Residual" just means the equity holder doesn't get paid until everybody else gets paid. This is really important. You see, there's nothing left over for equity holders until secured creditors, salary and wage earners, taxes, trade creditors, unsecured creditors, and preferred stock holders all get paid. Only after all these obligations are met can you, the equity holder, expect your shares to be worth anything. In fact, excess cash flows are the one thing that give your stock nearly all of its value. It makes sense, right? This is what makes a business valuable: the ability to generate lots of extra cash. Without excess cash, your shares are worthless. Think of it a different way… Suppose you own a business. You want that business to pay you as much cash as possible during the time you own it. And that's true whether you own 100% of a business you run yourself – or whether you own just one share of a multi-billion-dollar company. Free cash flow is easy to find. All you do is go to the "cash flow" section of a company's financial statements and subtract "capital expenditures" from "operating cash flow." If you want to be nit-picky, sometimes operating cash flow is called "cash from operations" or "net cash from operations." And sometimes, capital expenditures are called "additions to property and equipment" or something similar. Take software giant Microsoft (MSFT), for example. Here's how I calculate Microsoft's free cash flow: Net cash from operations is $28.8 billion. Let's subtract $4.3 billion for additions to property and equipment. This equals $24.5 billion. That's a lot of free cash flow. Very few businesses generate as much free cash flow as Microsoft. What's interesting is most people have no idea how important this financial clue is, so they're unable to understand what an amazingly good business Microsoft really is right now, despite all the negative headlines about it. To sum up: •   Free cash flow is all the excess cash left over after a business pays all its expenses and taxes and reinvests enough to maintain and grow itself.   •   Free cash flow is important because it's the amount of excess cash available for creating shareholder value, which is how you make the most money.   •   Free cash flow = cash from operations minus property and equipment spending. Both those numbers are on the cash flow statements inside a company's quarterly and annual reports. The thing is, while a company may generate lots of cash, it might not use it to benefit shareholders. I'll cover that idea tomorrow. Good investing, Dan Ferris  Source: Daily Wealth Follow us on Twitter: @blacklioncm

Honesty Is the Only Way to Make Real Money

Honesty Is the Only Way to Make Real Money

By James Altucher, author of the book Choose Yourself

Monday, July 29, 2013 Honesty is the only way to make money in today's world. Nobody believes me on this. People laugh at me. "Don't you know anything? Of course dishonest people step on the honest people and have more success." People want to justify their own failures and use their pretend-goodness to explain why they didn't start Google, or steal $65 billion, or get that last promotion when the backstabbing b***h from aisle 3 got the raise after doing who knows what. But here's the truth. Dishonesty works… until it doesn't. Everyone messes up. And when you are dishonest, you are given only one chance and then it's over. You're out of the game – at least until you get your act straight and you have to start from scratch with your tail between your legs. HONESTY COMPOUNDS. It compounds exponentially. No matter what happens in your bank account, in your career, in your promotions, in your startups. Honesty compounds exponentially, not over days or weeks, but years and decades. More people trust your word and spread the news that you are a person to be sought out, sought after, given opportunity, given help, or given money. This is what will build your empire. I know this through countless failures. The more times I fail but communicate about it, the more times I make no money at all but let someone have ideas for free, the more times I try to "get mine" but only end up getting stabbed by those who think it's okay to be dishonest, the greater the number of seeds I've planted and the more money I'll make in the long run. Be dishonest once, and all of those seeds will be washed away in a thunderstorm of life-killing proportions. A hurricane of despair that will sweep away all of your opportunities forever. You are left with a desert and will have to start again. How you can be more honest in your life… GIVE CREDIT. Even if the ideas were all yours. Even if you made nothing on them. Even if they were blatantly stolen. Give credit and move on. Hoarding your ideas for the moment when you can shine, will only leave you by yourself in a dimly lit room with only a mirror to stare at. BE THE SOURCE. "But if I give ideas for free, what if they could've made a billion dollars? I always get screwed by my partners." If you are the source of ideas, then you are ALWAYS the source. Forget the losers who steal. Move on. You become THE fountain of ideas. People come to the fountain and make wishes and throw money in. Don't be a trickle of dirty water. Be the fountain and let people know it by giving away all credit and rewards. INTRODUCE TWO PEOPLE. Every day you can think of at least two people to introduce to each other who will help each other. You don't have to be in the middle. "Take me off cc," you should say. Let them help each other. Let them benefit. You don't need to be in the middle and benefit this time. You'll benefit next time. Or the time after that. TAKE THE BLAME. "A 'No' uttered from the deepest conviction is better than a 'Yes' merely uttered to please, or worse, to avoid trouble." – Gandhi DON'T LEAD A DOUBLE LIFE. Everything you do takes up space in your brain. If you live a double life (and you know what I mean if I'm talking to you), then that extra life takes up neurons and synapses working overtime. The brain can't handle it. It starts to degrade instead of grow. DON'T BE ANGRY. Anger is a form of dishonesty. Nobody is perfect. It's a lie to expect the people around you to be perfect. Of course, you can't control your anger. Sometimes it just happens. But note it for what it is, examine it, and try to turn it around, even just a little – in order to learn more about yourself rather than to blame someone else. That's where the honesty will compound. NO EXCUSES. When I lost millions of dollars in 2000 to the point of going completely broke and losing my home, it was easy to blame an "Internet bust" and "corrupt CEOs" rather than my own lack of experience in the financial world. Excuses are easy lies we tell ourselves to cover up our failures. One such excuse is, only dishonest people get ahead. This is also a lie. MAKE OTHERS LOOK GOOD. This is more than just giving credit. At heart, everyone wants to be perceived as special. That's because everyone is special but are often never acknowledged that way. Be different. Be aware of the smallest movements around you and acknowledge them. Nobody will forget that. DON'T GOSSIP. One time I trashed an entrepreneur I had invested in to another investor. Later that day I was supposed to have dinner with the first entrepreneur. By that time, just four hours later, he had heard I trashed him. He never trusted me again. People always hear. And if they don't hear, they feel, because word gets around. And you can't predict this. And it's another way of living a double life. DO WHAT YOU SAY YOU ARE GOING TO DO. Be that guy. ENHANCE THE LIVES OF OTHERS. In 1999 some of my employees in my first company left and started a competitor company. Some of my partners were mad. I encouraged the employees. How come? Because nobody needs to be my employee for their entire lives. Always help people grow into their own potential. I haven't always been honest. I try. And I hope I'm getting better. I try every day to improve and to follow the advice I've just given you. Otherwise I wouldn't have given it. But I've seen it. With people who have been in business for ten, twenty, forty years. Honesty compounds little by little. And that compounding turns into millions or billions. The dishonest people disappear. They die. They go to jail. They don't maximize their potential. They run. They are scared. You will have nobody to run from. Some people will hate you. Some people will doubt your sincerity. But the people who need someone to call, someone to share with, or someone to give to, these people will know who to call. They will call you. – James Altucher Source: James Altucher via Daily Wealth Follow us on Twitter: @blacklioncm

How to Tell If You're Rich

How to Tell If You're Rich 
By Alexander Green, Investment U Chief Investment Strategist 
Monday, April 29, 2013 

One of the biggest points of contention in the last election was whether the rich pay their fair share of taxes. Polls show the majority of voters don't believe they do.

Of course, this raises the questions: Who is "rich" and what is "fair"? 

Answers are largely a matter of opinion. But here is a fact: IRS figures show that the top 10% of income earners make 43% of all the income and pay 70% of all the taxes. Is that fair? If not, how much should they pay: 75%… 90%… all of it? And how about the now widely recognized fact – thanks to Mitt Romney's secret videographer – that 47% of Americans don't pay any income taxes. Is that fair? Opinions will vary.

According to the IRS, the top 2% of income earners – the ones that just had their marginal tax rate raised 13% to 39.6% – already pay approximately half of all income taxes. President Obama says it's about time these folks "chipped in." What a kidder.

And who is "rich"? For today's discussion, I'll leave aside the truism that you are rich if you enjoy good health, a loving family, close friends, and varied interests. Politicians (and most voters, apparently) seem to believe that a person's wealth can be determined by his or her income. I would argue that you determine real wealth by looking at a balance sheet, not an income statement. But why not look at both? 

According to the Tax Policy Center, if your annual household income is $107,628, you are in the top 20% of income earners. If your income exceeds $148,687, you are in the top 10%. You are in the top 5% if it is $208,810. And if your household income is $521,411, congratulations. You are in the top 1%… and perhaps demonized by those who view hard work and risk-taking as a matter of good genes and good fortune.

However, net worth is a far better measure of wealth, in my view. According to the Federal Reserve Survey of Consumer Finances, a net worth of $415,700 puts you in the top 20% of American households. You are in the top 10% if your net worth is $952,200. (This jives with the findings of Dr. Thomas J. Stanley – author of The Millionaire Next Door – that one in eight American households has a net worth of $1 million or more.) 

If your nest egg totals $1,863,800, you are in the top 5%. And – trumpets please – if you have a household net worth of $6,816,200, you are again in the top 1%… and possibly frowned upon by redistributionists who resent folks that live beneath their means, save regularly and handle their financial affairs prudently.

How do you get rich if you aren't currently? The basic formula is pretty simple: Maximize your income (by upgrading your education or job skills). Minimize your outgo (by living beneath your means). Religiously save the difference. (Easier said than done.) And follow proven investment principles. (Which we write about here every week.) 

Most millionaires – folks with liquid assets of one million dollars or more – are not big spenders. Quite the opposite, in fact.

According to extensive surveys by Dr. Stanley, the most productive accumulators of wealth spend far less than they can afford on homes, cars, clothing, vacations, food, beverages, and entertainment.

The wanna-be's, on the other hand, (people with higher-than-average incomes but not much net worth) are merely "aspirational." They buy expensive clothes, top-shelf wines and liquors, luxury cars, powerboats, all kinds of bling, and often more house than they can comfortably afford. Their problem, in essence, is that they're trying to look rich. This prevents them from ever becoming rich.

It surprises many, but the vast majority of millionaires in the United States: 

•	Live in a house that costs less than $400,000.
•	Are more likely to wear a Timex than a Rolex.
•	Generally pay $15 or less for a bottle of wine.
•	Have never paid more than $400 for a suit.
•	Are more likely to drive a Nissan than a BMW.
•	Spend very little on prestige brands and luxury items.

Yes, they're frugal. But they're also happy, not to mention financially free. They are not dependent on their families, their employers, or the federal government. What a feeling.

Some can't abide by this important lesson, but the bottom line is clear: If you want to be rich, you have to stop acting rich… and start living like a real millionaire.

Follow us on Twitter: @blacklioncm

Source: The Project to Restore America via Stansberry Research