Regression to the Mean – it’s everywhere

There is a statistical concept I learned about from Dr. Dave Shafer: Regression to the Mean. It’s a simple concept, but one that when ignored, can cause enormous financial headaches. In essence, things can and do revert back to the mean rates.  The more extreme things get from the mean, the sharper things will swing back to the mean. Hence it is important to learn what the mean rate is, and not build on top of extreme positions.

A financial example

The Dalbar Report has been published for 20 years+. Each year, they do a lookback to see how investors that buy mutual funds fare. And the results are the same: terribly! The average rate is in the neighborhood of 4%. The market itself may grow by a bigger amount. But we aren’t the market, we are individual investors. To shoot for 12% as certain radio personalities advocate would entail getting triple the average rate of everyone around you. If you visit a financial planner and he pitches some precious metals mutual fund that grew by 85% over the past two years, you are setting yourself up for a shocking correction. For something that extreme, a huge correction is coming. See why people say “don’t chase returns?”

A gambling example

This concept appears in other places. A classic one are casinos. I’ve had friends point out that roulette wheels have no memory. The table doesn’t remember the previous spin, so the odds are the same. That isn’t what “memory less” means in betting odds. A betting system with memory is where a form of “state” exists. Such as dealing cards. Each card you receive is impacted by what was dealt previously. Betting red vs. black pays 50/50 odds. If you see red come up ten times in a row, odds are starting to mount that black will be next. The reason casinos stay in business, i.e. make money, is because they count on regression to the mean. They know that red and black will shift back and forth based on these odds. And the casino house DOESN’T PAY the odds. For red and black, they put two extra numbers on the wheel that are neither, but still pay you as if those losing options don’t exist. This is their cut, and is something like 3.5% on the average (if memory serves). Every game they play is based on regression to the mean and they aren’t stupid.

A literary example

As my final example, look at any industry. There are always big, visible leaders. For authors of fiction, there are best selling authors like J.K. Rowling, Michael Crichton, and others. They make big money. This draws other people into the field. In truth, a lot of people never get published. A vast number of people that do, never make big money. Regression to the mean says that if you average all these people together, the industry as a whole doesn’t average big pay for most people. If and when that average starts to climb, basic economics says that more people will flock to it, and pull the average back down. When the average falls, people will leave it, allowing the average to rise.

Take this concept and look around. You may start to notice it elsewhere. So what does it mean? When building a wealth building plan, use the averages to your advantage.

  • Most people don’t save a lot of money. First step: save money!
  • A lot of people count on other people to earn big money for them. Second step: get active and learn how to do it yourself!
  • Too many people get caught up in paying fees instead of picking avenues that actually build wealth. Third step: Shop around for vehicles that have a long history of building wealth and THEN be willing to pay the best experts to do it right.

Happy wealth building!

Annual Wealth Building Review – 2014

Back in 2013, I conducted an annual review. I meant to do the same thing last year, but getting my latest book off the ground ate up my schedule, and I frankly forgot about it until now.

To catch up, I started tracking my net worth month-by-month on a spreadsheet in September 2012. This was after I had started up an EIUL, but before I moved into real estate. As before, I’ll start with total growth and then move into various categories to see how things have gone.

Comparing my current net worth against last year’s annual review (which would be 15 months ago), I have seen a growth of 25.4%. That’s not too bad considering we’ve seen a couple big sell offs of the market. I don’t think we have seen anything quite like the 2000 and 2008 market crashes. But a few times there were things like “market consolidations” and this latest drop tied to the drop in the price of oil. My total growth since I started tracking net worth on my spreadsheet in September 2012 is 132%, which over this time span, derives an annualized growth rate of 45.28%.

As I’ve done so in the past, I again clarify that I don’t expect to earn 45% annualized growth over the lifetime of my investments. Instead, it’s important to look at the long term. Since I started tracking things, the annualized growth rate has been slowly dropping. The first month I tracked it, annualized growth was 118%. The following month it jumped to 258%. Then it was back to 117%. But the truth is, anything of five years or less isn’t very effective at making long term predictions. My various assets need to settle down and continue on their slow, but steady growth in both incoming cash flows and general increase in capital value.

Now let’s dig into the details.

Real Estate

My rental properties have actually declined by 10%, according to Zillow. I warned last year to take these value estimates with a grain of salt. They can jump up and down quickly. You don’t really know until you sell the property. At that time, things like total cash flow compared with operating costs can have significant impact on the value, and I’m sure Zillow doesn’t factor that in.

Our vacation home in Florida has grown in value by 52%. This is much better, but again, not highly critical because I don’t plan on selling it anytime soon. We get a lot of value out of that. The fact that I’m funding it with my company bonus check against a 4.5% 30-year fixed mortgage turns it into a nice piggy bank. If anything, the value of the equity may become useful if I decide at some point to pull out equity and invest. Another nugget of knowledge is that since we bought the unit, they have completed two new building and have started building a third. Definitely a sign of positive economic action. Seeing the current selling prices of the new units indicates that we bought our unit at essentially half price.

Mortgage debt on the rental properties has dropped by $21,878. That is because I have been pouring extra rent into the smallest mortgage. The “estimated” value of the properties may have dropped 10%, but our debt on the rental properties has now fallen by another 5%. 5% may not sound like a lot, but it certainly counts when it comes to building real net worth.


Last year, I had a big position in VNR and was using it to pay off the HELOC on my house. I also had decent growth in Apple, and Berkshire Hathaway, even though I didn’t really have big positions in those stocks. GD has shown great growth by essentially reaching double price from what I initial paid for it.

All in all, my stock portfolio reach a 10% growth on what I put into it. That’s when I decided to sell my entire stock portfolio and use it to kick off a discounted note portfolio.

Discounted notes

I recently blogged about getting into discounted notes. The note that I bought, I essentially bought it at 66% off the cover price. The hope is that I can continue to rake in more cash than I did with VNR, and when it finally pays off in a few years, triple my investment. It should open the door to buying more notes, and paying off rental loans even faster. But since it’s just gotten underway, I don’t any real performance to report. Stay tuned for next year’s report


My EIUL has continue to grow silently and slowly. If you calculate premium dollars that went in, subtract the fees, and then add up the credits, it still hasn’t hit positive. Essentially, you could say I’ve lost money so far. But I ran a spreadsheet that shows that it each month, the loss rate shrinks and shrink. In fact, in about six years, it should turn positive. And the idea is that by the time I reach retirement, it will have reached a very nice annualized rate of around 8%. Then I can start taking out tax free loans and have a nice, risk free source of cash.

Simply put, performance of the various parts of my plan is going well. Stay tuned!

Discounted notes vs x% 401K company match

house_cashI saw a post about someone that seems to have defied the averages and made over 12% on their 401K. Part of their follow up was asking “what product do you offer competes with my company matching the first x%?”

Well I can think of one. Discounted notes. It may be tricky to see because its kinda of opposite. But in the end, the net effect is the same.

With a company match, some amount, like the first 6% that goes in is matched by your company. That is free money and money people jump at the opportunity. With a discounted note, you are buying a loan, say $100,000 for a discount like $70,000. You will receive payments on that $100,000 debt. And at some likely point in the future, you will receive a pay off for that loan. Since you only paid $70,000, there will be $30,000 of profit included.

So just like your company giving you pure profit up front, you will receive pure profit. It just happens on the back end. What’s the downside risk? There is always downside risk.

A 401K with a company match typically only offers mutual funds. Most of them average 2% annual fees. If you build up $1 million, we are talking $20,000/year in fees. Did you catch the part where that is every year? Enter retirement that lasts twenty years, and you are talking $400,000 in fees. Yikes! Who knows? Maybe you’ll do better.

With notes, some of the risk is that the payer will stop paying. You have to foreclose, claim the property that is backing the note, fix it up, put it on the market, and sell it. Then you get to collect whatever money is left over. It might be more or less than your $70,000 investment after all fees have been paid. That is why finding the right note is critical, and why shopping for them by yourself can be hazardous to your wealth building health. If you don’t have a 1st position note, then your not first in line when a foreclosure happens.

If it’s not obvious, there is a lot more entangled details you have to manage when it comes to notes vs. 401K mutual funds. Which is probably why you stand to earn much better money with a discounted note. And why its worth every nickel to find the right expert to help shop for the right note to buy, in order to mitigate the risk of ever having to foreclose.

Some of the best wealth building strategies are simple yet subtle

I took my kids to visit Disney World recently. Frequent readers of this blog already know I own a town home outside Orlando.

You might disagree with The Disney Company’s efforts to extend copyright law, but you cannot ignore the sheer brilliance of Walt Disney’s core idea to tap the public domain for stories.

That man has taken vintage stories from the past and breathed new life by writing music, creating cartoons and also attractions you can ride to enjoy these timeless classics.

Couple that with our constant rise in technology and Disney’s ability to re-release their movies in new formats with more bonus material, and you’ve got a recipe for success.

I was again reminded of how the parks and resorts appear to have suffered no recession whatsoever. You might disagree with the price if tickets, etc., but as a tentative investor, this company is rock solid.

Do I own any DIS stock? Nope. It’s not on my short list either. I find the dividend yield too low at around 1%. That and the fact that they only pay once a year simply moves it much lower than my other prospects.

But I would never fear the stock crashing or becoming worthless. People will be coming to the parks and the movie theaters for years to come.

Growth rates and their statistical fallacies

Have you run into some fund or investment vehicle where the seller advertises a tremendous growth rate?

Watch out, because you might be getting played for a sucker!

When you come in here, you look for the sucker. And if you can’t find him, then the sucker is you. –Mark Cuban, Shark Tank

Let’s imagine a very tiny index fund. It’s worth a measly $1. What is the total growth rate if it climbs to $2? 100%!!! Someone can legitimately tell you they have a fund sporting 100% growth. Of course, it only grew by $1 total.

What if your fund was worth $100,000,000 and increased by $1,000,000? The growth rate would be a tiny 1%. But it still grew by $1,000,000.

What this says is the percent and absolute dollar are BOTH important metrics.

A tale of two 401K funds

401K Fund #1

wealthA long time ago, I shifted the money that was going into my old 401K into an EIUL. This vehicle is geared to survive negative downturns and hence, only go up. In a sense, I think of my EIUL as my new 401K. Again, it doesn’t participate in market down swings, which has huge advanages. It also has better odds at beating the earning average of mutual funds.

401K Fund #2

house_cashBut that is not all. I travel with my family periodically to Florida, specifically to the Orlando area. My wife works for Disney, and we take their kids there 2-4 times every year. Spending money on hotels would have been outrageous. My wife heard from someone a few years ago cheap condos were. We finally bought one back in 2011 after I figured out that my bonus check that comes every six months could fund the entire thing, mortgage, utitilies, and all. Perhaps you’ve heard of the 401K condo?

On one hand, we have enjoyed every moment spent there. It’s great. Fully furnished. Appliances, bedrooms. I even have WiFi. The memories we have built are the best and only getting better. But that is not all. We bought it on short sale. Since then, the housing market has recovered and it’s estimated value has doubled. By paying it off slowly but surely, we are building equity. In the future, if need be, I can always refinance, invest the money into discounted notes, and pay off the loan. It’s another powerful real estate asset that offers more options.

“The investor with the most options wins.” –Jeff Brown


Are you saving enough?

Financial speaking, the money that goes into both of these avenues is coming from my company salary. The total dollars is about 20% of my take home pay, which is not bad.

I’ve spoken before of this terrible investment exercise where people suggest you skip your daily $5 mocha and instead put that money into a mutual fund. According to those selling mutual funds, if you saved like that for 40 years, and 11% year after year, you would accumulate $1MM.

Except that in 30 years, $1MM won’t cut it. Assuming a 4% inflation, that dollar figure would be roughly equial to $208,000 in today’s dollars. Drawing 4% yield from that (as recommended by these same people) will grant you $8,320 Surrender 20% to Uncle Sam, and you’re left with $6700. We’re talking $560/month. What?!? So does skipping that daily mocha really turn into the cash generating machine you think it does? And do you really think you can earn 11% every year for 40 years, when Dalbar reports that people buying mutual funds can’t even average 4%?

That is pretty bad. If we are to turn things around, imagine that today we had $1MM.  How much would we need to start saving if we started 40 years ago? Doh! $5/day! So, set the wayback machine to 1975 and start chugging away. What is $5/day? About $1800/yaer. In 1975, median household income was about $11,800. This means that to save over $1800/year would translate to save almost 17% of gross income. Assume that 20% of that household income goes to the government and the savings rate against media take home pay would almost 20%.

So according to this, I’m on track to earning something the equivalent of $1MM in today’s dollars. My odds are much better because it isn’t based on earning 11% in mutual funds. And it isn’t based on having 40 years to save. Very few people start saving relentlessly when their 25. Instead, it happens in people’s late 30s/early 40s. They start to realize that their savings plan isn’t getting anywhere. So shift that 20-25 years of good solid savings.

Isn’t it time to switch to something that works with the odds rather than against them?


VNR cuts dividend in half

newlogo7.9.10Vanguard Natural Resources, a stock I have written about many times, has cut their dividend from $0.21/unit to $0.1175/unit. That is an almost 50% cut. Good for me that I moved that money to discounted notes a few months ago.

Perhaps you’re wondering if I would continue recommending it? I would if it fits the need. For any critical analysis, you must understand the business. VNR is 85% natural gas. This has nothing to do with the oil market, which caused its price to tumble in the first place. In essence, a lot of people panicked and took a lot of the energy market down. In my opinion, VNR has been acquiring solid assets. They have a strong history of paying dividends.

To be honest, this appears like a great opportunity to collect some VNR stock at a discount. Again, if it suits your purpose. My purpose in owning VNR stock was to pay off an interest only HELOC. If my monthly payment on that debt was cut in half, it would no longer be the right tool for me.

My prediction (take it or leave it) is that VNR will eventually recover and slowly but surely be able to raise its dividend again. How quickly? I don’t know. But MLP stocks have a high payout ratio due to their corporate structure.

Thankfully I moved my money into a warrantied, discounted, first position note. It is paying off my HELOC at a higher rate than before and isn’t linked to tremors in the stock market.

I’m not a financial advisor. Don’t buy or sell anything simply based on my opinions. Do your own analysis and make your own decisions.

Building wealth isn’t free

habit-saving-moneyAll too common, I see people obsessing about fees at the wrong phases of building wealth. There are countless websites and forums where people discuss low cost index funds. The problem is, they haven’t calculated the Big fee that will hit them at retirement: taxes.

Standard IRAs and 401(K)s are designed to get you to sock away money tax free today, only to turn around and pay income level taxes at retirement. And to top it off, Uncle Sam demonstrates his hunger for that tax revenue by forcing you to start cannibalizing your savings at the age of 70 1/2. If you save up a big pile of money in something that pays a handy dividend, you can’t keep it forever. You will be forced to start taking minimum withdrawals.

To illustrate, I tracked down an online early withdrawal calculator. I plugged in $1,000,000 balance, and it told me that the age of 70 1/2, the minimum withdrawal amount was just shy of $36,500. To frame this in lingo that financial consultants use, we are all told to withdraw no more than 4% per year in retirement. 4% of that balance would be $40,000.

A subtle but little discussed point in all this is the “no more than” piece of that advice. The idea is that our retirement fund is expected to grow by more than 4%. Hence, ONLY withdrawing 4% should let our principle grow. But if we only have a 3% growth, we should ONLY withdraw 3% and hence NOT tap into the principle.

If we have a losing year, we shouldn’t draw anything at all. The hope is that our retirement funds would throw off dividends to fund ourselves. Anything else, and we are cutting into the principle and forever reducing future earnings and available cash. But these minimum withdrawals don’t grant us the ability to scale back to 3% or even skip a year of withdrawals. Instead, we are forced to cut into that principle so the government can get their piece of revenue.

It’s okay to pay taxes

TaxesIf there is any kind of lesson, it’s that taxes must be paid. The only question is when. People obsess over paying taxes today. They would rather push them off and score all the tax deductions possible. But that might not be the most efficient strategy nor the most stable one for your retirement.

The truth is, it’s better to pay the taxes now. That way, in retirement, there is no need to ship off a chunk of your retirement wealth to the government at who knows what tax rate. And if you use Roth IRAs instead of standard ones, there are no required minimum withdrawals! If there is any hint of what the IRS prefers, just checkout the fact that people making over $191,000/year can NOT contribute to a Roth IRA.

There is an old adage: would you rather pay taxes on a bag of seed or on the harvested crop? In true mathematics, if the rate at both times is identical, then you would pay the same taxes on either side. But that is rarely the case. And who knows what the tax rates will be 30 years from now?

Don’t forget about management fees

panic_buttonI’ve talked about fees many times. One really surprising article was about a couple that held dozens of mutual funds and never consolidated. They actually had a big chunk of cash. The effect was disastrous!

The couple in that linked article were paying a financial advisor 2.5% annually. Sounds small, except that they had saved up $1.3 million. Annual fees exceeded $32,000! Imagine paying $32,000 each and every year of your retirement.

The actual plan they were pursuing was to consolidates into half a dozen funds, and reduce annual costs to 1%. That is terrible! Cutting down to $13,000 in annual fees is terrible. The irony is that if they looked at the top ten stocks in each fund, they might find a lot of well recognized companies: Coca-Cola, Walmart, Apple, General Mills, Pepsi, Dr. Pepper-Snapple Group.

If they simply sold everything and bought $130,000 of each of the top 10 stocks, their annual fees would drop to nothing. There would be a one time cost of selling the funds and buying the positions, but after that, no management fees. And then they could drop the financial advisor! To top things off, they would probably rack up better dividends, dividend growth (like getting a raise in retirement), and also see asset appreciation.

Stocks aren’t the only way

Mortgage_Loan_Approved1Other options would include discounted notes. I’m in the middle of migrating my Roth IRA into a Self Direction Roth IRA. The plan is to buy warrantied, discounted notes. The noted fund I have joined sells 1st position notes at a discount. That means mortgages that were perhaps written for 5% would yield me something much higher, like 9-12%. They are also warrantied meaning that if the payee stops paying, I have the option to either foreclose and sell the property, or I can collect on the warranty and get back what I put in. Show me a stock or mutual fund that offers that.

As an example of discounted 1st position notes, imagine a note where the payee owes $100,000. Imagine it was written with a 5% interest rate. Monthly payments would be $536. The person holding the notes decides to sell it for whatever reason. Maybe they needed a quick source of capital. To move the note quickly, they are willing to accept $65,000. For $65,000, I can get that monthly stream of $536. Punch that into your calculator, and you’ll see that we are getting 9.9% yield on that investment.

To top it off, whenever the payee decides to pay it all off, I collect an extra $35,000 (remember, original balance owed was $100,000). If that happened five years out, the annualized ROI would be about 9%. Pretty good return on the money. And then I can take all this cash and buy more notes, boosting my monthly yield.

Thanks to having this inside a Self Directed Roth, there are no taxes involved. I have to pay a service fee to my note payment collectors of about $15/month. And the Self Directed Roth custodian needs a minimal fee as well. But nothing close $13,000 year! That is horrendous.

EIULs are designed to reduce costs in the future

EIULeffectThe last leg in my talk about good vs. bad management fees are EIULs. I frequently hear life insurance products criticized as being ridiculously expensive. The truth is they ARE very expensive….for the first ten years. After that, the costs drop dramatically.

Insurance companies design these products so that they collect their profits up front. That way, if you fall through on future payments, they don’t care so much. It also makes the products better guaranteed to last properly. A key ingredient, though, is to overfund as much as possible. By overfunding a policy, the cash value grows much faster. And the faster the cash value grows, the less total insurance must be bought. It’s a vicious cycle. If you slow down the growth of cash value, more of your premiums is used to fund the difference, i.e. the corridor between face value and cash value.

But when you overfund the policy, the total amount of insurance purchases through the life of the policy is greatly reduced and in the end, the annualized costs drop to somewhere like 0.5-1.5%. That’s pretty handy for getting a big chunk of cash in retirement that is completely tax free according to IRS tax code.

It’s not simple or easy to build wealth all by yourself. But delegating ALL decisions to a financial planner can be very costly when you reach retirement. The key is understanding the fundamentals of building wealth so you can hire the right experts to set up things most efficiently.

Are you saving big enough and smart enough?

rodin_thinkeI was recently approached (again) from a freelance writer, offering to write blog entries. I figured this would be similar. They would offer several articles, and I would find them filled with stuff and nonsense about 401K plans, which I have remarked countless times DON’T WORK. This time it was different. The articles given were even worse.

One of these articles pointed to a recent survey of Millennials and how were they doing regarding saving. All the status I could find were that Millennials were doing better by starting five years younger than Gen X, and auto-enrollment options for employer-based 401K plans has helped shift 401K participation from 81.4% to 84.6%

First of all, starting younger IS a good thing to do. When you talk about the power of compound interest and compound stuff-money-in-the-bank, every extra payment is good. In fact, if you pay off rental properties at an accelerated rate, it will make the interest rate almost irrelevant. What that links points out is that when you calculate the payment with a couple points of difference in the interest rate, you’re talking about a six month speed up of the payoff of that note. What speeds things up is making extra payments EVERY month, or EVERY year.

Hence, socking away extra cash from EVERY paycheck is the real ticket to success. Or at least, a key factor.

But something that really got my goat was how the article assumed that auto-enrollment was the reason that 401K participation had increased by 3.2%. First of all, no evidence was presented that this was the correlation at all. For such a small change in statistics, there could be a dozen factors. The slow recovery of the stock market (until a few weeks ago!) could make people more comfortable. Or watching the market rally here and there might make people start jumping in.

But the focus was on the entirely wrong points. The real question should be, “Hey Millennial, what rate of return are you getting with your savings?” and “How much cash flow do you predict you’ll have in retirement?”

When we ask these types of questions, our advisor should tell us, “You’ll make more in retirement then any year you ever worked.” Instead, the most common street advice is, “Don’t worry about taxes in retirement. You’ll be a smaller tax bracket.”

Uhh, why will I be in a smaller tax bracket? Is it because I’ll be making LESS then than I’m making now? After retirement might devalue my dollars perhaps 60%? And drive me to get ripped off by taking a reverse mortgage?

401K plans are betting on mutual funds. Mutual funds are doing horrendously. They always have. There is over 20 years of data showing that people that invest in mutual funds tend to get less than 4% a year in annualized growth. Ever since I pulled my money out of my 401K, and repurposed it with real estate and notes, my net worth has sky rocketed. My portfolio isn’t secured by shaky fishbowls of stocks that are supposed to mitigate the risk, but never do.

So I turned down this potential author, because this person didn’t seem to write in the same vein as any of my articles. No, my standards are quite high, and finding someone that shares this odd but evidence based quality of writing is hard.

Goodbye VNR, hello discounted notes

Mortgage_Loan_Approved1This may be a bit of shock to the readers of my blog, I have sold my entire stock position and used the cash to buy some discounted notes.

Say what?!?!

Anybody that has read my blog for awhile is aware that some of my most passionate articles have been about my big position in Vanguard Natural Resources (VNR). And it’s true. VNR has averaged a yield to 7.5%. In fact, in light of the recent sell off the market, their dividend yield is now looking like 14%+. Suffice it to say, VNR has been pretty good. To top things off, the HELOC I used to buy a majority of my position has been knocked down by 20% thanks to monthly distributions from my past position.

So why drop something so good? Because I have something better. First, a little background.

Discounted notes

What are discounted notes? A “note” is another word for a loan. And we’re talking about real estate loans, i.e. mortgages. When you secure a mortgage with the bank, they hold what is referred to as a note. When you buy a note from someone, you hand them a chunk of cash in exchange for receiving the monthly payments from whomever secured the loan. You also take over the lien on the property meaning that you have the power to foreclose and sell the property to get your money back in case something goes wrong.

To top things off, there are different positions regarding notes. When a foreclosure happens, the notes get collected in order. 1st position notes get first dibs on collecting on the sale until their obligation is satisfied, then 2nd position, etc. The name of the game is to get a first position, discounted note, secured by a piece of real estate, ideally where the value of the property exceeds what you paid for the note.

Time for a real world example in the realm of discounted notes. Imagine someone decided to buy a house for $125,000. They go to the bank and put down $25,000 cash and borrow $100,000 at 5% for 30 years. The monthly payment would be about $536/month to the borrower.

Now, for whatever reason, the bank that loaned out that cash needs some money fast. So, they decide to sell the note. Perhaps at the time, the balance is now down to $90,000 based on past payments. But to move the note quickly, they are willing to part with it in exchange for $65,000 of cash. That’s where you step in. If you have $65,000 burning a whole in your pocket, you can buy the note and start receiving $536/month backed by a total obligation of $90,000.

What are the numbers? Over twelve months, you would receive a little over $6400. And since it only cost you $65,000, the yield on that would be 9.9%. This is not only higher than the original loan’s rate of 5%, but is in fact higher than the 7.5% yield of VNR. Tiny hint: the note I bought is actually yielding 12%. Sweet!

In addition to collecting monthly payments, people are paying off loans all the time. Let’s fast forward and imagine that we managed to collect five years of payments. That would add up to $32,160. The principal balance would be down to about $79,000 (remember, you are the one collecting the interest). At that stage, the person, perhaps through inheritance, perhaps through devote saving, decides to pay off their note by sending you a check for that remaining balance. You have now collected a total of $111,160, virtually doubling your initial investment. Given the timeline of 5 years, that would be a 14.4% ROI. With your bigger pile of money, you can now go and buy some more notes. Rinse and repeat.


So what are the trade offs? There are always tradeoffs. When you buy a stock, you can get in and out in a second. You can buy a big position, and sixty seconds later, sell it all. I built up my stock position over a couple years and then cleared it out in no time flat. I sold VNR at a peak price of $30.85/unit. Today, VNR was dragging along at $17/unit thanks to the panic of the energy market. I nicely pocketed a nice 10% total gain on the money I had stuffed into my brokerage account. That wasn’t pure skill on my end. It was fortuitous. The time frame it has taken me to cash in and wait for a note has been seven months. I have been paying off my HELOC out of the 10% gain, and still come out ahead.

All in all, it’s pretty nice compared to this recent massive sell off that has fleeced many people’s mutual fund accounts.

Notes don’t work like stocks. Each note has to be investigated. Is it a first position note? Is it a performing note (meaning the borrower is currently paying and up-to-date)? What is the value of the property that is collateralizing the note?

This is an area where DIY can kill you. You need professional people that know this industry. It’s why I have been working with Jeff Brown for about a year and his efforts to find the best note investment company to work with. Jeff has decades of note buying experience, which means he knows the questions to ask when researching companies that deal with notes. In fact, he has fine-tuned what is known as the “Bawld Guy Fund” and how it operates to make it worth my time. For example, every note this company gets appears to have a life of about 20 minutes before someone snatches it up. Sound stressful? The Bawld Guy Fund lets top tier members get first dibs for two weeks. Then second tier members (me) get second dibs for two weeks. After that, any member can go for a note. That’s fair in my book.

The note I bought also includes a warranty, so if it stops performing, I can still collect and not lose my money. Did you even know about warranties? Didn’t think so.

At the end of the day, what we seek is yield. We want to grow our net worth with a solid yield. And as Dr. Dave has shown, we need double digit growth if we expect to enter retirement with someone of value. By slowly but surely moving my investment portfolio into real estate, EIULs, and discounted notes, my net worth is not based on flimsy mutual funds, but instead on tools that minimize losses during down years, and instead, are poised to do well in positive years.

Happy investing!