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Best Investments For Young People

2012-05-29T13:46:09Z

Since I am a young guy, age 30, I am often asked what the best investments are for young people who obviously have a strong desire to make as much money as they can. It is always a tough question to answer because like my fellow young professionals, I have the immense desire to make as much money as I can as quickly as I can so that I can enjoy a good retirement and even a few toys today. Unfortunately, the answer isn’t always as simple as “invest in this stock and you will make 10,000%!”

I started to research investments back when I was 14 years of age and one of the first big lessons I learned was the power of compound interest. With compound interest, and with the proper long term outlook of retirement, a little bit of money doing well will lead to a lot of money down the road. Here is an example: If you are 25 years of age and you make $40,000 per year, if you are able to save just $4000 of your income every year until age 65, assuming a 10% return (which is how much the S&P 500 has returned on average), then at age 65, you will be sitting with a nest egg of $1,950,000! Again, that assumes that as you get raises and promotions, you ONLY invest $4,000 per year. If you merely increase your savings by 4% per year, then by age 65, you will be sitting on $3,000,000! It’s crazy to think that off of a starting salary of $40,000 per year, you could have several million dollars, isn’t it? Well, that’s the power of compound interest. (See the chart and table below to see how fast the money grows at the end)

Age	Balance	36	$94,091	48	$389,388	60	$1,316,158
25	$4,400	37	$107,900	49	$432,727	61	$1,452,174
26	$9,240	38	$123,090	50	$480,400	62	$1,601,791
27	$14,564	39	$139,799	51	$532,840	63	$1,766,370
28	$20,420	40	$158,179	52	$590,524	64	$1,947,407
29	$26,862	41	$178,397	53	$653,976
30	$33,949	42	$200,636	54	$723,774
31	$41,744	43	$225,100	55	$800,551
32	$50,318	44	$252,010	56	$885,006
33	$59,750	45	$281,611	57	$977,907
34	$70,125	46	$314,172	58	$1,080,097
35	$81,537	47	$349,989	59	$1,192,507

As you can see in the graph above, even at age 50, only 15 years from retirement and 25 years after you started investing, you are still at around $500,000 and in the next 15 years, you make up another $1,500,000! The key is to be patient. I don’t want you starting to invest and in 25 years say “That Paul Gabrail was wrong! I only have $500,000 and I have only 15 years left to retirement! What gives!?!?” What gives is compound interest…it will catch up as you can see in the chart and graph above. Patience is key.

So that’s all great and dandy, but the real question on your mind is, “What are good investments for young people like me?” And that answer is a not very sexy but highly efficient answer: Buy good long term diversified Exchange Traded Funds (ETFs) or mutual funds with low expense ratios. What are expense ratios you ask? Good question. It’s something to pay attention to. It’s basically how much the fund or ETF will charge just to be managed and run. Mutual fund companies tend to have higher expenses because they have research staffers that are looking for the best companies, or at least trying to. Unfortunately, most expense ratios can eat up 10-12% of your total return in a given year and over the long haul, that’s a big difference! Now, I am not opposed to expense ratios of course. If the fund company can prove that they beat the market consistently by at least as big a margin as the expenses, then of course it would be worth paying that. Unfortunately, most mutual funds do NOT beat the stock market on a yearly basis so why pay more to earn less?

Getting back to the point, though, is that the bottom line is you shouldn’t be trying to hit home runs. Your goal should be to hit some solid singles and doubles and with a few diversified mutual funds and ETFs invested in several hundred companies, you won’t have to worry about any individual company taking a dive and potentially ruining a large chunk of your retirement.

Is it sexy? Of course not, but what’s sexier than not having to worry about money during the last 25-35 years of your life? That is the main goal in any long term retirement planning.

I personally own over 800 rental units and several businesses generating several revenue streams and I still save the same way I state above. I am able to save over the 10% mark, but I have four ETFs that I purchase on a monthly basis with the money I automatically have taken out of my checking account. I also have a retirement account that is invested in several mutual funds and bond funds to provide good stable long term growth that is better protected against massive drops in the market. Is it sexy? Nope! But I keep my eye on the prize: Retirement.

So, what ETFs do I buy? Well, there are four main ones that I buy: SPY, SDY, VB, and MDY.

SPY is the S&P 500 ETF that tracks the stocks and returns of the S&P 500. This ETF has a low expense ratio of around 0.17% which is about 80% LOWER than the comparable mutual funds. Why should I pay such a large fee on mutual funds when all they are doing is mimicking a broad based index like the S&P 500? In addition to appreciation, this fund generates around 2% in dividends each year which I reinvest back into SPY.

SDY is an ETF that purchases stock in the top 50 dividend paying stocks that have a history of consistently increasing their dividend payouts in the S&P 500. If you look at history, dividend paying companies tend to outperform non-dividend paying stocks by 2.5% or so. Over a 40 year period, that could mean over a doubling of your money! That’s nothing to sneeze at or ignore, so I choose to go with historical records. This ETF yields around 3.5% for the dividend which, again, I use to reinvest for my retirement.

VB is a great ETF that invests in smaller companies. Small companies have a lot of growth potential and with such a long term outlook in my retirement, I can afford to take a bit of risk, as can you, in smaller companies making big moves and jumping.

MDY is the ETF I use for my mid-size company exposure. These are companies that aren’t as big as the S&P 500 companies, but are also bigger than small companies that may be a bit riskier. In any given year, large, mid-sized, and small companies can really perform well. During down markets, large cap stocks tend to do well since they are considered more secure, which is true.

The good news is that no matter how much money you are starting with, whether it’s $3,000 or $30,000, there are several online brokerage companies that make it easy for you to start an account and only charge $8-$10 per trade. This makes it affordable for ANYONE who wants to start investing for their retirement. You can try www.Schwab.com or www.TDAmeritrade.com to get started.

Unfortunately, this kind of investing didn’t come from some cheat sheet book. Why? Because books that preach boring investing tend to not do well. But the boring investing is what you will need in order to better secure your financial future. I am recommending to buy ETFs and Mutual funds…books are ALWAYS written about buying stocks, not about mutual funds or ETFs.

Anyone can chase returns and promise the moon and the stars, but being patient and disciplined is the surest way to financial security.

For more articles and thoughts like this, follow me on Twitter @capmanifesto and subscribe to my RSS feed. Also, feel free to contact me with any questions or comments.

President Obama - Not the best at financial planning

2012-05-16T02:43:52Z

http://money.cnn.com/2012/05/15/news/economy/obama-assets/index.htm?iid=HP_LN

In the article I just linked to, it shows President and First Lady have amassed a nice little fortune in the last few years. Most of the money has come from royalties from his two books “Audacity of Hope” and “Dreams From My Father.”

If you read closely, it shows that the vast majority of the First Family’s wealth is held in “treasury notes and bills” which is obviously a very safe form of investing. With the President and First Lady being so young, it may not be the best route, and I don’t know if he is required to invest this way, but other politicians have invested with blind trusts, which are trusts that they give to someone to invest and have no say over so that there can never be a conflict. Either way, this point is not my point of concern:

If you read on, it also shows that the family has a mortgage on a house in Illinois ranging in the $500K to $1MM range and an interest rate of 5.625%. Finance 101 states that you only borrow money if you expect to be able to earn a return higher than the rate you are paying.

Clearly, Treasury Notes and Bills are currently paying in the 0.09% to 2.93% range depending on if it is a 3 month bill up to a 30 year note. Now, I don’t know when the President bought these notes but even if he bought them a few years ago and his yields have dropped this month, that would mean his investment has done quite well. If he is paying 5.625% on his mortgage, he should sell those treasuries and pay off that mortgage. Why spend 5.625% when you are only making 2.93%?

Now, my comments are not 100% fair because I don’t know if they are in treasuries for a short period of time while he waits for other investments to come, but if this is a long hold, he needs to sell some treasuries and pay off his mortgage. That would yield him a nice return on his money.

The moral of the story is that clearly President Obama is an intelligent man, but academic, legal, and political intelligence doesn’t always lead to financial intelligence and vice versa. This is clearly NOT the smart financial move, but in the end, he can do with his money what he chooses. I am sure he will do fine financially after he leaves office, whenever that may be. In case you didn’t hear, President Clinton made $100MM in the 10 years after leaving office and President George W Bush made $15MM last year in speeches alone.

If You Buy into the Facebook IPO, you are NOT very smart

2012-05-08T16:39:51Z

I know this title may be a bit confrontational, but let’s call a spade a spade. This Facebook IPO has nothing to be desired. To get right to it, usually when an IPO has some upside potential, the argument would be made that there is a premium to be paid. I won’t even get into the argument, right now, on why I think that is a flawed logic, but what I will say is that this statement is all the more reason why Facebook would be a bad investment based on the current numbers.

Last year, Facebook had $1.1Billion in profit and as of today, the IPO is looking for an $85Billion to $95Billion valuation. That is a price to earnings ratio (P/E Ratio) of 77 to 86. Right now, the stock market is trading at around the historical average of about a 15 P/E. This makes Facebook 5 times more expensive when it comes to buying profit than the stock market in general, which is obviously a much more stable investment than one specific company.

Now, the argument back would be “well, yeah, but they have a lot of future earnings growth.” True. Until last year, they hadn’t made money and are now in the advertising space, which Google has proven to be very profitable. Facebook’s advertising setup is pretty easy to use and less expensive than Google, but then again, Facebook is for more of the building brands as opposed to the person who is ready to buy, which is what Google is going after.

Either way, let’s compare it to other tech companies that have more stable cash flows. Unfortunately, I am not splitting the atom or making any new statements that are not already out there by saying this, but Google is a conglomerate with a wide array of companies under its umbrella and billions in the bank and an established and dominating advertising business. In 2011, Google made $9.7Billion and has a current market capitalization of $196Billion. So they are a bit more than double the valuation Facebook is trying to get BUT they have almost 9 times more in earnings. Hmmmm.

I would make the argument that if you MUST be invested in the internet based advertising/social media/search engine stuff, Google is the way to go. It’s much more stable. It knows how it to make money and it has almost $53Billion in current assets like cash and other cash equivalents. That seems pretty solid to me.

For those of you who are reading this blog for the real estate, buying Facebook right now would be similar to buying a vacant lot for $500K because the house that would go on there would be worth $500K. Wait until the house is built then pay $500K for it…please.

I could always be wrong. I am wrong frequently, but unless Facebook has figured out some new way to make money that we haven’t been told of, it will be a while before they can justify the $95Billion valuation. Will it happen? Probably. It does have 900 million users and more time is spent on Facebook.com than any other website. The potential is there, but do me a favor…wait until they prove it because you aren’t getting the discount now for taking that risk.

Secular Bear still has time on the clock

2012-04-27T16:05:01Z

When it comes to timing markets, no one can do it. Granted, I say “no one” realizing that maybe somewhere in the world of 7 billion people there are a few people out there who can time markets. And I only say that because it’s a numbers game, but either way, the bottom-line is, timing markets will probably be a losing bet. The best one can do, in my opinion, is to see what is going on in the financial world and make determinations from it.

I am in Chicago right now meeting with a bank I do a lot of work with. Great guys. Smart guys. We talk about investing and finance every time we meet and it’s a good time.

One of them, yesterday, told me this little anecdote: They have STORMS of clients calling in and asking how they can get shares for the new Facebook IPO. And those clients aren’t even the young and stupid ones! They are the 60+ year olds.

This market isn’t done yet. The lessons of 10 years ago haven’t been learned. These investors are dying to get shares of a company that earned $1.1Billion last year in profit and is being valued at $100Billion. That’s obscene by any stretch of the imagination.

Facebook going public in this market is proof that the lessons haven’t been learned and even further proof is the desire of older successful people wanting some of those shares.

It may sound inconsequential, but when the masses haven’t given up, there is still room for lessons to be learned. Unfortunately, those lessons will be financial ones.

If You Build It, Tenants Will Come

2012-04-18T14:34:55Z

When I first started buying real estate 8 years ago, my thought process was to buy an OK property for a fair price and rent it out as is, but make it presentable. We had, at one point, 98% occupancy and 98-99% collected rents with waiting lists, so things were good. I didn’t think things would get better. I had always heard that some people put more money into their properties to increase rents. My rationale was that people wanted low cost good options. Now, in hindsight, I was right, but I was leaving a lot of money on the table.

We currently own and manage 300+ units in Shaker Square, a historic area of Cleveland. It is very close to the Cleveland Clinic, Case Western Reserve University, John Carroll University, University Hospitals, and a lot of places that demand higher-end renters. Our units hadn’t been touched/rehabbed in almost 50 years, and I thought that was fine. So did our renters.

But two years ago, we tried something new. We rehabbed a unit. We spent, at that time, $8,000 to rehab one unit and you know what we found? We got a better renter who was willing to pay us more than $100 more per month for that unit! So, for you number dorks out there, we easily increased the value of our unit by over $12,000 and it only cost me $8,000. Our upgrades included granite countertops, new cabinets, tile in the kitchen, and a new bathroom. Since then, we have increased our rehab to cost about $11K on average but now we are getting over $125 per month in rent and getting a better renter and less maintenance issues.

Here is the prime example. We use an online tenant background check system. They have a “rentability score” of 0-100. Anything in the 75-85 range is an acceptance but maybe with a condition of an extra deposit and anything above 85 is a full automatic acceptance.

Two years ago, we were happy to get in the 80+ range and we were ecstatic with 90+ scores.

As of yesterday, we had 19 rented apartments with approved applications. Of those 19, 17 were perfect 100 scores and the other 2 were scores of 93 and 94.

So as you can see, we not only get a much better quality tenant, which saves me money in collections and evictions, but we also got a much higher rent.

Every market is different and you should know the market you are in, but putting money into a property can pay off big! Don’t be afraid to try it out.

Advisors: Give Advice On What You Know

2012-04-12T12:48:34Z

I constantly run into “experts” who try to give me unsolicited advice. It gets to be obnoxious because I am of the mindset that if you are eager to give me advice, without me asking, you are probably just someone who likes to hear themselves talk. I like asking for advice from people who have proven they are able to provide me with advice.

I recently had a situation that affected a deal I had with a friend of mine. We had invested in a real estate deal together and he was the managing member who was in charge of day-to-day management. It was going well, but another opportunity arose that needed some capital in the next year or so, so I wanted to divest myself of this deal and move to the next. Luckily, Jim and I had good success with our deal and it was worth a bit more than I originally invested, but I am a big believer in the fact that when you invest in something, you are into it for the long haul, so I felt bad asking to get bought out. As part of my guilt, I decided to ask Jim to pay me back my original investment, split the bank account in half, and I would carry a loan on his purchase until he was able to refinance 3-6 months down the road. It was very fair. My interest rate was 6% and Jim really appreciated it. He had always been good with me and I wanted to be good with him since I felt bad.

Enter: Lawyers. So I draft up my documents with my lawyers for the note and we are ready to go. It says exactly what I wanted it to say and exactly what Jim and I discussed. Jim sees the docs, likes them, but has one issue, which was a legit issue, so he asked if he could send it to a lawyer. Of course I encouraged that, but knew it wouldn’t be a big deal since the docs were very straightforward….Boy was I wrong.

His lawyer started to say things to Jim such as he didn’t understand my motives and he was questioning and hinting that I was being shady to Jim. Jim quickly jumped to my defense, but the lawyers insisted that it was strange and they wanted me to give Jim 3 months to get refinanced out, which is standard. I agreed that it was standard BUT this was also not a standard deal. My pesronal belief is that once you have removed yourself from a situation, unless you have reason to remain in the deal, get yourself out of it so you don’t get any future upside or downside that you can’t control. If Jim was able to increase his rents by 20% in the next 2 months, I shouldn’t get any benefit after I had said “I am out” and after I made the offer to finance his purchase of my shares until he was able to refinance with a bank.

So…lawyers enter and don’t believe I could have this mentality. I decide to get my lawyer, Jim’s lawyer, and Jim on the phone so we can hash it out once and for all. Jim and I tell his lawyer everything we discussed originally and the lawyer, again, gave pushback and I found myself defending my business decisions like I was some Gordon Gekko type of character who had ulterior motives. Clearly I was getting upset and Jim kept telling his lawyers, “Paul and I are good friends and good business associates. He has taken a different path and I want to buy back a very profitable 50% of the business for less than market! This is good!”

Finally his lawyer agreed and Jim had a private conversation with his lawyer after we hung-up to confirm it all. The next morning I got a call from Jim saying everything was good and his lawyers understood our intentions and was ready to write it the way we wanted.

Fast forward 8 hours later. My lawyer emails me and says, “So the deal is done as long as you agree to a 90 day purchase contract where no interest payments will be made to you until he either refinances or 90 days are hit.” I was beyond livid! We were VERY specific and Jim called me that morning to tell me everything was squared away as we had discussed originally. And here I was looking at the exact same thing his lawyer was pushing for before.

I will be honest. I lost my cool a bit. Thinking that there was NO way a lawyer could be this moronic, I figured it had to be Jim who had changed his mind and I was hurt. I had gone to him with a very fair proposal. Not only could I have sold my 50% stake for a lot more money than I was into it for, I could have just been a jerk about it and found some random partner for Jim that may have been a pain. Jim does have a right of first refusal, BUT if he didn’t have the money now and needed time for refinance, why would he have the money when I sold the deal? No chance. So I was being nice and charging a reasonable rate of 6% interest and giving him up to 1 year to refinance me out!

I called and emailed Jim and didn’t hear anything. It was later in the evening, around 9 PM, but I thought he would see my calls. I was even more convinced of Jim’s betrayal because my calls weren’t answered so quickly. I decided to do what Jim’s lawyers had done…I was going to change the deal since my obvious generosity was being thrown back in my face. The new terms of the deal were much worse and I said “You can thank your lawyer for costing you more money. I was very fair to start and you guys took advantage of the situation.”

The next morning rolls around and I get an email at 6:30 AM from Jim. To my surprise, Jim was equally as shocked and annoyed at his lawyer. He wrote to me that he never authorized that deal and I truly believed him from the sound of his email. He was sincerely apologetic and he asked that I agree to go back to the original deal and I said I would, but there would be no further discussion of ANY points. It was take it or leave it.

As of this minute, I am waiting to get the new docs from his lawyers, but he had to have another long conversation with 2 partners at the firm to explain why he was doing this. I told Jim that he shouldn’t have to explain his business decisions. If he was signing a doc that was permanently hurting him in business, I would understand their objections, but to try to coerse him into certain business decisions is wrong. Jim is a very successful businessperson who has done quite well on his own with no one’s help. Now all of a sudden, two guys who had a law degree who have never owned a piece of real estate or their own business are advising Jim on his business decisions didn’t make ANY sense to me. The lawyer is there to say “Here are what the docs say and can you handle this?” That’s it.

My brother is in law school right now and of course I called him and told him this story and told him to not become one of those lawyers. My brother has his own cigar business and he has helped me with my real estate deals, so he is becoming more educated attorney from the business side. Some day, if a client wants, he can advise him on more than just the law, which is great, but not because he is a lawyer…because he is a businessperson.

Go find advisors who want to advise you on their area of expertise. Don’t find people who like to hear themselves talk and who will bill you for that. It’s not good for you or your business.

Entrepreneurs: Check Yourself before you Wreck Yourself

2012-03-13T20:45:17Z

With such a goofy title, I don’t want to make it sound like I am belittling entrepreneurs. They are the (insert cliche) backbone of this country and a big reason why we are such a great and strong economic powerhouse. But the same blinding drive and ambition that makes entrepreneurs so great is also their biggest downfall and not for the business management reasons most people may think.

There are shows like Shark Tank which is an AWESOME show. Everyone loves to see the sharks bid and rip on companies and start-ups just by asking basic questions. They don’t get into ridiculous valuation metrics that a lot of venture capitalists get into because they realize that a business is sold based on sales and profit, no matter how big or small. It’s that simple.

I recently started Concept Capital which is the venture capital arm of our business. We haven’t made any investments yet but our goal is to invest in first stage seeding of companies that have been started by young individuals (hopefully mostly college kids). Our thought process is that these kids have the least to lose so they would be willing to make big risks and they tend to have pretty neat and cutting edge ideas that we want to make sure we can help bring to market with our connections and management skills.

In the past year, I have sat down with 5 or 6 businesses looking for capital but they didn’t fit the mold for Concept Capital but we still took pitches from them to see what was out there and here are three what I wanted to comment on:

1.) A coffee shop point of sale system. Maybe I didn’t understand the idea but I didn’t see much that made this point of sale (POS) system much different than any other on the market. How much were sales at the time we spoke to them? Answer: $0. How much did they value their business? $3MM to $6MM, from what I remember. When I was floored by this, I asked them how they could justify it and their response was “Typical companies in this marketplace have those values.” Clearly that is one of the dumbest things I have ever heard. That was a quick “No.” Also, if I didn’t understand the idea well, either I was already not interested or they weren’t explaining it well. If either is the case, it’s a business I don’t want to be involved in.

2.) A medical device company that had a neat patent on a life-saving device. This one was interesting because of the patent and the technology, which I won’t get into due to the fact that I don’t want to reveal who the company was. A person I knew called me and said I had to meet with these guys because this was a “sure money-maker.” That created an immediate eye-roll from me on the phone and so I met with them. Yes, the idea was neat. The guys were enthusiastic and they had, what seemed to be, a good plan….and then the value came. “Paul, we are selling 1% of the shares for $100,000 each, valuing the business at $10,000,000.” So my first question, what are your sales so far? Answer: $70K so far. So, on $70K in sales, they expected a $10MM value. I don’t care what anyone says, that’s not reasonable. They had raised over $500K from friends and family and my thought was that was probably going to be the only place they would be able to get those kinds of valuations. Friends and family who want to help.

3.) I can’t describe this next one without semi-revealing what it is, so I will just say it is right in my area of expertise: real estate and property management. The idea I was pitched on was nothing spectacular and quite a crowded market but they did have two other apps they were trying to make that were interesting. The problem was I started to ask questions and they would get off on other tangents and I would have to bring them back into conversation. Then I pulled out my credit card and asked if I could give them $25 to try their service that was launching in a couple of weeks and they said, “It’s not ready.”

Paul: “Ok. Can I see some screenshots?”
Answer: “They aren’t ready either.”
Paul: “Ok. Can you log into my internet and use your iPad and show me the other apps?” Answer: “No, it’s ok. You will get the idea if I just go through it on here without the internet.”

So, I have two guys sitting here pitching me and can’t show me the product that they are pitching on and they clearly show they aren’t organized to show me what I need to know.

So then I asked how much they wanted in investment. They wanted a $300,000 investment for 20% of the business. So that’s a $1.5MM valuation and of course, you know their sales: $0!

It gets better. When I asked for the proforma to justify that valuation, they didn’t bring it with them and they said they would email it to me that day. Still haven’t received it.

I love entrepreneurs. I have a lot of respect for ANYONE who is willing to put their career on the line in order to make it. But please don’t insult me with how much your business is worth because guys like me will NEVER invest in those kinds of deals. And if/when you do get money from others, you better hit a home-run because if you don’t, you will never hear from those investors ever again when they realize they bought nothing.

Yes, you have a great idea. I can’t wait for you to be a billionaire, but until YOU are the only one writing checks, you have to realize that other investors will want to see what they can touch. They can’t touch hopes and dreams. They can only touch what they see on an income statement. If there is nothing there, prepare to give away BIG chunks of your company for necessary dollars. If you can’t do that, start out with other smaller ideas that will generate income and experience and success you can tout on your next start-up.

My Second Big Hedge - Mixing my two loves: Stock Market and Real Estate

2012-03-07T23:59:53Z

I am always trying to protect my downside because I do believe in being very concentrated in certain investments but always want to have protections because of my high concentration. From previous posts, you have seen that I have invested in the VXX due to my concern of volatile stock markets causing problems with my margin accounts that I use to purchase real estate.

One thing I have done recently is to protect myself for when natural gas prices revert back to normal levels. In Cleveland and Shaker Heights, all of my properties are properties in which the landlord (me) is responsible for paying the heat bill. This is obviously in the form of buying natural gas from certain suppliers, such as Dominion East Ohio.

Anyway, back in 2008, I am sure you all remember oil prices sky-rocketed to $140 per gallon. This was not the only resource that sky-rocketed that year. Natural gas also hit very high levels. To put it into perspective, today I am buying natural gas based on a wellhead rate of $2.30 per MCF. Back in July 2008, each MCF was selling for over $11 per MCF. It was a scary time for landlords who pay the heat.

So when I am buying 4,000 MCFs per year, that’s a BIG difference in terms of profitablity of a property. We can’t pass the costs onto our tenants overnight. Raising rents and charging utility reimbursements take time due to new tenants coming in and being locked into previous leases, so I had to figure out another way.

UNG: This is an ETF that tries to replicate the performance of natural gas. It buys futures on natural gas that are traded. If you look at the chart on Yahoo Finance, it shows that back in 2008, UNG was trading at around $506 per share. It is currently at $18 per share. I have been buying on the way down since $50. So have I taken a beating so far? Yes. I bought at $50, $30, and $19 per share. So far, I am down 39% overall, which is a large hit, but you have to remember, I am not in this for the short term or for trading gains, necessarily. Yes, I will sell it if it spikes up considerably so I can lock in gains to help offset, but let me explain my main reason for buying.

Let’s say I have 30 units in Shaker that are worth around $40K per unit. That’s $1.2MM in value. Now let’s assume, under normalized natural gas markets, I am paying around $10 to $11 per MCF with all my distribution charges and such all included from Dominion. So I am probably paying around $6.5 to $7 per MCF as a base charge to me so MCF at the wellhead, that I described above, is around $5-$5.50 per MCF. So right now, I am spending about $40,000 per year in gas charge with everything included.

If my cost per MCF doubles, I don’t get an exact 1 for 1 increase in gas costs, thankfully, but it’s still around $20K in increased gas costs, which is BIG for a $1.2MM property. So what do I do? Well, not only do I lose $20K in cash flow, I also lose that in value because with increased expenses comes decreased profit. If I profit $20K less per year consistently my property is worth $240K or so less. My $1.2MM property becomes $960K pretty quick. Now, over time, I will be able to recoup those $20K in costs, but for the short term, I will hurt pretty bad.

Enter UNG: If gas goes back up to the 2008 levels, I will probably be spending $25K per year more in gas, which is about $300K in lost value. So I look at $300K in lost value and have to figure out what I need to make in profit under UNG to make it even.

So…$300,000 / ($506 - $30) where $506 is where UNG stood in 2008 and $30 is my current average cost basis in UNG. This comes out to a total of 630 shares. I take the 630 shares and mulitply it by the $30 per share I have and this requires an investment of $18,900 as a hedge against my future potential loss at my properties.

Now, am I skipping a lot of steps and assuming quite a few things? Yes. UNG went to $506 largely because of a big fear and rampant increase in gas prices, so that would have to happen again, you may think, in order for UNG to go to $506, and you are correct. However, I am fine with that. Why? I can easily absorb a slow and steady rise in natural gas prices. I can pass that onto tenants if needed. I do not want to absorb a quick run-up in natural gas prices.

The other plus of this is that UNG just provides more diversification for my portfolio in general. I have about 24% of my money in Cash currently, 54% in equities, and 22% in fixed income, so taking out some of the money from cash to put into this investment can diversify me as well as provide the hedge.

Finally, I think natural gas is a good long term bet. As the rest of the world develops more, there will be more demand for natural gas, as well as other natural resources, so with increased demand comes increased prices. I look forward to this as well, so I can naturally make money both ways.

High End Foreclosures - Easily avoidable but up 273%

2012-03-02T15:46:19Z

http://finance.yahoo.com/news/million-dollar-foreclosure-buchanans-2-110500193.html

This article above is one that you may be hearing about more often now. I was surprised to see that $1MM+ foreclosures are up 273% and that the percentage of homes in this value range that are in foreclosure is actually higher than the overall US housing foreclosure rate!

I want anyone who is reading this to keep in mind that it has to be a very tough thing to go through this kind of situation. I don’t want to EVER experience it or have a close friend or family member experience it either. However, we can use this situation to see what went wrong.

A few years ago, a wise person once told me: You pay cash for your toys and you finance your investments. At the time, I didn’t really understand what they were saying but after seeing the economic and financial downturn we have had, I see the value in keeping debt low.

This family had a nice career and their decision was to put, what appears to be, the bulk of their money into one asset: their home. Now, that’s fine. They paid cash or put a big downpayment. That’s exactly what they should do! Why worry about a mortgage when you’ve done well and want to slow down? Now…here is where they made their mistake…

They went and borrowed against their home to start two restaurants. Now, restaurants are already a very risky proposition. And I love the enthusiasm and entrepreneurship. That can never be denied. But in my opinion, if you want to take that risk, sell your home and use the proceeds to do your deal. Don’t finance your home so now you may owe a bank and any other creditors to the restaurant that you are starting.

This isn’t the only case. I always hear of people financing their high end sports cars! Why buy a Ferrari if you have to finance it? If you are doing that, you really can’t afford to own it. These items are reserved for the ultra wealthy, if you ask me. If you can’t pay cash for the thing, please don’t do it. You don’t want to be married to a loan payment to something you love. If things start to go poorly in your financial world, you will resent the car or item you purchased and that’s not what you wanted to do when you first bought it.

I know it’s easy to say these things from the outside looking in, but I really do love the “Pay cash for your toys and finance your investments” mantra. It makes sense. Your investments should be financed because you can earn income off of them to help pay the debt. Some might say that your home is an investment, when it really isn’t. Your home is being used to provide shelter and the hope is that over time, it will go up in value because the cost to build that home 20 years from now will be more than what you bought it for. Don’t use it as your retirement fund.

Volatility Update

2012-03-01T15:45:49Z

I like looking at the Volatility Index (^VIX) frequently when there are massive run-ups or drops in the market. Basically, as said in previous posts, the VIX measures the fear in the market. As the market is crashing, VIX usually goes higher because there is fear in investor eyes because of slumping stock prices.

However, if you look at the way the VIX performs against the market, when the VIX is up (a lot of fear), the market is usually in a bottoming time and when VIX is low (very little fear), the market is usually at some sort of top or on its way to it.

Simple right? Well, yeah, I suppose, but not many people tend to really pay attention to it. I personally hedge my investments by buying VXX, which is an ETF that purchases short-term futures on ^VIX so that way if there is a massive crash (i.e. 2008), my investments won’t take nearly as big a hit because VXX would also be spiking as well. This hedge does not work well in long term slow declines…it only really works with massive fear based sell-offs.

So where is the ^VIX right now? 17. How does that compare to the past? The last time we were at 17 was in July 2011. And the ^VIX went from 17 to 47 within a week or so and stayed above 30 for the next 6 months. Just to give a frame or reference, the ^VIX had only broken 40 4 or 5 times before 2008 and since then, we have been above it several times.

Either way, the ^VIX went from 17 to 40 and hovered around 30 for the next six months. What did the market do in that same period? The S&P went from 1340 and change all the way down to 1100 before finishing the year at 1240 or so. So it was a nice recovery at the end, but as you can see, the market did not fare well when the ^VIX was low.

Now does this mean the market is going to crash or correct? I don’t know. I’d love to think I don’t, but looking at history, times when the ^VIX was low was not the best time to enter the market.