Personal Finance

What Three Decades In and Around Wall Street Has Taught Me about Investing

Including Peter Grandich’s Top Ten Biggest Investment Mistakes From: Confessions of a Wall Street Whiz Kid – Chapter 12

You’ve heard the old saying, if I only knew then what I know now? How true that really is. When I think of how I was promoted to head of investment strategy in 1987 with less than three years experience, I wonder how I managed. I spent most of my energies buying and selling stocks and foolishly believing I could continuously predict what the stock market would do, and I spent little time on learning and appreciating how money really works. It was not until I met Frank Congilose in 1998 that I was shown the real truth about money and that traditional financial planning, a process 98 percent of all investors employ (and one which is steered by “professional advisors”), is a horribly flawed process.

Back in the 80s, most professionals used a simple legal pad to show clients how to set up their “financial plans.” Nowadays, firms use fancy computer applications with all sorts of interactive charts and graphs. But in the end, whether on a legal pad or high-tech computer model, all of these “plans” do the same thing: They guess.

First, they seek a dollar number the client believes (or is shown) he or she will need to live happily ever after.  This is the first absolute guess. Once that is agreed upon, the professional advisor picks a product or products—most involve stocks, mutual funds, etc. —and, based on past performance, projects similar returns for the future in order to reach that magical happily-ever-after figure.  This is the second raw guess—a total shot in the dark as to how high or low future returns will be.

What’s wrong with this very unscientific method? Four economic factors have a major impact on any financial plan, and unless you have a crystal ball you’re simply guessing where they’ll be at any given time. They are:

  • Interest rates
  • Tax rates
  • Inflation rates
  • Rates of return

I’m going to let you in on a little secret: I can’t accurately predict the course of all four of theseand neither can anyone else except Almighty God. Therefore, despite the average plan having hypothetical assumptions of these four factors, one or more of them will not be accurately assumed. One could get lucky as some did in the 1990s when everything was doing well, but do you want to depend on good fortune to keep your fortune?  This is simply a well-established guessing game with all the bells and whistles. Make no mistake about it: traditional financial planning is a guessing game—a high-stakes round of hangman, charades, or 20 questions.

I don’t know about you, but I don’t want to leave my family’s security to chance. That’s why I was so awestruck by the process Frank Congilose introduced to me; one that employs the two most important money facts:

  • Lost Opportunity Cost
  • Velocity of Money

Let me explain: If you had $20 and lost it, how much did you lose? Twenty dollars, right? Wrong. You lost the $20 plus whatever that 20 bucks could have earned if you had it. That is a Lost Opportunity Cost (LOC). Just about everyone and every business has LOCs. The key to financial success is identifying the LOCs and putting them back on the right side of the ledger—your side!

If you were to identify about $20 a week (a few cups of latte, perhaps?) you could save, that would add up to $1000 a year in savings. But it’s so much more when you take into consideration the LOCs. By saving that $1000 per year, over 25 years you would save $25,000 plus the lost earnings on that money of over $18,000 (that’s at the modest interest rate of only 4 percent) for a total LOC of over $43,000.  At 5 percent interest, the number increases to over $50,000.  That $50K becomes part of your cash flow.

Cash flow, in case you didn’t know, is nothing more than the money that comes in and the money that goes out. If you spend more than you make you have a negative cash flow. If make more than you spend (leaving some extra) you have a positive cash flow.  Obviously, increasing the positive cash flow allows you to save more and accumulate more wealth.

No one knows more about money and cash flow than banks. They don’t produce anything yet they are able to turn one dollar into two or three or more. Here’s how it works: you deposit a dollar in the bank. The bank pays you interest on that dollar. The bank then lends your dollar out to someone else at a higher rate. How much higher depends on what type of loan the borrower takes. Not only is the rate they charge higher than they paid you, but they get to lend your dollar out two or three times on average. During the time your dollar is deposited in the bank, it may be loaned out for a car loan, personal loan, home equity loan, mortgage, or credit card. Each time the bank loans out your dollar they make money by way of charging the borrower more interest than they are paying you.

This is called the Velocity of Money, the average rate at which money is exchanged from one transaction to another.  Velocity is the frequency with which a unit of money is spent over a specific time period. The bank has taken full advantage of the velocity of money and effectively made a dollar do the work of two or three or more.  What I learned to do through the services of Frank and his associates is help people understand and take advantage of the velocity of money in their own finances just like banks do.

Another way to appreciate velocity of money is to take a penny and double it once a day. On day one you double a penny and end up with two cents. On day two you double your two cents and have four.  On day three you double your four cents and have eight…and so on. How long before you have over a million dollars? It may shock you, but it’s only 27 days. That’s right: a penny doubled each day for 27 days is worth $1,342,177.20.

Without any out-of-pocket expenses or substantial risk, you can add hundreds of thousands of dollars to your worth over a lifetime by simply capturing LOCs and employing velocity of money strategies which in turn increase cash flow.  The sooner you learn that the key to successful finances is cash flow (saving your money instead of trying to gamble on an asset’s appreciation in price to increase net worth), the better off you will be.

I have found that there are four basic ways most people approach money matters. In which group do you fall?

  1. The “No Planning” Approach

This is the person with absolutely no plan. Nothing. Nada. Wing and a prayer. Their entire plan is to worry about it tomorrow. Obviously, this is the worst-case scenario.

  1. The “Occasional Planning” Approach

This is the person who intermittently thinks about money matters and might put forth a half-hearted attempt at a plan, especially right after New Year’s, but soon the day-to-day grind of life takes over and they end up doing what the no planning group does; worry about it starting tomorrow. But tomorrow never comes.

  1. The “Needs Planning” Approach

This is the person who plans for specific events like college or a child’s wedding but does not have an overall, integrated financial plan. They at times actually progress on a specific goal only to find out they have let other important goals fall by the wayside and then try to catch up with some “Hail Mary” schemes.

  1. The True “Financial Planning” Approach

The infrequent person who seriously plans for the things life throws at us. Not just retirement, mind you, but life. Buying a home, taking vacations, saving for college and retirement, and a nest egg for those things that just crop up.

Even among those who do plan, there are speed bumps along the way.  In my three decades on Wall Street, I have seen many of the same mistakes time and time again. Here, I have assembled my list of Top Ten Biggest Investment Mistakes.

Peter Grandich’s Top Ten Biggest Investment Mistakes:

10.  “Hot Potato” buying  Buying the popular stocks of the day or the latest get-rich-quick scheme. Unless you have a crooked rabbit, the turtle always wins this race in investing.

9.  Believing publications – You see it all the time. Some magazine headline that reads “Ten sure fire ways to riches,” or “Ten stocks to beat the market,” etc., all for the low, low price of a few bucks for that issue. While there are some really useful publications, magazines likeMoney who depend mostly on financial institutions for advertisement are, in my opinion, always tilted to the cup being half full and are not truly objective.

8.  Failing to consider spouse’s views – Guilty as charged. Through my first making of millions then losing a good portion of it, my wife’s only regret was I didn’t take into account her desires and wishes. Family financial planning must be a team effort.

7.  Believing money is evil – Yes, the love of money is evil, but money itself is not. It’s a necessity but not to the point where we literally lose our eternal life with the true owner of it. Some people are afraid of it and what owning a hefty sum of it may do to them. As stated earlier, if you truly come to understand you’re only a steward with it, you are likely to do much good with it.

6.  Not fully understanding what you’re doing – The less you know, the more people who live off the less knowledgeable can thrive. God knew how important matters of money would be and dedicated a good portion of His life’s manual (the Bible) to it. Shouldn’t you make a similar effort?

5. Inability to judge worthiness of risk – Here’s a news flash; if it’s too good to be true, it’s too good to be true. If the banks are paying you 1 percent and someone says you can make 10 percent, you better know that there’s a certain degree of risk that comes with the potential. Many times the anguish of a loss far outweighs the dollar amount, and it lasts longer and impacts other areas of your life.

4. Trusting financial institutions – Despites decades of deceit and fraud throughout the financial industry, most people still place a large degree of blind trust in the financial institutions and the personnel with whom they deal. Any financial adviser worth his or her weight should have a well-documented and long track record of success or at least have numerous references. Wouldn’t you be glad to give a reference if your adviser did well for you? Run, don’t walk, from those who can’t provide them.

3. “Hope” is not an investment Strategy – When it comes to faith, hope is very good, but in investing it can be a killer. If I only had a dollar for every time I heard an investor say they’re “hoping” their stock goes back up so they can get their money back. Look, if you’re hoping the price will rise yet not willing to buy more at the reduced price, who do you expect to do so and pay up to the price you originally paid? Just hoping for these changes without sound fundamental reasons to back up that hope is a license for disaster.

2.  No written financial strategy at all – Similar to the “No Planning” approach. Like anything else at which you want to succeed, you must write it down. In the landmark book The Magic of Thinking Big, author David J. Schwartz tells us to write down our goals—all of them. Financial goals are no different. Writing your plan down not only keeps you on track but acts as a benchmark as you achieve your financial goals. One of the first things to do is to take a 30-day account of every dime you spend—and I mean everything. Almost always, people are surprised how much they spend and on what. They soon realize they can either do without some things or spend less on them.

And the number one biggest investment mistake is…….

1. Procrastination – Without a doubt, putting off dealing with matters of finance is the single biggest investment mistake. Whether it’s by accident or on purpose, delaying dealing with finances can only hurt most.

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Perhaps we can all take some advice from one of the richest men ever to walk this earth. No, not Donald Trump or Warren Buffet, but King Solomon. He was one of the Bible’s best investors.  King Solomon has a fantastic track record based on three basic biblical principles:

Principle #1 – Diversification

Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth. – Ecclesiastes 11:2

King Solomon knew that you don’t put all your eggs in one basket. This is especially true for those people who put all of their 401(k) savings into their company’s stock.

Principle #2 – Good Counsel

Without consultation, plans are frustrated, but with many counselors they succeed. – Proverbs 15:22

There’s no one person who can give universal counsel. Not only do you need to develop a support team, but you need to find a diverse group of a few individuals because one team member is not always aware of what another is doing and having someone quarterback all the different team players is important.

Principle #3 – Ethical Investing

The conclusion, when all has been heard, is” fear God and keep His commandments. –  Ecclesiastes 12:13

Not only should we be honest in our investments but make sure where we place our monies to be Godly. That’s different for every individual, but might include avoiding investing in businesses involved in alcohol, weapons, tobacco, or companies with questionable human rights practices.

SIDEBAR:

“Learn as if you were going to live forever.

Live as if you were going to die tomorrow.”

– Mahatma Gandhi

Remember this: on Wall Street there are bulls, bears, and pigs.  The bulls and bears each have their day, but the pigs always end up at the slaughterhouse.

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8-1-2011

The Experiment Has Failed – Are You Ready?

After about an hour’s worth of air traffic congestion delays around JFK airport, I finally departed New York City yesterday evening en route for Vilnius, Lithuania… one of my favorite inconspicuous corners of Europe.

The route took me through Helsinki, Finland for a brief connection, and I was on the ground long enough to witness something truly bizarre: a complete and utter lack of people.

I could practically count on two hands the number of passengers milling around the airport this morning during peak business hours… it was almost something out of a zombie movie.

Ordinarily I would have seen hundreds, thousands of people… and I have in the past as I’ve traversed this route many times before. And no, today was not a holiday.

Helsinki’s airport functions as a major transfer point, especially for European business travelers criss-crossing the continent or flying to Asia, which makes airport traffic an interesting proxy on the European economy (though not necessarily a reflection of Finland’s).

While a single example is not enough data to draw any significant conclusions, I mentally filed the observation as another snapshot of Europe’s deteriorating economic situation.

It reinforces what I observed here several months ago when I was last on the continent in April; it was as if a dark cloud was hanging overhead, and the general mood was absolutely sour. People seemed to be capitulating all hope and starting to make peace with the fact that their economic futures have been squandered by a stupid experiment.

Of course, I’m referring specifically to the ‘euro experiment’… however the euro is merely a symptom of a much larger experiment– that of fiat currency.

It wasn’t all that long ago that money was actually made of something scarce– a real asset that couldn’t be conjured at will by an appointed bureaucrat.

In time, money supplies grew to be controlled by governments and banking cartels in the form of worthless pieces of paper. Since then, it’s devolved further to strings of bits in a giant database; our money supply is nearly all digital.

As my friend Tim Price characterizes it, what passes as ‘money’ today is merely an abstraction of an abstraction of the real thing.

The euro experiment was merely a commingling of 17 different national fiat experiments… albeit a remarkably stupid one.

Under the normal fiat game, a country would at least have to stand on its own two feet and con(vince) the market that its particular brand of monopoly money was sound.

With the euro, even the trashiest economies in Europe were able to pass off Germany’s credibility as their own. And now, finally, after more than a decade, the market is calling that ridiculous bluff.

Spanish bond yields have risen to a euro-era record, well north of 7%. Italian bond yields are 6%. The talking heads on financial news are going bonkers… nobody can fathom these countries staying afloat with interest rates being so ‘high’. And they’re right.

What’s funny is that the 20-year average of Italian 10-year bond yields since 1993 is 5.9%. They’re currently priced at 6.06%. Italian bond yields aren’t spiking, they’re just reverting to the mean. The real spike hasn’t happened yet.

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Italy is in such dismal shape that having to borrow funds at ‘average’ rates is going to push it into insolvency… the government can only limp along if it can borrow at absurdly low rates that don’t even keep pace with inflation.

Perhaps more than anything, this shows how truly broken the system has become… and what a colossal failure the experiment has been.

Of course, before things completely break down, they’ll resort to the same old tactics that bankrupt governments have relied on in the past–outright confiscation of wealth, capital controls, and financial repression.

It’s already happening across the continent, in fact.

In Greece, the government is helping itself to people’s savings at will, in their sole discretion… and forcing businesses to ‘prove’ the tax purity of their funds.

In Italy, the government has colluded with several banks (like BNI) to freeze customers out of their accounts with no warning or explanation.

ATM limits are being imposed at many banks across the continent, and Euro leaders are openly discussing more severe controls to stem potential capital flight.

The conclusion to draw from all of this is clear: finance the government, save the banks, screw the people. This reality, coming soon to a western civilization near you.

This article was written by Simon Black and originally published at Zero Hedge

Risks of Fixed Mortgages

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Lately, we’ve seen firms advertise high interest rates again .. using such terms as “guaranteed”, “mortgage backed”, “secured by real estate” or “preferred rate of return” or similar misleading words.

We do understand the desire for monthly income, especially by older folks or retirees ! The financial industry is full of clever marketing people, many with little or no real world investing experience .. catering especially to the uneducated and the retired income seekers.

An annual return in excessive of perhaps 5 or 6% has RISKS ATTACHED. Most normal businesses in the western world CANNOT sustain, over a long period of time, 6%+ fixed distributions without exposing you to undue risk !

Many real estate firms or other investment syndicators have gone bankrupt or into foreclosure during the recession of 2008/2009. Just because the recession is over doesn’t mean a 12% annual return, paid monthly, is very doable. It is only doable under some very select scenarios – but with very high risk.

One such risky investment class is construction, especially in commercial construction, resort locations, rural areas or in tropical locations. Another one is land development. A 3rd one is poorly performing real estate, especially in unusual, often remote locations. If you are the lender and the project does not perform as planned your capital is at risk especially if your “mortgage backed” or “real estate secured” loan is in 2nd position behind an expensive construction mortgage in 1st position. This lender is in priority to you and may take the asset away, through a foreclosure process, and you lose all your principal.

Therefore, understand the nature of the business, the experience & proven track record of the operator and the position your investment is in – don’t look only at the glossy marketing material. Promises and fancy charts and brochures are easily created, but delivering results in the real world is very hard!

Also, have a look at their existing balance sheet. If you see other mortgages that are higher than perhaps 5 or 6% BEWARE. Commercial mortgage terms today are around 5-6% .. lower for apartment buildings, around 4%. Therefore, if you invest with someone that has 8% or 10%+ mortgages on their balance sheet, ask WHY IS THAT .. and the answer should be (but usually is not): “because our business is very risky and no commercial lender would give us reasonable terms !! Therefore we are looking for suckers such as you to be fooled by a 12% interest rate, paid monthly”. Best to walk away from such an investment !

Keep in mind that in a 3 year construction project, the “interest” paid to you on a monthly basis is just a return of capital, from your own money .. or from new investments. A modified Ponzi scheme really ! The income in these projects comes from selling land parcels or condos .. years down the road. Therefore, always consider return OF capital before you consider return ON your capital when evaluating any investment option !

Consider that you have a capped upside, but can still lose all of your invested principal if the project is not selling as fast as planned or for the prices targeted. Consider the risk adjusted return, please .. not just the promised return. A bit like gambling in Las Vegas, you can double your money in a few minutes placing it on “red” on the roulette table, but on average, you’ll lose. The risk adjusted return is negative, despite the ad “double your money with us” !

Our website also has a report on ‘8 mistakes to avoid when investing in real estate syndications” that you will finds useful to distinguish between swindlers and serious operators: http://www.prestprop.com/8mistakes.html

Sincerely + Successful Investing,

Thomas Beyer, President

Prestigious Properties Group

T: 403-678-3330 or 877-434-4345

P.S.: Check the latest investment offerings here to invest your cash or RRSP into inflation protected hard assets – income producing real estate: www.prestprop.com or call Scotty or Travis or email us at investor@prestprop.com !

Global Insights – June 11th

Kevin Konar

»» Stocks in North America and Europe rallied on news reports a Spanish bank bailout forthcoming. The clock is ticking.

»» Even though Bernanke didn’t tip his hand, the Fed may end up launching QE3 after all, but to what end? (page 3)

»» Many Americans are turning a blind eye toward U.S. fiscal cliff and European risks. (page 3 – U.S. section)

»» China’s interest-rate cut may be seen as reactive, rather than preemptive. (page 4 – Asia Pacific section)

»» Global Roundup: Updates from the U.S., Canada, Europe, and Asia. (pages 3-4)

Click Here to read the complete analysis

Investing for Income – Sat. June 16th

Our good friend Kevin Konar of RBC Dominion Securities is hosting a special seminar on Saturday, June 16th in West Vancouver entitled “Investing for Income  – What you need to know TODAY to Increase Income, Reduce Taxes and Minimize Risk.”

Kevin has been gracious enough to set aside some FREE seats exclusively for our MoneyTalks audience. If you live in the Lower Mainland we highly recommend that you take advantage of this opportunity. Michael Campbell asked Kevin to present on this topic last February at the 2012 World Outlook Financial Conference and this seminar is an expanded version of that presentation. Seating is limited.

Date: June 16th, 2012
Time: 10:30am
Location: Welsh Hall – West Vancouver Public Library – 1950 Marine Drive, West Vancouver (enter library via main entrance, Welsh Hall is downstairs on the bottom floor)

There is a parking lot beside the West Van Library that you can enter via Bellevue Street

To confirm your attendance please e-mail Brian Moore at brian.e.moore@rbc.com“>brian.e.moore@rbc.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it with your name and contact information. For more detailed information, please call 604-981-6645.

Topics to be discussed include:
– specific income alternatives to today’s low rates
– why dividend income is so crucial for anybody who pays taxes
– time tested investment strategies that minimize risk
– how to invest so that both your  income and your capital increases in value over time
– the current outlook for both interest rates and the equity markets

Buckle Up Canada: Real Estate Setting Up For Crash Comparable to ’08

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In May 2012 urban flippers met up with some price resistance despite energetic sales (Scorecard). Toronto and Ottawa prices stopped advancing, Vancouver prices fell off a cliff while in Alberta the animal spirits pressed on with Calgary prices bumping up against their top set way back in July 2007 (Plunge-O-Meter). The 10yr less the 2yr spread continues to narrow (36th month since May 2009). The last time this happened, the 10yr less the 2yr spread narrowed from Spring 2004 to Summer 2007 (similar duration as now) which set up the 2007-2009 crash. It’s an interesting comparison, buckle up.

In the panic correction into the March 2009 pit of gloom, the sell off was 16% (average price down $122,900). More charts and commentary HERE