Tag Archives: millionaire

The 401k fallacy …

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The objective of this blog is not to challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’ …

… that’s just a means to an end.

The objective is to help you become rich [AJC: after all the title of this blog IS “How to make $7 Million in 7 Years”], but in doing so we MUST challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’!

Do you see how one is the means and the other is the end?

So it is with many of these personal finance ‘myths’ … so many are treated as an end in themselves, rather than the means that they simply are; none more so than the Mighty 401k.

If we are to become rich, we must slay the temptation to lay at the feet of this great Financial Idol and see it not for what it promises (future financial freedom) but for what it really is: simply words written on a piece of paper.

That’s it, the 401k is just a tax-advantaged savings TOOL … it’s not even a scheme, as there is NO guidance as to what you should put in it (other than restrictions to tell you what you MUST NOT put in it).

Therefore, I have NO OPINION on whether a 401k is intrinsically good or bad for YOU … just as I have no opinion as to whether a stone carving is intrinsically good or bad for a pagan civilization … it’s what belief in its purported ‘power’ does for (or against) your [financial] future that concerns me.

It’s not the tool, but how you choose to use it that counts …

Now, I covered the 401k in many posts, but I thought that I would pick up on a great discussion going on over at my other site, where Scott says that he has no use for a 401k:

I can’t utilize many of the retirement accounts because of my income level and the ones that I can, I max so quickly that it just seems moot. For example, right now, I’m saving up cash as fast as I can to purchase the entire building that my practice is located in. This building also has another business next door that will be paying me rent, and in essence, will drop my personal mortgage significantly, while it’s getting paid off in a few short years, then I own the commercial building, not pay rent, AND receive passive income!

So my question to you would be; Should I delay the purchase date to buy this building and all the above said benefits to first max out retirement accounts that I can’t touch for 30+ years, AND get taxed on them when I do.

Which gets me to my Number faster? Purchasing commercial real estate NOW as fast as I can in my 30’s, particularly one’s that I would normally have to pay rent on and actually begin RECEIVING rent on as well, or fund a retirement account to shed some tax now?

After a bit of discussion around the possibility of finding other tax-advantaged investment vehicles, depending upon your financial positions, Jeff summarized the discussion quite soundly:

The only reasons I can come up with right now to not invest in these types of accounts first is either:

1. The amount you want to invest is greater than the annual contribution limits.

Or

2. You don’t like the age restrictions and early withdrawal penalties that go along with these accounts.

Those are both very valid concerns and certainly reasons to not use typical retirement accounts.

Absolutely, Jeff!

If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so.

However, if you divert from a financial course that stands a reasonable chance of meeting your financial objectives – the type of course that Scott seems set to take – just so that you can take part in, say, an employer-sponsored 401k, that may not achieve your financial objectives (in the timeframe that you require, not the timeframe that the employer/government offers) then, in my opinion, you are making a huge mistake 🙂

The fallacy of dividend paying stocks – Part III

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Today, in a final post in a long series, I show you how to put what you have learned about dividends into inaction 😛

But, to wrap up this important series, first it might be nice to go “all the way way to the beginning” with some history on dividends, courtesy of our friends over at Everything Warren Buffett:

During the first half of the 20th century, dividend income made up all of the 5.3 percent return U.S. stocks delivered to investors, data compiled by the London Business School show.

At the time, companies paid out most of their earnings to shareholders, compelled by a Treasury Department rule that established penalties for “improper accumulation” of income, according to the sixth edition of Benjamin Graham and David L. Dodd’s “Security Analysis.” The book laid out the principles of value investing followed by billionaire Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and the world’s most successful investor.

“The prime purpose of a business corporation is to pay dividends to its owners,” Graham and Dodd wrote.

Between 1980 and 2000, investors increasingly sought price gains as dividends contributed 25 percent of returns. The shift occurred as companies such as Cisco Systems Inc. and WorldCom Inc. increased profits by using excess cash for expansion and acquisitions. In the five-year bull market that ended in 2007, cash to shareholders as a percentage of earnings fell to a record low of 31 percent, based on data compiled by Yale University professor Robert Shiller, as profit growth juiced by borrowed money outstripped dividend increases.

Returning money to shareholders prevents managers from wasting it on investments that may not prove profitable, according to Bahl & Gaynor’s McCormick.

“It forces companies from empire building, stupid acquisitions and nefarious activities,” he said. “You can’t fake the cash.”

The last sentence pretty much summarizes the pro-dividend position: it stops companies from making mistakes with their cash …

… but, my perspective on that is simple: who is better placed to invest my cash? Me (Mr Ordinary Investor) or, say, Warren Buffett (Mr World’s Richest Man)?

In fact, at the 2000 Berkshire Hathaway Annual General Meeting, Warren Buffett was asked about the dividend policy at Berkshire, to which he said:

We will either pay large dividends or none at all if we can’t obtain more money through re-investment (of those funds). There is no logic to regularly paying out 10% or 20% of earnings as dividends every year.

Given my somewhat ambivalent stance on dividends – I can take ’em or leave ’em 🙂 – it was interesting to see this recent and nicely coincidental article in Motley Fool:

… it’s important not to focus on a dividend yield alone, as recent happenings in the stocks below make clear:

Company

Problem With Dividend
General Electric Either must cut dividend or lose AAA rating, according to analysts.
Gramercy Capital Company forwent its fourth quarter dividend.
Education Realty Trust of Memphis Cut its dividend in half.

Even in a bear market, growing companies that pay dividends can be too good to be true — so be sure to do your research.

You see, the decision to pay dividends is a somewhat arbitrary decision of the board of directors … only loosely tied to the actual profit (better yet, cash flow) performance of the underlying business.

Profits are related to the internal performance of the business.

Dividends are related to the external relationship of the company’s management (as represented by it’s board of directors) to its owners (i.e. its shareholders).

So, when you invest in stocks, you should simply remember that you are buying a small share of a big business: and like any other investment, you should make sure that it makes a decent – and, steadily increasing – profit (called ‘earnings’) and produces strong – and, increasing – cashflows that management uses wisely.

This means that you will EVENTUALLY get your money back in some combination of two ways:

1. The share price will eventually rise to reflect increases in profits and/or

2. The board of directors may choose to distribute some of the profits as dividends.

So here are your Buy For Income INVESTING strategies if you do decide to choose stocks as an investment vehicle:

Making Money 101

You will probably be investing in a low-cost Index Fund and holding until you reach your Number; the fund will usually collect any dividends and reinvest them automatically for you. All you will see is a long-term increase in the total value of the fund (appreciation + reinvested dividends) … frankly, this is all you really care about right now.

Making Money 201

If the urge to invest in individual stocks strikes, you will probably purchase 4 or 5 undervalued stocks (i.e. where the current price does not fully reflect the current and/or future earnings of the company … notice, I haven’t mentioned dividends here) and hold them. You will probably reinvest the dividends into buying more of the same stocks as they probably still represent excellent value. You will keep doing this until you reach your Number (or decide to cash out for a ‘better investment’).

Making Money 301

You will talk to your accountant about the tax advantages of withdrawing any dividends v reinvesting v selling a small portion of your portfolio every year to live off … other than that, you won’t care if you make your yearly ‘retirement’ income by selling stock, withdrawing some/all of the dividends, or any combination of the two.

Still confused?

Think of it this way:

Dividends are what you MAY get if you speculate on some stock (i.e. a piece of paper) …

… Profits are what you WILL get if you invest in a solid business.

If you invest well, eventually the stock price PLUS the dividend (it’s not terribly relevant in what proportion) WILL rise to meet the steadily increasing profits … Warren Buffett has averaged a 21%+ annual return by this simple assumption.

Suffice it to say that I have NEVER (yet) bought a stock for (or despite) its dividend … how about you?

The upside down car?

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carpark

Trees Full of Money shows us how to deal with a situation where we’re ‘upside down’ on our car loan:

If you can no longer afford your “upside down” vehicle, here is a a better way to get out of your loan:

Step 1
The most important step in unloading a vehicle with negative equity is to accept the situation for what it is. Saying “if I sell my vehicle now I’ll lose money” is not a plan. The quicker you sell your “upside down” vehicle, the less money you loose due to further depreciation.

Step 2
The second step in selling an “upside down vehicle” is deciding on a fair market value. Lately, the value of used vehicles has been just as volatile as the stock market or the price of oil. The fair market value of your vehicle may be significantly more or less than used vehicle pricing guides such as NADA and Kelly Blue Book suggest.

Step 3

Once you’ve established a competitive price, you need to secure funding for the difference between what you owe and what the vehicle will bring.

Step 4
Once you have met the obligations of your loan, it’s time to do a little marketing and salesmanship. I little effort in the marketing of your vehicle can pay huge dividends.

Step 5
When you have identified a prospective buyer for your vehicle, be sure to ask your bank how to proceed with the transaction. Each state has different laws so be sure to contact your state’s motor vehicle division as well.

[AJC: If you do want to sell your financed vehicle, I recommend that you read the full post here, as I have only extracted TFoM’s highlights]

But, where is Step 6??!!

It should be the one that says: how do I buy a replacement vehicle?

You see, unlike many things that you may choose to own, a car is probably a necessity … now, that doesn’t mean that you need the best car, but you do need a car that can achieve [Insert objective of choice: get to/from work; haul stuff around the farm; schlepp the kids; etc; etc].

So, what do you do?

Well, you first try as hard as you can NOT to get yourself into a financed vehicle in the first place …

… you see, almost anybody who has a financed vehicle is in a negative equity situation:

– As soon as you walk a new car off the lot it has depreciated 10% to 30%, yet you still owe 100% – deposit + payout costs on the loan,

– If your loan is longer than a year or two, the car is probably depreciating at a faster rate than you can pay down the loan.

If you’re not convinced that you are already ‘upside down’ on your loan, ask for a ‘payout figure’ from your finance company – this is the amount that they would expect in a check today to hand over the title to the vehicle to you ‘free and clear’ – and, get ready to choke! Go on, try it …

So, don’t get yourself into this predicament!

But, if that is the only way that you can get into your first set of wheels (is it really, truly the only way? Or, are you just kidding yourself?!), or you are already into a financed vehicle, don’t sweat it.

Just take a look at your current monthly payments and the payout cost … if you can payout the vehicle and buy a cheaper one with cash, go for it. But, the chances are you will need to hang onto your current vehicle, as long as you can afford the payments.

Now, if you can’t afford the payments and you ARE upside down on the loan (as you surely will be), you will need some help to negotiate your way into handing back the vehicle, walking away from the loan and finding a way to start again. Now, that’s a whole can of worms that you just don’t want to open …

… so, next time you’re thinking of upgrading your car with a nice little “low-interest dealer loan” … don’t 😉

401k … a means or an end?

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There’s still this general expectation that if you earn an income then you will have a 401k … it’s seen as an ‘end’ rather than the ‘means to an end’ that it really is.

Let’s look at the advantages:

1. Tax free on deposits into your 401k … ‘boosts’ your investment buying power by up to 25% to 35%

2. Possible employer ‘match’ … further ‘boosts’ your investment buying power by up to 50% to 100%

Now, let’s look at the disadvantages:

a) Generally, limited investment choices (e.g. managed funds)

b) High fees (both explicit and hidden)

c) Restricted access to your money until government-managed ‘retirement age’

d) A fairly low ‘cap’ on amounts that may be invested

But, similar lists of advantages and disadvantages can be draw up for ANY form of investment, tax scheme, etc. etc. …

… it’s just that we mostly don’t bother. We blindly accept the 401k as the ONLY way to go.

Ryan says:

I share your distaste for 401Ks, and their fee’s and penalties, but I have to believe that there is some advantage to having tax shelters (be them 401k or not). Otherwise, won’t the government just take all of your hard earned (and passively earned!) money?

Ryan’s right … the Government WANTS you to pay tax, but only the minimum that you NEED to pay … they don’t expect a penny more. The problem is, the government is only interested in the tax portion of your personal ‘Profit & Loss’ … YOU should be concerned with all of it!

As Scott says:

Robert Kyosaki states that the wealthy aren’t the one’s paying the lion’s share of the taxes. The middle and upper middle class do.

A 401k, ROTH, ROTH IRA, etc., etc. are all simply methods of protecting assets from taxes to a greater or lesser extent …

… the problem is not with these ’shelters’ in themselves, it’s in their design. You see, they were designed for the ‘average American’ to encourage them to save for retirement.

You and my other readers are probably NOT average Americans – if you are like me, you are aiming for a Number in the millions – and will surely hit the ‘roof’ (i.e. the maximum amount that the Government ‘allows’ you to sock away during any one year) of these vehicles very quickly, as your income starts to sky-rocket from Making Money 201 activities …. then, once you achieve your Number, the limits that you can have socked away will mean little to your Making Money 301 wealth preservation strategies … it’s why I don’t even bother!

It doesn’t mean that you shouldn’t tax-protect your money …

… it’s merely that Scott has hit the nail on the head: these aren’t the ONLY tax shelters available, or even the BEST tax shelters available.

For example, and as Robert Kiyosaki suggests, investing in income-producing assets via corporate structures (LLC’s; trusts; C- and S-Corporations; etc.; etc.) and taking advantage of all the tax deductions available to you (e.g. depreciation, 1031 Exchanges; etc.; etc.) will blow away any ‘tax advantages’ of 401k’s and similar (even WITH the ‘free’ money from the employer match factored in).

So, let’s not put the cart before the horse:

– FIRST look at the types of investments that you need to make in order to reach your financial objectives – be they long term (i.e. your Number) and/or short-term (e.g. flipping a house / trading some stocks and options)

– THEN look at the best ‘vehicle’ to house them in.

As an extreme example, if you decide that a business is the way to go – and, put up 100% of your savings as ’seed’ capital’ – then having a 401k is hardly going to help you, is it?

Blindly setting up a 401k first, then seeing what investments you are allowed to make in them is putting the cart well before the horse!

What price Russian Roulette?

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If you scroll forward to about the 3.5 minute mark and start paying VERY CLOSE ATTENTION you will hear Warren Buffett impart one of the most important Making Money 301 lessons that you will ever hear …

[AJC: The lesson is simple: STOP WHEN YOU HAVE ENOUGH!]

… it might also help to explain to my friends why I am not rushing out to find “the next big thing” and why I have decided to limit my ‘venture capital-style’ investments to no more than $150k each (and, preferably ~$50k for each of my internet startups); then again, I don’t give my friends the same information that I give you … that would make me insufferable 😉

If you only take away one thing from this whole post, let it be these wise words paraphrased from Warren about certain ‘greedy rich people’:

To make money that they don’t have but don’t need, they risk what they do have and do need.

Can you see the idiocy in that?

If so, then you truly understand why I ask you to find your Number: it’s the ultimate antidote to playing Russian Roulette with your own finances!

Rich Dad. Rich Kid?

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theaddamsfamily-011Let’s not mince words: by most measures The AJC Family is Rich!

But, does that mean that our children are rich? Does it mean that Mom and Pop will buy them cars, vacations, etc.?

The inspiration for this post comes from a comment (on a post by Diane about her car), where Debbie says:

I think most 16 year old’s get cars these days.

I had one before I turned 17, although I had to pay for it with my own money and get my own insurance (but I think the trend is now parents buying their kids first vehicles and insurance from what I’ve been seeing and in fact- I wrote a post about how teenagers are in the perfect position to put aside some money during their high school years on Wisebread.com and do you know the comments I got?!

Parents saying that the idea was ridiculous, kids shouldn’t be expected to save the money they earn on jobs nor would they do it if they understood the value of compound interest and how much those first few thousands would be when they were ready to retire; if kids work during the summer how will they take trips to Europe and attend soccer or music camp, etc. I am still in shock!)

I must admit that I am in ‘shock’ as well …

… but, this brings me to an interesting point: how do ‘rich parents’ bring up their kids?

After all, when you all reach your Number, maybe you need some guidance as to how YOU should face these same issues?

All I can tell you is what we do:

We are in one of the highest socio-economic levels, yet our children (11 and 14 years old) already know that if they want cars, they will need to buy their own. We will contribute (prob. up to 50%) … but, they will need to save up their portion and fund the running costs.

I’m guessing that most of you reading this blog had to do it the same way (?) … at least we had to, so why shouldn’t they?

We feel that just because your parents are ‘rich’ doesn’t mean that YOU are … at least these are the conversations that we have with our children 😉

Why?

We feel that the best FINANCIAL gifts that we can give our children are:

a) Teaching them to take sole responsibility for their own financial situation, and

b) Teaching them how to become rich on their own

… we hope, leading them to the type of confidence and independence that only self-sufficiency can provide.

Think about the second one: what an advantage is it to have parents who have gone from $30k in debt to $7million in the bank? It’s got to be better than reading a blog, or having an occassional mentor … of course, the disadvantage is the child’s natural inclination to rebel from their parents, so, we add a couple of extra advantages:

c) We pay for their formal education. 100% … no “if’s” and “but’s”, for any course, in any reasonable location (we’re not sending them to Switzerland to go to Finishing School!) as helps them achieve their academic goals … but, only their first ‘real’ degree. If they want to sacrifice current earning potential for future by earning Masters, PHD’s, and/or MBA’s, that’s their financial trade-off to make, and

d) [AJC: This is the secret advantage that we do NOT tell them about up front] They will never starve … if all else fails, we are their Safety Net. But, they will not be able to “mooch off the folks” … this is simply an ‘insurance policy’ against disaster.

To that, we add all the ‘normal’ non-financial parenting, PLUS the luxuries of private schooling; after-school activities; bedrooms with private bathrooms, robes and studies (equipped with MacBooks, of course!) for each; as well as the swimming pool, tennis court, travel, etc. lifestyle that living in a ‘rich household’ provides …

What do you do (or plan on doing) with your children?

Exciting Money Making Opportunity? Horses …

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horsesassThanks to all of those who responded asking for further information on this Exciting Money Making Opportunity! But, applications – for suckers – are now closed 😉

It seems that the ‘scam radar’ of my regular readers was well and truly up [AJC: And, I didn’t even have to publish on April 1st, like I was first planning … too obvious, huh?]; take Rick, for example:

I look forward to the follow up post where you outline the lessons to be learned from this post. You did a great job including all of the hallmarks of a sca.. ah, questionable investment: limited time offer, “GUARANTEED”, astronomically huge returns, no knowledge or effort, a new secrete system, and an inherently shaky premise :-) .

Seems like I won’t be able to sell any snake oil on this site …

For those of you who are wondering, here is some ‘scam sniffer bait’ that I threw out for you:

1. Making an offer like this is a HUGE departure from my previous statements: no advertising on this blog; no product sales ever; etc.; etc.

2. If you did a Google search on Derren Brown – or, even just click on the link that I conveniently provided … not all scammers are smart 🙂 – then you would find that Derren is actually billed as “the maestro of mind control” and is a “performer … [who] is in a class of his own, exhilarating audiences with his unique brand of intelligent and theatrical entertainment”. Hardly a “horse racing phenom” ….

3. As in most scams, there is a crumb of truth to my claim that the “foolproof horse-racing system that has been making him … and subscribers … millions of pounds.”

– It IS foolproof, but not profitable (you have to bet on every horse to ‘guarantee’ a win … d’oh!)

– It has made him, and the subscribers to the stock of the various TV stations airing this special, millions of pounds in broadcasting rights …. nice.

4. I am excited to be able to lie “that I have acquired SOLE RIGHTS to the package WORLDWIDE” …. c’mon, I can’t flag every obvious BS statement for you!

5. It’s always good to have testimonials … scammers are masters of those; trouble is, if you Google this one, you’ll find that it’s for something that has nothing to do with The System … in fact the whole section was just ‘lifted’ from another racing product promotional site and I merely cut/pasted the product names:

“Punters look for winners, not fancy color adverts endorsed by famous racing personalities. The System© may come with modest presentation, but has proved to be an explosive winner-finding system that leaves its flashy competitors far behind. The System is definitely an investment and not an expense.”
Odds On Magazine

6. I think that the best one is the banner ad that I put on the next day’s post (you can see it here); it’s actually for some other product entirely – I have no idea what, nor do I care, but I did leave the product name in to make it even easier for you to play ‘spot the scam’!

In fact, you’ll be pleased to know that I don’t even know Derren Brown, and I know even less about horse racing; I haven’t put money on a horse, even socially, in about 20 years 🙂

The point of all of this?

Well, next time you think you’re getting something from the horse’s mouth just make sure that you’re not being the horse’s ass 🙂

Applying even a little common sense will stop you from losing an AWFUL LOT OF MONEY in life …

… and, money saved is EXACTLY the same a money earned (just with less upside).

PS I strongly encourage you to watch the videos that I linked you to … now that you have some idea what it’s all about, it may lose a little of it’s ooomph … but, just seeing how Derren can flip heads on a totally fair coin toss 10 times in a row is a hoot!

Retirement Accounts: 7 Case Studies

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retirees7Everybody has a slightly (some – like me – dramatically) differing view on the whole subject of 401K’s, ROTH IRA’s, and other forms of so-called ‘retirement accounts’.

If you are in a job, then it might be an easy decision: pull the trigger on maximum withdrawals from your salary and attract the generous employer match. Or, is it?

But, if you are self-employed – or, you have more flexibility in how you choose to handle your retirement accounts than the typical employee – then it becomes a bit more confusing: do you outsource or self-manage? Do you try and save your tax now (on deposits) or in the future (on your withdrawals)? Do you even bother …. ?

Well, if you are still confused, let these 7 ‘case studies’ from our 7 Millionaires … In Training! ‘grand experiment’ guide you:

Scott – Not everybody chooses to have a 401k – or, any type of retirement account, for that matter – and some even do it because they feel that they have an even better ‘retirement plan’. Scott is one such example … what do you think? Is he doing the right thing?

Lee – Is at (or past) typical retirement age for most of us. He thinks that he has made some (a lot?) of mistakes with his finances, yet he at least has some money put aside. But, it’s not enough to meet his goals … and, is it really enough to live off?

Josh – On the other end of the age/work scale is Josh, who still has the ‘luxury’ of living at home with his folks: free rent = more to save (or spend?). Should Josh even be saving in a system that doesn’t allow him free’n’clear access to his money until he is 3 times his current age? And, should Josh be using his ‘retirement account’ in the Grand Casino that is the Options Market?

Ryan – Is a highly paid rep. for medical equipment with some ideas of his own. He is exploring the options as to whether he should be investing INSIDE his 401k etc. or OUTSIDE, both for him and/or his wife. What advice could you give him?

Diane – Is currently assessing her options; while she does so, she is drawing down on her retirement account. Should she take the penalties and pay down debt and/or continue to draw down her living expenses?

Mark – The title of his post is 201k in reference to the beating that the stock market has given it recently, but Mark has a long-term view; it seems to me that he hopes to reach a large Number through investments, etc. and leave his retirement accounts simmering along nicely … if the meat’n’potatoes of his Wealth Strategy don’t pan out, then perhaps he’ll have a nice hot financial stew waiting for him when he reaches 60?

Jeff – Here is an example of a reasonably well-salaried government employee who has one foot in each camp: his Grandpappy once told him to invest in his 401k so that he does, as well as have a couple of residential properties. How much money – in today’s dollars – does a high-saving guy expect to accumulate by the time he reaches 60? Is it worth the wait?

You be the judge … be sure to read the comments and add some of your own 🙂

Another way to mitigate risk?

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riskquadrant

Say that you’re a venture capitalist who has found some semi-reliable way of categorizing entrepreneurs on their capacity to undertake action with / without first doing a lot of research … which group in the above matrix would you be most likely to back (assuming that they all come to you with equally good ideas, etc., etc.)?

Before I share my views, I want to quickly talk about risk: you see, we have some readers who, I believe, are overly concerned with risk …

… as it happens, I am (by nature) one of them, struggling to overcome my own ‘addiction to fear‘. I’ve done OK, but not without some personal psychological ‘cost’ along the way … nothing serious, just a few extra grey hairs … maybe 10 or 20 years off my life … the usual 😉

One of the ways to avoid risk, course, is to do some research before you take irrevocable action; it’s the old proverb:

Look before you leap!

newcokeComing from my famous 20/20 hindsight, though, I can say that this an overblown theory. The reality is that too much research is just as dangerous as not enough … perhaps more so.

Let me explain …

Let’s say you take on a project and despite years of research before you plunge into it, it fails!

Can’t happen?

I have only two words for you: New Coke 😛

So, you’re out …

Now, let’s look at somebody a bit more ‘gung ho’ … they jump into one project after another, fail early and failing often … but, in just about the time that it took for you to jump into (and crash back out of) your Well Researched Project they have finally struck gold (after failing 4 times) … 5 times lucky 🙂

Contrived example?

Perhaps not as much as you might think …

… you see, venture capitalists work on the Power of 10 Formula; for every 10 businesses that they fund:

  • 7 Fail, causing them to lose their entire investment
  • 2 return their initial investment, nothing more
  • 1 makes it all worthwhile

Despite all their research, VC’s can’t tell in advance which of these businesses would succeed (or, they wouldn’t bother investing in the other nine, d’oh!). What ‘saves’ the VC is action … they act/fail/act/fail …. act/succeed.

So, if we look at people on a scale (in the chart above) of how much  research they tend to do in advance of action (or, otherwise), I would much rather back the guys in II over the guys in III; I would almost be prepared to back the guys in II over the guys in IV simply because of their capacity to implement more ideas sooner … in my book, trial and error in the real world produces faster results than any form of theoretical research.

What’s the takeaway?

Get started in something that has a low set-up cost and you can get into the market (and, out of again) quickly … if it succeeds, more power to you. If it fails (as it probably will) you can dust yourself off and try/try again.

Internet businesses are ideal ….

A strange conjunction of posts …

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I was skimming through the alltop.com listings of personal finance blog titles as I do from time to time, when I came across these two posts  on Ranjan Varma’s blog:

Timing the Market is Nonsense

and

Quantum Gold Fund Gives 29.7% Return

I don’t know about you, but I rolled on the floor laughing … if you don’t see anything ‘wrong’ with the juxtaposition of these two headlines you’re wasting your time reading my blog 😛

But, it’s the first article – on market timing – that I want to talk about … because there’s an interesting (and very short) ‘slide show’ embedded in it that I want you to see:

http://www.slideshare.net/thinkingcarl/average-is-not-normal-presentation?type=presentation

There are two points that the slideshow ‘author’ makes that I want to discuss here …

Average is Not Normal

The creator of the slide show suggests that in the last 80 years the stock market has “averaged” a 10% return, but in only 2 of those years has it actually returned anywhere near 10%

picture-11

Timing is Everything

The slide show creator then uses that data to (erroneously, in my opinion) reason that timing in the stock market is actually critical … for example, would you want to start investing here?

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or, here?

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So, where would you rather invest? Come on, be honest?

Before I tell you where I would invest, let me tell you where the real big bucks are to be made …

… the real money is to be made in the second chart; investing at the peak of the market!

But, it only works if you can recognize the peak:

Jesse Livermore, the legendary trader of the 20’s and 30’s reportedly made and lost a fortune 4 times before he (understandably) blew his own head off. One of his greatest profits came when he SHORTED the market on the day of the famous stock market crash that heralded the beginning of the Great Depression. We’re talking so much money that the President of the USA called him to beg him to stop because he was singlehandedly making the market crash worse!

Given that I’m not Jesse (and, neither are you) my answer is:

I don’t care …

… you see, whether the curve is up in the beginning, smooth all the way, ziggy zaggy every which way in the middle, I only care what my starting and ending numbers are. And, what I do know is that, over a 30 year period (based upon ANY continuous 30 year period starting on any day that you care to name in the past 75 or so years … INCLUDING purchasing on the day before the greatest stock market crash in history … the one that saw the beginning of the Great Depression), the stock market will NOT give me less than an 8.5% return.

So, I will only buy stocks for 30 years as an investment (or less, if I feel like gambling) … or 20 years, if I only need a ‘guaranteed’ 4% return …

If the market happens to ziggy zaggy up in the right ways, and I’m lucky enough to get somewhere near the averages, well, there’ll be some extremely happy charities and surviving family when I die 😉