Blog | Personal Finance

How the Rich Play the Game of Money in Booms and Busts

The economy always goes up and down. When it does, there are also always winners and losers. Which do you want to be?

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A friend of mine told me about a conversation he had with one of his employees. She was lamenting about the fact that she hadn’t saved money for her children’s college education yet.

“I think I want to start investing in the stock market,” she said. “But I don’t want to do it while it’s crashing.”

“I don’t like investing in the stock market personally,” he told her. “But if I did, I’d only do it when it’s on sale!”

The economy always booms and busts

One of the nice things about investing for a while is that you realize history repeats itself. The economy is a continual cycle of booms and busts. Those with high financial intelligence understand this and have learned how to see the warning signs of each cycle…and act accordingly.

What my friend was telling his employee was that, if you were going to insist on investing in the stock market, you should only do it when it’s down. Very sophisticated investors do this all the time using technical investing. Of course, they also know how to read the emotions of the stock market and when to sell to optimize their investment.

The point is that the economy always booms and busts. The rich know how to play the game of the markets. They are often in before others at the bottom of a crash and out before others before a new crash begins.

This is because the rich understand one important thing about money that many others don’t: it is a currency.

The difference between money and a currency

I’ll write in more depth on this soon, but very briefly I want to hit on the difference between money and currency.

Money is something that has inherent value. Gold is money, and has been for thousands of years. It is scarce and is accepted all over the world as a store of value. For many years the US dollar was based on a gold reserve. It wasn’t the dollar that was money but the gold that the dollar represented. When Nixon took the dollar off the gold reserve, it no longer was money and instead became a currency.

A currency is a medium of exchange, but it is not money because it doesn’t have inherent wealth, and in fact the value of a currency can go up or down quite significantly and in a short amount of time. The US dollar represents the “full faith and credit of the United States”. That used to mean something of value, but now it’s starting to mean less and less.

A currency, like an electric current, is only good if it is moving. If it sits, it dies. That is a hard truth many people are learning now with record inflation. The value of dollars in a bank account are worth less and less everyday.

Currency can be valuable in that it’s an easy way to purchase things of inherent value—assets. The rich understand this and continually move currency from one asset that is high in value but ready to lose value into other assets that are low in value but will go up in value. They also use it to purchase assets that themselves create more currency.

Another crash is coming and the rich are salivating

In 2008, my real estate Rich Dad advisor, Ken McElroy and I were salivating. While the markets were panicking, we saw a world that was ready to firesale valuable apartment buildings. We made a number of key investments in burgeoning markets. Later when the economy had recovered, we sold those investments, which had cash flowed the entire time, for a premium. We got much richer.

Today, the same thing is happening. We’re prepared to invest again, but we’re not the only ones. ZeroHedge recently reported that Blackstone, the largest private equity real estate investor in the US, is sitting on a record $50 billion in “dry powder”.

What are they waiting for?

The real estate market to crash again. When it does, they will gobble up all the cheap deals. As ZeroHedge writes, “Translation: at a time when Americans are liquidating their housing en masse to shore up liquidity when the bottom falls out from the economy, Blackstone will step in and buy all the distressed properties at pennies on the dollar, becoming an even bigger presence in US, and global, real estate.”

High emotions, low intelligence

This is a prime example of why the rich get richer and the poor get poorer. Just like my friend’s employee, when things are going bad in the economy, most people think with their emotions rather than with their brains.

I understand, market crashes can be scary, especially if you don’t have a lot of money. Unfortunately, when your emotions are high—fear, anger, etc.—your intelligence is low and you make very bad decisions. That often looks like selling out of fear, skipping on a good deal, and more.

The rich understand how markets work and can read booms and busts. So, they are not nearly as impacted by their emotions. They can remain calm and rational, hunting for the best deals like a shark in choppy waters.

If you want to be rich, you also need to learn how to master your emotions so you can have low emotion and high intelligence.

Mastering emotions starts with financial education

How do you go about this? You can start by increasing your financial intelligence. Think back to a favorite game of yours. The first time you played it, how did you feel? Perhaps excited but also trepidatious. Why? Because you didn’t understand the rules. The anxiety especially goes up when you play against people who know the rules very well. You’re almost assured to lose the first time you play.

Unfortunately, most people approach investing and money this way. They lose once and decide never to play again. But the best way to ensure you can play a game well is to learn the rules inside and out and to play as much as you can. Over time, you become a master and win a lot.

When it comes to money and investing, it’s a game. You must learn the rules. Read books, attend seminars, get a mentor. Whatever you can do to up your financial intelligence, do it.

But you must also play. Make smaller investments. Learn from your mistakes. Put your knowledge into action. Over time, you will get very good at the game.

Now is the time to enter the game of money

There is a financial reckoning coming. Firms like Blackstone know it. The smart ones are building their pots of money so they can play hard when the markets crash.

If you want to be rich, now is the time to start playing the game of money. Save what you can, learn and learn some more, and when the time comes, you’ll be ready to make your move.

Original publish date: July 25, 2022

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