Heroic Investing
Welcome! If this is your first time visiting Jason Hartman's website, please read this page to learn more about what we do here. You may also be interested in receiving updates from our blog via RSS or via email if you prefer. If you have any questions about first responder finance feel free to contact us anytime! Thanks!

The Hazards of Too Much Equity & Wealth Creation the Donald Trump Way

Jason Hartman

Episode:

Guest:

iTunes: Stream Episode

At the start of the episode, Gary Pinkerton tackles the risk of using all your money to pay off your primary residence. Then, Jason Hartman discusses the subject of debt, both good and bad. He explains how using borrowed money can boost your wealth and reduce risk in the long run. Jason also looks into Donald Trump’s profile and his troubles in the 90s.

Announcer 0:04
Welcome to the heroic investing show. As first responders we risk our lives every day our financial security is under attack. Our pensions are in a state of emergency. A single on duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society. We are self reliant, and we need to take care of our own financial future. The heroic investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Gary Pinkerton 0:39
Hello, and welcome to Episode 93 of the heroic investing show, we’re getting close to 100. Folks Hang in there, we’re almost at 100. On this show, we focus on those challenges unique to military members to first responders and veterans. But we also focus on those that we all have in common all of us that go off to work and a W two job that perhaps is not perfect and ideal for us. Listen, if you’re an individual who is at that job that inspires you, and you would do it for free. That’s awesome. Most of us are probably not there, though, right? It’s not perfect, maybe it’s in the field that we love. Maybe it is doing things that we’re inspired to do. And certainly that’s where I was for my 30 years in the military, I certainly was proud of what I did, and what our people accomplished of what my of the incredible people I got to work with. But it wasn’t perfect. But I’m working very hard to make it perfect now to have a pursuit that I’m inspired to do every aspect of, and I’m really close to that. And I’m trying to help others get to the same place. So on today’s show in Episode 93, we’re going to listen to Jason talking about a concept of reducing risk by leveraging debt. I’ll call it the Donald Trump way. And he actually spend some time playing a clip of an individual talking about some research he had done on some trouble that Donald Trump had. And one of you know when one of his businesses went under and how having debt to secure that purchase both made it more of a reasonable solution, and one that basically saved him from total ruin, in that he had partners, specifically the lender to go through that event with him.

You know, I’ve talked about this many times with all of you, I think it’s an essential thing to consider when you’re starting to build your real estate Empire, or your businesses. Certainly imprudent debt debt taken on for the wrong reason, or heavy consumer debt taken on to buy doodads or just luxury items can get you in big time trouble. But if you’re taking on prudent fixed rate, debt that is backed by cash flowing, income producing properties, it’s a totally different ballgame. And in that case, debt helps you offset the impact of inflation. So instead of working against the government or trying not to get destroyed by the government’s decisions, instead, you’re working with them if you can’t, you know, a Bugs Bunny used to say if you can’t beat them, join them. And so, you know, Robert Kiyosaki talks about that a lot, you know, study what the Federal Reserve does, and then get on the same side of the table as them so that you’re not getting ran over by that steamroller of the Federal Reserve. So I have done a few videos, a couple of webinars, would gladly make them available to you, if you haven’t received them before or are interested, you know, please reach out to me at Gary at Gary Pinkerton COMM And I will send those your way. I show in these videos with the math with some calculators, that the ideas that the banks advertise frequently, of paying down your mortgage faster refinancing into a 15 year mortgage, making double payments, all of those put the bank in a better position, which is why the bank is doing the advertising, right, it doesn’t put you in a better position when you’re stuffing equity into your property. And let’s say you’re a couple of years from finished, you lose your job and you’ve put an extra couple $100,000 into your property. Are you in a better position? I mean, can you go to the bank and say listen, tough spot here, I lost my job. wife’s in the hospital needs an emergency medical procedure that’s not covered by our insurance that we actually don’t have insurance anymore because we lost my job. We’d like to get back that 200,000 you know, and the bank’s gonna save sorry, we’re not in the business of lending to people who can’t make repayments seem you don’t qualify for the loan anymore. Yes, sir. But I put that money in there in good faith following you know, the advertising that you did that this was going to set me up for success. So storing all of your wealth in a place where you don’t have any control is a risky move. Is it better to pay it off completely?

Well, maybe but let’s cover something else first. So that strategy of paying off you know and stuffing a bunch of equity into a into a place where you really They don’t have the control is the backbone of this concept that we’re starting to hear a lot about. And it’s dangerous. And it’s this concept of putting a HELOC in first lien position. So it’s really the same thing as having a primary mortgage, a long term fixed rate mortgage. But the difference is, it’s touted that you can save a lot of money, actually, you’re saving pennies, and I’ve got a couple of videos to help explain that as well. But you’ll save a lot of money by paying off your mortgage in seven years or by putting your your monthly w two income in there. And then using a debit card on your HELOC pulling equity slowly back out of the property as you spend, you know, on the monthly expenditures from there, so you’re kind of using it as your checking account. But the point I’m trying to make is that you’ve got all of your wealth stuck in this property again, just like we were talking about, about paying down a mortgage early. Yes, this HELOC thing supposedly has a 10 year window, where, you know, there’s a period of time where you can continue to do this, put money and take it back out. But you get to this point where you can no longer take it out. And then what I mean, if the lending conditions are such that there are good interest rates, then you can just refinance into another 10 year period of time or eight year period of time to get you know, an option to start pulling money out again. But what if the lending environment doesn’t support that or you don’t have the job anymore, or you just for whatever reason your debt to income doesn’t support taking the loan. Bottom line is, is that you’ve stuffed all of your family’s wealth back into a property and have no true control of it. In 2008, and 2009, banks cancelled most lines of credit that would have been opened by individuals. And if that happens in this situation, you don’t longer have money in your savings and checking for emergency funds, you’ve been talked into putting that inside your property, it’s not emergency fund if you can’t get to it. So please just be very careful with those types of arrangements.

Jason Hartman 7:01
Now, let’s talk about you know, completely paying it off. Well, a lot of people that seems to be kind of the American dream that your home is paid off by the time you retire. And people feel a lot of safe, no secure feelings about having a paid off, they’ve achieved the American Dream they have, they’re much more stable, they’re not worried about a mortgage payment. But again, the issue is you’ve got a lot of equity, got a lot of your family’s wealth locked up in a property that could go down in value, or, at best is just very difficult to get access to try getting a loan when you’re in your 80s or late 70s. And don’t have a job, right. So security is your only income, they’re not going to give you a loan to pull the equity back out of that property. But what if instead, you had just simply put the money in an asset that is private and protected, that maybe is even growing. And at any moment, if you needed to, for some reason, you could pay off the home by using the money that’s in the asset. But in this case, you’ve still got the money available, you’ve got both control of the asset, and you’ve got options, I think you’re in a far better position there. So again, I have a few videos, a couple blogs, some articles on those subjects. But please listen to him in here with Jason as he goes through this analysis of the situation that Donald Trump went through, you know, years before he was president, when he was heavily into real estate. And, you know, think about it for yourself about whether you’re safer with a fully paid off asset, or you’re safer, having the cash somewhere accessible, and control of the asset. I leave you with a quote that has been attributed to many, but I’ll use the JPMorgan one. If you owe the bank $100,000 and can’t pay it, you have a problem. If you owe the bank $100 million and can’t pay it, the bank’s got a big problem. And they’ll be your best friend to help you through that situation. So that’s all to say, if you got a big loan balance there, there are people there are institutions. There’s your partner, the lender, that will help you through that situation. And I think that’s, you know, kind of the theme that we’ll hear here with Jason’s discussion about what Donald Trump did when he was in a situation financial difficulty, but had had alone and how much difference that made. So enjoy this. And next time, we will be back with a really special guest, Mr. JOHN Schwab, who has 45 to 50 years of experience in single family rental properties as well as educating others on how to do it. You’re really going to love this one. So hang in there and enjoy this one with Jason Hartman.

Jason Hartman 9:39
Today, I’d like to talk mostly about debt. And we’ll have a little clip here talking about Donald Trump, who I think you’ll be interested in his philosophy on debt and hearing more about it. But a couple things before we get into our core content today. The first one is an interesting thing that Sarah, one of our investment counselors And also someone who does some of our rental coordination for us and for our clients gave me that I thought was kind of a good little thing to start off with. It has been a wild ride this week with the economy and Wall Street and the financial markets. And it’s just, it’s amazing what’s going on, I think the stock market is, is really nothing more than a gambling casino for business people. So glad that I don’t determine my mood, like some people do by what’s going on in the financial press and what’s going on with the the stock markets around the world on any given day, because it is a roller coaster. And he listened to the last podcast, you know how I feel about group investing, and investing in pools or investing in anybody else’s deal, or pooling money together, it’s just a bad deal. But suffice it to say that there is a lot of fear out there nowadays. And again, it reminds me of that great quote by one of the world’s most renowned investors, certainly, and that is Warren Buffett, when he said be greedy when everybody else is fearful, and be fearful when everybody else is greedy. And I tell you now, when there is a lot of fear out there, in my opinion, is the time to get real, real greedy, and start accumulating hard assets, hard assets that are built from commodities. See, if you think about it in 2006, in the United States, we broke the 300 million population mark.

Last year in 2007, we added over 3 million people to the US population, 3 million people that are counted 3 million that we know of not including various forms of illegal immigration. So the population of the planet increase. If you look on the front page of our website at Jason Hartman calm, you see that world population clock. And it is just incredible. go spend an hour on our website, listening to podcasts, downloading videos, and watching some of the great educational content reading articles, whatever it is, and just write down the world population when you visit the website. And then write down the world population when you leave the website. And you will see that there is good reason to be very, very bullish on packaged commodity investing, which we will talk about in a future podcast in great detail. But all of these commodities that it takes to build these houses, and build the commercial real estate that we’re helping people invest in, they are going up in value. So be greedy when everybody else is fearful. So when Sarah handed me this little quote yesterday, I thought it was interesting, because it’s about fear. And it’s from a calendar that she has on her desk that is based on the secret which we talked about a few podcasts ago. And it says that fear is the most debilitating emotion there is. And each and every one of us can live a life without fear. The key to absolute freedom and joy for each and every one of us is to let go of fear. Remembering you’re listening to flashback Friday, our new episodes are published every Monday and Wednesday. When you understand that fear puts you on a frequency of attracting more fearful events and circumstances into your life, you will understand how important it is to shift yourself. People are in fear of being late of losing their job of paying their bills of getting sick, the list goes on and on. But the fear of those things is actually summoning more of them to us. The law of attraction is impersonal. And whatever we focus on with feeling is bringing more of it to us. When fearful thoughts come stamp them out immediately. Send them on their way and replace them with anything that makes you feel good. Remember all of this stuff about the law of attraction. And the older philosophies of this, whether it be way back to biblical times, or James Allen or all the stuff I talked about on podcast number 40. About this is we’re just bringing more of it into our lives. So we need to focus on the opportunities.

The Chinese they have that symbol for crisis, which is identical to the symbol for opportunity. And it means crisis is opportunity riding the dangerous wind. That’s the literal translation. So every fear, every piece of bad news has a flip side of opportunity. And there is some market somewhere or some product somewhere or someone is creating wealth from it. Okay. Also, I think just last Sunday, I believe it was I got my first piece of hate mail. And I kind of like it when this happens because it really makes me think I like people who challenged my ideas. So I want to thank Jenny Jones, who I think sent me sort of a snide email, which was kind of a little hate mail piece I thought I’d share with you here. And I guess when you’re getting on someone’s nerves out there, it means that you’re doing a good job, right? in some way. Well, she says, Hey, Jason, here’s a good story, for you to read to bring you back to reality about real life, hope it’s affecting you too. And when you click on the story, the link that she sent, it’s about what’s going on in real estate and how tough it is for most people out there. And certainly, I’m sorry to see this. The real estate industry is a very dysfunctional industry. It’s massively overstaffed. And now we have a market in many areas around the country that is slowing down. And so this is a change, and it will be painful for some people. And remember, the key to minimizing this kind of pain in anybody’s life is to adapt quickly. And to make changes quickly and to be nimble and agile. When change comes in to expect change and be prepared for it in advance. I like to say expect the best, but be prepared for the worst. So anyway, this little sort of snide email that Jenny sent, I replied back to Biden saying, Hi, Jenny. That’s all true in many of the bubble markets, like California, Florida, and many others. We saw this coming years ago. And that’s why we never recommended these overvalued places. As bad as it is in the bubble real estate markets, it’s actually much worse than the mortgage business. We are doing business in 36 markets around the USA. And these markets make sense. We’re getting fantastic returns for our clients very conservatively. Last year was one of our best years ever. Actually, it wasn’t one of our best years, that was our best year ever, with a 50% increase in revenue to our company. So apparently, we seem to be doing something right here. At least that’s what our clients are telling us. It goes to show how there is no such thing as a national housing market, but rather hundreds of local markets in a country as large and diverse as the United States. Talking about real estate nationally, is like talking about the weather as if it is the same in LA, New York, Miami and Chicago all at the same time. Real Estate, like weather is local. Are you listening to my podcast? I asked her. I don’t know, I didn’t get a reply back to this email. And it’s been a week now. There’s a lot of great free info there.

And if you’re a listener, check it out at Jason hartman.com. We have listeners in 26 countries. And we’re getting lots of great feedback and much appreciation for our honest outlook on the financial markets. Let me know what you think and happy investing. So we’ll see if I hear back from my little piece of snide hate mail there. Okay, last show, we talked about how these overpaid, greedy people on Wall Street are just taking all the money off the top and leaving very little for us investors to share. And there was an article here in the May 21 2000 issue of Forbes magazine. I love Forbes magazine. It’s great magazine. But you know, it’s largely all about the lousy stock market. And it just talks about great while nobody’s watching, and it talks about how people are just taking money off the top, and it talks about overpaid bosses. This is unbelievable. This one CEO his tenure as chief was 39 years. average total return was 6.4% to investors. The last six year return was 4.5%. But the average compensation over the six years was $10.9 million and paid $12.6 million in 2006, including 1.3 million in annual bonuses while the stock was down 17% in the past year. Isn’t that ridiculous? And then it talks about the next one. The CEO of Walmart Lee Scott Jr. was paid $9 million in 2006. The retailer’s stock has been even more money in 2001. But here are the stats right? Seven years is chief during his tenure, the stock was down 3.4% in the last six years it was up point 1% only when the average compensation over this 10 year was $9.1 million. I mean, next one Amgen, Kevin share stock of the drug company firms slumped 18% in the past year, by chair and $7 million, including $250,000 for a company jet. It’s just on and on Eli Lilly Same deal. And by the way, they’re based in Indianapolis one of our markets, which we think is a great market but again, I wouldn’t want to be investing in their stock because the people making all the money Are the insiders, the people in the executive suite? Okay, let’s talk about debt a little bit here. And let’s hear how Donald Trump views debt and how we should too. In my seminars. I talk about a wall street journal article that is quite interesting to me. And this is an article in the Wall Street Journal, and it is titled stocks versus other investments and the date of the article so that you can reference it is September 30 1996. So it’s a pretty old article, and it is prior to the major real estate booms. And the article says stocks versus other investments average annual rates of return from 1926 to 1992, says Dow Industrials had been a wise investment decision. Now, the reason I liked this article so much everybody is because it is a very long sample. A lot of the people that argue the merits of investing in stocks or bonds versus real estate, will argue that I am only picking a favorable time period to take the sample. Well, first of all, I didn’t pick this time period, the Wall Street Journal did, and certainly the people that advertise in the Wall Street Journal are largely companies that recommend Wall Street investments, whether it be Merrill Lynch or fidelity or T Rowe Price or Janis or any of these mutual fund companies or bond companies, whatever they are Ameriprise all the rest, right? largely very few, very little of the Wall Street Journal’s revenue comes from real estate advertising.

Okay. So in this article, says Dow Industrials wise investment decision. But really, are they wise? Because what they say is that from 1926 to 1992, a very long sample, what did we have in this timeframe, we had a great depression, we had several wars, we had a lot of things happen in the US economy and the global economy during that very long time period. And it says that over this long time period, small cap stocks performed at an average of 12.5%, while real estate nationwide performed in an average of 11.1%. And the Dow Jones Industrial Average was in even 10%. Now, by the way, just for comparison bonds, averaged 5.2% treasury bills 3.7% and inflation 3.1% over this very long period. Now, I won’t get into the inflation subject, because we’ve talked about it on many past shows. But you know, my feelings about how the inflation numbers are manipulated. Here’s the problem, everybody, that even if you take what the Wall Street Journal says, it says Dow Jones have been a wise investment decision, you would have done better in real estate. But the reality is that nobody who is investing the right way in real estate ever pays cash for real estate. Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday. So if you put 20% down to acquire a property, that means you are financing 80% of it, and you have a five to one leverage ratio. The real estate massively outperforms all the other investments. Because what happens you take that 11.1% that is the Wall Street Journal’s number, and you multiply it times 520 percent down 80% financing gives you a five to one leverage ratio. That means that the comparison now looks like this. Those small cap stocks that were number one before are still giving you 12.5% over this very long time period. But real estate is now giving you 55.5% that’s an annualized return on investment. Now you need to understand that is simplified because it doesn’t include buying the property and the closing cost on the way in. It doesn’t include selling the property and the closing cost on the way out. And it doesn’t include the cash flow or the tax benefits. Now closing costs in and out. You have commissions when you trade stocks and bonds, same deal. But on real estate, the closing costs are a little bit high. So of course, if you flip properties, you’re going to eat up your profits with closing costs. So don’t flip properties. We’ve talked about that on past shows. But the tax benefits real estate is the most Tax favored asset in America, bar none. So the tax benefits will make you a whole lot more money As long as you qualify for all of them. And there are ways to do that listen to that on prior shows. But the real estate just dramatically outperforms.

So assuming you have a slight negative cashflow on the real estate, you might chip away at your 55.5% return and bring it down to 40%. So what, okay, and if you sell the property, you might chip away at your return as well. But if you sell the stock, you’re going to have to pay capital gains. There’s no 1031 tax deferred exchange on stocks. Real Estate has that benefit, but stocks don’t. So you’re going to have another benefit there. Real estate is a much more favored asset. Okay. 55.5% with real estate at a five to one leverage ratio. What about the Dow Jones, still 10%? Okay, you could buy the stocks on margin, you could get a 50% margin on your stocks. But guess who pays the interest? You do on real estate, your tenant pays the interest for you? Because so far, I have never and I don’t know anyone else who has rented out their stocks so that the renter will pay the cost of the debt. All right. And then the other investments, same performance, you get the idea. Real Estate blows it away. Okay, here’s the return with 10%. down, and a 90% mortgage, same numbers quoted in the Wall Street Journal, September 30 1996. Now you have small cap stocks at 12.5% Dow Jones at 10% bonds at 5.2. Treasury bills at 3.7 inflation at 3.1. Over this very long period. Real Estate which was 11.1% 10% down gives you a 10 to one leverage ratio. Now you have a simplified annual return on investment of a whopping 111% you multiply times 10. But if you use more leverage, you will have more negative cash flow fine and dandy. chip away a little bit at that. So Fine. Listen to our show on deferred downpayment and you will see in detail how we calculate this. But what if that negative cash flow or that deferred downpayment brings your return down to 70% 80%? I don’t know 40%. So what you still have tax benefits, the real estate just massively outperforms any other investment. Remember, when you buy a property, you have a choice, you either put the money into the property or you put it in the bank, I say that the property is the worst bank. Real estate is a lousy bank, it does not perform well as a savings vehicle or as a cash flow vehicle. It performs well as a lean, highly leveraged vehicle for so many reasons. Now, many of you are probably readers of Robert Kiyosaki his books. He’s the author who wrote the Rich Dad Poor Dad series. And you know what, he’s a terrific educator. I like his material a lot. The last one of his books that I read is called who took my money. And in many parts of it, he’s kind of bashing the financial services industry, I agree with him. And he compares real estate, over 10 years $10,000 invested in a single family home, versus $10,000 invested in s&p 500 index fund.

Well, if you put $10,000 in 1992, in the s&p 500, by 2002, you would have back $17,400, approximately. But if you put that $10,000 into a piece of property, you could buy $100,000 property rented out, let your tenant pay most of the carrying costs of the debt, the property taxes, the insurance, everything, all right. And over the years, you’re going to raise your rent every year. So this is a simplified example again, like the other example was, but at the end of that 10 years on the average single family home, it would be worth over $158,000. So your gain on your $10,000 investment very roughly here is over $58,000 versus your gain in the s&p 500 have only $7,000 in change. And this is not including the incredible tax benefits. Real Estate offers as America’s most tax favored asset. Now I have talked A lot about the virtue of debt, real estate, because we put the real estate label on it, the entire US banking system and nowadays, many banks around the world in different countries see how favorable real estate is as an asset class, and they will offer much more financing on real estate, because they know it is a much safer investment than stocks. Why do you think it is banks will loan you 90 95% of the value on a piece of property, yet, they will only loan you 50% margin on stocks, because real estate is a safer, better asset class. Okay, so what if you get into trouble, leverage or debt needs to be treated with respect, it is a powerful tool for wealth creation, you can accelerate your wealth creation much faster by using leverage in a smart, conservative, prudent manner. But if you’re not careful, and you don’t respect leverage, you can also get yourself into trouble with it. So we have to respect it properly. Now, I ask a lot of you and I have before, how many of you have ever loaned money to a friend or a family member? Guess who was in control of that transaction? Was it you the lender? Or was it your friend or family member the borrower, it’s the borrower, the borrower has the position of strength whenever they borrow money. So I say borrow money. Shakespeare was only half right when he said neither a borrower nor a lender be being a borrower is a good position to be in, as long as you are borrowing money on assets that create wealth, and not assets that decline in value and do not create wealth, like consumer goods, bad borrowing, good borrowing, constructive debt, destructive debt. But the other thing that happens is that the lender, when you get into trouble, if you ever do is to a large degree, your partner, and your advocate, and the party that can help you through these troubled waters.

So let’s listen in to a clip from a great book entitled all the money in the world, or the author profiles, the Forbes 400 richest people in america. And here’s what he says in this short clip about Donald Trump. When Donald Trump the big real estate investor, the big real estate guru got into trouble in the 90s. What did his bankers do? Well, his bankers became his ally, his partner and his advocate. If he was not leveraged if he was not in debt, he would have had nobody to turn to except himself. So listening to this clip, and I will be back with you in a few minutes, and we will talk more about the virtue of debt.

‘Audio Clip’ 33:08
Donald Trump, he has learned the hard way that in the casino and real estate industry, it’s best to share the burden among as wide a group of people as possible, one of the highest profile victims of 1980s over leveraging and one of the few who lived to fight another day, Trump still emblazoned his name on many projects springing up around the country, but it is often other people’s money that bears the brunt of the risk. Trump began building his empire in the early 1970s by buying the railroad yards along the Hudson River of the failed Penn Central Railroad. Then he began investing in land in Atlantic City, eventually buying two hotels, the Trump Plaza and the Trump castle. Both were described as deteriorating and problematic. In 1987, Trump added to his Atlantic City gamble by borrowing $80 million to buy a controlling interest in resorts International, a company that included the Atlantic City Taj Mahal among its properties. The purchase was a first step in wresting control of the company. In addition to wrangling with shareholders, Trump also face competition from Merv Griffin, the TV tycoon who had recently pocketed $250 million from the sale of his television production company, which had created Jeopardy and wheel of fortune. Griffin outbid Trump for control of the company, and the two ended up in court. In hindsight, being outbid by Griffin was a godsend as Trump later admitted to Forbes resorts was in bad shape. Griffin’s company finance the deal using $325 million of junk bonds and went bankrupt a year later when it couldn’t handle interest payments. Trump who had retained only the unfinished time Mahal Hotel Casino, along with a $12 million cash settlement survived. But then he further added to his debt burden in 1988 when he bought the Plaza Hotel in New York City for $390 million, and the Eastern Airlines shuttle, which he renamed the Trump shuttle for $305 million. By 1990, Trump was more than $3 billion in debt. As Mark singer wrote in The New Yorker in 1997.

Trump’s excessively friendly bankers infected with the promiscuous optimism that made the 80s so memorable and so forgettable had finance Trump’s acquisitive impulses to the tune of $3,750,000,000. Through the early 1990s, Trump and his organization went through a debt restructuring. He lost the Plaza Hotel is Boeing 727 his yacht and the Trump shuttle. Worse still, Trump was personally liable for $900 million of the debt and was forced to agree to a personal spending cap of $450,000 a month in the opening pages of his 1997 book, Trump the art of the comeback. Trump recalls walking down Fifth Avenue one December evening with a holiday lights a glow, seeing a homeless bum on a corner and thinking that this unfortunate man was richer than Trump. It would take years for Trump to work his way back. In the mid 1990s, Trump took two of his heavily debt laden casinos public. The resulting company Trump entertainment resorts, filed for bankruptcy in November 2004 and reemerged the following may with Trump’s stake in the company reduced from 47% to 31%. And with James B Perry replacing Trump as chief executive, but the Trump Organization survived. Nowadays, Trump and his eldest children Don Jr. and Ivanka make their fortune overseeing other people’s projects and bestowing upon them the Trump name and brand. Trump gets eight to 15% of other developers condo sales usually puts up no money and gets upfront payments of several million dollars. According to Forbes, the Trump name can command a premium of 20 to 30% in added revenue for any project, and in 2006, the magazine reported no fewer than 33 Trump franchise projects underway.

Yet, when asked what was the biggest risk he ever took, Trump didn’t talk about his brushes with bankruptcy. Instead, he replied, I took a big risk when I decided to star in and co produce the apprentice. The statistics show that 95% of all new shows fail. Those were not great odds, but I had a feeling the show would work. I wasn’t expecting the show to become the number one show on television. That was a nice surprise. But I did think the concept had merit and knew we’d encounter some level of success with it. So how could a man whose businesses were once mired and billions of dollars worth of debt with $900 million dollars of that owed personally see his biggest career risk as the apprentice? As weird as it seems? It also speaks to the Supreme Self Confidence shared by Trump and many others on the Forbes 400. When asked about that time in his life, Trump says pressure can bring out the best and worst in people. And in my case, it made me stronger and more determined than ever. I also employed my blip versus catastrophe theory. Yes, I had some financial problems. But it wasn’t a war, an earthquake or something truly horrific. That allowed me to keep my equilibrium and perspective intact, and make my company bigger and better than ever. Then he adds, I was already planning for the future and what I would be doing, and I just knew that I’d pull through and continue working at what I love doing.

‘Audio Clip’ 39:10
In case after case, self confidence and fearlessness save the day for members of the Forbes 400 but it also helps if they are obsessed with their vision. Take for example the case of shipping magnate Daniel Ludwig. Born in 1897. Ludwig started out at age 19 with a $5,000 loan that he used to buy and convert a paddle steamer into a barge. Later he moved on to chartering and eventually building tankers, becoming the owner of the fifth largest tanker fleet in the United States. By the end of World War Two. Ludwig leveraged his tankers to build a fleet that peaked at 60 ships, which he then used as collateral for loans that financed business ventures throughout the world, including real estate and mining wasn’t

Jason Hartman 39:59
Interesting, by the way, there’s a lot of interesting stuff in that book or on the audio CD, which is what I played a clip of. And I’d encourage you to get it. It’s called all the money in the world. And it’s about the Forbes 400. It’s really quite interesting. Here’s the thing. Now, you may think after listening to that, gee, what if Donald Trump didn’t have that debt? The debt is what got him into trouble. Hmm. It does not make the opposite point. You’re wrong about that, if you think that because the debt is what allowed Trump to create so much wealth. And remember, the debt is what gives us the inflation hedge the main part of it, you’re paying the debt back and cheaper dollars. I mean, it’s kind of funny how they say that Trump said, Well, I was in so much trouble, I was under so much pressure he had he was getting his bankers put them on an allowance of what $400,000 per month, gee, it must be tough to live on that kind of money. And just remember, you can grow a lot faster with the prudent use of leverage. But I want to make something clear that anything that does not create income, does not qualify in my eyes as an investment, but rather a speculation. I’ve given the example on prior shows about when I bought those gold coins from the monex. dealer. And I said, I’ll pay cash for them because I have to you won’t finance them over 30 years, at the lowest interest rates. And for decades, I don’t get tax deductible interest, and I can’t rent them out to anybody. Remember, we don’t recommend vacant land, because it doesn’t produce income. Your house is not an asset the house you live in, because it doesn’t produce income. Anything that is a consumer item, a new car, a new plasma TV, a vacation, new clothing, that is not something you should use debt for, because it does not produce income. Only use debt for income producing assets like rental properties, because someone else pays the debt back for you. That is the key to creating wealth with debt. Otherwise, you’re a speculator, you’re just planning to buy low and sell high. If you buy stocks, you’re a speculator buy low, sell high, maybe get some dividends along the way. If you buy precious metals, you are a speculator Now, granted, I’ve made some good money in precious metals recently. And you might have to and a lot of people have, but did you know it was going to happen for sure.

Now, no one is ever Sure, predicting the price of gold or platinum or palladium or silver is nearly impossible. Ask all the gold bugs when 1980 who thought the price was going to go up forever. for 18 years, it’s out there and did absolutely nothing but decline. So speculative, buy something that has universal need. Everybody needs food, clothing, and shelter. And when it comes to shelter, the only choice they have is they either buy it or they rent it from you. Someone else pays for it, the bank pays for it, your risk is very low, because you’ve only put a small amount of money into the deal. And by the way, let me mention something else about risk and debt. When talking with people in some of my seminars and so forth. I’ve said before that the best insurance is a high loan balance. And you know what, I hate to say this, but it seems to be true, at least in past experience. Look at what’s happened after natural disasters like the Northridge earthquakes here in the 90s. In California, Hurricane Katrina, Hurricane Rita, the people that got hurt the most were the people that own their properties free and clear, because they were the ones that had to go fight with their insurance companies to get them to pay the claim. Where is the people that were highly leveraged, their lender became their advocate. Their lender was the one that helped them battle with their insurance companies to go recover the money and pay the claim after Hurricane Katrina, the states of Louisiana and Mississippi, I believe it was the Attorney General they’re sued all the big insurance companies because of their unwillingness to pay the insurance claims. You don’t want to go down that path. You don’t want to be arguing with your insurance company. You don’t want to have to go hire the attorney to bicker with the insurance company for you. Let your lender do it. your lender becomes your friend, your advocate, your partner who is in there with you, just like with Donald Trump, but the thing about it is that your lender doesn’t get any of the profits. They just collect a small interest rate paid for by somebody else your tenant pays your lenders interest rate you don’t pay it And then the value of that debt goes down over time with inflation. So you keep paying it back and depreciating dollars. listen to the podcast where I talk about inflation, especially the great inflation payoff. So I hope this was helpful to you to keep the concept of debt in perspective, again, a powerful tool for good, but it needs to be used prudently, conservatively and with respect. And you need to follow all the other rules for this to work. You need to make sure you’re not a speculator, you’re only buying properties that make sense the day you buy them.

That’s commandment number five. All right, so there are 10 other things you need to do, right? To make sure this works. Go see my show on the 10 commandments of successful investing, for more details on that. And in the meantime, we’re getting a little long here. So I want to say Happy investing to you. And Tune in next week. We have another great show coming up for you on a whole bunch of different interesting topics in the future. So this is Jason Hartman over and out happy investing.

Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.