I think we’re screwed …

If you needed any evidence that the ‘global financial crisis’ – on a global macro level – and problems with the US real-estate market – on a global micro level – are still affecting people in the their day to day lives, you need read no further than Rischa in Seattle’s comment [AJC: I've added punctuation for your reading pleasure]:

From what I’ve read I think we’re screwed, but I’m not even sure what we can do. Here is the scenario: my husband and I bought this house about 10 years ago in the boom here; with both of us working we could afford the mortgage and our lifestyle easily. I’ve [since] been laid off and we’ve been living on my savings, which is now gone and I’m on unemployment, which is fast running out.

We’re about $100K upside down, we got a trad. loan 30 yr fixed, but without 2 incomes we’re sinking fast. We don’t necessarily want to stay in this house, in fact we want to move to a part of the country where the cost of living is less.

Any clues? What should we do? How do we get out of this when getting out would cost more than we have, even if we spent our retirement to get out? We would have less than nothing left!

Of course, it’s difficult to give Rischa personal advice – and, I wouldn’t do it – but, I could suggest that she go back to that post and reread the bit where I said:

Ask yourself the following TWO questions:

i) Can I afford the payments? If so,

ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?

If the answer to both questions is YES, then stay. If the answer to either question is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).

In Rischa’s case, the answer to the first question appears to be NO … and, she would prefer to be moving to a cheaper part of the country (and, cheaper house?), anyway …

So, it’s obvious that she can’t afford her existing house, but what would you do? Hang on to a losing proposition? Or, cut your losses?

Don’t be high …

Don’t be high when you are buying or selling stocks

… you can take that advice to the bank!

The Myth of the Million Dollar Retirement Goal …

A couple of weeks ago, I posed the question: Will a million dollars be enough when I retire?

There was much discussion that makes it clear that you must also ask: WHEN do you want to retire?

You see, 4% inflation (say) eats away at your money, such that if you were to retire in 20 years  – which is when you hope to get your $1 Million bill – it’s only ‘worth’ $500,000.

And, inflation continues even after you retire, which then means that you probably need to earn at least 9% on your Million Dollar Bill (4% to ‘cover inflation’ and 5% to spend) … this still leaves you only the equivalent of $25k today to live from (assuming that you want your $25k ‘retirement salary’ to at least keep up with inflation for as long as you need an income).

Assuming that this makes sense, let’s see how practical this Million Dollar Retirement Goal really is:

There are two schools of thought:

- There are those who believe that you should aim to approximate your pre-retirement salary in retirement, and

- There are those who don’t.

Now, I am in the second group – as are most people who have tried the same exercises that our 7 Millionaires … In Training! tried.

For example, my salary throughout almost all (bar the last 3 years) of my working life was less than $50k – $100k (incl. fringe benefits) and my wife had to keep working, BUT that was a purposeful strategy designed to get me to a retirement in just 5 years (instead of the notional 20 years) i.e. at 49 y.o. on the equivalent of $250k+ a year income for life (indexed for inflation) post-retirement.

But, this post is aimed at those new readers who are still in the first group … they, too, fall into two (sub)groups:

- Those who believe that they need at least 100% to 125% of their final salary in retirement (because, they say, you spend more in retirement due to travel, leisure activities, and escalating health care costs as you age, etc.) , and

- Those who believe that they need only 75% to 99% of their final salary in retirement (because, as these other ‘experts’ say, you need less in retirement as your children are grown up and educated, weddings are already paid for, house is paid off or downsized, etc.).

… at least, that’s how the personal finance columnists seem to be split.

So, in our example from the last post, we work backwards:

Somebody who aims to retire with $1 Million in 20 years time is really saying that they want to live off an annual income of roughly $50k in retirement (that WE now know is only ‘worth’ $25k a year), which means that their final salary will probably also be $50k (+/- 25% depending on which financial ‘guru’ they happen to follow).

Now, if you follow $50k in 20 years time all the way back to today, that person is probably earning $25k today (i.e. assuming that they earn CPI salary increases for the next 20 years) …

… so, now we can work forwards again:

If you have a starting salary (i.e. today) of $25k and aim to retire with $1 million in the bank in 20 years, you will need to set aside about 45% of your gross salary AND earn 9% on your money (after fees and taxes) AND have a house that you can free up at least $250k from when you do retire (e.g. by downsizing or moving into a very cheap rental).

Of course, if you can save 45% of your salary for 20 years, then you must be in the Salary-LESS-45%-In-Retirement camp, which is another story altogether

So, it seems to me that getting to $1 mill. in 20 years for somebody on a salary of $25k is all bar impossible … and, even if you do scrimp, save, and ‘frugal’ your way there, you have only made it to the ‘lofty heights’ of living off about twice the poverty line, for a two-member household:

2008 HHS 100% Poverty Guidelines

Members of household————- 48 Contiguous States———–Alaska————–Hawaii

1———————————$10,400 ———————–$13,000————– $11,960
2———————————-$14,000 ———————–$17,500—————–$16,100
3———————————$17,600 ———————-$22,000——————$20,240
4——————————-$21,200————————–$26,500——————-$24,380

For each additional person, add—–3,600———————4,500————————-4,140

SOURCE: Federal Register, Vol. 73, No. 15, January 23, 2008, pp. 3971–3972

So, I think the Million Dollar Retirement Goal really is a myth – or, at least a very low bar to aim for – how about you?

Ali G hits Donald Trump for some money …

http://www.youtube.com/watch?v=8SaHW6Y7_Yg

I usually do my videos on Sundays, but this one – by the ‘genius’ (?) behind Borat and Bruno – actually has an important message for aspiring entrepreneurs … and, it’s this:

When doing your business plans, it’s tempting to find some stats online that say something like:

… the market for widgets in the USA is $10,000,000,000 per year …

… which leads you [AJC: especially, if you are Ali G] to make ‘conservative’ claims like:

… and, if me capture just 1% of that market, with our New Improved Widgets, we’ll make at least $100,0000,000 per year, so you should invest with us …

Wrong!

You see, you haven’t answered the key question that the Venture Capitalist is sure to ask:

How will you capture 1% of the market?

What will your sales strategy be? How will your marketing/sales team capture 1% of the market? And, why won’t they capture 1.25% or 0.75% of the market (with such a variance being worth a paltry $25 million either way)?

Rather, what I (and, I assure you, the other VC’s out there) want to hear is how you will attack the market? What resources and expertise will you supply? Why will they be more successful than the competition?

And, if you have (say) 5 sales reps, making (say) 10 calls per day, what is reasonable to expect them to be able to close and how much revenue does that mean?

I dare say, if you take this bottom-up approach, you won’t come anywhere near to $100 million in sales in your first few years … but, do you even need to?

Make your business plans ‘real life’ … that’s my advice

Are polar bears left-handed?

Not only does fellow-blogger, Financial Methods provide a handy weekly wrap-up of the week’s posts, he also occasionally provides some ‘random knowledge’, for example, observing:

Apparently, all Polar Bears are left-handed. If anyone has more information about this, please let me know!

Well, it seems that there are two types of people in this world: those who will now run off and propagate this ‘fact’ at trivia and pub nights, and those who will go and check their sources.

I’m in the latter … now, I’m not obsessive about it, so this information ‘seems’ right, but I’ll let a polarbearophile prove me right or wrong with these Polar Bear Myths:

- A hunting bear will cover its black nose while lying in wait for a seal.

Canadian biologist Ian Stirling has spent several thousand hours watching polar bears hunt. He has never seen one hide its nose, nor have other scientists.

- The great white bears are left-pawed.

Scientists observing the animals haven’t noticed a preference. In fact, polar bears seem to use their right and left paws equally.

- Polar bears use tools, including blocks of ice to kill their prey.

Scientist Ian Stirling believes that this assertion can be traced to unsuccessful hunts. After failing to catch a seal, a frustrated and angry polar bear may kick the snow, slap the ground — or hurl chunks of ice.

- A polar bear’s hollow hairs conduct ultraviolet light to its black skin, thus capturing energy.

This theory was tested—and disproved—by physicist Daniel Koon.

- The polar bear has a symbiotic relationship with the arctic fox, sharing its food in exchange for the fox’s warning system.

Not only is the bear-fox relationship not symbiotic, the little foxes often annoy the bears. An arctic fox will sometimes tease a bear by darting in to nip at its heels and will sometimes try to drive a bear off its prey.

- Orca whales prey on polar bears.

This has never been observed.

- Polar bears live at both poles.

Polar bears, of course, live only in the circumpolar North. They never encounter penguins, which do not live in the same regions as polar bears.

[AJC: Polar bears = Arctic and Greenland; Penguins = Antarctic, Australia and New Zealand. Get it??!!]

Source: http://www.polarbearsinternational.org/bear-facts/myths-and-misconceptions/

So?

Well, if this is how many myths polar bears can generate, imagine how many there are about our favorite subject: personal finance?!

Here are just some that I have tried to dispel on this site:

- The myth that entrepreneurs are driven by greed

- The myth that a high income equates to wealth

- The myth that diversification is one of the most important personal finance tools around

- The myth that retirement planning centers around replacing your income

… and, I have written many, many more (just type the word ‘myth’ into the search box at the top of this page).

What myths (personal finance or otherwise) have you recently had cause to question?

AJC

PS in the image at the top of the page, the polar bear is obviously right-handed. Ipso facto … Great Left-Handed Polar Bear Myth of 2009 busted!

What is a good BUSINESS idea?

http://www.youtube.com/watch?v=GS04yv4xgpE

I like this guy’s tips … his delivery is a bit dry and antiquated (overhead transparencies?! What’up w’dat, man?) … but, what do you expect from an attorney?

Pay attention to his Tip # 3: he makes an excellent point about the differences between a Good Idea and a Good Business Idea … listen up!

I don’t agree that you need to throw equity all over the place to get the skills that you need for # 4 … sometimes you can buy in the necessary skills … and, sometimes you can’t. Just be selective as to whom you invite to your party

Instant Real-Estate Valuation Tool!

Today, I want to share one of my secret weapons for purchasing real-estate: it absolutely kills paralysis by analysis, and it works for all type of real-estate, including residential and commercial.

But, I warn you in advance, you won’t like it!

You’ll think it’s risky, you’ll think it’s stupid … then you’ll find out that I’ve actually used this method three times … well, four times … and, each time it’s made me more money than I could ever have dreamed of.

Let’s think about the biggest problem in real-estate: knowing how much to pay.

So, what are the solutions:

1. You ask a realtor – if you can trust them

2. You ask a friend – but, are they the experts

3. You ask (actually, pay) an appraiser

4. You put in the ‘hard yards’ (missing many potential bargains as you simply stand by taking notes) learning about real-estate until YOU are the expert.

Of all of these, 4. is the one that I would recommend …

… if I did it, but I’m way too lazy

Instead, I use 7million7years Patented Real-Estate Valuation Tool

Here’s how it works:

I find a property that somebody else wants to buy … somebody who is already an expert in that specific property … somebody who has: measured the place, gone to council, hired an appraiser, looked at 1,000 identical houses in the same areas … in short, somebody who has made themselves an expert in this type of property, and has narrowed down his search to this one property that I also happen to be interested in …

… and, I make sure that I offer just a little bit more for the property than he does. Simple!

Does this work? Sure … I’ve done this on my own home, an investment condo, a quadraplex, and an office.

Is this the cheapest way to buy such properties? Of course not; by definition, I’m always paying (at least a little) more.

Can it make money? Absolutely … I’ve probably made at least $2 million profit doing exactly this.

… and, the best part is that I’d probably still be researching my first deal if I didn’t.

Here’s one example of how it worked:

I was driving around and saw a condo for sale … actually, it was up for auction that day. I noticed that the sign was from an ‘out of town’ agent – I love these properties because they usually attract the smallest pool of buyers because the agents don’t really know how to attract the buyers out of their own area.

I went home and grabbed my checkbook and rushed back because I wanted to look at the condo before the onsite auction started: I saw a young guy in coveralls walking around with a tape measure doing a final ‘once over’ … it was obvious that he had been though the place before and was planning to rehab and flip it.

This was perfect: I simply bid against him at the auction until everybody else dropped out and it was just him and me bidding … the difference between us?

He needed to buy at a low enough price to rehab and make a quick buck; since I was buying to hold and rent, I could afford to pay a little more … which is exactly what I did: every time he bid, I bid a little more … eventually, he could bid no more, and my $500 ‘overbid’ was enough to buy the property.

I was surprised that I bought it … but, not as surprised as my wife

But, we still own it … it’s the smallest property in our portfolio, but is still cashflow positive and has appreciated by over $250k.

So, who are these ‘unofficial appraisers’ that you are looking for?

- Home buyers – we bought our first house by attending an auction for a house that we expected to sell for a lot more; we just kept bidding until the only other serious buyer dropped out and we bought it – much to our surprise – far cheaper than we ever expected. We knew it was a good deal, because we knew the other guy had been looking around the area for quite a while

- Developers – I bought my office for $1,000 more than a developer was prepared to pay to buy it for as a ‘tear down’ … so, I figured that I was buying the property at land value and getting a whole building for only $1,000 more. I used the property for my business then sold it (a year or two after I sold the business) for around $1 million profit.

- Owner / builders – as well as the condo, I also applied the same technique to a quadraplex that I eventually bought; this was rehabbed while we were in the USA (my accountant oversaw the project) and I have never even seen the finished product, yet it is cashflow positive and has already appreciated by around $1 million. Again, I only saw this building once: on the day that I paid over $1.25 million for it!

Now, I don’t recommend that you do quite as little ‘due diligence’ as I often do (or, don’t do … as the case may be), but you have to admit that it is the ultimate cure to paralysis by analysis!

Scary, and you won’t find this technique in any book, but it works

My top posts!

These are my ‘best-selling posts’ … what does this say about me? More importantly, what does this say about you???!!!

1. How much interest do you earn on one million dollars?
2. Making Money 101
3. Why did Warren Buffett buy half a dozen MLM companies last year?
4. How much should you have saved by now?
5. The 4 absolutely vital questions to ask before buying ANY business …

BTW: I am not unhappy with any of these posts … but, I doubt that many of those who came to my blog via Top Post # 3. have stuck around

The Myth of the IPO

By now we all know that the quickest / surest path to stock market success is the IPO:

Take a company worth 3 to 5 times earnings and throw it onto the New York Stock Exchange (or NASDAQ, if you prefer) where it is valued at 15+ times earnings and … wacko! … instant billionaire.

Just ask the boys and gals at eBay, Google, Yahoo, and Microsoft!

Of course, there are a few problems, according to James B. Arkebauer, founder of Venture Associates, and author of “GOING PUBLIC: Everything You Need to Know to take your Company Public, including Internet Direct Public Offerings”:

1. Your company has to be IPO-size:

Many underwriters require that your company is generating sales of $10 to $20 million annually with profits of $1 million. To obtain a NASDAQ listing, you need $4 million in tangible net assets. However, most IPOs today are much, much larger with most offering sizes over $100 million.

2. IPO’s are expensive:

The following figures are considered minimums and many larger offerings will have costs that greatly exceed these numbers.

• Legal – $50,000 to $150,000
• Accounting – $20,000 – $75,000
• Audit $30,000 – $200,000
• Printing – $20,000 -$80,000
• Fees $10,000 -$30,000

3. IPO’s take a lot of time and energy to execute:

[It can take] 3 -12 months (6-9 average – when well prepared) … [including] detailed discussions on information pertaining to:

• Business product/service/markets
• Company Information
• Risk Factors
• Proceeds Use (How are you going to use the money)
• Officers and Directors
• Related party transactions
• Identification of your principal shareholders
• Audited financials

4. The IPO process can fail; IPO’s are all about marketing, but that marketing can fail:

It’s often said that IPOs are sold, not bought. That means a road show and a Q&A with the company’s top officers – in short, marketing.

5. Your company may not survive after the IPO; according to Management Today:

The probability of a new listing surviving in its first ten years falling sharply to 37 per cent by the 90s from 61 per cent in the early 70s

Of course, you only need to worry about the company lasting long enough after an IPO to get your money out … I’m not sure about the USA, but in some countries your money is escrowed for two years to ensure that you retain some ‘skin’ in the company along with all the suckers … I mean shareholders … who bought in to your dream. In other words, an IPO is best seen as a way to raise capital for growth, rather than a ‘quick, easy, and profitable’ exit for the owners.

Technical issues …

… again.

Apparently GoDaddy (who hosts this site) are experiencing temporary/intermittent problems with this site (in fact, many of their hosted wordpress sites). This means that (hopefully, only occasionally) you might see a “page error” message … obviously, you aren’t seeing it now

Hopefully, it will be a thing of the past, soon. In the meantime, you have my apologies …. and, theirs:

The issue you have been experiencing is being worked on by our technicians. You site is currently active, however you may still experience intermittent issues.  Service will return to normal as soon as possible. Unfortunately, we are unable to give a specific time frame for this resolution. We appreciate your patience and understanding in this matter and we apologize for any inconvenience.