Why retail businesses suck …

My blogging friend, JD Roth posted a great reader question recently on his super-popular Get Rich Slowly blog:

I’ve been at the same job since I graduated from college nearly ten years ago. Lately I’ve lost the passion for what I do and am aching for something completely different. I want to start a retail shop.

Two problems:

  1. I’m paid well here, so I’m going to have to figure out how to make this transition in a way that won’t hurt the family’s finances.
  2. I don’t have any real business training, and the thought of keeping books for the business gives me stomach pains.  But there are resources out there to help with the logistical side of running a (retail) business, and I know where I need help and will pay for it (accounting, interior decorator, etc.).

Well, this reader is exactly where I was not that long ago … nearly 10 years into a high-flying corporate career – with all the perks that go along with it (cars, travel, expense accounts) – and, I got bitten with the entrepreneurial bug …

… just like getting bitten by a mosquito and catching West Nile (the non-fatal form!), once you get it, it’s almost impossible to shake off.

So, I have a question for this reader … in fact, it’s probably the most important question that he needs to answer before going INTO this (or any) business:

Who are you going to sell it to when you finally decide to get out?

If his answer is: “whoever wants to buy my retail store” …

… then I suggest that he doesn’t even start, because he will effectively be trading his high-paying corporate job (with perks) for a low paying, slave-labor ‘job’ in retail.

Retail sucks because: there are way too many overheads; your balls are tied up in leases and inventory; and, you’ll be working 60 – 80 hr workweeks for the rest of your life.

BUT, if the reader can honestly & passionately answer with something like:

“Well, I have a unique niche/vision, so I’ll be opening my first store in 2008; 3 more in 2010 and 50 across the Eastern seaboard by 2015, then I’ll IPO or sell to Sears”

… he just MAY have an opportunity worth pursuing!

The reader then went on to ask:

The bigger issues, I think, are how to get from where I am now — sitting behind a desk doing the job I’ve been doing for 10 years — and getting the momentum going to really make this happen (and to not fail at it, leaving me jobless and penniless).

No, Little Grasshopper … if you have the passion, and can feel it in your bones … and, if it is REALLY an opportunity worth pursuing … then you are either all wet or all dry …

… you need to have a financial buffer (well, I started even without that … but, then again, I’m one crazy dude!), then get out and Just Do It!

You will NEVER start a retail business like this whilst still working full-time … there are just too many roadblocks in your way: scouting for locations; negotiating leases; sussing out the competition; negotiating with suppliers; hiring your first employees; sucking up to the bank manager; and, so on.

Would I start a retail business … unlikely.

How would I start a business today … exactly the same way that I am now starting two:

Come up with an Internet-based business concept; look for partners who can build the business for equity; put up a little seed money; and, stay in my day job as long as possible (well, this last step doesn’t apply to me … but, you get my point?).

Then I’d cross my fingers, close my eyes, and jump right in 🙂

Flipping / flopping?

On Wednesday, I pointed out that “if I don’t have direct experience in the specific area of a question, I will say so”.

This was the case with my response to Joshua (coincidentally, another 7 Millionaires … In Training! Final 30 applicant) who used a recent post to ask me a question about ‘flipping’, which I have never done …

… at least not for real-estate (there’s a strong case to be made that a year or two ago I ‘flipped’ a business for a rather large profit … but, that’s another story).

[AJC: Josh, I didn’t mention it then, but I would consider Dave Lindahl an expert in this area – I haven’t met the guy, but I have studied a lot of his material and consider it good-to-great, as is John T Reed’s stuff on real-estate in general … not sure what John has to say specifically about flipping: you should check]

But, Josh, I do have some advice for you:

Treat flipping as a business …

… it’s probably closer to real-estate development, than it is to real-estate (long-term buy-and-hold) investing.

The downfall of many a flipper (or developer) is when the market suddenly turns and you are holding inventory that you can’t afford to cover the holding costs on.

Since we are closer to the bottom of the current cycle than to the the top, this will become less and less of a fear as the market eventually (and, inevitably) starts to rise again … it’s the next ‘correction’ that will catch you out!

Here’s what happens:

You buy your first property – it might be a house that you intend to live in for a while – you fix it up … and, you sell it at a profit. Maybe you pick up $10k – $50k in the process … maybe more.


So, you do it again … then you buy two.

Pretty soon, you are earning a nice little side income buying/rehabbing/flipping houses all over the place … you don’t even bother to rent them out – you are purely looking at this equation:

Profit = Selling price – (Buying price + materials used + interest + closing costs + reselling commissions)

The problem with this formula is that you now have a second job!

Your time isn’t factored into this, since you are doing the work yourself … but, your ‘salary’ is actually included in what you call profit. In a great market, you are earning a great salary … in an ‘average’ market, you are probably not really earning all that much.

Here’s what to do:

Treat the rehab. business as exactly that … a business. Go and get a contractor’s estimate or two and add that cost into the formula (don’t forget to inflate the estimate by 20% to cover contingencies) to get:

Estimated Profit = Estimated Selling Price – (estimated Buying price + contractor estimate + interest + closing costs + reselling commissions)

Now, if the ‘profit’ that you estimate makes the project worth while, then you just may have a nice little ‘business deal’ going on here …

… and, it’s then up to you if you decide to hire yourself as the contractor!

But, there is a problem that I see with this ‘business’ … and, it’s a problem that arises out of too much success!

Yes, success makes you more aggressive … makes you do more and bigger deals in order to grow your little business into a bigger and bigger business (buying more/bigger properties to rehab).

That’s when you need to do a couple of things:

1. Move into multi-family properties,

2. Outsource the work,

3. Have a buy-and-hold contingency

The first two are obvious: these are the steps that will pave the way to unlimited growth in your (now, real) business … ALL businesses need to remove obstacles to growth, because a stagnating business is an (eventually) dying business.

The third one will (hopefully) protect you against the inevitable selling problems and market ‘corrections’ that will come up from time to time.

Which brings us to the subject of developers (those developing ‘on spec.’ to then sell ‘in pieces’ to investors and owner-occupiers):

Developers have all of the same issues as flippers, only on a larger scale … many flippers, in fact, end up growing to become developers themselves.

As developers become successful they tend to make two major mistakes:

1. They move into bigger and bigger developments … max’ing out their financial capabilites in one or two large ever growing deals. One market correction can sink them.

2. They start bringing teams of ‘helpers’ in house (architects, designers, builders, etc.) and they have to ‘feed the team’ with a constant stream of projects … it’s very hard to wind back if the market starts to tighten up a little.

So, while I can’t tell you much about the business of flipping or developing, I can tell you that like all businesses you have to be able to handle:

a) Growth, and

b) Contingencies

…. both very hard to do in a business that requires taking huge financial risk for each project.

Here’s what the smartest flippers and developers do: they start off buying to churn …

… this churn (i.e. quick reselling) generates chunks of cash; instead of investing all of this chunk of cash in their next (bigger) project, they divert some to buy-and-hold real-estate.

For example, they might rehab. and reposition an apartment building as condo’s …

… they might then sell most condo’s, but try and keep a couple for themselves as rentals. Do this a few times, and you just might have something left over when the next crash wipes your ‘business’ out (assuming that you have set up your business in the right legal entities so that your ‘hold’ portfolio can’t be touched).

All in all, what can I say?

Some people make huge fortunes (and others lose theirs) in exactly these types of businesses, so who am I to say that this is something that you should/shouldn’t do to start making your own fortune?

Good Luck!

Which side of zero to gear?

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


A couple of weeks ago I wrote a pair of articles about real-estate: the ‘$7million Real Estate’ Question and Rule.

The first part of the shared title was an obvious reference to how I made my first $7 mill. of which the majority was made in real-estate … not directly in business, as many assume – but, certainly ‘fueled’ by an income generated by two (then mediocre) small businesses diverted towards RE purchases and mortgage payments rather than to my spending ‘wants’.

These articles seemed to ‘flush out’ of hiding the RE enthusiasts from the 7m7y Community!

One of those was Luis who is a 7 Millionaires … In Training! Final 15 applicant and he asked (as a comment to the first of the two articles):

How close to positive is close enough? How do you calculate against vacancies?

Should we expect 2 months out of the year which we would have to pay the entire mortgage?

Lastly, would you stay away from areas that are under rent control laws?

I should warn you in advance: I don’t always answer questions left by readers left as comments or sent in as e-mails; sometimes I let them know that I feel the question deserves a follow-up post, as I told Luis in this case, and sometimes I am simply not expert enough to proffer specific advice.

If so, simply diarize for 45 to 60 days (as I told Luis) and contact me if you don’t see a response within that period …

… I NEVER use “I’ll get back to you” as a tactic to get out of answering … if I don’t have direct experience in the specific area of a question, I will say so.

Back to Luis

The first part of his question relates to the whole concept of positive gearing and negative gearing … in my opinion, one of the worst-handled subjects in real-estate …

… in fact, I have never seen as much rubbish written about any investing subject (except maybe diversification and 401k’s) as I have about negative gearing!

Generally, the RE [Real-Estate] Guru’s fall into two camps:

The Argument For Negative Gearing

Those promoting negative gearing say this allows you to buy more real-estate for greater capital appreciation. The more property appreciates and the less that you put in, the greater your cash-on-cash return.

Here’s why:

Negative gearing implies that your expenses on the real-estate (your mortgage payments; repairs and maintenance; insurance payments; and the like) are greater than your income (rent received).

To a great extent, you can ‘control’ the amount of the ‘negatively geared’ short-fall simply by ‘dialling’ up/down the amount of capital that you put into the property (usually more quickly by way of a deposit, or more slowly through making larger Principle & Interest payments)

Lower deposits generally mean higher mortgage payments, therefore you are ‘controlling’ more real-estate with less of your own money.

This may mean that your cash-on-cash returns get higher and higher as property appreciates with less of your own cash (and, more of the bank’s committed). You can use that cash to buy more and more of these appreciating properties.

But, there’s a downside: as you borrow more and more from the bank against any specific property (by putting in a lower deposit yourself) your interest bill goes up … your rent stays the same (your tenants won’t pay higher than market rates just because you get a big interest bill from the bank!) … you may make a loss on the property.

But, you get it all back – and more – on the capital appreciation on the property. Don’t you?

Amazing how the proponents of negative gearing are suddenly quiet when the ‘RE bubble pops’ … not, to mention your ability to grow your portfolio will depend upon how much monthly loss you can fund.

The Argument For Positive Gearing

Those promoting positive gearing say “buying a property is an investment … investments should make you money, not lose you money”.

So they suggest looking in areas where rents are relatively high, stable and growing.

They recommend buying fewer properties, putting in a bigger deposit, and letting your rents cover the costs and pay down the property.

Not only do you have a buffer (and build an even bigger one over time) against market crashes, vacancies, interest rate hikes, and unexpected repair bills, but you build up a nice little pot of equity if these properties also rise in value (as they surely will, given a long enough holding period?).

The problem is that these types of properties (i.e. the ones that generate a decent rental return) don’t tend to be in high appreciation areas, whereas properties that appreciate nicely tend not to produce a great rental return.

So, it seems that real-estate investing is a trade-off: do you want faster appreciation or do you want a greater income?

If you are young and are investing to build great wealth – and, are prepared to take greater risk – then you may be chasing higher appreciation and may have the income to carry some short-term (you hope!) losses.

On the other hand, if you are approaching retirement, you may want to be selling some of your portfolio, using the proceeds to jack up the equity (by paying off some of the mortgage, hence lowering your largest monthly expense) – keeping some as a cash reserve against vacancies and expenses – of each remaining property so that you can live off the proceeds. An income that should rise roughly in accordance with inflation … nice.

Here’s how I look at it:

I am neither for nor against negative gearing … ideally, I see absolutely no reason to take a loss. But, this can come in two ways:

1. By buying a property that doesn’t produce enough income, when (if I just looked a little harder, negotiated a little better, added a little more post-purchase value, chose a different class of RE or a different location) I could have bought something with similar appreciation that didn’t produce a monthly loss, or

2. By passing on a property that had great potential because I didn’t want to suffer a little short-term loss.

Both are dumb reasons to buy (or pass) on an opportunity …

… to me, the monthly short-fall or excess (if i don’t actually need the money to live off NOW) is just a part of the investment in my future.

If negative, then I am just increasing the capital that I am allocating to that property … if positive, then I am calculating whether that return could be used better elsewhere by pulling some capital (by refinancing) out of the property.

In other words, to me, a monthly excess/shortfall is just ONE part of the overall investment equation and there’s absolutely no reason to be bloody-minded one way or the other.

Let me leave you with a couple of final thoughts:

i) For those proponents of negative gearing who justify their methods on the basis that “you get a tax deduction on the loss, so Uncle Sam is helping to pay for your future” … get a life. Let the tax deduction be an effect of a business decision taken for other reasons, not the cause! Why lose 70% just so that Uncle Same can ‘donate’ 30%?

ii) Sometimes a negatively geared property can become positively geared just through tax benefits: depreciation is a great one to have available as it is tied to this property (so, if one works; maybe 100 will work for you just as well?) whereas the deduction on negative gearing only works when you have enough outside income to make use of it, so it may only work on one or two properties at a time.

So, in which camp do you sit, and why?

Does diversification really suck?

Last month I wrote a post ‘busting’ the myth of diversification (and, did a little follow-up segment about it on my ‘live show’ @ AJC Feed).

As expected, I got some ‘for’ and ‘against’ comments … including this comment from Ramit Seth who writes the great personal finance blog I Will Teach You To Be Rich:

People love to talk about beating the market when, in reality, they rarely even get close to matching the market. Instead of doing the mundane work like paying off debt, maxing out retirement options, and properly diversifying, they go after the next best thing.

And even if they focused *only* on beating the market, odds are they still couldn’t. In fact, fewer than 15% of mutual funds fail to beat the market over time, with managers that focus on investment full time.

David Swensen is a great voice to read in this argument.

Also, here’s another tidbit: In a 1996 study of hundreds of over 200 market-timing newsletters (the ones that claim they can help you beat the market), two researchers named Graham and Harvey put their findings delicately: “We find that the newsletters fail to offer advice consistent with market timing.” Hilariously, at the end of the 12.5-year period they studied, 94.5 percent of the newsletters had gone out of business.

Saying that “you can pick better funds than average” is exceedingly difficult. And saying that “index funds” are boring is a great excuse to seek out sexy investments without taking care of the bottom-line concerns first. Chances are, the people who say this aren’t even getting index-level returns.

“Moom” said that I encourage people to be entrepreneurs when it’s not clear that I’ll be successful. A good point, but I advocate people to think entrepreneurially, not to all be entrepreneurs. There’s a big difference.

The final point — you should read the research on how diversification can reduce your risk and actually increase your returns. This is not a touchy-feely argument about how diversification makes you “feel.” Read the investment literature and the math behind it. It works.

Well ….

… Ramit’s very blog is called I Will Teach You To Be Rich … no if’s and but’s about that. So, unless my definition of ‘rich’ is way off …

[AJC: basically, it’s to be able to live the Life of Your Dreams when you Need to live it, and without working … for most people, I’m guessing that’s going to take more than 120% of their current salary and sooner than 65 … if that’s not you, then sign off now]

But, nobody said that you have to “try and beat the market” instead of diversifying 😉 It’s not binary …

What I am saying is this:

a) if you ARE satisfied with ordinary outcomes then don’t stuff around with fancy investments, picking stocks, picking funds, etc. Do the sane thing: go for the ‘guaranteed’ 30 year return of 8% (or, take a ‘gamble’ that you will indeed match the average 30 year return of 11%, if you prefer) via a broad-based, low-cost Index Fund

b) If you ARE NOT satisfied with ordinary outcomes then what choice do you have? Find SOMETHING that you CAN make money out of and DO IT … it could be stocks; business ventures; blogging; real-estate; trading; options; flipping; MLM; working 5 jobs; whatever rubs the skin off your knuckles … [Ramit and I share at least a couple of these ‘interests’ – not together … yet!] …

But, you are going to HAVE to do it (and get BLOODY good and LUCKY at it) … or, go back and read (a)

Remember: the objective isn’t to make money in stocks (or RE, or whatever) … it’s to make money …

… to support Your Lfe’s Dream – whatever that may be; however much it may require!

Can I get any clearer?

I’m about to find out if you can make money online … Part 4

Well, it’s been a while since I’ve hunted for the ‘next big thing’ on the internet … as I’m still trying to find a way to make you all rich online …

…. of course, when (if I ever) do, I won’t actually sell you anything – or even refer you to somebody who will pay me a nice big, fat commission – because that’s not how I operate.

But, I think the point is pretty moot if this e-mail that I received from “Brent L” (I won’t tell you his last name) that I will paraphrase for you here, is anything to go by. I have to paraphrase it, because I deleted it before I realized that some of you may actually be tempted to go for it:

AJC [he used my name, sweet],

Here is something that has made me a lot of money and might make your site some money too …

[click affiliate link here]

Brent L.

Well, I pretty much check everything out – I’m a curious fella – and here is what I found … a web ‘sales letter’ that said, in part:

[AJC: unfortunately, the site that hosts my blog forbids links to ‘spam’ sites … so you will have to trust me on some of this … don’t worry, sooner or later somebody will e-mail you a similar breathlessly worded ‘hot tip’ and you will get to see the sales page … just don’t be tempted to sign up unless you really know what you’re doing]


This is an incredible system developed by none other than Dr Jxx Cxxxx, MD (retired) who found a little-known “twist” in how to use the pay-per-click (PPC) and paid-for targeted advertising programs at Google™ and the other search engines.

Say you went to the heads of Google, Yahoo, MSN and 100’s of other TOP Search Engines, and got to be good friends with them, and then they suddenly said to you:

“Don’t worry ever again on paying for  advertising with us – we’ll just let you advertise on our search engines, but we won’t charge you – so feel free to sell whatever you want, using as many keywords as you want, and we’ll even place YOUR ADS at the TOP of every FRONT Page and for EVERY SINGLE KEYWORD you choose!

So, the promise of free advertising on Google adwords (those little ads that you see on the side of most web-pages … except mine) … you’d be crazy not to take it up to advertise anything that you wanted on the internet! You’d make millions!!


Until we check out a little bit of semantics … you see, I hunted down the Good Doctor’s own words on this web-page where he defends his product and advertising with a clever example:

I went to a carnival one time as a young man and a fellow was shouting “Buy 1 get 1 FREE!” and I asked him:

“Which one is the free one, and which one is the one I have to pay for?”

He held up one and said “If you buy this one, you get this one here free!”

I told him I would just forego the one that would cost me money, but would surely take the free one for free.

He slapped me on top of my head, and said “Get out’a here, punk!”

[You think I have a deep New England accent! – You should’a heard this guy!]

His point was that in order to get the one for free, I had to buy at least one – which to me I thought meant the “free” one wasn’t really free at all!!

—-> But this is an ACCEPTED advertising practice used by fast foods restaurants, your local businesses, and so many more businesses I can’t even begin to name them all! —->

So, this should give you a clue – the guy (a ‘doctor’ apparently) is hinting that his own product doesn’t really get you free ads on Google … it’s just ‘like getting ads for free’ …

… there’s only one way that I know of to do that:

It’s to bring in as much money (or more) from running your own ads to pay for the ads that you put on Google … so, in a twisted kind of logic, the ads on Google (that you DO have to pay for, by the way … they aren’t free at all! So, of course, Google loves you!) bring you enough customers to your own site to pay for the ads …

… well, isn’t that the purpose of all advertising?!

So, why do I need to pay $67 for an e-book (yep … a $67 e-book) to learn that?

Here’s an exerpt from a UK site that explodes Online Venture Attempt #4:

Ok, so what is in the ebook? Great advice on how to get millions of pounds (dollars) worth of Google Adsense advertising for nothing? No. Here’s the system:

  1. You select as many popular keywords as you like;
  2. You bid the highest possible price for all of them (getting you to number 1 foreach of them);
  3. You fill that website with advertising and affiliate links which will make you money.

That is the “system”.

Forgive my ignorance, but surely that is not free! In fact, that is the whole premise – they aren’t actually FREE, you pay for them, but they are as good as free because of all the lovely cash you’ll be earning. What bollocks. What about all the countless people who click onto your site, and sooner or later, realise that it is just full of shit that they don’t need or want to read. They go elsewhere, yet you’ve spent $2 for them to visit.

Now, you may not understand fully what this is all about, because I can’t give you the link to the web-site (the spam-checkers on my hosting site will send me a cease-and-desist order, thinking that I’m actually promoting the site rather than debunking it! BTW: that’s a pretty good ‘smell test’ right there, isn’t it?) …

… but, I’m pretty sure you will come across this idea soon, if you haven’t already, so bookmark this page.

One final point: I wrote a post a while ago about being able to apply very simple common-sense logic to things that just seem to good to be true.

The test on this one is this:

1. This is the internet … so, news travels fast!

2. So, don’t you think that by the time that you have heard of this, that Google would have, too?

3. And, if by some miracle the Google Ad Execs hadn’t heard of this system already, don’t you think that the Good Doc would want as few people in the know as possible

4. If so, would he risk his self-proclaimed $67 Mill. empire for a few lousy extra million in e-book sales giving the precious ‘secret’ away?

5. And, since #2 is much more likely than #3, don’t you think that Google would have changed the rules by now, if the Doc had really found a way to place top Google Adwords for free?

Hmmm … smells pretty bad to me. Pass!

Anyone else come across this product yet? Anybody try it?

It's a Wonderful Life …

There was a great black-and-white movie that they show every Christmas, without fail, that starred Jimmy Stewart. The movie is called It’s a Wonderful Life and, if you’ve never seen it, I highly encourage you to find it and watch it.

It’s a particularly great – and relevant – movie for anybody following along (hopefully, actively!) in my 7 Millionaires … In Training! ‘grand experiment’.

Even though the movie was a financial ‘failure’ when it was first released, and failed to win any of the 6 Oscars it was nominated for, it has since been recognized for the tour de force it really is and the film has since been recognized by the American Film Institute as one of the 100 best American films ever made, and placed number one on their list of the most inspirational American films of all time.

The premise is that George (Jimmy Stewart) has a Savings & Loan business that defaults and he feels that he has let his town down and tries to commit suicide. An ‘angel’ then shows George what life in the town would have been like without him – showing him how many people he ‘touched’ in his life and gives him a second chance.

This clip – the final 9 minutes of the film – picks up there …

The financial relevance?

Nothing and everything, as those following here are about to find out … but, it may help to explain why I have asked them (and, you, if you want to follow along actively or passively):

  • To answer 10 ‘soul searching’ life questions.
  • To think deeply about what you really don’t want in your life
  • To think even more deeply about what you what do want in your life

… and more.

I hope that you’ll take the time to look in and see what all the life-changing fuss is about.

Define 'long term'?

That was the challenge set to me by Diane, one of the applicants to my 7 Millionaires … In Training! ‘grand experiment’ in response to a post that I wrote, exploding the myth of diversification that the the 401k jockeys seem to hold on to so dearly … I guess that their financial lives do depend upon it 😉

In that post I said that “diversification is only a mid-term saving strategy ..”.


As I mentioned in that post: “it automatically limits you to mediocre returns: The Market – Costs = All You Get … period!”

But, Diane is right: a key question is market timing. For example, does diversification help you over shorter time frames? Define short, medium, long … ?

Well, typically financial texts will define short term as anything less than 1 to 5 years; medium as anything between 5 and 10 years; and long-term 10 years+

But, it depends upon who you speak to: Warren Buffett would probably define short-term as anything less than ‘for ever’ … because that’s how long he aims to hold his acquisitions for, and often regrets having sold out of other positions too ‘soon’.

He is also reported as saying that he wouldn’t care if the stock market was only open once every 5 years.

But, I have a different viewpoint, and it begins with a question that I posed to Diane:

Di, the ‘pat’ answer is MINIMUM 10 years. The real answer is: depends why you need to know?

Let’s say that you found an individual stock that you want to buy; when I set out to do this, I set no minimum/maximum time-frame that I would hold the stock for. For me, the holding term is entirely driven by price …

… when I buy the stock, it’s only because I believe that it is well undervalued and the underlying business is one that I understand and love. I’m buying the stock and patiently waiting for the market to catch up with my thinking.

When the market eventually does catch up … I’m outta there!

That process can take months or years … if it takes years, then I am reevaluating how ‘cheap’ the stock still is every time an annual report comes out (if the company’s financials no longer make the current price look cheap, then I am outta there early … whether I need to book a profit or a loss).

So, time-frame is just not an issue here …

But, when I ask this question of others, most people are aiming to ensure that they are building their retirement nest-egg correctly, so for them time-frame seems more important … and it is.

When you plan for retirement, you need to work backwards:

1. How much do I need to ‘earn’ as a replacement-salary from my investments in retirement?

2. How big does my supporting nest egg need to be?

3. How long before I want to stop working?

4. What market return can I bank on getting for that period?

5. Therefore, how much do I need to sock away (in lumps and/or dribs and drabs) to ensure that I get to #2 by #3?

You will most definitely need someone to crunch these numbers for you … just make sure that they crunch the numbers that you provide for #1 thru’ #4, not just the numbers that they will try and ‘sell you’!

Because, ‘they’ will tell you:

… well LONG-TERM the market has RETURNED an AVERAGE of 12% -14% on stocks and only … yada yada …

The problem is that YOU are most certainly not AVERAGE and YOU only get ONE SHOT at this nest-egg-building business. Unless, you can find a way to turn back time and try again 😉

So, you need to choose ‘guaranteed’ numbers for #4 …

Here’s where I like the research that Paul Grangaard did for his excellent book, The Grangaard Strategy, specifically aimed at planning for (Book # 1) and living in (Book # 2) retirement:

Using the research done by Ibbotson Associates (published annually in their authoritative ‘Stocks, Bonds, Bills, and Inflation® Valuation Edition Yearbook’), Grangaard found that over the 75 year period between 1926 and 2000, large cap stocks averaged and annual return of 11% (small cap stocks did a little better at 12.4%), but he also found:

The average annual return [through that 75 period] bounced around all over the place, just like you would expect – between a high of 54% in 1933 and a low of negative 43.3% percent in 1931.

So, clearly planning on holding stocks for just one year has to be counted as extremely short term.

However, if we hold those same stocks for just 5 years, Paul tells us that we get a 6i% reduction in volatility

… this means that every 5 years period within that time frame (e.g. 1926 to 1931; 1927 to 1932; etc.) still has a chance of being wildly different to the average, but 61% ‘less wildly’ than simply holding a stock for 1 year.

And, it makes sense: wouldn’t your 5 year return have been dramatically different if you bought at the end of 2001 and sold at the end of 2006 than if you bought at the end of 2002 and sold at the end of 2007?

10 year holding periods reduce volatility by 83%; interestingly, we need to move to 30 years before we see another major reduction in volatility (20 years is only few points lower in volatility than 10 years) …

… even so, holding stocks for 30 years means that we should achieve the 11% average return on large cap stocks; but there is still some significant volatility; Paul says:

The best thirty-year holding period delivered a 13.7% average annual rate of return between 1970 and 1999, while the worst thirty-year period delivered an average annual rate of 8.5% between 1929 and 1958.

So, while your “odds” may be high that you will get an average 11% return over 30 years, who do you want to be?

The guy who invested $100,000 and locked it away for 30 years for a ‘safe, secure retirement’ in 1970? 1929? or in an ‘average’ year? Let’s see:

Worst 30 Year Return  $ 1,065,277
Average 30 Year Return  $ 2,062,369
Best 30 Year Return  $ 4,140,507

It’s clear that you would be stupid to ‘bet’ your retirement on ending up with $4 Mill. (BTW: a lovely number … worth about $1.3 Mill. in today’s dollars, if inflation averages just 4% over that period).

But, I equally think that you would be stupid to bank on $2 Mill. either …

… I would use 8.5% in all of my retirement calculations, because 75 years of history  (including buying the day before the biggest crash in Wall Street History, then holding regardless for the next 30 years) says that’s what I will get … not might get, and certainly not hope to get.

And, I will be thankful if I am mildly pleasantly surprised … and ecstatic if I end up winning the Wall Street Lottery!

So, let’s look at time frames in terms of what Wall Street will ‘guarantee’ me:

If I hold for ….. I will get (as a minimum):

10 Years -0.9%
20 Years 4.0%
30 Years 8.5%

So, Di, in terms of being certain of your retirement nest-egg; I’d have to say that 30 years is long-term.

20 years doesn’t even keep up with inflation (4%) and mutual fund fees (1%) … and, anything LESS than 20 years is down-right dangerous!

That’s why gambling on Mr Market for my retirement wasn’t even a consideration for me. How about you?

Now, what number will you be plugging into your #4?

Scam, bam … thankyou, Sam …

I received a call today from a very legitimate sounding “XXX Futures” … I took the call wondering if they were associated with a prestigious Bank of the same name – who, through a very circuitous route actually owned a minority position in one of my businesses.

They weren’t … it turns out that they are just a well and conveniently named independent company selling ‘investments’ in Futures, options and the like.

I have no direct experience with the company, but trading Futures and Options just aren’t my style, so I respectfully declined and asked to be removed from their list … [click] was the response. Professional!

Now, I’m sorry that I didn’t invest 😉

But, my day was soon made brighter when I opened my in-box and found that I had ‘won’ a Spanish Lottery!


Batch Number: 074/05/ZYxxx
Ticket Number: 5877600545 xxx

We are pleased to inform you today  2008 of the result of the winners of the EURO MILLIONNATIONAL LOTTERY ONLINE PROMO PROGRAMME, held 2008.

($1,500,000.00) (One Million, Five Hundred Thousand Dollars)
Names, Contact Telephone Numbers (Home, Office and Mobile Number and
also Fax Number)and also with your winning informations via email.

Email:    mlacaixxxxx88@aol.com
 Provide him with the information below:
1.Full Name:        2.Full Address:
3.Occupation:       4.Nationality:
Yours Truly,
Anna Maria(Mrs)

The days are not so long-gone since the mere sight of $1.5 Mill in writing gave me a blip of adrenalin; even so, it didn’t take me more than a micro-second to assess that it belongs in the Scam basket.

Not sure why I blanked out the last digits; which of my readers would actually call them? Still people get ‘stung’ by these and the so-called Nigerian Scams all the time.

I have a question: what would happen if you called, it was legitimate, and you actually won?!

Here’s what I think: if you don’t work hard to grow your wealth (through whatever legitimate means can get you there) and learn the rules of money on the way up … the statistics would say that you have an 80% chance of blowing it all – and, then some – within the next 5 years …

… and, believe me, it’s a lot more devastating to slip back down than it is to suffer some setbacks on the way up, in the first place.

Get Rich(er) Quick(er) … it’s much better than getting there too quickly … or, not at all 🙂

Options as hedges: one safe, the other downright dangerous!

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


Yesterday I mentioned an interesting article from the Tycoon Report, that talked a little about ETF’s. The same article gave a great summary about using options as a hedging tool …

… but, watch for the subtle difference in using two different types of options to do essentially the same thing … one relatively benign, the other can put your whole financial house at risk!

Here’s what the article had to say:

What strategies to incorporate now in the market to increase your return and decrease your risk? The market and the economy have been ugly lately.  [Just two of these] best strategies for this type of market are:

1.  Selling Call Options –An investor who sells calls believes that the price of the underlying stock (or ETF) is going to remain stable or decline.
    Remember when selling calls that:

•  Your maximum gain is the premium received

•  Your maximum loss is potentially unlimited

•  Your break-even is the strike price plus the premium received

2.  Buying Put Options –An investor who believes that the price of a stock is going to fall would buy a put option on that stock (or ETF), etc.

    Remember when buying puts that:

•  Your maximum gain is the strike price minus the premium paid.

•  Your maximum loss is the premium paid.

•  Your break-even is the strike price minus the premium paid.

Now, I’m not really an options trader – so don’t ask me for any ‘power strategies’ on this – read the Tycoon Report instead … it’s free!

But, I do know that selling naked calls is a dumb move … you can be liable to cover the entire stock purchase if you are ‘called’ and your downside can be theoretically infinite! Tycoon Report says:

If the call writer (seller) is uncovered (naked), and does not own the underlying stock, the potential loss is theoretically unlimited, since there is no ceiling on how high the price of the stock may rise. 

Why ever do it … particuarly when Buying a Put essentially produces the same result for absolutely minimum risk?!

For those who aren’t familiar with them, don’t just dismiss Options out of hand, the power of options is that they allow you to control a whole share/stock (well, usually you have to buy them in ‘lots’ of 100) with only a small ‘down payment’ known as a premium. Depending upon the option, you can gain the entire upside of the transaction …

… let’s say you buy a call on a stock that moves from $10 to $15 …. VERY OVERSIMPLIFIED: you might get the entire $5 increase just by putting up the, say, $0.50 per share ‘premium’ … 10:1 on your money. Not bad!

The problem is that the same works in reverse: if you sell a call on a stock that moves the wrong way (in this case you are ‘betting’ that it will go down … but the price skyrockets, say, from $10 to $50, you are in a whole world of hurt, because YOU have to come up with that $40 per share and give it to the guy who bought the Call Option from you!

Here are the FOUR BASIC OPTIONS for investing in options [pardon the pun]:

Buy Put
Sell Put
Buy Call
Sell Call

Here are times when I think it is safe to use Options:

1. When you have bought the actual stock (say, 1,000 shares of Apple, Inc. – Stock Symbol: AAPL), but are worried that they might drop, even though your are fairly certain that they are about to skyrocket (still sounds like speculating to me). Then you might buy 10 lots of Put Options, which (for a small premium that you essentially ‘lose’) will protect you against a price drop: you get to sell them to the sucker who sold the Put for the agreed price (usually, what you paid for the shares BEFORE they tanked … nice!).

In practice, I only buy stocks that I think are undervalued, will go up over time (I don’t really care when), hence am quite happy to hold on to – if I get caught in a down market, I will likely hold if I happen to get caught out. More likely, I will have already traded out of it using technicals (i.e. black magic and witchcraft … it’s little more than that), and use a Trailing Stop Loss to help protect me if the stock should fall.

I happen to prefer carrying the risk of a sudden and catastrophic crash rather than paying the small’ish premium for the Put. But, could equally recommend buying the Put. Personal choice, I guess.

2. When I own a stock that I think will trend up over time … isn’t that all of them 😉 … but, not dramatically so, then I may Sell a Covered Call (means that I also own the underlying stock), which is almost like ‘renting’ the stock out to somebody else for a few days/weeks and getting a small premium. Surprisingly, unlike selling the deceptively similar so-called ‘naked’ call (where I don’t actually own the underlying stock) this is a super-low-risk strategy … low, in that you don’t see yourself losing money.

In actual fact, you can lose money when the share goes up higher than the sell price that you set on the call and you have to hand them over to the buyer, while watching the price shoot up even further – to his benefit, not yours! So, it works best with a stock mildly rising in price (of course, the market is not always stupid and reflects volatility in the price of the option).

3. When you are retired and want to shift most of your money into nice, safe, boring inflation-protected Bonds (TIPS from within a tax-shelter; certain MUNI’s outside), but still want a little ‘gamble’ on the stock market. Then, why don’t you allocate, say, 5% of your portfolio and Buy some calls over a whole of market ETF (I know, I know … just yesterday I said that ETF’s were yada yada yada … this is a Making Money 301 wealth-preservation strategy; that’s a whole different enchilada to what we were talking about yesterday!)

… but, before you even think about 3. (a) buy a copy of Zvi Bodie’s excellent book for retirees: Worry Free Investment and (b) see a financial adviser (this is your whole future, we’re talking about).

Now, this wasn’t meant to be a primer on Options, so forgive me if I cut a few corners … I just wanted to let you know where I would consider them …

The way wealth is built …

Damn, I had just finally trashed (and, I mean that in the nicest possible way) the Tycoon Report article that I had excerpted yesterday and the say before … after all, there is such a concept as “too much of a good thing” …

But, I wanted to cover the basics of making money today – hence, my digging the Tycoon Report Article out of my trash (a third time!) because the author, Jason Jovine, just happened to have summarized it really nicely in that same article:

Let’s start off today with a very short, simple lesson on the basics of money.  The way wealth is built is based on just a few things …

1.  How much you make (your income).

2.  What your expenses are.

3.  How you invest your money.

(I am of course not factoring in any inheritance or gifts that you may receive; they are just icing on the cake.)

The key here is to focus on the words “the way wealth is built” … here, we are talking about making money.

And, to make lots of money, if boils down to a ‘simple’ formula:

fn{a($Income – $Expenses)} x fn{b(%Returns – %Expenses)}

Now, I haven’t done maths in 20+ years, so the formula (mathematically speaking) is cr*p, but the principle is this:

Your wealth is some function of how much you earn (less what you spend each year living, etc.) together with some function of how and how much you invest (less any expenses involved in ‘investing’).

This means that there is more than one way to skin the ‘get rich’ cat; for example:

1. You can earn a sh*tload every year on your job (say, $250k p.a.), save a huge % of it (say 35% pre-tax), and invest in a bunch of off-the shelf products (e.g. mutual funds, ETF’s, etc.), taking into account that you will only get circa-market returns (stats say, usually less) and carry some costs (averages 1% – 2% of funds under management, hopefully all tax advantaged at least until withdrawal).

2. You can earn an average salary every year (say $50k p.a.), save a reasonable proportion of it (say 15%, preferably pre-tax) and amp up the returns on your investments (carrying some additional risk in order to do so) … I say ‘some function’ because you can (and should, IF getting rich on a small salary is your prime concern) borrow as much money as you believe that you can handle to increase the upside (of course, you again increase your risk).

3. You can increase your income (e.g. start a full or part-time business, with all the attendant risks) and then invest per 1. or you can amp it up (again) and invest per 2.

There are many combinations, hence strategies, available – obviously increasing your income and increasing investment returns greatly increases your chances of getting rich(er) quick(er)! As does lowering both your personal and investment expenses.

Now, the article’s finally toast!