Saturday, October 2, 2010

The Michael Masterson Journal

MM Journal

Issue No. 62 - $1.91

Saturday, October 2, 2010


"Charity is injurious unless it helps the recipient become independent of it."

John D. Rockefeller

The Ten Commandments of Charity

Down the road going north from my vacation home in Nicaragua, you pass two hamlets, both bearing the same name: Limon.

Most of the families that live there have at least one member who works for Rancho Santana, the residential real estate development my partners and I started 13 years ago. Some work as guards, some as groundskeepers. Others work as housekeepers or gardeners. Still others have found employment as bartenders, waitresses, lifeguards, plumbers, carpenters, mechanics, electricians, or laborers.

The homes they live in are two- or three-bedroom wood-framed or clay-block structures. They travel to and from work by bus or bicycle. They get their water from community wells. Their children go to local schools. When they get sick, they get medical treatment at the clinic, which is financially supported by Rancho Santana.

It is a simple life, but not without its pleasures. There are baseball games and soccer matches on Saturdays, church-sponsored events on Sundays, and many birthday parties and weddings and baptisms.

And ever since Rancho Santana erected a tower three years ago, everyone has a cell phone.

When I first came to Rancho Santana, these same families were living in abject poverty. Their houses were shacks put up on dirt floors. Their diet was rice and beans. And there was no medical care available less than an hour's bus ride away.

The reason things are better now has nothing to do with international development agencies, government initiatives, or non-profit organizations. It was due to private enterprise. Rancho Santana created jobs that have kept hundreds of people employed for more than 10 years.

Moreover, the early success of our project spurred the construction of dozens more up and down the coast that have employed thousands.

We didn't go to Nicaragua to upgrade the lifestyle of the people. We went there because we saw a great profit opportunity. And developing the ranch was, indeed, a good deal. That's because we paid much less for both the land and the labor than we would have had to pay in other sun-bathed retirement destinations.

So, yes, we took advantage of Nicaragua's low costs to build our community of expensive ($250,000 to $1 million) homes and condos. Meanwhile, we acted as responsible businesspeople, gradually and prudently increasing the local wage levels and investing in services for the benefit of both our customers and our employees.

As a result, the residents of Limon Uno and Limon Dos are much better off now than they were before we came -- something I'm proud of. Still, they are poor. And I can't help but be aware of the extreme contrast between what I have and the meager resources of the people who work for me.

It's an uncomfortable feeling -- one that drove me to try to come up with ways to help them on a personal level. In the beginning, that meant listening, half-comprehendingly, to their "solicitudes" in Spanish and then handing out dollars.

This technique quickly backfired. Within weeks, my serene home overlooking the Pacific became handout central. By the time I got out of bed each morning, a line of supplicants had already formed from the driveway to the front door.

I had no criteria except for expressed need, no means of verifying claims, no requirements attached to the money I doled out. What was intended to be an occasional kind gesture had ballooned into an unruly giveaway that was converting the happy, hardworking local population into disgruntled beggars who believed they had a right to anything and everything their neighbors had received.

Instead of helping the people in the community, I was creating a culture of dependency and entitlement.

In short, I was doing more harm than good.

So I reined in my beneficence for a few months to give myself a chance to do some reading and thinking about this problem I was having -- this problem of giving.

The result was several insights that became the basis of the charitable work I have been doing ever since -- insights that contradict most popular, conventional "wisdom" on the subject of giving.

Here's what I came up with...

My Ten Commandments of Non-Destructive Charity

Charity is a double-edged sword, and must be exercised with caution. To keep that sword from unintentionally doing damage, I now make sure that 10 rules are followed:

1. The donor must be certain the money is being requested to satisfy a need rather than a want.

2. He must be able to see some productive result from his giving.

3. He must not simply hand over 100 percent of the money that is needed.

4. The recipient must make a formal, written application for the money.

5. He must state, in explicit terms, how he will use it and how it will have a positive effect on him as well as others.

6. The recipient must faithfully and scrupulously honor the terms of his contract, and cannot apply for further assistance until all his obligations have been met.

7. After receiving aid, the recipient must formally and convincingly thank the donor.

8. The charitable action should be a matter of public record. Charity that is private -- contrary to what some say -- is the worst kind. Neither the donor nor the recipient can opt to be anonymous.

9. In giving money (or other help), the donor should assume responsibility for the recipient's actions related to the gift. It is primarily the giver's job to make sure the recipient uses it as it was intended.

10. Throughout the entire process, the recipient must treat the donor with the utmost respect.

If your idea of charity is writing a check to Unicef once a year or volunteering for a soup kitchen from time to time, you may find these Ten Commandments disturbing -- perhaps even outrageous.

If you feel that way, it is because you have never thought much about what it means to help out your fellow man.

Doing Less Harm Than Good -- a New Approach to Giving

Loosely enacted, charity can be very destructive. That's why my motto has become: "Do less harm than good." It reminds me that in giving help I take on the responsibility to make sure the help I give doesn't disable.

Armed with this mantra and my Ten Commandments of Non-Destructive Charity, I cautiously began to give again.

My first action was to hire a young woman to be my administrator. I knew that -- despite my convert's passion for my Ten Commandments -- I would have neither the time nor inclination to do it myself.

Next, I put the word out that if anyone wanted anything from me from then on they had to make a formal application to Brenda, not walk up to my house at any hour of the day or night to "platicar."

Then, with Brenda's desk covered in "solicitudes," she began implementing my rules.

The first new program I had in mind was a micro-lending facility for local people who wanted to improve their living conditions. Brenda prepared a form for them to use to explain how the improvements they wanted to make would increase the long-term value of their homes. (Cement floors were in. Big screen TVs were not.)

In addition to the form, we required a handwritten letter from the potential borrower explaining, in his own words, why he wanted the money, what he would use it for, and how he intended to pay it back.

Brenda would then verify all his facts, check his material and labor estimates for accuracy, and verify his employment or other proof of his ability to pay back the loan.

So far, this is sounding pretty much like an ordinary banking transaction. But we did two additional things (related to my Ten Commandments):

  • We posted all loans and repayments in her office for all the other borrowers to see.

  • We required everyone who received a loan to send a handwritten thank you.

  • We strictly enforced a rule that no individual could apply for additional funding unless his previous debt had been fully repaid.

The result?

To date, we have executed scores of these loans -- and it is easy to see the impact they have had on many homes in Limon Uno and Limon Dos. Just as impressive, we have a perfect 100 percent repayment rate so far.

I don't know if any other unsecured micro-lending program in the USA (or anywhere) has a perfect repayment rate. I attribute ours to the public nature of our program, our inflexibility toward defaulters, and the requirement that recipients say thank you.

My next program was to sponsor children who couldn't afford to pay for the school supplies and uniforms they needed in order to attend public school. These were gifts, not loans. We didn't, therefore, have repayment terms but we did mandate applications, personal letters, and letters of thanks from the children themselves.

Next were micro-loans for local people who wanted to start their own businesses. My housekeeper, Yesinia, borrowed money to open a clothing store that turned out to be very successful. My gardener/maintenance man, Enrique, borrowed money to establish a little tienda in front of his house. His wife runs it, bringing in extra income for the family. And recently, a group of men came to me with a proposal for a slaughterhouse for cattle. They had a good, sensible business plan and impressive experience.

If you walk through Limon Uno or Limon Dos, you will see dozens of little businesses, half of which were funded by this program. Some of them are doing just okay and some are doing quite well. But none has yet closed its doors. Again, I think it has something to do with our criteria.

A year ago, I invested in an English language school for the locals.

Lots of the laborers at Rancho Santana would like to learn English. They realize that English-speaking jobs (e.g., waitress, bartender, housekeeper) pay 50 percent to 100 percent more than jobs that do not require English. And I'm very pleased with the progress that's been made. Attendance at the school is nearly 100 percent, even on days when the roads to the school are flooded. The students are respectful of our teacher, eager to learn, and proud when they "graduate" to the next level.

My latest project is the biggest to date. I'm building a community center just across the street from the entrance to Rancho Santana. It will contain the English school, several technical schools, a library, a crafts room, and a full recreational facility. It will probably take about five years to complete (and use up all of my available income).

My youngest son is going to design the library. He knows the area very well and believes the community will welcome a place where they can read, online and off, for free.

Jeff Munson, a friend of mine who has bought property near Rancho Santana, plans to retire there after his fighting days are over and teach local kids wrestling and mixed martial arts at the center.

Nicaraguans are crazy about baseball. Ours will be the only regulation size field within 30 miles. There will also be opportunities for kids to learn to play basketball, soccer, and tennis. Who knows what future superstars will emerge from this tiny part of the world?

Of all the things I've done so far, this is the one that worries me the most. That's because after it has been in operation for a year or two the local people might look at it as something that should be there, something they are entitled to.

To combat that, I'm thinking of incorporating some sort of application process, strict rules for good behavior, and maybe an annual membership fee. But I don't sense that will be enough. I'm going to have to add to it as I go. I'm also concerned about the "sustainability" of the community center. Other things I'm doing -- from micro-lending to the English language school -- can eventually sustain themselves. All I'll need to do is charge a small fee to pay for Brenda's time. But I don't think I'll ever be able to charge enough in membership fees to cover the cost of running the center.

(By the way, if you have experience in this sort of thing and have some good ideas, pleas e-mail me at AskMichael@ETRFeedbackcom.)

Shortly after Daniel Ortega came to office, he fulfilled a campaign promise by giving every poor family in Nicaragua a pig and a kerosene-fueled light. He was a hero that day and for some days that followed.

But within a week, the poor people were selling or butchering their pigs to buy things they needed, and a month later the kerosene lights were useless because nobody had money for fuel.

"Indiscriminate charity," said Andrew Carnegie (who gave more to charity than perhaps any other person in history), "is one of the most serious obstacles to the improvement of our race."

Conclusion:

The impulse to help others in need is just as human -- just as deeply ingrained in our DNA -- as the Ayn Randian impulse to take care of oneself and one's own.

I see these seemingly contradictory impulses as two sides of the same coin. I believe they are both natural to our thinking because evolution mandates it.

But charity is a risky endeavor.

It is dangerous not just because it has the potential to promote the idiotic (and ultimately self-abasing) idea of entitlement. It is dangerous, too, because it tends to create dependency, reduce initiative, and sometimes breed resentment.

That said, the charitable impulse cannot be denied. And despite its potential for destruction, charity can help promote self-sufficiency, personal responsibility, and reciprocity... if done the right way.


More About My Special Theory of Wealth

As I've mentioned before, I'm publishing my latest book, tentatively titled The Special Theory of Wealth, in installments as I write it. But only subscribers to the Liberty Street League, ETR's premium wealth-building newsletter, get access.

In this month's issue, LSL members learned that almost every decision you make -- no matter how big or small -- is an opportunity to build wealth. And I showed them how to seize those opportunities.

Here's a quick excerpt from the essay:

My Special Theory of Wealth is based on the observation that our lives our filled with all sorts of events and situations that we can turn into wealth-building opportunities.

Put differently, you have three choices:

1. You can be oblivious, blind to the possibilities.

2. You can be aware of the things that happen in your life but do nothing to take advantage of them.

3. You can be conscious of the potential value of every situation you find yourself in and invest in them.

To see the rest, and to read the rest of my book over the next several months, sign up for the Liberty Street League today.


How to Have Great Tenants

When I first became a landlord about 15 years ago, I intended to be the best landlord a tenant could ever ask for. I listened to my tenant's stories. I allowed them to pay me "when they could." I did all the repairs that were needed at my expense, even when it was they who caused the damage.

Of course, I lost a ton of money. What really bothered me, though, was the "thanks" I got when they left (usually without notice) -- apartments and houses that were completely trashed, often costing me a year's worth of rent (rent I hadn't collected) to put in order.

Rental real estate is still a great business -- one I highly recommend you consider getting into. But if you do, heed my advice and practice tough love with your tenants.

Here are my rules :

  • Write a tough contract -- one that puts you completely in charge. Include the harshest provisions permissible by law. You don't have to enforce them. But you will be happy they are there. (You must, of course, keep up your part of the bargain. In exchange for the rent you get, you should give them a clean dwelling in excellent shape. And you should keep it that way.)

  • Make it very clear at the beginning that you will evict them if they violate the contract in any way. Furthermore, tell them you will sue them if back rent and damages exceed the amount of their security deposit. Take a photo of them in the apartment to demonstrate the good condition it was in when they took occupancy. (Nobody else does this but me, as far as I know. It works wonders!)

  • Charge them penalties from month one. They must know you were and are serious about your warnings.

  • Evict them without second thoughts if they fall behind more than a full month's rent.

When I got some of my family members into the rental real estate business with me five years ago, they objected to my toughness. I let them do it their way because I know that the only way to learn is from experience. They bent over backward being "good" landlords -- and learned the same lessons I learned the hard way.

Needless to say, they now follow my "tough love" rules.


[Ed. Note: Michael Masterson welcomes your questions and comments. Send him a message at AskMichael@ETRFeedback.com.]

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