101 Investing Tips

habit-saving-moneyA few weeks ago, during spring break, I was offered a fee to write up a list of investment tips. I thought about it for a bit and ended up writing five. Today, the article is published at Dividend Reference. Go there and find mine at #55. I’ve skimmed the list (planning to read the whole thing when there is more time), and so far, it looks great.

I want to let this one sizzle a little before I publish a follow-up article with the other tips I submitted, but didn’t make the cut. (There were LOTS of submissions!)

Happy reading!

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!

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.

It’s the yield, stupid!

habit-saving-moneyWhen it comes to building retirement wealth, you must keep your eye on the ball. What does that mean? Simply put, your goal is having the biggest after-tax cash flow when you reach retirement. Cash flow now, 25 years before potential retirement, is foolish. If you take a step that results in MORE cash flow today but produces LESS cash flow in retirement, then it was the wrong step.

Something to look at is the yield you currently receive. In essence, at any given time, you have a pile of cash. Your pile of cash should be earning some degree of cash. The rate it earns is the YIELD. If you have $100,000 and it nets you $5000 a year, you have a yield of 5%. We can discuss lots of different assets and their various yields. Real estate, CDs, mutual funds, bonds, stocks, whatever. Bottom line: your cash needs to be put to work. And the higher yield the better.

Duh! That part is obvious. What is more subtle is that you need to always look at all money coming in as cash flows. You may have a daytime job, which is one cash flow. But you may also have real estate properties generating cash. Your stocks may generate dividends and distributions. But at the end of the day, you need to know what your total yield. And then you need to be willing to investigate options that can increase your yield.

At that point, it becomes easy to evaluate whether or not debt will help or hinder your growth of wealth. When real estate can generate 5% growth and you leverage it 4-to-1, you dial things up to 25%. Borrowing money at 4.5% becomes a no brainer. The remaining hurdle is hedging the inherent risk that higher yields produce. One of the biggest ways to immunize yourself from real estate risk includes:

  • Having a big bag of cash sitting at the bank. How much? Think about 100% vacancy for a year.
  • Buying top quality property. This draws top quality tenants. It costs more but reduces the risk of renting to non-payers that must be evicted.
  • Renting in a landlord-friendly state. Hot tip: I don’t own rentals in California, and won’t in the foreseeable future.
  • Become a macroeconomic investor. Invest where the big indicators show a good rent-to-cost ratio (like Texas).

And never, ever, ever pass up opportunities to sell one asset if you find another that shows a consistent, sustainably higher yield. Because the higher the yield, the fast you can put that cash flow towards buying MORE quality assets to generate cash.

Good luck.

So you want to build wealth? Look for multiplicative ways, not additive ones

“Another day, another dollar” — common expression

This expression is commonly known by many. It represents a common, core feeling we get as members of the vast work force. We go to work, put in the hours, get paid our wages, and go home for the day. This is not the way to build retirement wealth.

When it comes to building wealth, getting paid on a day-to-day basis is additive. To accumulate enough wealth to last for years, we have to put away huge amounts of money. Typically 30% of our take home pay is a minimum amount.

Why do I say that? Because the tools we are being sold on for investments don’t work unless we compensate by over-saving. A good example is the classic skip-that-daily-latte and instead save the money, and it 20-30 years, you will be a millionaire. I had heard that a few times, and figured it sounded great. Until I read an objective analysis of that. Basically take $5/day and multiply it by 365 days. What do you get? $1825/year. Doesn’t sound too bad. Today. But let’s take this concept and back up to 40 years ago. What was the median income for people back then? According to one source, median household income in 1974 was $9780/year. That would imply that saving $5/day, the price of a cup of coffee, was like putting away over 18% of gross salary. If you can assume 28% in withheld taxes, the percentage saved against take home pay would be 25.7%.

Wow! If we are to read that correctly, it suggests that saving $5/day today may result in $1MM, but in 40 years (if you started this when you were 25), $1MM probably won’t be worth much at all. Instead, we should read that correctly as needing to save AT LEAST 26% immediately.

Many people, if they looked at that, would just throw their hands up in the air and give up. But if you’re here, you surely have guessed that I’m going to say something different.

We need to look for options that have a multiplicative effect. What is that? It’s when you make some making by direct action, but the more actions you take, the more they interact with other actions already in progress.

One thing that I realized as I wrapped up the last chapter of my 3rd book, is that doing something as small as writing books on the side can introduce multiplicative money making. Today I finally got some time to watch a TV series with Neil deGrasse Tyson. I’m quite fascinated by astrophysics and his series seems entertaining. In the opening credits, it notes that Dr. Tyson has written ten books. Something I can realize is that the more books you write, the more books you will sell. Not additively, but multiplicatively. Simply put, people that enjoy one of your books are VERY likely to go and buy your others. My first book has yet to earn enough to pay off the advance I received. The second accomplished that about two years ago. My dream is that my 3rd will accomplish that even sooner, possibly through more social media, more people that read my previous works, and that some will even go back and buy my previous writings.

It’s only natural. I read the first Jack Reacher book, got hooked, and have now read ten so far. I read “Schrödinger’s Kittens and the Search For Reality”, and have since ordered the predecessor. When you go out and invest yourself into more and more and more opportunities that can yield more and more wealth, the opportunities grow.

So I highly suggest that you take some time to sit down and think. Simply think. Look at what you are doing today. What you have done for the past week. And think about what else you could be doing that can generate secondary effects. What if you started a blog and wrote on a daily basis? It could be small stuff. But it might grow your public image. It might open doors you didn’t expect. Open your mind to looking for new opportunities such an endeavor could raise.

These are all important the rather narrow vision the corporate 401K plans have. The general idea of a 401K is to sock away money in a fund that doesn’t grow very fast. And when you hit retirement, you are required to cannibalize it. Why do I suggest this? Because the federal government has a schedule after which you are obligated to start taking withdrawals. If you’re retired and doing just fine, it doesn’t matter. The government set things up such that they can collect taxes on your withdrawals and they will NOT be blocked from you doing just that.

In case you didn’t know this, the rich NEVER cannibalize their assets. There is this mantra out there that rich people adhere to: NEVER TOUCH THE PRINCIPAL.

In essence you are on a mission to accumulate wealth producing assets that themselves generate wealth you can live off of. You can’t wait until you are retired to begin writing books, building a blogger reputation, or something else. Instead, that is what must embrace while you still can earn enough of a daily paycheck to keep afloat. This is your opportunity to start buying real estate, dividend yielding stocks, EIULs, and discounted notes. Simply putting away 50% of your take home pay and planning to live like a pauper doesn’t sell very well. Good luck!

Why you shouldn’t fear bankruptcies the way the press does

If you make investing decisions based on the news, you will suffer debilitating setbacks in your portfolio time and again.

What comes to mind when you think about Sears & Roebuck today, compared to what you remember as a kid, and what you may have heard about this company decades ago? Sears was historically THE company to buy general merchandise.

I remember reading The Great Brain books as a kid. It’s a collection of stories told from a younger brother about his big brother, aka The Brain, who is quite smart, but governed by a money loving heart. Anyway, these books set back in the days when silver dollars were common currency, the character mentions having the rare and golden opportunity to order from the Sears catalog. As a kid, I remember that Sears was the place to get all sorts of stuff. But what do you think of it today? Do you flock to that store to buy things? Or do go elsewhere.

So would you consider investing in that company by purchasing its stock? Perhaps not. Take a step back. If you had the chance to buy stock in Sears thirty years ago, would you take it? Perhaps. But what if you knew everything you know now about how its gone down hill over the past years? Would you buy it then? Read this article for details on exactly how might fare.

Based on bad new stories over the years, you might say “no!” But if you actually looked at the balance sheets over that time frame, you would actually do quite well. Sears grew big and accumulated many various assets. As it crumbled, it sold off pieces into separate businesses. As a stock holder, you would hold lots of different companies, all generating profits. In fact, you would do quite well.

How can this be? As stated by the economic Nobel laureate Milton Friedman, “when a company or a person goes bankrupt, generally their first step is to contact reputed firm attorneys such as the bankruptcy attorney in Knoxville, TN. While filing for bankruptcy, their factories don’t go poof.” Assets are sold off. New management is hired. Things are repurposed. New businesses plans laid out. Mid and senior level managers may get rolled and some employees may suffer, but in general, the core underpinnings of the company get refreshed, not burned to the ground.

This point seems to be lost on the press in general. Any shutdown of a company seems to draw reporters to find the saddest stories and turn them into headlines. They never bother to find these people a year later, and see how they are doing. On rare occasion, I saw a journalist actually find one such employee, only to discover that they were doing WAY better than before. They used to putter along with a poorly performing company. But getting tossed forced them to find something else, and they actually found something better.

Buying a car with cash

toyota_highlanderI just recently bought a new car with cash. The feeling was great!

Let me fill in some details. My wife and I have been looking into another car for at least a year. We had looked at many models and had a list of features we wanted. We were also open to buying used, perhaps up to 2-3 years old, if it was in good shape and didn’t have gobs of mileage. But the key part of it was: it would be a 100% cash purchase.

Unfortunately (or fortunately), we couldn’t find anything used that didn’t have high mileage. It only cost a few thousand more to buy a 2014 new car with less than 200 miles than a used car with 70,000+ miles. (Some of these used cars, in fact, cost more than what we got). To top it, the features they include with the baseline model were WAY more than we needed. Given we have smart phones and our own DVD player, the upgrades were frankly unnecessary.

Car payments can really drag you down

Top priority: I didn’t want to take on a car payment. I’ve heard statistics say most cars you see driving down the road are dragging along a $400+ monthly car payment. If you’re reading my blog site, then I can bet you have already heard the pitch to save up and buy a car with cash instead of financing it with debt. I heartily agree with this practice.

The other piece of advice I often read but doesn’t seem to get stressed as much, is to try and make your car last a long time. Don’t get caught up with “car fever” and think about new one three years from now. That’s already burned into me. My wife’s car is eleven years old, and our minivan is seven.

Here’s some good news from the industry according to Kelley Blue Book,

“Americans are now holding onto their new vehicles for a record 71.4 months. On the used vehicle side, that interval has risen to 49.9 months, a figure that also represents a new high mark. Collectively, the ownership period currently stands at 57 months, up from about 38 months back in 2002.” — Kelly Blue Book, 2012

57 months equates to about five years. That’s good to hear! But better yet, if you can keep your car for ten years, you will be way ahead of the curve. Cars require a significant outlay of capital. The last car I bought was seven years ago, and I’m still driving it.

What if you can’t buy a car with cash?

I can certainly empathize with those that want to pay cash but simply can’t. I don’t want to get preachy. There are radio shows and forums that talk about how you CAN in fact buy a car all cash. You just have to lower your expectations, save, etc. Everyone reading this has probably heard all about it. I’m not hear to sway you in that regards.

What I want to write about is how my ability to pay all cash represented a more deep seated realization. My net worth and money making efforts have grown to the point that I CAN pay all cash for a car.

Given the current performance of my rental properties, EIUL and dividend paying stocks, I feel like the next time we buy a car, we will be even BETTER off than now.

I don’t have the data on hand to back this up, but I’m speculating that those that don’t have a solid wealth building plan in action probably tends to wards buying cars more often and using financing. Cars are nice and shiny. We all like to have them. I’ve driven through neighborhoods where things don’t look very wealthy, but people still seem able to have a couple nice, new cars. It’s probably the biggest “toy” people can buy and get it financed through the bank.

As my father told me the last time I went car shopping, “your goal is to beat the average.” That applies to building wealth, buying cars, and anything else money related.


Ups and downs of trading stocks

graph_up2I recently finished up executing the last shares of my big stock option. It is nice to wrap it up and be done with it. It represents a very nice part of my compensation package, and yet the whole experience was somewhat distressing!

I want to chronicle what it has been like to give you a taste of the emotional roller coaster that comes with trading stocks and options.

In the beginning

I was hired in 2010. My stock option grant was designed to be paid out on the following four years, with the first 25% vesting on the first anniversary of my hire date. My grant had two parts. One part would pay out the rest in 25% chunks annually. The other half would start vesting the rest in monthly periods. February 2014 is when I receive my last full vesting.

My company’s market price was about $44/share when I was hired in 2010. I didn’t pay a whole lot of attention to the price until 2011 started to approach. On my first anniversary, the price had risen to $97/share. Essentially, my stock option had doubled in value and I was super excited.

I got a big chunk of money when I cashed out the bits that I could. At a similar time, my wife had overheard someone else mention about trying to sell their town home in Orlando. When I heard the price, we started shopping online. After several months, we had figured out that with the stock option money so far, we could easily put down enough to buy one. Mortgage rates were around 4.5%. I had also worked out that my bonus check could fund the monthly payments, mortgage, utilities, and all. We signed the papers in November of 2011.

The Wealth Building Society is born

booksIt was March of 2012 that I started writing this blog. I had learned something new in the world of building wealth a year earlier, and it took me almost a year to shake loose the old ways and embrace this new concept. I reached a point where I couldn’t keep it to myself. Thankfully, this happened before I got my first chunk of stock option money. I had originally intended to use it to nuke my home mortgage. That was off the table and other things were being considered. Rental property, dividend paying stocks, and an EIUL were in the pipeline.

In the middle of 2012, the stock price had risen to over $113/share. I figured things were just going up and up and up. The sad part was, I had already exercise 2012’s quarterly grant. It was really hard being forced to sit on my hands and wait for another vesting of stock options.

Some varying news shocks were felt and the price dipped briefly down to the mid-80s. That hurt. I was worried. But it quickly rose back to $100/share. Frankly, $100 feeling like a mystical edge that was hard to cross. It seemed that running up to $100 was a struggle, but once crossed, it felt magnificent. And I hoped it would stay there.

Danger Will Robinson! Danger!

panic_buttonIn the first quarter earnings report of 2013, my company missed their earnings estimate. It wasn’t a huge miss. But in less than a month, the price fell from $99 to $72.38. It recovered the following month into the mid-80s. And then dropped even further in July to $66.51. While a 33% drop is pretty bad, this stock option had a strike price of $44. The value is in the difference. It went from a delta of $60/share to $20/share. That is a 66% drop in exercisable value. I knew what those people felt that had scraped together 401K funds with mutual funds totaling $1 million and watching the market take away $300,000+. It would drive me to get out too to avoid a total collapse.

But I was in a different situation now. I had already acquired cash flowing rental properties in the fall of 2012. I had started funding my EIUL and had seen it grow steadily for over a year. And in March of 2013, I took the cash proceeds from the sale of my previous home and used it to buy a big position in VNR. Cash was flowing in on a monthly basis that was close to the amount of money I earned at my day time job.

This provided me quite a bit of emotional relief. It also helped me collect my thoughts. The stock option has an expiration date after which its worthless, but that wouldn’t happen for a few more years. I told my wife that we would have to wait on getting that new car, and she was okay with it.

The best things come to those who wait

rodin_thinkeFrom there on, I decided to bite the bullet and wait it out. In my mind, I had set the day of the last vesting of stock option as my target date to shoot for. Before then, I would simply ride things out (unless the stock did something like jump to $200/share). My company beat its earnings estimate in the last quarter of 2013 and began to steadily recover its price. It climbed into the $80s followed by a slight dip into the upper-70s. I was waiting for each earnings report with glistening eyes. I had already seen what it meant to miss one. Now I awaited them to beat their estimate. In mid-January 2014, I watched the price rise back to $98. The tension was unbearable. If they didn’t make it this time around and the price tumbled, I would have missed a keen opportunity due to the timing of my vestige. On the big day, my company beat the earnings estimate again.

I cheered. And then something awkward happened. In after-hours trading, I watch the price fall five points. Huh? I was chatting with a colleague over Skype and he asked me what that meant. I couldn’t answer. To tell you the truth, Warren Buffett couldn’t answer. He avoids this type of daily chatter and points out how important it is to invest in strong businesses with long time frames.

Someone posted a similar question on Seeking Alpha regarding the drop in price. For the next 2-3 days, the price wobbled around $90/share. Then I heard a news report indicating that the DOW had dropped 300 points. Professional analysts referred to this as “consolidation”. I think they were spinning the news to make it sound less harmful. Several of the stocks I monitor had all slumped 3-5% in price. This had something to do with emerging markets, a facet of investing I’m not really familiar with (yet). Dr. Dave posted an article a potential market correction coming in the next 1-2 years.

Let’s wrap this thing up and put a bow on it

habit-saving-moneyI was getting a first hand taste of how tough it can be to depend solely on appreciation of the stock price. My option didn’t have any dividends to hedge the risk of price fluctuations. But then after this correction passed, things began to inch back up. I noticed for three days in a row, the price climbed 1.3-1.6 points each day. I quickly calculated in the head that ten more days, and the price would hit a golden price to sell and which I would be quite happy: $110/share. I told myself that if I could sell what would effectively be half of my entire option a hair away from the peak price of the last four years, I would be quite happy with the outcome.

Then the growth rate began to slow. I watched one day where it went up 0.6, only to see it fall the same amount the next day. I pondered selling immediately. Or putting a limit order to sell if it hit $100. Or a limit order if it hit $110. Or. Or. Or. It drove me crazy!

Finally one night when the price had closed just below $97/share, I put in a 60-day limit order of $110. If it was going to jump to that price, why not line things up to make it happen automatically. I knew it would be good.

At the end of February, I watched it go up almost 2.5 points. The next day it fell 1.7 points. This is really tough to sit by. It always feels like the next day will mimic the current one but you just don’t know what will happen.

On the first Monday of March, I see it drop 1.4 points and then start to recover. By the end of the day, it has dropped around 0.4 points.

On Tuesday, the price jumps 3.5 points in first ten minutes of trading. I’m shocked. What is different between today and yesterday and last Friday? Throughout the day, stock keeps going up. Right now, it’s up 5.6 points around $101.30/share. This is friendly territory. It isn’t the golden price of $110, but a price I would be very comfortable selling.

While running an errand after lunch, I hear a news report that says Wall Street is rallying due to news of an eminent easing of tensions regarding Russia’s invasion of Ukraine. I immediately recognize that this type of news has almost nothing to do with the company and it’s stock.

Since this could crash the next day, I decide to move. One block executes at $101.13, the other at $101.03. Whew! I’m out. No more panic. I got a good deal. I see the price rise maybe 1 point over the next couple days, and then drop again. I made the right decision.

Lessons learned

talkingI was never, ever, EVER happy with the price when I exercised some shares. If I made a move and then saw it rise after that, I felt like I had missed an opportunity. Sometimes the price fell after a trade, but I would ponder what if I held it until later. I had to condition myself to accept the trade and instead focus on where to move my freshly acquired cash. I can replenish my rental property cash reserves. I also plan to open a custodial account for my 2-month-old son. And I can finally snatch up some new positions from my short list of stocks. Stay tuned for more on that.

It was often a joke reading the opinion pieces and the buy/sell/hold recommendations were frankly worthless. It almost feels like everyone is trying to coach everyone else.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time and even dangerous, because it may blur your vision of the facts that are truly important. –Warren Buffett

I have been able to reflect on many aspects of my wealth building plan, and there is no denying that my stock option has empowered me in many ways. I also can’t wait until I get my next chunk of ESPP payoff in five months. I also have one last small stock option so I might yet be able to exercise some shares at $110 if not higher.

What’s fun about this? My division was spun out into a separate private company. We were issued another stock option grant several months ago. At some point in the future, I get to go through this entire “exercise” again. It’s VERY nice to get an equity position. But it isn’t stress free.


Happy 2nd Birthday, Wealth Building Society!

Two years ago, I launched this website by documenting my plans to cut off all funds going into my 401K and instead route the same money into an EIUL. I went on to write up my other plans, such as buying real estate and dividend paying, dividend growing stock.

I have written many other opinion pieces, chronicling either my own ventures or reporting on things I have observed in the financial world.

Since then, I have seen readership grow. I have run into colleagues at conferences, on Skype, and other forums, had exciting conversations, and many thanks for taking the blinders off the iffy world of mutual fund investments.

I wanted to start this site for several reasons. One was the pure fact that since I discovered that mutual funds didn’t work, I had to tell everyone that I knew. I couldn’t keep it to myself!

I also noticed that since the paradigm of passively throwing money into a handful of mutual funds inside a 401K wrapper had been shattered, I observed a LOT of other financial advice that didn’t hold water. I began crunching scenarios using spreadsheets. I learned to not take someone’s “average rate of return” for granted and hence discovered the difference between arithmetic mean vs. geometric means, i.e. the CAGR.

I began reading web sites that also eschewed mutual and index funds, and instead focused on stronger, historically validated wealth building tactics. I read several articles that mentioned a town outside Atlanta in which a whole batch of millionaires had been created decades ago because of this small town banker that had suggested to the local farmers that they buy one share here and there of Coca-Cola and reinvest the dividends. Ever hear stories like that from your 401K spokesperson at work? Didn’t think so.

I wanted to share these exciting experiences that I was learning in the arena of building retirement wealth. And I definitely wanted to communicate that building wealth wasn’t confined to the fear of opening quarterly statements in a bad year.

Suffice it to say, it has been a fantastic two years. I appreciate the various people I have met and been able to trade opinions.

Don’t get depressed over lack of wealth mobility

Something that seems to be sweeping the newspapers and blogs is how bad the economy is. The articles seem to point out how pay has been flat for several few years and that there is little income mobility.

What may not be clear is that there are two different results. One set of results is found when you average large groups of people and then compare different time periods like now vs twenty years ago. An entirely different set of results is found when you pick individual flesh-and-blood people, track their wealth mobility over twenty years and then average THAT. The results are much more pleasing.
Why is that? Well, the people in a given group today aren’t the same people that were in that same group twenty years ago. Which makes the first result set inherently flawed. But the fate of your retirement wealth shouldn’t be tied to such metrics.

Instead, you should focus on how you can become an owner, not just an employee. The wealthy members of society don’t settle for being simple employees. Instead they go out and own things including real estate, cash yielding stocks, cash value life insurance, and business equity. When you become an owner, the weight of income mobility, whether a valid concern or not, eventually fades in importance.

It may seem beyond your reach to build a million dollar business. But setting aside $100-500 every month and buying blocks of VNR, KO, WMT, GD, or any other blue chip stock that has paid increasing dividends for 25+ years is very realizable. 
These stocks become cash generators. By becoming business owners you can partake a piece of the profits. $500/month over 30 years would turn into $180,000 of pure investment capital, growing at 9% a year, would turn into $817,000.  Collecting 4% dividends would be tantamount to receiving over $32,000 a year just for being alive.
This is just one strategy but should illustrate that instead of worrying whether or not your salary is going up or not, people like Dividend Mantra are showing that your future is very much in your control. You’re the boss. Don’t let politicians and newspapers deter you from building your retirement wealth.