Category Archives: Investing

The New Lexus 401k Hybrid …

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This is actually a post about finance, so keep reading, even when it seems to be all about cars!

I have a 2009 BMW M3 Convertible. It chews through a tank of gas at least once a week. At Aus prices of $5.30 a gallon, it’s not cheap.

But, it is a heck of a lot of fun 😉

My wife counterbalances: she owns a 2009 Lexus 400 Hybrid. She grudgingly refills about once per month … sometimes I think that she must push the car up hills just to avoid having to refill early.

But, she also thinks playing Gas Roulette is a heck of a lot of fun.

My first car (actually second) in the US was a Mustang GT convertible. It had a monster V8 engine, sounded great with the roof down. Needed a gas station on every corner. Drove like a tank.

It was also a heck of a lot of fun.

But, it was the dumbest car I ever owned …

There was an air-scoop on the hood of the car. The idea of an air-scoop is to suck in extra air to the carburetors on the car to keep the engine happy.

An air-scoop is supposed to be a performance enhancement …

… except, it sticks up out of the hood, so it destroys some of the air-flow, increasing drag, actually decreasing performance and fuel economy.

But, the engineers are made to make the hard design choices: do the increases in performance (extra efficiencies in the carbies) offset the losses (extra drag)?

Naturally, the engineers are experts at what they do so we can trust them to make the right decision. Right?

Well, I would have thought so … until I bought my Mustang. You see, I’m a layman, but even I can tell that:

1. The Mustang has NO carburetors (neither does any modern car), nor does it have any turbo-chargers or anything else that required the injection of air that a hood air-scoop would provide.

2. Now, here’s the killer (just in case we have any engineers out there to dispute my point 1.): the scoop has no air-holes in it.

That’s right, it’s simply an imitation airscoop. A fashion accessory.

As a marketing device, simply designed to make me buy the car, it worked brilliantly!

In other words, it reduces the performance of the vehicle!

Now, don’t get me wrong, the Mustang performed well, and was fun to drive, but didn’t perform better than ‘advertised’. It’s (partially) a marketing con.

My wife’s hybrid is also (partially) a con.

She paid a lot of money to have a hybrid that clearly does save money. But, just like the Mustang, it is designed to perform less than optimally, I believe just to build a marketing story to help sell the product.

The Lexus Hybrid includes a dynamic dash that shows the power flow between the gas engine, the wheels, and the electric motors.

If you don’t understand how a hybrid works check out this video:

In essence, it’s a closed system that uses electric motors (and batteries) to augment the traditional 6 cylinder gasoline engine:

– The gas motor drives the vehicle at all times except when the car’s at rest

– It saves gas simply by ‘switching off’ the engine whenever the vehicle stops.

– The electric motors then restart the engine as the car begins to move (like ‘jump starting’ a car by pushing it downhill … you can even feel a very slight ‘jump’ as the engine kicks in)

– The gas engine then takes over again when the car is moving at a mile or two an hour

– The electric motor’s batteries never need recharging: they are simply charged by an alternator and whenever the car is coasting or braking (it’s called ‘regenerative braking’)

Now, just like the Mustang’s air-scoop, the problem is in the ‘performance enhancement’ of the recharging system. For example, let’s take a closer look at regenerative braking:

Whenever the car is coasting down a hill, it needs to be able to retain as much momentum as possible to help carry it up the next hill, otherwise you have to hit the gas pedal that tiny bit earlier.

The regenerative braking takes a bit of the car’s energy and turns it into electricity, creating additional friction which slows down the car. So you do have to hit the gas pedal that tinier bit earlier.

If you know your physics, introducing this extra step MUST reduce overall efficiency hence increase gas usage.

So, the hybrid works (because when you have to come to a complete stop, such as at a traffic light then you might as well put some energy into the batteries rather than simply heating up the brake pads), but it would work BETTER by turning OFF its regenerative braking ‘performance feature’ when coasting.

But, then that pretty display (image at top of post) wouldn’t be nearly so pretty 😉

What does this have to do with finance?

Well, your 401k is pretty much like my wife’s hybrid!

Sure, it helps to save money. Sure, it’s employer matched. Sure, it’s tax-protected.

But, it could be a lot BETTER simply by turning OFF some of the ‘performance enhancements’ that they’ve added to make the products SEEM more attractive to both employers and employees e.g.:

1. Choices of funds: it has been shown time and time again that long-term buy/hold investors would be better off either selecting their own stocks (if they have the necessary desire and aptitude) or simply putting their money into an ultra-low-cost Index Fund (e.g. S&P500).

All those other high-fee fund choices perform more poorly over the long run. So, why not eliminate them from the fund choices offered? Simple: marketing!

2. Additional services: Fund managers, and the guys that put together benefits plans for employers, offer all sorts of freebies & incentives to the employer to encourage them to buy THEIR funds and services; the problem is, these help the employer – not you. Worst of all, they cost you money. So, why not eliminate them? Simple: marketing!

So, a 401k performs a lot worse than it should, just so the marketing guys can pitch a better story.

Forget the Lexus Hybrid – and, your 401k – they don’t deliver on their promise.

Instead, hop into a BMW M3 – or, direct stocks, real-estate, or business investments – and, supercharge your life.

Unlike my wife’s Lexus Hybrid, or your 401k, their promise – living a little on the edge, but being thrilled with the results – is delivered in spades!

Marketing and performance, for once, are totally aligned 🙂

 

The entrepreneurial investor …

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There’s a misconception amongst my friends – which I don’t bother correcting – and, amongst some of my newer readers – which I will correct in this post – that I made my first $7 million through selling my businesses.

Since the sale was to a public company, the details of the sales (there was more than one) are equally public …

… which is one reason why I choose to remain ‘semi-anonymous’ here.

What my friends don’t realize is that well before selling my businesses even became an option, I had been quietly building up a real-estate and stock investment portfolio instead of paying myself a decent salary.

In fact, my self-paid salary never exceeded $50k a year (plus cars) until I moved to the USA, at a time when my professional friends were all earning at least double or triple my salary.

At one stage, I owned 5 condos and a commercial office building (now, I still own the five condos, but sold the building, adding an extra house, a small, downtown retail shopfront, plus two high-rise condo development sites in its place, not to mention various business and venture investments).

I did this because I didn’t know that I ever would be able to sell my business …

In fact, I wouldn’t be writing this blog if my first $7 million (that I made in just 7 years) relied on either selling my business, or drawing a huge salary as that wouldn’t be repeatable for most of you.

You see, only a minority of people (a) are really driven (as opposed to simply want) to be entrepreneurs, and (b) only a minority of those ever succeed, and (c) only a minority of those ever succeed in spectacular fashion.

So, for me to write a personal finance blog about my (later) business success would be about as useful as a lottery winner writing about their lottery success: interesting, but hardly a key learning experience 😉

So, you do NOT need to be an entrepreneur to make your own $7 million in 7 years …

… but, you do need to be entrepreneurial.

You don’t need to start a business, but you have to make investing your business.

And, that takes a particular mindset; I’m not sure if it can be learned, either. That’s because I believe that entrepreneurialism is an instinct.

How can you tell if you have the entrepreneurial instinct?

Well, I can think of at least three ways:

1. There’s an old joke that asks: “how you can tell who the psychologists are at the movies?”

Answer: instead of watching the movie, they’re the ones in the audience watching everybody else!

Well, my twist is to ask: “how can you tell who are the entrepreneurs at the movies?”

Answer: they are the ones counting the number of seats that are occupied v unoccupied and mentally calculating the ticket price of each to try an work out how much money the theater is making!

Are you that guy? If so, you probably have the entrepreneurial instinct to try and find the ‘deal’ in eveything that you do.

2. Do you play poker? If so, what kind of player are you?

Are you a ‘rock’ or ‘grinder’ who plays tight and patiently waits for the ‘nuts’ (think a pair of Aces or Kings, if you don’t play poker and you’ll get the idea)? Then you’re probably more suited to frugal ‘save and wait’ personal finance philosophy … forget making $7 million in 7 years: it’ll never happen.

Are you a ‘fish’ who just plays the two cards in your own hand without considering what the other guy may have, do, or represent? If so, you should probably quit poker now; equally, you probably don’t have the creativity and imagination to succeed in ‘serious investing’ either.

Or, are you a creative player who knows when to flat call (with the occasional raise, just to be cagey) with a speculative hand (such as a pair of 3’s, or a small suited connector like a 7 or hearts together with a 6 of hearts) knowing that you will either throw the hand away pretty quickly or you will take a lot of money from the ‘rocks’, if you hit your third 3 or make two pair, a straight, or a flush with your 6 and 7 of hearts.

This is the kind of thinking that will help you test an investment, then follow through if it proves to be working for you.

3. You can try a psychological test.

I distinctly remember making the mental ‘click’ from thinking like an employee who wanted to rise up the corporate ladder to an entrepreneur who wanted to be in his own business …

… but, even though I ended up in my own business/es, I didn’t realize that I had true entrepreurial instincts until I signed up to do a Kolbe A-Test.

Not surprisingly – in hindsight (!) – I came up as an entrepreneur … by instinct!

That gave me even more confidence to proceed at ‘full steam’ with my investing (and, business) plans; maybe one (or more) of these methods might do the same for you?

The problem with P2P lending …

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I am not a fan of peer to peer lending, so please forgive me, when Glen Millar of Prosper – one of the leading P2P lending sites – sent me the following e-mail, if I didn’t fall all over myself with excitement:

As a personal finance blogger we thought you might have interest in Prosper (www.prosper.com) and peer-to-peer lending.  You may know that Prosper was the first peer-to-peer lending marketplace in the US.  In 5 years, we have originated over $215 million in loans on our site.

In fact, here’s what I said in my reply:

Oops!
http://7million7years.com/2010/01/13/peer-to-peer-lending-a-7m7y-tool/

My argument in that post was about risk; Glen responded with a link to the following:

The basic argument being that Prosper manages loss/risk better than competing P2P sites through their proprietary rating system which “allows [Prosper] to maintain consistency when giving each listing a score. Prosper Ratings allow you to easily analyze a listing’s level of risk because the rating represents an estimated average annualized loss rate range.”

Which is all well and good until it is YOU that suffers the statistical loss/es (you can get unlucky and lose on a number of your loans); I don’t know about you, but I don’t like any system where I play statistical roulette without at least some measure (OK, illusion) of control.

The only control that you can really apply here is diversification: take out lots of small loans in your risk/reward categories:

In fact, if this risk-rating-system is so good, why doesn’t Prosper simply knock out the competition by adjusting the interest rate earned by the rating-weighted loss-rate and carry the risk themselves?!

But, what’s your for/against reasons?

I would like to hear both from readers who swear by P2P, and those who wouldn’t touch it with a 10 foot pole …

Wrapping up …

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You can check out the latest Carnival of Personal Finance (#298 – The Best Money Articles Online) here.

_________________________

I didn’t expect that one of my most argued series of posts would be about dividends; I thought it would be around my vehemently anti-anti-debt stance (see if you can work THAT out).

So, I’d like to wrap up that discussion with a point-by-point review of a really interesting comment left by Deek:

I see where you are coming from and disagree to a point. It depends on what your outlook is. 7 mil in 7 years of course dividends aren’t going to get you their.

But my grandfather who was a coal miner who cannot work into his 70s because of the type of job. He was able to be a dividend millionaire. When he did retire the income from dividends, his pension and social security was more than enough for him to live comfortable into his 90s and leave money for his children.

At 90 years old he isn’t going to work,build a business or mess around with real estate. He wanted to check he dividend paying stocks once a month and enjoy retirement, drink a few beers and his biggest worry was cutting the grass.

I also find it interesting you mention Berkshire Hathaway. Depending on when you look at BRK holdings they do invest a significant amount of money into dividend paying stocks even though they do not themselves pay a dividend.

This really summarizes a lot of the for/against arguments around dividend stocks, at least as raised by the many reader comments to my earlier posts, so I thought I should run my readers through it:

1. Yes, this blog is specifically aimed at those who want to make what I call a Large Number / Soon Date (eg $7m7y or $2m5y, etc.); however, in this case, I don’t think it makes any difference: investing in stocks just because they happen to produce dividends is dumb.

In my businesses, I am free to create a dividend whether the business is performing well or otherwise. So can the boards of public companies. If that simple point doesn’t win the pro-dividend lobby over, nothing will.

2. It seems like Deek’s grandfather did an amazing job! Investing in a bunch of “dividend stocks” – and, holding for long periods – is certainly a lot better than many other strategies, certainly for non-$7m7y’ers.

But, he may – probably (certainly!) – have done even better by following a Value Investing approach (e.g. such as that proposed by Rule # 1 Investing author, Phil Town). Buying and holding great stocks – ones that produce a steadily growing profit stream – is an even better way to make long-term money than buying and holding stocks just because they happen to pay a steady dividend stream. The two should be synonymous, sadly that’s not always the case.

3. I’m not suggesting that you (or Deek’s grandfather) should invest in business or real-estate etc. Although, I strongly argue that in retirement RE, in particular, provides a much more secure retirement, again for $7m7y’ers.

4. Deek’s point about Warren Buffett (“BRK holdings they do invest a significant amount of money into dividend paying stocks even though they do not themselves pay a dividend”) neatly summarizes my key point:

Like Warren Buffett, I am not against investing in stocks that pay a dividend; I am simply for investing in great businesses – or, the stocks of great businesses – regardless of whether or not they pay a dividend.

Get it?

What’s the best financial move that you’ve made?

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Michael asks What was the best financial move you’ve made so far? and then tells this story about his car:

I’ve concluded my best financial move to date has been my decision to keep cars for very long periods of time. I drove my first car for over seven years before it died. My second car just passed 100,000 miles this last weekend and is over nine years old.  So, here I am in my late thirties and I’m still on my second car.

Having no car payment during 9 of the last 14 years has allowed me to spend more in other areas of my life where I value such spending while still permitting me to save substantially for my future.

What an excellent question!

I’ll tell you my best financial move, then perhaps you can share yours?

I have a few ‘best financial move’ candidates (including moving to the USA, selling out just before the Great Recession, and others that I will tell you about some other time), but I can pin my ‘best’ financial move – not my biggest, but my best from a pure financial strategy point of view – down to one:

My accountant talked me into buying my own building (I had a small’ish call center operation but was renting office space at the time).

Making the purchase was very tight, financially, as the business wasn’t making a lot of money (there was a bit of juggling to come up with the cash for the deposit and making the monthly payments!). I really sweated as I was making the bids at the onsite auction (that’s how most properties are sold in my home town).

[AJC: Property valuation technique # 1: Q: How did I know how much to pay? A: I didn’t! But, I did know who I was bidding against (very important to know who your ‘opposition’ is) … a property developer. Logic told me that he would not buy for more that true current value, because it would be reasonable to expect him to buy-rehab-sell or buy-rebuild-sell. If – on the other hand – I intended to buy/use/hold, then it stands to reason that I could afford to pay AT LEAST as much as him. So, I just kept bidding until he stopped, and ended up paying just $1,000 more than his highest bid.]

To backtrack a little, I had already decided that I would buy prime real-estate in prime location, instead of buying a cheap building in an industrial area (typical for call centers, to keep costs low).

So, instead of spending, say $500k or so on a cheap industrial-area building, that’s how I found myself spending $1.35 mill up front at that auction and another $500k (100% financed) on the rehab and fitout, once I closed on the deal.

Why?

Well, I saw two major benefits:

1. It was a show-case building that I thought would be my ‘shop front’ for our ‘Fortune 500’-type corporate clients, making them think we were bigger (therefore better/safer to deal with than our opposition) than we really were, and

2. I guessed that it would have great resale or redevelopment value down the line.

As things would turn out, this was one of those rare occasions when I was right … on both fronts!

Our business grew substantially in that building with many a deal completed in our own board room.

[AJC: Once the Internet era arrived circa 2000, we created a fully web-enabled system – way ahead of its time – at which point it became advantageous for us to make our sales at our clients own premises. Once they saw the drop-dead gorgeous – by 2000 standards – web-enabled charts and graphs, they virtually signed our standard contract on the spot! Our office could have been in a garbage dump then, and it would no longer have mattered. Oh, good times … good times!]

In doing so, I avoided 5 years of rent, reduced my taxes by $500k (because of the rehab), paid down about $500k of the principal, and eventually sold the  building for $2.4 million.

Once business picked up (again, partly because of the marketing / credibility benefits of such a professionally fitted out building in such a prime location) I barely noticed the payments, and probably would simply have raised my personal spending had some of the profits not gone into the mortgage and rehab repayments.

Instead, after 5 years of mostly tax-deductible ‘forced savings’ I walked away with what felt like an extra $1.5 million in my pocket. Not my grandest move, as things would turn out, but certainly my (financially) most astute …

… I encourage every business owner to do the same!

So, what’s your best – not necessarily your grandest – financial move?

A fund manager’s view …

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This is a little different to all of those “this is what a millionaire thinks” posts, because Evan is in a support role (“my role is more brain storming and putting together documents and calculations….then I prepare materials for the planners’ second meeting and beyond”) at a financial planning office that specializes in sucking the blood out of – I mean assisting – high net-worth clients:

My role is more brain storming and putting together documents and calculations. So basically I see almost every balance sheet that may have significant net worth which goes through my office

Since I’m a sample of one, when it comes to high net-worth clients, it might be interesting to see what Evan sees:

The House is almost always Paid off

Prepaying your mortgage is always a hot topic on Personal Finance Blogs.  Everyone once in a while one of the big players in the field will put a post and it will garner tons of comments.  The comments are usually heated and go both ways about how the move is stupid and then invariably someone will say, its a great move.  Regardless of how you feel, most of the high net worth clients’ balance sheet that I see will have either a paid off house, or one with a very low debt to equity ratio.

They Almost Always Own a Business

Almost every high net worth client’s balance sheet has a business on it.  The types of businesses range from the mundane, lawyer who owns their practice, to beyond what I could have imagined as a viable business.

They Almost Always have Investment/Financial Advisors

Almost every single high net worth client/prospect is not hands on when it comes to their own investments.  Some are more active than others when it comes to asset allocation, but for the most part unless they are in the money business (fund managers, hedge fund execs, etc.) they just don’t deal with it.

Since Evan is coming from a position of observation of his sample size of many, I will observe from my position of a sample size of one:

– I found it valuable to have a business; indeed, it’s the ultimate driver of my financial success; even before selling the business I could use the spare cashflows (after attending to the business’ own growth needs) to fund a substantial real-estate and investment portfolio.

– I own a house, and almost always have … now that I am wealthy, I carry no debt on these houses, but started reducing my debt almost in proportion to the increase in my wealth. It’s not a strategy, just a happenstance. But, I will not hesitate to use some (perhaps, up to 50%) of that equity, if required to fund an investment.

– I certainly use an investment advisor – in fact, multiple; but (here is where my experience diverges from Evan’s observations) Evan says: “Almost every single high net worth client/prospect is not hands on when it comes to their own investments.”, yet the opposite is true for me. Could this be observation bias for either Evan (he does work for a financial planning/advisory firm, right?) and/or for me?

I would never hand the keys over to my Future Fortune [AJC: How do you make $1,000,000? Give an ‘investment advisor’ $10 million … and, wait!] to somebody who has not already made their’s … if so, why do they need me?

Thanks for sharing, Evan!

Paying down debt IS investing …

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Budgets Are Sexy [AJC: If J. Money really thinks so, I don’t want to be invited to his Stag Night!] poses an important question: “Should you invest or pay down debt?”

And, he provides these guidelines to help you decide the answer:

Whenever you have any extra money in your pocket, make sure to take care of these financial priorities, in this order, before you do anything else:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Accumulate a financial safety net. If you don’t have at least three to six month’s worth of your living expenses saved up in an accessible emergency fund, that’s the next place your extra money should go.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with double-digit interest rates, attack those financial burdens next.

If you’ve accomplished the above and still have excess money left over each month, you’re in a great position. Maybe you have an extra $100 and are struggling with whether to invest it in your Roth IRA or to use it to pay down your mortgage, for example. The answer to the dilemma is simple: Determine which option is more profitable for you. To do that, you have to figure out your after-tax return for each choice.

I agree with the first bullet point: you must pay down any delinquent debts. You have to keep your head above financial water.

As to the rest, well, I think that we’re in danger of forgetting a critical point:

Paying down debt is investing!

You’re investing in your own ‘debt instruments’, where the risk is low (in fact, by paying down the debt, you’re IMPROVING your risk profile) and the return can be low / mediocre / high depending upon the AFTER TAX cost of the interest and any other fees and charges.

Your student loans and mortgage debts are probably LOW interest, hence LOW return investments.

Your car loan and credit card debts probably HIGH interest, hence HIGH return investments.

… and, you may have some personal loans or other debts that fall somewhere between the two.

So, I would modify BAS’s guidelines as follows:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Put in place a financial safety net. Put a HELOC in place; make sure that you can tap into your retirement accounts, or keep some spare loan facilities in place in case a financial emergency arises.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with high double-digit interest rates, you’re probably safe in attacking those financial burdens next.
  4. Find investments that can outperform your remaining debts. If you have 1st mortgages, student loans or other loans with low single-digit interest rates, let them ride PROVIDED that you instead invest somewhere where AFTER TAX returns should be expected to outperform these remaining loans by a comfortable margin.

Once you’ve made the mental leap that paying down debt IS investing, you’re in a MUCH BETTER position to decide how best to use your money … particularly if you have optimistic financial goals 🙂

View your 401k as insurance!

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I agree with Financial Samurai’s basic sentiment, which is to effectively ‘write off’ your 401k and Social Security:

Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500.  Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math.  After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match.  Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.

CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations.  In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income.  Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year. With the stock market implosion of 2008,  your 401K has proven itself to be totally unreliable.  Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life.  I

Depending on Social Security is depending on the government doing the right thing.  There’s no way that’s going to happen.  Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.

Because Social Security is a burden on governments and society, it’s always at risk of being watered down or eliminated … this is less of a risk the older your are (hence closer to receiving the payments).

But, not so your 401k: while governments can (and, probably will) water down – instead of increase – the contributions and benefits of your retirement program, the money that you contribute (and, your employer match) is still yours!

I don’t think you’ll ever lose what you contribute + whatever gains the flawed investment choices available may bring.

I look at my retirement plan (which I haven’t contributed to in years!) as insurance: if all else fails, when I reach whatever age the government of the time lets me access MY money, I’ll have something to keep me one step away from homeless … just.

So, I agree with Financial Samurai’s closing advice:

The only person you can depend on is yourself.  This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can.

You’ve heard of Paying Yourself Once? Well, I think you need to Pay Yourself Twice™ … once inside your 401k (there’s your ‘insurance policy premium’), and once outside of your 401k.

It’s the money that you can put aside OUTSIDE of your 401k that will drive your wealth, because you can put it to MUCH BETTER USE (e.g. investing in business, real-estate, value stocks, etc.) than that money locked away inside your 401k and in the hands of grossly under-performing, fee-driven mutual fund managers 🙂

Managing your life through the rear-view mirror …

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Not many people are rich, so following COMMON financial wisdom can’t be all that it’s cracked up to be, can it?

Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on 😉

Financial rock’n’roll …

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I don’t think that I ever mentioned it at the time, but I went to Warren Buffett’s Annual General Meeting in Omaha in 2008.

It was like going to a rock concert … without the music.

It was held at some football stadium, which was packed with 30,000 (maybe more?!) people and Warren Buffett and his long-time business partner, Charlie Munger sitting at a table with three large video screens behind them (just showing Warren and Charlie sitting at the table … only MUCH larger!).

They basically spent the day munching on Sees Candy (peanut brittle, I believe) and sipping on Coke …

Warren invites all the ‘international visitors’ [AJC: That’s anybody who registers with a foreign passport as their ID … I have a US driver’s license, of course, but I heard that there were ‘extra benefits” to registering using international ID] to a meet and greet.

This meant bringing anything that you bought from his trade show in the huge conference hall attached to the stadium (he has stands from a number of the 70+ businesses that he owns) and he and Charlie will shake your hand and sign it one item that you bought.

But, he stopped doing that – after 2008 – because there was a line of 1,000+ people waiting to shake his hand and get their signature. I know this, because when I got to him, the World’s Greatest Investor spoke to me!

He said (looking visibly paled): “Are there many more people in this line”. Sadly, I had to say there were …

Still, I got my $5 T-shirt signed, and had it framed with a couple of Warren Buffett and Charlie Munger playing cards (!), a couple of pictures that I printed from a web-site after googling “warren buffett”, and my round official entry badge.

Which has nothing to do with anything other than Bill McNabb – who replaced the famous founder of Vanguard (with their famous, low-cost Index Funds), John Bogle, who also seems to afford ‘rock star status’ with fans of his investing philosophy (which, naturally centers around buying and holding Index Funds) calling themselves Bogleheads and acting more like rockstar groupies than investing disciples – recently said that one “essential ingredient” in the investing and advice business, is:

Simplicity, which is exemplified by the “Five-Minute Rule” first coined by Richard Ennis of the pension consulting firm Ennis, Knupp: “If you don’t understand the thesis underlying an investment in five minutes or less, take a pass.”

This equally reminds me of a recent story of a company that a friend of mine was CEO of that existed solely to build, manage, and sell tax-advantaged agricultural ‘investments’:

Basically, this company did complex deals with rural land-owners, farmers, and so on to plant certain crops and sell shares to private investors; the advantage to the investors being (a) immediate and attractive tax-deductions, and (b) future (i.e. 10 to 30 year) capital returns … trees take a LONG time to grow!

Given that one friend was their CEO, another one of their key operations directors, and a third an enthusiastic ‘professional’ (counting, amongst others, my wife as his client) who positively represented the project to a number of my affluent friends who were also his clients, you may ask how much I invested in the company.

The answer is ZERO.

You see, I don’t invest in anything:

1. That eats or grows (because eventually it will stop eating, stop growing, and will die),

2. Uses tax-advantages as one of its key features (because I don’t mind paying my fair share of tax and governments have a sneaky habit of changing the tax rules),

3. Because of the 5-minute rule (if I don’t IMMEDIATELY understand it, I don’t buy it … and, truth be told, I don’t IMMEDIATELY understand much).

Postscript: because of the Australian drought, many of the trees did die, and the government did change the tax rules, and the company did go broke … and, many of my friends did lose 100% of their investment.

And, I still don’t understand the business 5,000,000 minutes later 😉