According to author Chris Martenson in his 2012 book, Crash Course: The Unsustainable Future of Our Economy, Energy & Environment, there are only two out of the three types of wealth that matter and that investors should focus.
First, the three types of wealth are:
Primary Wealth. Primary wealth represents the physical resources from which all other wealth is created. It’s the farmland that produces agriculture for sale, the land from which oil, gold, and coal are extracted, and the buildings from where businesses are operated.
Secondary Wealth. Secondary wealth is what is made from primary wealth. It’s the wealth created from putting primary wealth into production. After all, rich soil, oil-rich land, and office buildings that sit idle aren’t much use.
It’s by putting the physical resources of the primary type of wealth into production that creates secondary wealth. It’s the produce and meat sold on the market, the leasing of the building to business tenants, and the oil and gold extracted and sold to willing buyers.
Tertiary Wealth. Tertiary wealth is paper wealth, including cash, stocks, bonds, and mutual funds. Highly-compensated professionals such as CEOs, doctors, and lawyers generate this type of wealth from working. Workers convert their cash into other types of tertiary wealth like stocks, bonds, and mutual funds in hopes of growing it from appreciation.
Here’s the problem with tertiary wealth. It’s unreliable and unsecured.
A doctor, lawyer, and CEO can all get in an accident tomorrow and lose the capacity to make money and lose this tertiary type of wealth. Even cash itself is unreliable as currency can lose value due to inflation. Putting money in a savings, CD, or money market account where inflation outpaces interest earned is the same as burning your dollar bills.
As for stocks and mutual funds and other Wall Street products, you could lose everything. Shareholders are last in line in a liquidation. Just ask the shareholders of Lehman Brothers, Worldcom, and Enron.
The 1%, the wealthiest of the wealthy, are focused on primary and secondary wealth. They own natural resources, land, real estate, and businesses.
Why? Because these are the only type of wealth that can create income while they sleep. But you’re thinking CDs and money market accounts make money while you sleep. Not if inflation is eating up that gain.
Ultra-high-net-worth investors (“UHNWIs”) are only interested in the types of wealth that will create generational wealth – wealth that can be passed on to their children and their children’s children, and so on.
Do you want to know the UHNWI strategy? They acquire physical assets then put those assets to use and put those profits back into acquiring more physical assets.
The business owner uses office space and resources to peddle their wares then use the profits to expand the business by acquiring more office space and resources. One recent example is Amazon’s plans to open up an East Coast headquarters. A real estate investor converts a building and land into rentable space and uses the income to acquire more rentable space.
The key to true wealth – the kind that you make even as you sleep – is leveraging primary wealth to create secondary wealth in the form of income to reinvest into more physical resources and income-producing products and services.
Primary and secondary wealth are the only types of wealth that investors should be focused on because it’s those types of wealth that can build upon itself as well as the least volatile and most secure.
You hear about investors losing a billion dollars in one day from a stock market crash. You don’t hear the same about investors in alternative assets like real estate, precious metals, farmland, and businesses that are uncorrelated to Wall Street. A shareholder can lose their entire investment, but a real estate investor will always have an underlying asset, the value of which will never go to zero.
Here’s the good news for the doctors and lawyers of the world who have tertiary wealth.
They can convert that wealth into primary and secondary wealth to generate true wealth. But top earners are time-constrained. They’re at the hospital and courtrooms. How do they have time to acquire resources and develop those resources into productive farms, businesses, or real estate? The answer is they don’t have to.
Time-constrained top earners can generate secondary wealth by investing indirectly and taking partial ownership in private companies in the business of creating primary and secondary wealth.
For example, investing in a private fund in the business of commercial real estate investing offers investors the opportunity to reap the income, appreciation, capital preservation, and recession-resistance benefits of direct real estate investing without the time commitments or headaches.
Conclusion
If you’re focused on tertiary wealth, you’ll never stop trading time for money, or you’ll always be a victim of low yield (CDs, bonds, money market accounts) or volatility (stocks, mutual funds, etc.).
Unless you focus on primary wealth through direct investments or secondary wealth through indirect investments, you will never achieve the true type of generational wealth the 1% enjoy.
Unless you find a way to generate income in your sleep, you’ll never stop working.
Investing for growth,
Michael Foley
