Use Creativity to See Value Where Others Can’t

Wealth gurus talk a lot about how wealthy people see money differently. The theory goes that they treat money and assets in a different way than most people, a way that tends to attract more into their lives.

Part of this different paradigm, especially for the self-made wealthy, is creativity. People who are wealthy or on the road to wealth often create money out of what seems like nothing. They are able to see opportunities that others cannot. They often take risks when other people are shying away.

The first step to creating wealth is not learning the tricks and techniques of the wealthy, it’s learning how to tap into your creative powers.

Supply and Demand

The laws of economics support this idea. The principle of supply and demand rewards creativity and punishes conformity. The majority of people are perfectly content taking a job where they trade their hours for dollars. Since there is a seemingly endless supply of workers, wages tend to stay low.

Consumer prices tend to follow wages because most people tend to spend all the money they make. The more money they make, the more they spend. If the supply of goods remains the same, prices rise. If prices always follow wages, how is a person supposed to get ahead in this system?

On the other hand, economics rewards the people who aren’t doing what everyone else is doing. It rewards those who start businesses. It rewards those who buy things that are out of favor and sell them when they come into favor. It rewards the people who create value in something that no one else can see.

Real Estate

Real Estate is my absolute favorite asset class. I love just about everything about it: the fact that it tends to have more stable appreciation than stocks, the fact that it is easily leveraged, sometimes 100% or more, the fact that a tenant can pay your mortgage for you, the home improvement projects (insert manly grrr sound), and the fact that a home and land is a very emotional asset to most people.

Most of all, I love the fact that (believe it or not) it takes a lot of creativity to be successful in real estate. If you don’t have a down payment, you have to get creative in the financing. You have to be a creative negotiator to come up with win-win deals. You have to get creative when figuring out what to do with those ugly cabinets that the last owner left.

There are several real estate shows I watch on TV, one is called flip that house, and another is flip this house. I love these shows because they illustrate how creativity can equal dollars in real estate.

Flipping can be risky business, but a professional makes her money by buying a run-down house that no one else wants. You see, most people can’t see past a house’s outward appearance. It takes a strong creative muscle to see the potential in a property that has been run down, or is poorly laid out.

The investor buys the home for 20% below market rate because of its poor condition. She uses her creative eye to start adding value by cleaning it up, adding square footage, knocking down certain walls to make rooms bigger, re-purposing rooms, adding nicer fixtures and appliances, etc. By the time she’s done, the property could be worth tens of thousands of dollars more than she put into it.

Even if you don’t have the stomach for flipping, a creative buy and hold real estate investor can find the same diamonds in the rough to rehabilitate and rent out for a premium.

Stocks

The stock market is a great example of rewarding creativity. Think about it: Once everyone likes a stock and buys it, the price becomes over-inflated; so you can’t just buy the same stocks as everyone else.

A creative stock investor can see the value in a company before everyone else. When everyone else catches on and drives up the price, he sells and books profits.

Peter Lynch became famous for seeing value in stocks before everyone else. The Magellan fund that he managed at Fidelity once averaged a 28% return over a 13 year period. He did so by finding companies that weren’t being covered by analysts, but were good companies nonetheless.

Simple Retail

Simple retail businesses make up the majority of most economies. A retailer finds a way to buy a product at a wholesale price to resell to the end consumer for a profit.

Why doesn’t everyone buy at wholesale prices? Well, wholesale prices are tricky to find and usually limited to purchasers who buy in bulk or have an arrangement with a supplier. This means that retailers have to be creative to find suppliers.

I admit that it can be hard if you don’t have a lot of money or connections to find products at wholesale prices, but it can be done with enough creativity. eBay has made it even easier. Now anyone can start a buy and sell business.

It used to be that you had to have money for a bunch of inventory, a storefront, and employees. Now you can sell one product at a time on eBay by yourself in your home. eBay even has a section for suppliers selling at wholesale called wholesale lots to get you started.

Think like Donald Trump and Warren Buffet

The Donald is a creative real estate investor of the highest order. He finds multi-million dollar properties that he can add value to creatively.

Warren Buffet does the same thing with businesses. He finds undervalued companies that no one else likes and buys them to fix up.

My Diamond in the Rough

A couple of years back, I was looking to buy some more vending machines for my bulk candy vending business. I had an alert set up with eBay that would send me an email when anyone had a listing with the words candy vending machines. One day I got an alert that I couldn’t believe.

A man wasn’t just selling his vending machines, he was selling his entire vending business. He claimed to have 20 machines placed in locations cashflowing $500 a month, and 20 machines in storage. No one had put a bid on the listing, but there were still a few days left.

Without getting my hopes up, I calculated what I might be willing to pay for the company if he was telling the truth. $500 x 12 months is $6,000. I usually like to get at least a 20% return on my investments, but since this was more risky, I wanted at least 50%. Under this logic, I would be willing to pay $12,000.

I further rationalized that even if the cashflow was not what he claimed, I could sell all 40 used vending machines for $100 a piece, or $4,000. I decided to take the conservative approach and make this my highest offer.

No one had bid on the listing with ten minutes to go, so I decided to put in an offer to test his reserve. I set a proxy bid at $4,000 and eBay told me that I broke his reserve at $1,500. I waited for the flood of last minute bids to knock me off.

I waited and waited, but when the bidding closed, I was the lone bidder and won at $1,500! No one had seen the value in this business!

Could this be True?

The real test was when I met the man to take over his business. He showed me the machines in storage, which all looked good, and gave me a map of his route. He also told me that there was a bit of a surprise that he didn’t advertise on the eBay listing.

It turns out that there were another 15 locations that he hadn’t advertised because he had abandoned them. Since he wasn’t sure of their fate, he didn’t want to promise them. He said that I could track them down if I wanted!

Now that I knew I had at least my money’s worth with 20 good machines in storage, I set out on my treasure hunt! I went to all of his advertised locations, plus found some of his abandoned locations. Many of the neglected locations had money in them!

In fact, I collected over $750 on my first day of owning the business! Since I had only paid $1500 for it, I got half of my money back.

This guy obviously didn’t care about his business. Most of his machines were dirty, empty, with the wrong types of candy. He had a lot of the machines set to give out too much candy.

I’m not a grinch, but I know that there is a point of diminishing returns when it comes to how much candy the average person expects for a quarter. If the candy is falling out of their hands, it’s way more than they expected and taking money out of my pocket.

I cleaned up the machines and set them to give out a reasonable amount of candy for a quarter. I hit the road and started placing the stored machines in locations. With very little effort, this business started adding an additional $1000 a month to my cashflow, and it only cost me $750.

Now, this deal didn’t make me rich like Trump or Buffet, but it sure gave me a taste of the creativity those guys use to find deals. Now, I am always on the alert for diamonds in the rough!

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