August 19, 2020

I have been thinking about this for a long time. But what causes the separation between the rich and poor?

What causes the wealth gap in our current society?

In this video, I dive deeper into the wealth gap by analyzing the risks and rewards of each person in the society. There are four key roles in the societies: employee, self-employed, business owner and investor.

Most of the population fall under the employee category. 

This means their income is mostly fixed and guaranteed (low risk) but the return is also not that high.

So what can you do to increase your return?

In the next 10 years, are you going to transform yourself to take on a different role within the society?

In this video, you will learn:

  • Why do some people get rich and some don’t?
  • What are the 3 ways to “get rich and retire early”?
  • What are the trade off between getting rich, retiring early and staying where you are?
  • Are you okay with putting off investing?

90% correct transcript

So let's be honest here, stock market investing is risky and if it was simple, anyone would do it. Right? So today I want to talk about an interesting topic that I've been thinking about for a long time. And it is the wealth gap. It's really talking about the risk and reward when it comes to life, when it comes to working. And we want to dive deep into this topic to kind of understand why some people get richer over time and some people don't. My name is Eric Seto. I'm a CPA, and I've been investing for over 10 years. I tried a lot of things that didn't work, but once I figured out how to invest in the markets, my annual average return for the last four years is around 46% or so. So before we get started, I just want to celebrate another case study within investing accelerator.

And this is from Serena. She exited Boeing for a 32% gain and she held it for one month. So congratulations, Serena for making such a quick profit and hitting the target of 32% so quickly. So let's get started. There are basically four types of people in the world. The first type is employee. Second type is self-employed. The third type is business owner and a fourth type is investor employee. They do the job self-employed they own a job and they do it as all. This is owners. They own a system and people work for them and investors. They invest in a system which is kind of similar to business owners, except they have less control. So they mainly use capital. That's pretty much it. If we think about these four categories of people, when you think about their risk and reward, because that's the most important factor.

And if we start off with employee, it is actually very straightforward. Employees get paid every two weeks or every month. And the income is fixed is steady. It's almost guaranteed. So I would consider this to be low risk. But when you think about the reward of being an employee, it is also low. And that makes sense because within the business, within a system, employees take the least amount of risk and they get the most guaranteed income. So when you think about it from a business perspective, it's very difficult to give an employee a variable amounts of income because employee stands for costs within the business. Now, of course, employees also the key driver of the business. But when you think about it, I'm hiring someone to do a job for me. So then there's a cost and there's also a profits or revenue coming in.

And a difference is the profits. So the second type of people is really self-employed self-employed people. They get paid more than employees because they can set their own prices. And he does not need to pay other people because this is assumed to be a one man business and he can charge as much as he wants, as long as the markets, as willing to give it to him. And this power of setting your own prices is fairly important because you can determine how much you're worth, but for employee is based on market. Competitive rates for employee is based on what other employees are willing to get paid for. And you can compare your performance again against that our employees, but your salary is not going to be off by that much for self-employed. You can really price your services based on a fixed price, based on an hourly, based on whatever you want, success fees.

And the best thing about being self employed is really, if you created this business yourself, you can't really get fired for it. The third type is really business owners and they hire multiple people to run a system that is designed. They put in capital. They also put in time and it put in a lot of effort as well, because they need to design how the system works. And if the system functions properly, then they get paid a lot. They probably make more to the employee and the self-employed, but if the system does not function properly, then they can lose their time and capital at the same time. And when you're thinking about it, in terms of risk and reward, I would say that is considered to be high risk, but the reward is also medium high as well. The reason why it is high risk is when you look at the restaurant industry, for example, you'll notice that the number of restaurants that open per year in Canada, it's the same as the number of restaurants that closed down per year.

So you can think about startup. You can think about entrepreneurship as a giant graveyard of people without a solid strategy. People are failing businesses closed down and especially in the middle of COVID-19, there are risks involved. I've known people that they try to open a restaurant using their parents' money. And he lost it all. And the parent's retirement money has gone so they have to go back to work. So there is risk involved when it comes to opening your own business, especially a capital intensive business like retail, restaurant manufacturing and so on, and this is can be stressful. The fourth one is really investors and I actually broke this out into index investing and startup investing. And the reason is because if you are choosing to invest in indexes mutual funds, they're usually diversified. And the risk is very low because at the end of the day, the average increase for S and P 500.

It's really around 7% a year. So if you are investing in the markets with very little capital 7% a year, it's really not that much. Imagine you put in $10,000 and you get 7% a year, that's like 700 bucks. That's getting paid less than you being an employee. So you definitely need a lot of capital when it comes to index investing. But the good news is that is very diversified. You basically invest in entire markets. So unless the entire market fails, you're going to be okay. And there are situations where the entire market fail like back in 2008 and March, 2020, I would say the return is lower than employee. And the risk is slightly higher just because it is variable. When it comes to comparing your index investing versus being an employee the return for index investing is variable for being an employee.

You might get fired as well. So there is a certain level of risk. So it's not guaranteed. Now the next type of investors is really start of investors. And I'm using two extremes here because obviously you can be between start startup and index investing. And that's where I put a leverage investing. So for startup investors, that is really, in my opinion, the highest risk there is to take and highest reward you can possibly get. And that is really because when you're working at a startup, you are just using your time to build a business that can run for many years to come. The potential return can be infinite if the startup works out, but if the startup doesn't work out again, you'll lose your capital and also lose your time. So you can think about, well, Facebook, Apple, Google, Uber. These are all successful companies that basically dominated the market.

But you also got to think about all the companies that did not dominate the market. So if you think about the search engine business, which is what Google was in back in the day, there was around two to 300 search engine companies and Google was up one of them. And if you are building your own search engine company, then you can think, well, your chance of succeeding, it's around one to 200. So that's less than 1%. That's 0.5% in order for you to dominate the entire market. Now, of course, companies get acquired throughout the way like Yahoo, and you might be able to exit before a certain company monopolized the markets and dominate the entire markets. So when you think about it, there is a certain level of risk involved and the reward is also there. So if you a 10 X, a 100 X, 1000 X, your capital, a startup investing is one of the ways to do it.

And I think it is possible. Now in the middle, I put something called leverage investing. Now, leverage investing is really about using other people's capital to invest in the market. And this can include something like real estate investing. For example, if you buy a piece of property, you borrow money from the bank, which is actually just other people's money is not the bank's money. Then that is called leverage investing. And if you make a return high enough that you can pay the interest and the maintenance costs for the property, and you still have some leftover, then you are in the green, you are good. I would say that's actually higher return. And self-employed because as you scale as long as you have capital, you can make a higher return, but then the risk is less than self-employed. Because when you're looking at self-employed, the risk is really about you having a job.

And if the demand dries up, then you're kind of screwed. But for leverage investing, if you know how to pick the right investment and you diversify, it should be safer than being self employed. Now, this is the complete picture I wanted to show you. And it's actually very subtle, but this subtle difference is what creates the wealth gap. In my opinion. Now, of course, there are a lot of other factors like where you're living, you know, where someone else is living, what kind of opportunities your encounter for the last 30 years or so, but this is subtle difference of how much risk and reward you take is what creates the wealth gap. And most people are actually in the employee category and that's okay. But if you look at people who retire early, people who are having a fantastic retirement is having a blast. Those are really the people who started the business, who invested in the business, who invested in real estate, using mortgages, and they leveraged over time.

So those three categories are really the people who retire early and they basically just live off the dividends or the interest they get every single year. Can we dig deeper into this concept and how do these people actually get compensated? Because in order for you to go from one to another, you need to understand how each of them make money and what is the equation. So in school we're taught to trade time for money. There's a very famous saying, time is money. Money is time. You get the idea. And if you have a part time job, then you probably get paid by the hour. And at work, sometimes you get paid overtime and it just means you are getting paid by the hour because you work more than what you agreed upon. And when you're looking at employees, it is actually very simple is dollar per hour times the number of hours you worked.

And if you think about this equation, and if you try to scale it, then you will quickly realize you can only have 24 hours a day. So you can only work 24 hours a day. And in order to compete with another employee, to say that you're a better employee than that person, you need to basically work more hours, or you need to work on more important things, which gives you more results to demonstrate to your superior. So either way you are in the, what people call a rat race, where you're trying to work more hours. If you're trying to outcompete the person next to you. And when you think about it, yeah, you quickly hit the bottleneck in life because you only have 24 hours a day. So as an employee, you can't really scale. And if you do scale, which is working more hours than you end up sacrificing other areas of your life, like spending time with family, go notification.

So on and so forth. Okay. Let's look at the next one. Self-Employed and when you look at the equation for self-employed is really the number of customers x the price, you charge them. Now this can be a fixed price, every recurring price, so on and so forth. And the number of customers is also depending on how much you can take on as a self employed person, it depends on how much you have. And if you are a solo entrepreneur, which means you're working by yourself, then again, you're limited to 24 hours a day. Plus the automation you put in. So at some point you do need to expand, and that's when you transition to become a business owner. So for a business owner, it's really about system design, how well you designed it, the system can make you money. So you put in the capital, you put in time to design and build a system, and then you run it and you hire people to run the system.

So for example, you can own a bubble tea shop. You can own a Poke shop. You can own a restaurant, you can own an internet business, but basically you are designing a system that allows you to make money. So the way you get compensated is how effective your system is. And the problem is if your system fails that you don't make money. So you've got to make sure you design a great system. Now, finally, for investor, it's quite simple. It's very similar to a business owner is that mounts of capital. You invest times the rate of return and this equation is basically the same, except you don't get control over the system. You invest because the business owner or the CEO will be designing the system. But you as an investor, you're just kind of a passive passenger. That's on the ride. You're basically in it for the return and you don't do anything else.

So when it comes to investing, there's really no guarantee of return. And yes, there are bonds that gives you a guaranteed return. There are some guaranteed that can give you a guarantee return, but those are usually very low in terms of percentage, because when it, whenever something is guaranteed, that return has gotta be low or close to negative, and businesses can go bankrupt. This is this kind of fraud. So when you're investing, you need to be careful and you need to do your own due diligence. If you're not investing with a lot of capital as an investor, then you're not really getting a lot of money out of it. So when you think about that, then it might not be worth it to invest. If you don't have enough capital, because investing is really a game of capital and amounts of return, you can get, if you look at people who retire early, the people who retire early are really business owners start up investors, leverage investors that basically accumulate wealth and they can get money to work for them without having them putting in a lot of time.

Because once you develop a system that is self-sufficient, once you invest in a property and it collects rent, then the maintenance is really very low. So yeah, if you want to retire early, then that's what you need to aim for. And the truth is you need to master at least one of the three higher return skills that doesn't trade time for money. And that's actually quite important because if you're watching this YouTube video, chances are, you are either into self-employed or the employee category. You're a full time professional and you have a family, but you can take on both roles of an investor and an employee. So then you haven't guaranteed income from a company. And at the same time, you invest your capital to something that gives you a higher return that you are aware of. You understand the risk, you know, how to pick a good investment.

And when, once you're able to do that, then you're basically transitioning the way you make money from exchanging your dollar for exchanging your hours for dollars to investing capital, to get cap money, which is capital. So you're basically investing money to get money, to get more money so you can invest more money, get it. So that is pretty much it for this video. And I just want to congratulate Serena again for making 32% from Boeing in one month. So amazing return Serena, keep up the good work and I look forward to your next investment. So my mission is really to help people, to master investing using an hour a week through a coaching program called Investing Accelerator. So if you are interested in learning more, you can click on the link below. And that will take you to my website, which is five minute case study. So that's where you can sign up for a free webinar and you will learn more about my investing approach, which is leverage investing. Once you sign up, just click on the video leg, then you should be able to watch the webinar immediately. So I'll see you inside the webinar.

So thank you for watching and I hope you enjoy the video. Please help support me by like subscribe and you can watch the next recommended video here as well. So I'll see you next time.

About the author 

Eric Seto

Eric Seto is an investor with over 10 years of experience. He travelled around the world to help with auditing, accounting, purchase and sale of companies.

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