AJC is taking a break …

I’ve packed my rod’n'reel and I’m travelin’ for the next couple’a weeks …. be back soon, y’all y’hear?!

Click here for suitable ‘traveling’ sound effects

I’ve committed a blogging faux pas …

It seems that I’ve committed a blogging faux pas … unintentional, but a faux pas nonetheless.

You see, Planting Dollars ‘tagged me’ way back in January and I was supposed to tell you 8 Random Things about Me!

The fact that I only stumbled across the back-link now – not to mention that I have no idea what ‘tagging’ really means, but I’m guessing it’s some sort of ‘chain letter’ in blogging post form - tells you a little about how much I really know about blogging (even though I’ve been doing it for a couple of years, now).

Anyhow, it seems that Planting Dollars and I have some commonality, so here goes:

Planting Dollars has been unlucky enough to break bones on 5 separate occasions. I’ve only done this once, but it was a beauty: broke my tibula (shin bone) and fibula in a compound (multiple breaks i.e. I broke both bones) and complex (because I got to see a sharp end of bone poking through my skin), and have 4 screws in my leg (still there, to this day) and a nice long (36 stitch) scar to remind me of the unpleasant teenage episode.

He can’t get enough of scuba and sharks! In fact Planting Dollars studied abroad in Australia for the sole purpose of having the ability to dive in the Great Barrier Reef and with sharks. On the other hand, I already live in Australia, can barely swim (although, I somehow managed to get some sort of swimming certificate for swimming the length of a pool fully clothed, including shoes … I think I was just progressively drowning, and randomly ended up at the other end), and much prefer card sharks to white pointers. 

Planting Dollars is a myers-brigg ENTP personality type.  Apparently that means he’s ”most attracted to the idea of being a renaissance man or jack of all trades.  New experiences and ideas are what motivate me, I cannot stand routine.” As much as I hate ‘pop psychology’, I must also be an ENTP-type as this describes me to a tee … I detest routine, but love ”new experiences and ideas”. 

His highest bench press thus far is 350lbs. Mine? About 35 lbs … haven’t you seen my videos?! But, I used to be pretty athletic: an excellent runner, and an avid lacrosse player (I had no idea that those uniforms denoted FULL CONTACT until it was too late!).

Planting Dollars plays the piano and drums and will eventually learn the cello. I love music but have almost zero talent; I try to sing (a lot), but even my kids don’t let me! But my musical tastes are eclectic, to say the least: I have everything from (the real) AC/DC to Pavarotti, Il Divo, Eminem, and The Fugs on my iPod. Oh yes, I also have Kelly Clarkson, and I’m proud of it

As a kid, Planting Dollars drove his mom crazy wanting to have a lizard as a pet. Now, I’m not sure what this says about me psychologically (but, I can assure you that I have no homicidal tendencies), as a child my sister and I used to hunt for little lizards (calls skinks) when on vacation in the Australian countryside. We would invariably come back with a few in a box (of course, some would always escape and run around the house, which my mom just loved …. not!). I won’t tell you how I fed them … 

Most of his role models are dropouts. I have no role models. I think everyone is equally flawed (no doubt, Ghandi picked his nose; Warren Buffett gossips; and, the Queen swears in private), so we should all be our own man / woman / or both. Still, it doesn’t hurt to learn from others, but I strictly look for ’how to’ lessons: so, if I go to a Warren Buffett AGM I’m looking for a tidbit of information, not how to duplicate his style. 

Planting Dollars absolutely loves Blue Moon Ice Cream. I’m lactose – and, people (mainly family) - intolerant.

‘Nuff said

10 Paths To Wealth?

Ken Fisher is a well-known money manager – I know, because I’ve had to endure phone call after phone call when I stupidly signed up for one of his ‘free’ reports!

However, watching this video (and, maybe even buying his book) seems like a fairly non-threatening way to learn some of his wisdom.

Personally, I think you need to mix’n'match some of these methods to have a bats-chance-in-hades of making your Large Number / Soon Date.

On the other hand, I’m all for marrying into wealth, but who’d have me?

The broke actuary …

All this talk of ‘safe withdrawal rates’ begs the question: can you build a perpetual money machine from stocks and bonds?

I’m going to go out on a limb, here, and say NO.

To help us find out why, let’s try and answer Rick’s question:

I agree if you can live on what your investments produce over inflation you’ll never run out of money.

Does it still make sense to plan using the rule of 20 when you don’t think you will be able to reliably pull out 5%?

It seems to me use a more conservative rule say 25 or 30.

Also, you could still use stocks- you would need some other income sources too- bonds or cash to draw upon in down years.

Rick raises a three part question:

1. Why base the Rule of 20 on a 5% withdrawal rate, when that doesn’t appear to be safe?

Well, given that I don’t think ANY withdrawal rate is safe, for me at least, the Rule of 20 should only be used as a PLANNING figure i.e. to help you convert  your required annual income into your Number.

As a planning figure, I think the Rule of 20 underestimates your Number; the chances are that you will overachieve it rather than underachieve it.

Given that it’s extremely unlikely that you will exactly achieve your Number, you will either undershoot or overshoot it … if you wait until your Number is a virtual gimme before selling your [Insert Number Reaching System Of Choice: business, real-estate, stocks, horses, etc., etc.] you will probably find that it takes time to decide what/how/when to sell and in that time, your assets have appreciated even more.

If you don’t think that’s the case for you, use a higher multiplier … I just don’t think it’s necessary to stress over it :)

2. Why can’t you use stocks to create your ‘perpetual money machine’?

It is a rare stock that provides the kind of income that we need without compromising the underlying business, but they certainly do exist: you would need to find a business (that you can buy stock in) that generates at least a 4% dividend, yet still grows the stock price at least according to inflation … consistently, over 30 to 50 years after you stop work!

However, using “bonds or cash to draw upon in down years” is a losing proposition (it’s not income … you are spending your capital!); I think that a two year emergency fund is a great idea … but, is there a reasonable chance of a stock downswing that will deplete that fund?

If so, I would not like this stock+bonds+cash retirement strategy one little bit … which brings me to the final – and, key – question:

3. Can’t we use a more conservative rule say 25 or 30?

Here’s the crux; the Trinity Study (for example) says that we have a small chance of running out of money, even if we choose a “safe” 4% withdrawal rate …

… the longer we expect to live – hence have our money last – the larger the failure rate (which can be as low as 2%).

Here’s my question to you: if you are facing even a 2% failure rate, what are the chances that your money will last as long as you do?

98%?

Well, you would think so, but I once asked a doctor friend a similar question when – in a moment of rare weakness (thankfully now passed) – I actually thought about getting a vasectomy.

I told him that I heard that the operation was quite reversible. I asked him what the reversal success rate was. 

 ”In your case” he said ” exactly 50/50 …

… either it will work, or it won’t!” 

So, Rick, find an actuary to help you choose any multiplier that you like and the chance is still 50/50 for you: either your Number will be enough to last as long as you do, or it won’t

Xmas in Australia …

Being able to call two countries ‘home’ is a luxury that few can afford, and it opens up some interesting points – and counterpoints – of view.

For example, I came back to Australia with a new appreciation for the infrastructure that such a sparsely populated country has. To put it into perspective, my two homes of Australia and Illinois share around the same population (circa 20 million), yet Australia:

- has the land mass of the entire contiguous states of the USA (i.e. the 48 U.S. states located on the North American continent south of the U.S. border with Canada),

- has 4 or 5 major national banks (IL has no equivalently sized banks of its own),

- 2 national (and international) airlines (IL has none that I am aware of),

- A national system of roads, a number of ports, 3 layers of government, etc., etc.

Other points of difference are more subtle, yet even more interesting (at least, to me); one of my favorite being that Xmas and New Year in Australia is summertime!

This means that Australia partially shuts down from about the last week in December until the end of the first week or two in January; for example, attorneys and accountants will shut their offices entirely for 2 to 4 weeks and most factories will shut off production entirely for at least 2 weeks.

And, bloggers will put down their ‘pens’

What do Aussies do in that time?

We vacation!

For example, I am writing this post from my rented vacation apartment in a very warm part of Australia while my daughter finishes her first ever surfing lesson …

Aussies have no trouble vacationing, in fact every Aussie worker from the humblest production line worker to the highest paid corporate executive receives a minimum of 4 weeks paid vacation each year (plus 5 to 8 days paid ‘sick leave’, and 9 or so paid public holdays, all for a normal 36 to 40 hour work week).

Oh, and until recently, employers had to pay an additional 17% bonus on their employees’ normal salary while they were on vacation!

I remember laughing when I first arrived in the USA, where vacations are usually accrued at only 2 weeks per year, at seeing advertisements urging Americans to take their vacations … it seems that we have the opposite problem in Australia, we have to encourage our employees back to work!

Tomorrow, I’ll try and bring this preamble back to some sort of personal finance angle

What’s wrong with this ad?

Aside from the obvious [AJC: Believing that you can turn $1k into nearly $6k in just 2 weeks is obviously stupid, right?] …

… there’s a basic reason why you are doomed to failure with FOREX (i.e. foreign exchange) trading activities. First, though, let me explain what FOREX is for those who don’t yet know:

The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business’s income is in U.S. dollars.

In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The foreign exchange market is unique because of … the extreme liquidity of the market [and] the variety of factors that affect exchange rates. As such, it has been referred to as the market closest to the ideal [i.e.] perfect competition.

My dire ‘doomed to failure’ prediction comes about because of that last sentence: FOREX “has been referred to as the market closest to the ideal [i.e.] perfect competition”.

Think about it: for every dollar, drachma, or rupee that you buy … somebody has to be on the other side selling. And, since you are ‘betting’ on the relative strength of one currency versus another, you are effectively betting opposing arguments.

You have the same points spread on the ball game, but you are betting on opposing teams … one winner, one loser.

Now, who do you suppose has better information? You, or the other guy?

Who do you suppose has better FOREX training and more experience? You or the other guy?

You are the amateur, the other guy is (probably) the professional who does this for a living …

Now, you can argue that people are trading currency because they are moving country, so the ‘relative strength’ argument doesn’t apply … or, that they are government agencies moving in and out of foreign positions for stability and political reasons … or, that they are corporates moving funds between various international subsidiaries …

Which all be true and yet another reason why you are gambling and they are expertly managing their portfolios.

The same double-sided coin argument applies to options trading … indeed, most other forms of trading: you bet one way and the person on the other end of the transaction has bet the other way. And, they probably know what they are doing …

… best case is that they are equally naive as you

One winner, one loser.

So, that means that 50% of the traders out there must be winning and the other 50% losing?

Well, the stats – somewhat surprisingly – tell a different story; cast your mind back a few weeks, where taloudellinenriippumattomuus  mentioned a Taiwanese study that found that (after costs) only 0.16% (or 1.6 per thousand) of traders [AJC: in this specific case, Day Traders, but I doubt whether FOREX or stock option traders fare much better] actually made a profit!

I’m sure that plenty of our readers have made – and lost – relative fortunes trading; if so, I’d love to read your comments …

The Be Happy poll …

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If you ask most people what they want out of life, it’s “to be happy” … go ahead, try and ask a few people!

But, Julia Baird, the deputy editor of Newsweek has an interesting viewpoint:

The most inspiring people are those least obsessed with their own happiness, especially those who stride confidently across the globe to create, evoke change, or wrest from life what they will. Eleanor Roosevelt believed happiness “is not a goal, it’s a byproduct.” I think she might be right.

Your Life’s Purpose then is the Goal that Julia refers to – and, money (i.e. Your Number) may be the tool to get you there – with happiness the outcome … at least, that’s how I see it.

And, it may serve to explain why Money and Happiness seem to be intrinsically linked, as Julia goes on to say:

The most recent findings, for example, are that wealth makes you happy

I have a personal viewpoint on this (from experience of both sides of the wealth equation), but I would be interested to hear what you have to say?

It’s just not cricket …

Today’s Video On Sunday has absolutely NOTHING to do with money, other than that it may help you win a few bets at the pub

And, my American readers [I hope!] will appreciate learning a little about cricket …

… which is best explained, IMHO, by comparing it to that great American institution: baseball. In fact, cricket is just like baseball, except:

- There are only two ‘bases’: imagine home base being where the batsman (a cricket term for the guy hitting the ball with the bat) stands, and that ‘first base’ is shifted to sit on top of the pitcher’s mound – except that there is no mound, so the pitcher (in cricket terms: the bowler) has no height advantage.

- There are 11 players a side, but two batsmen are on the ground at the same time; one stands at ‘home base’ to hit the ball and the other stands at ‘first base’ near the where the bowler (aka pitcher) will be.

- There are only two innings per side, but each innings is over when ALL of the batsmen from each side is ‘out’ (actually, 10 from each side, because you need 2 on the ground at the same time).

If you can imagine those differences, let me walk you through the video which covers the 3 main aspects of the game:

Bowling

- The bowler cannot whip the ball (which is VERY hard, much like a baseball … perhaps a little harder) with his elbow, as he MUST bowl with a ‘straight arm action’. A little curious I know, but he gets speed by running as far/fast as he likes, until he reaches a line just behind ‘first base’ than releases the ball; the combination of the run and the fast (albeit strange-looking) straight-arm overhead throw produces the speed.

- The ball can be thrown directly at the batsman (within reason … you aren’t allowed to deliberately try and hit him!), but is usually bounced off the ground making it much more erratic and harder to hit.

- In fact, the red (or yellow) ball has a very pronounced seam effectively dividing the ball into two hemispheres, therefore a slower ‘spin bowler’ can be equally effective as a ‘fast bowler’ by deliberately imparting spin and/or aiming the ball at a spot on the ground that is rough or has cracks from the heat to make the ball ‘jump’ or ‘spin’ one way or another.

- The IDEAL outcome for the bowler is to get the batsman out, not by ‘striking him out’ but by using the cricket equivalent of hitting those three little sticks sitting right behind the batsman. Very quaint. It gets better! If you look carefully, balanced in little grooves on top of the stumps (i.e. those three little sticks) are two even smaller pieces of wood called ‘bails’, and the batsman is OUT if the bowler can hit the stumps with the ball AND the little sticks fall off. Cute

Watch the video until 1:30 and you’ll get the idea …

Fielding

- Of course, the other team is all on the field, carefully positioned to ensure this doesn’t happen. For example, if the batsman happens to hit the ball then they can get him out – just like in baseball – by catching the ball before it hits the ground.

- Because both bases – hence most of the action – happens right in the middle of the pitch (which is usually a large oval playing field), the batsman can hit the ball in ANY DIRECTION (there is NO ‘foul ball’ rule in the game of cricket), so it is just as critical in cricket to carefully place the fielders – but, in this case, all around the entire ground -  depending on the characteristics of the specific batsman (is he a left-hander? is he likely to accidentally ‘snick’ the ball or is he going to whack it a long way?)

- Remember that really hard ball? Well, the cricket fielders prefer to catch them without wearing gloves. Just watch the video until 3:00 minutes in, and you’ll see what I mean [AJC: if you really want to see a tough sport, if I get enough interest, I'll tell you about Australian Rules Football in a future post!]

Batting

- Of course, the batsman are in there trying to make runs, just like in baseball; and, they do it by running from ‘home base’ to ‘first base’ and back again as many times as they can, before they are at risk of getting out.

- But, in cricket, a batsman can ONLY get out four ways:

1. By being ‘bowled out’ i.e. the ball hits the stumps and those little bails (remember them?) fall off,

2. Or by being bowled out on a technicality (much like a ‘technical knock out’ in boxing) where the umpire (aka referee) rules that the ball WOULD have hit the stumps EXCEPT that the batsman stuck his leg in the way (instead of his bat) to avoid that from happening. This is called ‘Leg Before Wicket’ … imaginative, huh?

3. By being caught out (just like in baseball), either by the fielders around the ground, or by the wicket-keeper, who is the cricket equivalent of baseball’s short-stop except he wears NO body of face protection. But, the wicket keeper does usually wear TWO over-sized gardening gloves (that don’t look anything like baseball mitts).

4. By being ‘run out’ which is where the batsman hits the ball and madly dashes for the ‘base’ (actually called a ‘wicket’) which is merely a line drawn on the ground a couple of feet in front of the stumps:

- If any part of his body or his bat (because, in cricket, the batsman always seem to carry their bat when they’re running) touches the ground between the line and the stumps BEFORE the opposing team can get the ball to knock those little bails [there they are again!] off the stumps, the he is IN (aka SAFE!)

- If the opposing team can throw (or touch) the ball to the stumps and get the bails off before the batsman reaches that ‘line drawn in the sand’ (literally!) then he is ‘run out’ i.e. OUT in any sport’s language! Oh, and touching the ball to the batsman or catching the ball and standing on the line means nothing in cricket, sorry

All of this means that the batsman can score in a few different ways:

- They can hit the ball (or bunt it, or miss it entirely if they like) and attempt to run between the wickets as many times as they like (i.e. until they feel that they would be at risk of the opposing team getting the ball to hit the stumps before they are ‘safe’).

- Batsmen can usually run back and forth between the wickets 1, 2, or 3 times … only very rarely will they get 4 runs in (usually because somebody has tried to throw the ball at the stumps, missed it, and the ball has started to run on towards the other side of the ground … ooops!).

- The bowler can throw the ball so badly (or make any number of ‘technical errors’) that the batsman has no real chance to hit it, so the team is automatically awarded one extra run (conveniently called an ‘extra’)

- But the best is if the batsman can hit the ball so hard that it bounces or rolls until it hits – or crosses over – a rope encircling the ground just inside the fence (hence, it’s name: ‘the boundary line’), as he is awarded 4 runs (nice!) … but, if he can hit the ball all the way over the boundary line without it touching the ground (or anybody else) first – the cricket equivalent of a ‘homer’ – he gets 6 runs (better!).

- Best of all, each batter stays in and keeps hitting the ball until he goes out (in one of the four ways mentioned above); so it is typical for even a bad batsman to score a few runs (eg 15+) – and, not uncommon for a GREAT batsman to score up to 50, 100, or (extremely rarely 200+) runs in each of the two innings!

- Remember, the team innings isn’t over until all 10 batsmen from the team go out, and the game isn’t over until both teams go out twice … two innings … no wonder a game routinely lasts 4 or 5 days with each teams scoring 150 to 450+ runs!

Oh, and because a 5 day ‘test match’ (as they are called) is way too exciting for the Average Joe (or, more likely, Bruce in Australia and Nigel in England), two new versions of the game are being played at the moment:

- The One Day Games, which have been reduced to a mere 8 hours of excitement, simply by having only one innings per side, which finishes when the 10 batsmen are out OR 50 overs (6 balls – or ‘pitches’ – constitute an ‘over’) which usually comes first, and

- The 20 Over Game (i.e. each side is limited to seeing how many runs they can score in only 20 x 6 balls/pitches), which is proving to be way too short and exciting at a mere 4 or 5 hours, so is in danger of being consigned to the ‘cricket trash can’.

Well, it’s nearly summer here in Australia, so if you don’t see a post for 4 or 5 days you know where to find me …. yawn …

With this text, I thee wed …

With this simple text message, I purchased a commercial property for $1.5 million (plus taxes and closing costs):

demo $75 and roofing $60 the rest $200 – $250 approx.

Good enough for me to close the deal!

Let me backtrack a little …

Over the past three or four weeks, I’ve been going through my numbers on developing a main road site into a high-rise condominium complex (60+ condo’s over 8 stories plus basement car-parking), but the project didn’t start that way:

It actually started as a buy-with-a-twist project that I favor so much (for good reason, I might add) …

…. the idea was to buy an unloved showroom/warehouse and rehab it into a bright, modern showroom with an excellent main-road frontage, then rent it out as a ‘buy/renovate/hold’ investment. It was only AFTER I made the decision to acquire it that we found out about the potential to rezone as multi-story.

So, let me walk you through the buy/renovate/hold scenario; you’ll be surprised [AJC: unless you've read this series of posts ] how LITTLE financial analysis that I do before acquiring

Step 1

The first step is to understand what your end product is worth: to that end, I undertook EXACTLY the kind of analysis that I talk about in this post. This tells me that a showroom in this area should rent for approx. $250 per square meter (or, $23.25 per square foot) for office/showrooms in the 800 square meter (8,600 square feet) size range. It also tells me that the ‘capitalization rate’ in this area/market – at the current time – is approx. 5.5% to 6%, which is (a) not much in absolute terms, and (b) not even much when compared to prevailing interest rates.

So, now I know two things:

(i) Buying and holding a ‘ready made’ investment (i.e. something in good condition, already leased to a good tenant) ain’t gonna do much for my future financial well-being, and

(ii) Creating a ‘ready made’ investment for some other sucker … I mean, investor … could be the way to go.

Step 2

I now need to work out how much the project will cost me; which is easy, thanks to that little text:

- Purchase Price: $1,500,000

- Taxes and Closing Costs: $200,000 (approx.)

- Rehab costs; this is where that text – which was from my builder [AJC: whom, I should mention, is a trusted friend ... otherwise, I would have looked for written quotes before proceeding] – comes in handy because it lays out the major costs for me:

- Demolition works – at $75,000 actually a large expense because the roof is asbestos and has been fire damaged, so needs to be entirely (and, carefully!) removed and disposed of; also, the building was formerly squash courts, so there are remnants of internal brick walls that need to be removed

- New roof – once the old roof is gone, it appears to be (surprisingly) cheaper to put up the new roof than it was to demolish the old!

- Renovations – now that we have a ‘clean’ four walls and (new) roof, $200k to $250k should be enough to render the horrible old yellow-brick exterior, put in nice large aluminum showroom windows, new plasterboard interior walls, suspend a new ceiling and associated lighting, dab a little paint on the walls, and put in some flooring (and, a little kitchen and bathroom) and we have a ‘new’ building for not much money!

[AJC: commercial renovations are generally cheaper on a per-square-foot basis than residential because the quality of finishes is lesser and there are no - or, small - kitchens and bathrooms to fit out]

Step 3

Now, I get to redo the sums:

a) I have an ‘as new’ showroom in a prime position that cost me $2,085,000 all up,

b) It provides a ‘net lettable area’ of approx. 800 square meters at $250 per square meter … we’ll have some letting, management costs out of this, but the tenants pay ‘all outgoings’, so let’s say that this nets $200 psm x 800 sm = $160,000 per year

c) This provides me with a $160k / $2,085k = 7.7% return

Step 4

Now, a 7.7% return isn’t shabby (in the local market that we are talking about); but, I could now turn around and find one of those lazy investors that we spoke about in the beginning … one of those guys who is after a low-maintenance, fully-let property and who is willing to accept a paltry 5.5% – 6% return.

They should be willing to pay me $160k / 5.5% to 6% = $2.7 mill. to $2.9 mill. or a cool $600k+ profit for not a lot of work/time on my part …

So, if I decide not to build the condo’s, my backup plan is complete

Let me know if this long-winded series on real-estate has been useful to you …

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.