Guest Post: Mistakes … I made a few

I wrote a little ‘Saturday Post’ that I thought wouldn’t get a lot of attention … after all Saturdays and Sundays are the ‘crash days’ for bloggers … at least they seem to be for me.

You see, those are the days that the Stats Graph takes a nosedive and I begin to wonder where all the readers have gone …

… then on Monday, there you are again (for some reason Wednesday and Thursday are the peak days), usually in even greater numbers than before.

Anyhow, the post was just about some of the mistakes that I had made … with the biggest mistake, by far, being not starting early enough in both my business-building and investing careers.

By coincidence, and I didn’t mention it at the time, I suffered a huge paper loss with one of my investments just as I was writing that post … enough to send most people into a foetal position, never to recover!

Even in the face of that loss, I didn’t see the need to alter a single word in that post: I still maintain that ‘time loss’ (i.e. not starting early enough) cost me far, far more … but, because I did start eventually, this loss whilst huge is nowhere near catastrophic to my personal financial situation … a mere blip on the chart … sick, I know. But, true 🙂

Anyhow, Alex weighed in on that post with one of the longest, most honest, and most interesting comments that I have ever received on my blog … so, Alex (with your unwritten ‘permission’) I decided to elevate your comments, unedited and unabridged, to the lofty status of Guest Post:

I enjoyed this post very much. I’m young, and yet through your blog and other sites, I come to realize what I’m making a lot of mistakes too. I should have been a lot richer than I am today, had I not been too greedy and gullible.

My mistakes were:
1. I never had a set goals that I wanted to achieve. I went to college, straight-A for 2.5 years, because my parents paid a fortune for me to go study. Had I known what to focus on during that time, I WOULD be already rich.

I programmed a classified ads website for my college literally overnight. It was a lot of fun and caught on buzz at the school. My friends and the administrative staff (including the deans) loved it. The bookstore hated it for I let students trade textbooks by passing them. But I failed to make a single dime out of the site. I didn’t have a goal to start with. Another project for the sake of working on something exciting at first. Then after the excitement dies down, the reality kicks in. I let the site faded to nothing. Who benefited the most from my service was this one couple working at the college. He was able to sell his microwave for $35 (he thought it would be junk) and kept mentioning it when he met me.

I was there when FaceBook first started. Friends asked me that did I program Facebook too? I was there when Rube on Rails began to take off. I was there when Ajax was the kid on the block. I was there right before the spectacular financial run-ups before the credit crisis. I was there a lot of the times, and yet all I did was to be a casual observer.

My mistake was that I was not aware of the world around me at a level where I could get richer. And I didn’t have enough knowledge to understand and see what course of action I would do next.

2. I was greedy and gullible.
3rd and 4th year in college, I got hooked to trading Forex. I “invested” in prediction service. I bought the service for $2,000, on my credit card (if you search around, probably my name would show up, asking about forex…). I was a dirt poor international student, making ~ $7/hr! All I could think of was to bite the bullet, buy this service, make $20,000 from Forexso I had enough money to propose to my girlfriend at the time.

Things turned sour. I lost money in forex. The service gave out garbage signals at … 3am. My creditcard debt was like $3,000 just from this stupid service. I called them up to cancel andbecause I already signed the contract, they refused to refund me the $1,000 I haven’t paid (those guys splitted up the payments so I can fit on my cards!). I was too nice to give them a finger and get my money back. Afterwards, I experienced life of a debtor: ashamed, got called by collection agency at least 30, 40 times a day. My credit score, until now, is still at the “poor” level because of those late payments to the CC companies 3 years ago.

I remembered 2, 3 months after the whole thing about Forex died down for me, I opened up one of my paper-trading accounts. I had a 3000-pip run up (paper-profit!) for a trade I forgot to close.

The moral of this mistakes: don’t gamble on other’s people money. I was borrowing against my future incomes and placed bets on things that were too good to be true. This was bad greed.

3. I never have a mentor or know anybody that can told me: this is how you can think and focus your actions so that what you do will bring more wealth to you.

After college, I read “Think and grow rich”. The book didn’t crack my head too much at the time. I was still with the “casual observer” mindset. Fresh off college, I worked 60, 70 hours a week, making HALF of what I’m making now, hoping one day I would see the day light. Literally, my job was on 2nd shift. I worked from 4pm to 12pm, got home, worked another hour or two, then went to bed, woke up, worked from 9am to 3pm, got ready, then off to work again. It was like that for 8 months straight. I paid up all my CC debts and other responsibilities. If people tell me they are seriously in debts, have no way of re-paying what they owe, well, they will have to try to work harder and more hours. There’s no way around it. That’s why debt is slavery.

Then I started to really think where I want to be in life. Sort of a mid-life crisis for a 22 year old guy. I had the chances to talk to *quite a few* millionaires (AJC, that includes you also ) ). I kept thinking: what makes them so different from me, how could they get so far ahead financially while I was stuck here, barely making enough money to pay my dues. I begin to walk down the path of entrepreneurship. For the lack of money, I have a mindful of ideas, and now, a determination to work my way up. Now it is really to “think and grow rich.”

It took me 2 years to come to realize my first financial goal: a number to reach when I’m 30. I will keep working 12, 13, 14 hours a day until I reach my goal. I will keep thinking, learning, asking questions, finding answers. I will continue making more mistakes, but each time, I’ll be a bit wiser and more determined to go forward.

Learning from my mistakes, here are how I keep myself from repeating the same mistakes:

– Never get into credit card debt. Ever.
– Surroundmyself with people of the same thinkings. I have to be in the right environment to grow and learn faster.
– Talk to people who has actually done it, e.g. getting rich so I can learn from them. Surprisingly, once I had told myself to do this, I started to know a lot more millionaires!
– Fake the mindset of successful people until I make it. Having the determination to achieve the dream.
– Work harder and smarter. If I work 8 hrs/day to make other people richer, I will have to work more than that for myself in order to go charging forward.
– I need to have enough money in case I see an opportunity, plus I have to prepare a cushion of cash as a safety net to fall back to, if I happen to fall down in this entrepreneur path. I will certainly get right back up again, but having a cushion will be much better and give me a warm feeling inside.

I wanted to write more, but it’s time to work on my project )

AJC, thanks for sharing with us your experience!

No, Alex, thank you for sharing with us your experience!! 

20/20 Hindsight is a wonderful thing … but, the important thing is that you learned from your ‘mistakes’ (I prefer to call them your ‘first swing at the ball’) and quickly moved on.

Alex, is an immigrant to the USA, he is here without family, without a support network, yet he is incredibly gifted in what he does and has a mind chock-full of ideas … Alex is definitely a guy ‘on the way up’.

Anybody else feel like sharing? Please feel free to comment as long/short as you like …

Look! I've got a Golden Ticket!

My ‘grand experiment’ has reached another milestone … we now have narrowed the field down to the Final 15 ….

… that means that 15 lucky people (well, 18, but 3 more will be eliminated over the coming weeks) have won a “Willy Wonka” Golden Ticket behind the gates of 7million7years’ Millionaire Factory.

We started with a field of over 70 serious applicants but, by the end of next month there will only be 7 Millionaires … In Training!


PS If you want to become wealthy, as well, then you had better follow their journey, which starts here.


Should the rich invest in Index Funds?

When I glanced at the incoming stats to this blog this morning, I happened to see that a number of people had come to this site because they had typed the following search into Google: “should the rich invest in Index Funds”?

It’s a great question to which the answer is: it depends! 🙂

If you want to BECOME rich: No

If you have a high salary and can save a lot of it (see yesterday’s post) … and are happy to keep doing this for 30 years (to ‘guarantee’ the return), then plonking your money into an Index Fund (preferably via a series of 401k’s, ROTH’s, etc. etc. to get the tax benefits) may be all that you need to do.

But, even with some employer matching and tax benefits, for many salary earners the low returns (and, the costs built in) to such funds might not be enough to get you to where you need to go

If you are ALREADY rich: Yes

Here the rules change … you are more concerned about wealth-preservation than wealth-building. Therefore, ‘saving’ in a way that ‘guarantees’ your principle and living standards can be a suitable alternative to ‘investing’ for high returns in retirement (or close to it .. i.e. within 10 years).

The typical choices here are:

1. CD’s: Just keep your money in the bank – but, inflation will kill you.

2. Bonds: Preferably inflation-protected – and, low returns will probably put a damper on your long-term spending habits.

3. Real-Estate: Using low-or-no borrowings (opposite to our wealth-building real-estate strategies!)  – reasonable (and, reasonably safe returns) provided that you invest wisely, manage the property well (using an expert and reputable property manager, of course!), have a suitable cash buffer for expenses and loss of tenants, etc. You live off the rents and you may have the added benefit of a larger estate to leave to the rug-rats and/or donate.

4. Index Funds – you may need to be prepared to sell down 2.5% to 4% of your holding every year (that becomes your ‘replacement salary’), but – over a 30 year period – that should be enough to self-sustain (i.e. keep up with inflation and your annual salary). The lower the % that you withraw, the greater the chance that your money won’t run out before you do (and, if the market goes well, you COULD even have the added benefit of a larger estate to leave to the rug-rats and/or donate).

But, when planning for retirement, don’t make this mistake: the market has returned an average of 12% – 14% p.a. for the last 100 years …

… but, if the market crashes just before – or in the early stages of – retirement, it can have a major impact on the longevity of your portfolio … in other words, you are screwed!

So, do what I do and plan for the worst: plan to have the bulk of your money in the Index Fund for 30 years, because that’s how far out you need to go to ensure an 8% return … then take off another 1% for fees … another 3% or 4% (5%?) for inflation …

If you only plan for 20 years, the ‘guaranteed’ return drops to a measly 4% and inflation will just say “thanks for the snack” and leave you with nothing!

So, are Index Funds for you?

Copping a loss …

I received an e-mail from Andrew who asked;

Your webcast today prompted me to look up some more of Warren Buffet’s letters to shareholders and general advice, I wanted to get your take on something I came across that seemed potentially contrary to what you mentioned about your use of stop losses in your webcast today.
Warren said he believes that when you invest in a company you should be able to see it go down in value by as much as 50% and not sell off because you know that you already bought it at a steep value. I know this is potentially different than what you mentioned because you were talking about protecting gains, but if you have the time let me know what you think.

Now, this is a very timely question …

First, let me tell you the context of what I believe that Andrew was seeing:

Warren Buffett has said that he has only taken a 2% loss on a position … however, he has watched one of his holdings go down 50%. Now, I can’t find the reference so my memory may be failing me, but it seems that warren is saying that he simply held through the drop and the stock came back.

Of course, Warren isn’t saying that he accounted for the cost of lost opportunity when his money was tanking in a stock only to recover to slightly less than break-even, when his track record says that he averages 21%+ compound return …

… in other words, by my reckoning, he actually ‘lost’ 25% on that transaction …. but, he could have just as easily crystallized a real 50% loss had he panicked and sold out.

Here’s where I think warren is at:

He generally buys a business – perhaps 100% or a controlling interest, or sometime a minority share as an ordinary stock-holder (as though having Warren Buffett / Berkshire Hathaway on your share register can be considered ‘ordinary’) – but, in all cases he is buying the underlying cash-flows.

He is not using technical trading to buy a stock because it has broken some mythical ‘support line’ or using some fundamental analysis to determine that the Price/Earning growth rate seems higher than the current stock price is reflecting.

No, he is ‘buying’ the whole shebang – even if he only ends up buying some of the stock.

Under these circumstances, as long as the price he pays is low compared to the future cashflows that the company will produce, who cares if the stock price drops 50%? In a same world, it eventually had to come back, and even if it doesn’t who cares?

As long as you never sell!

The price you pay gives you the right to your fair share of those future cashflows regardless what arbitrary price the auctioning system called the stock market ‘values’ the stock at today.

May we all have the foresight and fortitude of Warren Buffett …. [sigh]

I am facing a dilemma right now:

As part of a deal I made to close a recent business transaction, I took a final (bonus) payment in the form of stock in the acquiring company – just under 1% of its entire share capital.

Of course, the London Stock Exchange crashed a day or two before the share certificates were in my hands … and kept dropping. So far, I have lost half the ‘face value’ of the payment in stocks.

Will I hold or will I sell? Will the price keep dropping or will it reverse? Does the company have the cashflows to justify holding?

Luckily, the outcome shouldn’t affect my financial future … but, it would have paid for a chunk of my new house and the renovations, as well.

BTW: if you are ever offered stock in an acquiring company for stock in yours … decide:

IF they paid you cash instead, would you then turn around and ‘invest’ that money in the acquiring company’s stock?

If the answer is ‘no’ then push for a cash deal … that’s what I did (except for the last little chunk … boom!) …


There's no Law of Averages!

The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at ….


Just yesterday I wrote a pretty long piece about the effects of inflation, and how much you could reasonably expect to save for retirement …

… it turns out that you need to save a lot (per week) to get a little (to live off per year, in today’s dollars).

If you followed along, you would have realized one thing … I used a very conservative annual expected return on my investments of only 8%.

This got me to thinking … what annual rate of return should we be using? Isn’t  the historical rate of return from the ‘market’ (hence an broad-based Index Fund) around 12% – 14%?

Let’s face it, the difference between investing $100,000 for 20 years at the 8% and 12% is not the 50% more that you would intuitively expect …

It’s actually a difference of $430,000 or exactly 100% !

That means that whether you make an 8% return or a 12% return is the same as doubling your ‘salary’ in retirement … compounding greatly magnifies success (and, failures!), especially over long periods.

Since the average return for the stock market is 12%, we should use that, right and just double all the numbers that I gave you yesterday [phew!] … right?

Trent from the Simple Dollar asked that exact same question … on June 17, 2007; here’s an excerpt from that post:

Another favorite of mine is the ongoing debate over the Vanguard 500. The Vanguard 500 is an index fund started in 1976 that precisely mirrors the S&P 500, a collection of the stocks of most of the largest companies in the United States. Since its inception, it has averaged a return of over 12% per year. Given that, I often use a 12% annual return as a number to use to calculate annual returns in the stock market over a long term (longer than ten years).

I will never be bold enough to say that I’m absolutely correct and the 12% annual average will hold up, but if you ask me what I thought, I’d say that it will, at least for a while, and I’d dump several reasons on your lap. Someone else would likely disagree with this and deliver several reasons why it won’t happen. I know at least one person with a degree in economics who firmly believes that the next several years will be much betterthan 12% as several new industries come online with marketable products. Who’s right? Only the future can really tell.

How has the market actually fared over the past 10 years?


No, the broad S&P 500 Index that Trent referred to averaged just somewhere between 2% and 4% over the past 10 years!

The Dow Jones Industrial Index that measures a smaller basket of larger companies averaged just somewhere between 4% and 6% return [AJC: Why the range? There was a major crash exactly 10 years ago, so do we assume we go in at the top or at the bottom?].

Isn’t it great having the benefit of 20/20 hindsight? Does it mean that trent isn’t smart? 

No, Trent’s a pretty smart cookie … so am I, and so are you … even smart people get stuff wrong!

For example Warren Buffett (who I like to quote – a lot – on stock market-related topics, because he is regarded as the World’s Greatest Investor) has made some doozies that he openly admits to; here’s just one of them, according to USA Today:

Buffett conceded that he has made what he considers mistakes, including a reluctance to buy large amounts of Wal-Mart stock several years ago. “I cost us about $10 billion,” said Buffett.

I guess for Warren a $10 Billion mistake is the same as a 8% – 10% mistake for us?

Actually no, if you were planning for a 12% return but only got a 4% return, for every $100,000 that you invested for just 10 years, you would ‘lose’ $650,000 – your estimates of future income would be out by a factor of 3 (that’s just like getting a 2/3 pay cut)!

So, here’s what I recommend … as I said yesterday, averages are for everybody – what might happen to everybody anytime.

You are special … you are investing whenever you invest [AJC: stick with me on this!] … and, you have to live forever more with the consequences.

This means that you should plan for the worst case … and smile when the result is better.

So, if you decide that $1,000,000 in 30 years is enough [AJC: I hope, by now, that most of my readers are planning a LOT more a LOT sooner!] and you are willing to take a chance on the averages (i.e. 12% returns), then by all means set aside just $60 a week (starting now) … but, make sure that you index it for inflation (means that you will be saving $85 a week by year 10; $127 a week by year 20; and, $187 a week towards the end). 

But, if you want to be certain that you will have $1,000,000 in 30 years, then you had better start by putting aside $110 a week (and, increase to $157 a week by year 10; $232 a week by year 20; and, $343 a week towards the end) … because the market only guarantees an 8% return for every 30 year period in history!

What does this mean? 

Aim for the certainty … don’t leave it to chance [a.k.a. historical averages]!

What can you do?

1. Decide whether a different type of investment would be better for you (e.g. direct investments in stocks; or leveraged real-estate; or businesses) in which case you can save the same amount per week and (hopefully) achieve better returns to get you there … i.e. concentrate on investing rather than building income.

2. Increase your income, so that you can just dollar-cost-average into the broad-market Index Fund … i.e. concentrate on actively creating income rather than actively investing the proceeds.

3. Do a little of both.

This blog is aimed at squarely at those who want to do a little of both …

Good Luck!

That little pup called inflation …

If you’ve been sticking around to see how the 7 Millionaire … In Training! ‘grand experiment’ can pay off your you … 
… your patience is about to be rewarded – at least, that is my sincere hope. 
Starting today are a series of special weekly posts at designed to help you find your Number.  
This is perhaps the most important financial exercise that you will ever undertake in your enitre life … at least, it was for me! Whether you intend to be an active participant in my second site or not – this is my gift to you: 
All you need to do is read the posts, starting today and continuing (once or twice a week) for the next 3 weeks, and follow along with the simple – but critically important – exercises that I will be providing. Like everything here, this information is provided free, without any catches, for your benefit. Make good use of the opportunity … it won’t come around again. 
Good Luck and I hope that it is as profound an exercise for you as it was for me! AJC. 

Sometimes you can’t see further than the back of your own hand until somebody points the way …

… then it just seems so damn obvious that you wonder why all of those other dopes out there are still staring at the backs of their hands!

I was preparing for a radio interview the other day and I happened to pull up an old e-mail (that I mentioned in a previous post) from Fidelity – a fine investment management company – that proudly proclaimed:

Did you know that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?

At the time, I just wrote my little counter-piece and laughed it off because that $76,000 probably won’t even buy you a car in 20 years time!

But in thinking about it – and, this is what I said on air – it’s actually much worse than that …

You go without lunch every day for the next 20 years, and you don’t even get a new car?!

How the hell are you ever going to retire!

Think about it, if $34 a week gets you $76,000 in 20 years … then, you would need to save $340 a week for the next 20 years just to get $760,000 !

Now, even if you could figure a way to save $340 a week (starting right now!) $760,000 a year in 20 years is NOT the same as having $760,000 today …

$760,000 today will get you a reasonably ‘safe’ income of $30,000 a year (indexed for inflation) if you invest the capital wisely, if you don’t suffer any major losses, and if you don’t spend any of it up-front or along the way.

In other words, the equivalent of $30,000 a year has to buy you everything you need and want for the rest of your life!

But …

That’s only if you have the $760,000 today!

If you’re like the rest of the world, to get there you’ll need to put aside that $340 a week for the next 20 years, but that little pup called inflation will be nipping at your heels the whole way

… and, that $760,000 in 20 years will only be ‘worth’ $350,000 if inflation is just 4%. I can’t even begin to think about what would happen if inflation rises to 5%+, as predicted.

That means that you get to live on $14,000 (in today’s dollars) a year!

So, how much did you expect to save?

By when?

But, wait, Fidelity is offering a 7% annualized return … aren’t you going to invest that money in the stock market (an ultra-low-cost Index Fund, of course) that averages 13% a year?


Because the day that YOU invest the market is going to crash, WWIII is going to break out, the sub-prime crisis will just be getting into full swing (again … will they never learn?), or worse.

YOU, my friend, will need to plan for numbers that you can rely on because you only get one shot at this …

… and, the money has to last you for the rest of your life  – unless your backup plan is (a) still checking out groceries at the local supermarket when you’re 75, (b) eating dog food, or (c) let me hear it [leave a comment].

And, the number that you can rely on is this: 8%

Because, you can put your money in an ultra-low-cost Index Fund (we’ll forget about minimums and entry/exit fees for now) and rely on the fact that the market has never had a 30 year period where the returns have been less than 8% (that includes periods of war and pestilence and pure market stupidity).

… but, now you have to wait 30 years; because if you only wait 20 years, you can only be sure of getting a 4% annualized return, and that just sucks.

The good news is that if you can wait 30 years so that you can get a ‘guaranteed’ 8% return and you can keep socking that $340 away, week in week out for 30 years, well that’s over $200,000 a year (at a 4% ‘safe’ withdrawal rate)!

Unfortunately, we still have that little pup (a.k.a. inflation) dragging at us via his leash, which means that you can really only comfortably rely on an annual income of $25,000 in today’s dollars.

But …

You will do (much) better if you can start socking away, without fail, $340 a week and indexing that with inflation as well (in 15 years you’ll be putting away $588 a week and in 30 years $1,060 a week).

In fact, if you can maintain that regimen for 30 years, you’ll deserve a medal as well as your annual income of $37,000 in today’s dollars!

$14,000 … $25,000 … or even $37,000 a year in 30 years: is that really what you had in mind?

I suspect not, or you wouldn’t be reading this blog 😉

The true cost of 'helpers' …

The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at ….


Last month, I wrote a post that was a little scathing about what I call ‘middle-men’ and Warren Buffett calls ‘helpers’ … all of those people inserted between us and those fantastic “little pieces of American Business” [another Buffett quote … he means ‘stocks’] that we want to buy.

The problem is they cost us …

and, for every 1% in fees that they cost us, and our returns on $100,000 invested for 20 years goes down as follows:

1% 2% 3% 4%
 $17,383.14  $31,876.74  $43,938.73  $53,958.08

That’s how much you LOSE from what you COULD have earned on that $100,000; scroll to the bottom [better yet, keep reading] to see what Warren Buffett actually estimates all of these middlemen (agents, brokers, advisers) to cost American Business – hence us!

In the meantime, let me cast my views on these two important topics:

Financial Advisers

I will lay it right out on the table for you: I don’t like ’em, don’t trust ’em … but, sometimes you can’t live without ’em. In fact, I usually advise people to see a financial adviser and, I have NEVER told people not to.

I’m just telling you my opinion 😉

I see four problems:

1. Commissions – in the USA, most advisers are tied in some way or another to selected funds and/or providers … they will not or can not, provide you with truly independent advice. Sure, they may be honorable and educated and ethical (of course, they all are) but would you go to an honorable and educated and ethical Lexus salesman and expect her to advise you to buy a Maserati?

2. Fees – I love them! Truly … if I pay a fee I know I should be getting what I need, not what some ‘freebie’ guy is selling me. Unfortunately, in the financial planning industry even fee-only advisers can have affiliations to selected providers via agency, equity, or simply because they only have experience with a limited product set.

3. Results – How rich is your financial adviser? How rich do you want to become? They should be as rich as you want to become x 10 [AJC: OK, as rich as you want to become x 1 or 2 for right now is OK … but, when you get half-way whomever you ask for financial/commercial advice should be as rich as you want to become x 5]. And, if they are stinking rich already, did they get there because they invested in the same way as they are advising you or because they run a damn good financial planning business (which requires more selling talent than investing skill)?

4. Product – When was the last time that a financial adviser – particularly a financial planner – said, “Look Bud, I’d love to sell you this really great financial product, but [takes you aside, puts his arm around you and whispers conspiratorially] what you really need to do is [insert sensible alternate investment of choice: invest in real-estate; buy your own home; put the money towards starting a new business; look for 4 or 5 undervalued businesses and buy their stocks]” ?

Personally, I’ve never been to a financial planner [AJC: actually once, nice guy – I went because I kind’a know him socially – but, as soon as he started talking ‘business’ I felt my skin crawl and couldn’t wait to get out of there!], I would rather look for a business/investment savvy accountant to run the numbers for me.

Invisible Middle-Men

These are the guys researching, packaging, distributing, and managing investments for you. The most ‘typical’ product that we are talking about here are Managed Funds, which all carry fees – most hefty, some miniscule – to cover the costs associated with all of these ‘invisible’ middle-men, as well as the financial planner’s commission (if you decided to go with Option 1., above after all).

The problem is that, even if you wanted to diversify [you shouldn’t!] you wouldn’t buy one of these funds through an adviser/salesman … you would go direct to, say, Vanguard’s web-site and sign up for their lowest-cost broadest-based Index Fund and start contributing … and, you wouldn’t need to come up for air for another 30 years!

Warren Buffett talks a lot about other middle-men; what he laughingly calls the “Helpers” (as in “I’m from the Government and I’m here to help you”) e.g. the stockbrokers, the hedge fund managers) and if you want to read his beautifully laid out reasoning from his 2005 Letter to Shareholders, check out this article.

In the meantime, I lead you to Warren’s stunning conclusion:

The burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

Try compounding a 20% ‘loss’ over 10 years and see what you end up with!

ETF's as a hedging tool?

A while a go I wrote a post that discussed the difference between ETF’s and and Index Funds for diversification purposes … and, you know what I think about diversification.

But, for those who are just passing by the blog and thought you’d like to drop in [AJC: my regular readers will skip over this post because they wouldn’t be interested in diversification either 😉 ] here is an interesting article from the Tycoon Report:

If you haven’t already, you should start moving your money out of mutual funds and into ETFs (Exchange Traded Funds).  In my opinion, they are tailor made for the “Average Joe” investor to get the benefits of a mutual fund without their crazy fees.

For a detailed listing of all of the fees, etc. that come with mutual funds, you can visit

In my opinion, the only downside (for some people) with respect to ETFs may be that you can buy and sell them as easily as you can.  The reason that I say that this may be a downside for some people is because, if you are impatient or have an addictive personality,etc., then you may know yourself well enough to stay away from investments that you can easily get in and out of.

In other words, if your personality is such that you are tempted to trade without a logical reason to do so, then perhaps the difficulties (such as fees) that come with a mutual fund will prevent you from trading needlessly.  An ETF, on the other hand, may (because of their ease) encourage certain types of people to trade.  If you do not have this type of issue, then you should certainly choose ETFs over mutual funds.

I like ETFs personally because they are less risky than individual stocks.  As you may know, you can never totally eliminate risk, but you can reduce it.  You can reduce risk by hedging, diversification, and insurance.  ETFs reduce risk through diversification, as you’re not assuming the risk that your investment will go to zero based on the demise of one single company.

Nice summary. Here’s where I sit … if you’re using the ETF for:

1. Speculation– Using an ETF (or any other ‘broad-based’ investment) as a hedge against short-term risk is fraught with danger … you are speculating. Yes, you are ‘hedging’ against the risk of any particular stock tanking (conversely, spiking) but you are really just betting with/against the whole market – if people knew where the market was going, they would be richer than Buffett. On the rare occasions that I do speculate (anything less than a 5 – 10 year outlook going in is speculating to me), I prefer to speculate with options and/or just a select handfull of the underlying stocks.

2. Investment– Now, if I am going to invest with a 5 – 10+ year outlook going in, then I am less likely to be speculating and more likely to be ‘saving’ or ‘investing’. It’s important to realize that I may not actually hold the investment for that long ( who knows what the future will bring?), but I certainly have the expectation of holding, going in. I don’t like to ‘invest’ in a broad-based ETF/Index because then I am truly ‘investing’ in paper, and market sentiment/emotions. I would not be investing with the understanding of the fundamentals of the underlying business, which is the only way that I expect to ‘beat the market’ in the long-term: buy under-valued businesses that I would be prepared to hold forever, and wait for the market to ‘catch up’ to my way of thinking … this is pretty much what Buffett does (actually, did … when he was a little smaller and could make smaller investments) with the stock investment part of his portfolio. If I get it wrong, but I llike the business and it makes good profits (else, I wouldn’t have bought it … then, I don’t mind holding. If I get it right, and the price spikes up to ‘fair market value’, I may end up selling early.

3. Saving– I don’t have ‘saving’ strategies – my speculation (20%) and investment (80%) strategies seem to cover me pretty well. But, if you just want to plonk your money away … either as a one-off (Uncle Harry left you some money) or on a more regular basis (you have a 401k or just want to regularly save) … AND you have a 20+ year outlook, then this is where ETF’s or Index Funds finally come into play! Plonking your money into a Spider ETF or broad-based Index Fund can be better options than CD’s or Bonds. Just don’t get fancy here … the good news is that Warren Buffett also recommends this strategy for the “know nothing investor” as he calls them … he also calls it “dumb money“, but he means that in a nice way 🙂

Now, as to selecting an ETF v a broad-based Index Fund, it’s a close call.

Finally, I was a little amused this little ‘teaser’ on the very same page as this very nice Tycoon Report article exhorting you to ‘invest’ in ETF’s; it said:

Most ETF Traders Will Lose … And Lose BIG

ETFs are the hottest new investment around, and for good reason. But many everyday investors who jump into ETFs without a proven system to guide them will lose their shirts.

Then [of course] it went on to the ‘solution’: On Thursday, June 12th, Teeka Tiwari will reveal the secrets of using ETFs to generate enormous wealth. But, there’s nothing wrong with a little good marketing …

My advice? Keep your shirt buttoned!

Can a Trailing Stop Limit Generate Explosive Investment Returns?

Short answer, I don’t think so … in fact, a trailing stop has nothing to do with increasing returns, it’s all about attempting to limit losses.

But, that was the premise of an article by Debt Free, excerpted here:

A trailing stop limit is simply a stop loss order, but one with a very important difference compared to a traditional stop loss order. A traditional stop loss order is a command to your broker to sell a stock holding when it drops below a preset price.

For example, say you hold 1,000 shares of Microsoft (MSFT) corp that you bought at $10.00 a share. You can tell your broker to sell those shares if the stock ever drops below a price that you feel comfortable with, for example $7.50. That way you limit any potential losses on your position.

There is a problem with a traditional stop loss order however, and I’m sure you’ve spotted it already. What happens if Microsoft corp shows impressive gains for a year, say it increases its share price to $18.00? That’s great, but your stop loss order is still set at $7.50, so if MSFT corp’s stock then drops back down you’ve protected yourself against a 25% loss in your original position, but you haven’t protected your gains at all.

A trailing stop limit changes that for you. A trailing stop limit order actually changes the number at which it goes into effect as the stock price changes. That buys you a very important benefit as an investor. It protects you against loss, but also allows you to make a nice profit while doing so. Basically it mitigates a certain measure of risk while maximizing your investment returns. Anything that mitigates investment risk while allowing an investor to generate potentially explosive returns is a great thing.

Using a trailing stop limit can generate explosive gains for your portfolio because you will maximize gains in your stocks, while minimizing losses. Any time you can do that, you’ll be retired on a beach in Maui that much sooner.

I’ve taken a whole chunk out of the article because Debt Free summarizes the idea of a Trailing Stop Loss quite nicely …

… in fact, whenever I buy a stock I always set a Trailing Stop at about 5%, 8% or 10% depending on the stock and how volatile I think it might be.

Perhaps counterintuitively, the more volatile the stock the higher the number that I set, as I don’t want to be shunted out of a stock that is just bobbing around in a range … the less volatile the lower, usually 8% but maybe 5%, as any downward swing could be a bad sign.

But, I don’t see how a Trailing Stop on its own can generate anything?!

It may help protect you from losses, therefore, may make you overall returns higher (same gains, fewer losses = higher average returns) …

… equally, it can bump you out of a stock that was having a slight correction, but then jumps back up too quickly for you to (sensibly) buy back in again, meaning that you miss out on the upside (lower gains, fewer losses = lower average returns).

In other words, it sure ain’t no Magic Bullet!

And, there’s one other problem with Stop Losses of any kind: they can’t always protect you.

If the stock has a sudden and major drop, the price may suddenly drop from, say, $168 to say $10 (remember Bear Stearns?) … the Stop Loss may trigger the sale (if you have it set to accept the market price) but you will still ‘drop’ 95% of the value of your investment!

The only way to protect against that is to buy a PUT Option (at, say, 8% less than the current price to avoid paying top dollar for the PUT) … that way, no matter how low the stock drops you have already locked in a buyer at the price that you set for the PUT.

So, Stop Losses – particularly Trailing Stop Losses – are a great tool …

… but, using a Trailing Stop Limit can’t generate explosive investment returns on it’s own … only time and/or luck can do that!



How to see through a job disguised as a business …

The best way to give up your ‘day job’ is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at ….


Lots of people come up to me to proudly tell me about their wonderful, growing businesses … how do I look them in the eye and tell them that I really think that what they have is actually a job?

… and, no, I’m not just talking about the obvious: the accountant, doctor, attorney who earns an income from their own labor, whether individually or in a partnership.

Anthony asked me to post on this (I had said I might … so, I guess he was just encouraging me!), when I mentioned in a recent post that I would comment on this exact topic: 

You should. I want to start my own business in an artistic field and every-time I think of having an employee create my vision, I shudder, just a little bit. That’s where modelling someone comes in. Model those who were able to export their vision to other people.

To me the difference between a ‘job disguised as a business’ and a ‘true business’ is:

1. Could it run 3 months without you?, and

2. Can you sell it?

The first point is self-evident: no employees/partners = no ability to run without you (unless, you can totally automate your business … in which case, call me … I want in!).

Therefore, no business!

The second point is a bit more subtle: if the business is not saleable (a) it probably also fails the first point (i.e. no employees), and (b) you are tied to the business and it is tied to you … when you stop, the business stops … when the business stops (market changes, product life-cycles end, etc.) … you (at least your income) stops.

To me, that’s a job; sure, it’s a flexible job with extra benefits … but, a job none-the-less, just like that ‘self-employed’ accountant/doctor/etc.

Now, how do you make a ‘glorified job’ into a true business?

First, you create Positions in your company!

Now, the business may be you, your Mom and your Dad (that’s a whole series of other posts right there!) … but, if you are going to morph into something that meets our two requirements (i.e. runs without you; and, is saleable), then you are going to need to create a simple Management Structure:

CEO (the gal who runs the show); CFO (the guy who runs the finances); Sales/Marketing Manager (the guy who brings in the business) … right on down to Mail Girl.

If there’s only one, two, or three of you … well, you’re each going to be wearing lots of hats for a while. The key is, though, that each ‘hat’ (i.e. position) has only ONE person who wears it! Only ONE of you gets to be CEO (now, I let me know when you have your first Owner’s Meeting … I sure want to be a fly-on-the-wall wall for that!).

Now, for small businesses it can be very difficult to understand this concept, so try this one one:

When the OWNERS walk in the door, they become EMPLOYEES … when they leave at the end of the day, they become OWNERS again. Simple … critical!

Next you create Systems!

You need to get down and document absolutely everything that you (and everybody else!) does in the business.

As Michael Gerber (whose ground-breaking book, The E-Myth Revisited, taught me everything that I know about business!) says, you should act as though your business is a prototype and that one day there will be 500 more just like it.

Even if your little store is ever going to be the only one, this step will allow you to easily grow and add staff, and sell the business … because the purchaser will see how well everything is documented.

Of course, if you’re like me, you could never believe that your business can run without you … here’s how I learned otherwise:

In the early days of one of my businesses, every file would come to me for approval … now, I had experts – trained in the field in which we were operating (compared to me: I was self-taught when I decided to get into that particular business!) – yet, I still checked every major file.

Eventually, my staff stopped bringing me every file … gradually, at first (they’d ‘forget’ to bring me one here and another one there).

When I didn’t notice – because I was so damn busy, running myself ragged doing ‘other stuff’ – they conveniently ‘forgot’ to bring more and more files to me until, they stopped bringing any to me for approval at all!

If I had noticed, would I have got so upset that I would have fired somebody? Probably. Ego does that.

Did the business run any worse after they stopped bringing me the files? Of course not … I said they were trained, and I wasn’t! I just needed a lesson in faith and trust.

So, that’s how I was gently pushed out of Operations and never again stepped a foot back in … in ANY of my  businesses.

But, I was CEO … without me at the helm the business would hit the rocks and sink … or, so I thought:

A year or two later, I closed on an opportunity to acquire a business in the USA, requiring me to move countries. I decided to move to the USA (where we’ve been ever since) as this would be a much bigger business – but, at the time, I wasn’t selling any of my overseas interests.

So, I did the responsible thing: I hired a replacement CEO months ahead of my planned relocation …

… who decided to leave less than 6 weeks before my departure for the USA!

Luckily, after a frantic phase of executive search that consisted of me calling the only guy that I thought could do the job (even though he had no direct industry experience) and him saying ‘yes’ immediately (phew!), I found somebody who could start exactly 4 weeks before I was leaving … remember, this is a business that COULD NOT POSSIBLY run without me, and here I was putting in ‘New Guy’ with only 4 weeks ‘training’!

Needless to say, he took over seamlessly, didn’t miss a beat, never called me about ANYTHING (bruised ego on my side!) and, not only did he keep the business running, keep the staff happy, and keep the clients equally happy, he damn well GREW the business!

In his favor, he did have Positions all neatly laid out and filled before he joined, and he did have a whole Operating Manual full of Systems that worked …

… and, in my favor, I had a business not a job! How do I know for sure?

Not too long after, I found a buyer …

How about you? Do you have a business or a glorified job?