Are You a Sloppy Joe Investor?
Focus on the fundamentals if you want to win in investing
In 1986, the U.S. government changed the rules for investors with the passage of the Tax Reform Act. Literally billions of dollars were lost. The investors who lost the most were speculators who had purchased high-priced real estate. They made their purchases with the assumption that the price of real estate would go up and the government would always give them a tax break for their losses.
In other words, the government was subsidizing the difference between the rental income and the higher rental expenses. After 1986, that all stopped.
After the rules were changed, the stock market crashed, savings-and-loan institutions went broke, and a huge transfer of wealth occurred between 1987 and 1995 as professional investors in the I quadrant scooped up the remains of poor investment decisions by those in the S quadrant, high-income earners like doctors, lawyers, engineers, accountants, and architects.
Could this happen again?
Could we experience another transfer of wealth from one side of the quadrant to the other? Only time will tell, and history does repeat itself. When it does, some people lose and some people win.
The reality is that governments can and will change the rules. Some people refuse to accept this reality. In a few countries today, the government still has laws that allow investors to “negatively gear” their investment real estate. In other words, you are encouraged to lose money on your rental real estate with the idea of gaining a tax break from the government.
I often hear howls of protest when I tell people in those countries that their governments could change the laws, just like they did in the U.S. I just shake my head. They don’t realize how painful the law change was to millions of investors.
Why risk it?
The point is why subject yourself to the risk? Why not find a property or investment that makes money? Anybody can find one that loses money. It takes skill to find investments that make money.
The idea behind investing is to make money, not to lose it. The best part is that if you know what you’re doing, you can still gain many tax breaks and make money.
Sadly, many people don’t want to take the time and effort it requires to find such deals. Unfortunately, that mindset can be costly.
As I mentioned, the people who were hurt most from the 1986 tax law change in the U.S. were the average-joe investors who were following the advice of their accountants. Unfortunately, when it came to investing, they were sloppy Joes.
The problem that rich dad and I had with the idea that “losing money is a good idea because of the tax breaks” is because such ideas often lead to people being sloppy. Instead of looking at the numbers and really analyzing a deal, they hope to find a deal that subsidizes their taxes. Of course, getting money from the government for losing money is basically getting 30 cents back for every dollar lost (depending on your tax bracket). I don’t follow that logic at all.
Why not invest so you can have it all—security, income, appreciation, and tax breaks? Of course, you can’t be a sloppy Joe and make those kinds of investments. It takes financial intelligence and a continued commitment to financial education.
There are several important lessons from this example:
1. The idea that losing money is OK because of tax breaks often causes people to become sloppy in choosing investments.
2. These people do not look as hard for real investments. They do not look at the financials closely when analyzing an investment.
3. Losing money destabilizes your financial position. There is enough risk involved with investing as it is. Why make it any more risky? Take the extra time and look for solid investments; you can find them if you can read the numbers.
4. The government does change the rules.
5. What might be an asset today could be a liability tomorrow.
6. While millions of investors lost money in 1986, there were other investors who were prepared for the change. Those who were prepared made the millions that the unprepared investors lost.
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