brip blap - Latest Comments in 38 random thoughts on building prosperity

Re: 38 random thoughts on building prosperity

Thomas Tatzel — Tue, 22 Jul 2008 11:50:49 -0000

Ret,

I think the key here is moderation. A home can be a great tool in building wealth, but it can be a tremendous drain on your finances if you buy more house than you can afford. The problem is that too many people let the lender decide how much they can afford. The lender is not interested in their financial well being, it is interested in its own. You need to think for yourself on how much you can afford and stick to that budget when buying. You must also take into account that the larger the house the more you will pay for other bills like utilities and property taxes.

One thing that is not mentioned often is that buying a home is a forced savings plan. Since some of your payments go to paying down the principal you are forced to build equity (which could be considered a savings account). If you buy a home when you are young and don’t do cash out refinancing you will have been forced over the lifetime of your loan to save whatever the current value of your home may be. When you look at all the people who go into retirement with no liquid assets because they spend everything they make, the ones that own homes are way better off than the ones that have rented all there life and not saved.

Re: 38 random thoughts on building prosperity

Ret Miles — Thu, 17 Jul 2008 06:09:35 -0000

Thomas,

I don't disagree that real estate should be considered when diversifying. And I think buying a home (if you can afford it) is great if you are doing it because you want a home. Buying it primarily as an investment is putting an extremely large amount of eggs in a very large basket, and incurs more risk than people want to admit. And I find more honesty in the used car market and politicians than I do in the real estate market. I also find that the biggest liars are often the homeowners and folks applying for mortgages. When Gareth or anyone else is just getting started, it's a good idea to save and invest awhile first, studying the market, and then invest in real estate. If that means missing this party, so be it. There will be other parties later in various sectors. There always are. Meanwhile he doesn't have to get locked into a riskier debt situation.

That isn't to say all debt is bad, and it's also not to say that you should never buy real estate. It is to say, "Slow down, study your choices, and be sensible." And THAT isn't to say never take any big risks.

I have seen many folks religiously believe in the magic of real estate, only to get burned. Having lost money on a hot residential property, I learned the hard way.

Meanwhile, the companies in which I own shares own real estate.

As for getting rich off dividends, no, in the short term you can't get rich off dividends. In the long run might be a different story. And in the shorter term you can get good results buying underpriced shares paying high dividends in the anticipation of the share price eventually rising. And you don't have to mow its lawn, keep up with repairs, buy insurance, pay for the appraisal, etc., etc., etc, and all the other "money pit" expenses.

By the way, if you know what you are doing, are sensible, and can afford the risk, real estate is not the only investment which can be leveraged.

Re: 38 random thoughts on building prosperity

Thomas Tatzel — Mon, 30 Jun 2008 10:25:50 -0000

Ret
You Mention diversity and then advise against buying real-estate. To truly diversify one needs to buy different asset classes not just different types of the same asset class. The reason for this is to reduce your systemic risk. All stocks act similarly to certain stimuli, and thus when these events occur all your stock holdings will either go up or down. To cushion this you diversify into other asset classes. The only ones your broker will talk about are bonds and commodities. That is because he sells those too. Real-estate would do a lot to diversify an all stock portfolio. In fact if you are looking for current income real-estate should be an integral part of your asset mix.

As an example what will happen to all dividend paying stocks when the government raises the taxes on the dividend (an event that very well might occur in the US in the next year or so). While this event would cause all dividend paying stocks to go down, it would not affect real-estate except maybe to make it go up as a lot of the money leaving the stock market may very well head to the real-estate market. Large capital flows out of one asset class into another don’t affect you if you have equal stakes in both. That is true diversification.

Re: 38 random thoughts on building prosperity

pscherer — Fri, 27 Jun 2008 22:35:00 -0000

Pulease!!! RET I don't see anything religious about Gareths comments. Real estate, even with its huge drops lately, is still way ahead of most stock investments over the last 10 years. All real estate? no of course not, that certainly is not true for everyones experience. But really who is going to get rich on dividends from stocks. The reason I like real estate is for it's many benefits, LEVERAGE, being the biggest and most important. Just leveraging a property doesn't guarantee anything of course and it can work against you. I am talking about investments that take as much effort to find as your stock picks. The days of walking up to a house and buying and making a quick killing are over for the average person. They are not over for experienced professional investors just as an intelligent stock pick can make a bundle if you know what you are doing. Many people gave back more than they invested in real estate because they bought just anything they could find and got a similar result as the person who buys a stock because his friend says it is a good deal.
I also like the fact I can shelter a great deal of my income due to the depreciation that I get from my rentals and that I can exchange properties and put off paying taxes on the gain as long as I do not cash out. What do stocks offer me in that regard? If I want to purchase stocks or mutual funds my banker is not going to lend me money to do so, however he is happy to lend me money on a income producing, low loan to value rental property. Why do you think that is? Perhaps it is because real estate is safer than purchasing individual stocks and that it is generally a more stable investment.
I have been able to leverage a $9000 investment into $400,000 of very conservative equity in real estate in only 6 years. That is after deducting current pullbacks. I certainly do not believe that real estate is the only way to wealth or that it is for everyone, it isn't. It takes time and dedication to a goal. It takes the willingness to stick to your plan and not allow yourself to buy just to be buying something to get started. I have been buying real estate for many years and have watched as markets change.I realize when everything is going up thousands a day it is difficult to not jump in and buy at the top of the market. The primary difference though, for me, is that I control my investments. I don't have fund managers, boards, or brokers making decisions for me. I am the captain of my ship, I don't have to grit my teeth when a CEO that lost Millions or Billions of dollars gets a severance package of hundreds of thousands or millions of dollars. If I screw up I am to blame, if corporate exec decides to misapply millions of dollars on a scheme I have no control over it and no control over how the Board of Directors treats him/her misappropriation. That control on my part has very real value to me.
The idea that one can get wealthy on stock dividends makes me think of the old commerical on TV of Eddie Albert on a huge sail boat exhorting people to "save their way to a fortune" (at 3 % interest) at xyz Bank. Unless you already have "big bucks" who can live on a 3% dividend?

Re: 38 random thoughts on building prosperity

Ret Miles — Thu, 26 Jun 2008 22:18:45 -0000

Or, Gareth, you can invest in Barclays, RBS, or some other shares of solid companies which are likewise currently selling at bargain prices and with phenomenally high-yielding dividends (seriously, take a look at their dividends right now). They'll bounce back quicker than real estate. And once they do, you'll still be getting a good dividend (speaking of "buy-and-hold"). Barring some freak incident like the one that did in Barings (which is less of a risk if you sensibly diversify -- hard to do with real estate), these two companies should be around for awhile, or bought out at a higher price than they cost now. That's now. After you graduate, there will probably be some other opportunity. My point is, don't adopt a religious faith about real estate.

Re: 38 random thoughts on building prosperity

Gareth John — Thu, 26 Jun 2008 19:22:26 -0000

I think dont get into debt is much too simplistic. If A has a loan and B doesnt yes in the long haul B is better off. If A gets a mortgage at 20 and buys his first property but B waits and saves ad eventually when he is 50 buys his house there are two scenarios. B will be better off as he has incurred no interest, the obvious one. Or A has played the proerty market as most people do firstly he has paid no rent unlike B (unless B lived with his mother till he was 50, sound advice but not practical) also A could have a much bigger house capitalising on market fluctions in his favour while B could be buying a property in boom time A could have bought it dirt cheap. Im lucky enough to hear predictions here in the UK of hearing about the declining market :D so when i finish University my dirt cheap house (mortgaged) will be a well placed debt. Debt is your friend.

Re: 38 random thoughts on building prosperity

Shawn@MoneyBrick — Wed, 30 Apr 2008 16:02:52 -0000

Thomas... cool, I will check you out there!

Re: 38 random thoughts on building prosperity

Thomas Tatzel — Wed, 30 Apr 2008 14:10:14 -0000

Steve,

I agree with you 100% that buy and hold is the best strategy, and that if you are not willing to do your homework that Index Mutual Funds (OR ETF’s) are the best option. The only bad thing about buy and hold is that it is often used as an excuse to not do what is necessary when investing, which is research your holdings constantly and sell your losers. Jim Cramer, who is often wrongly accused of just being a trader and not having any info for long term investors, did a show segment recently titled “Buy and Homework” that I totally agreed with. All buy and hold investors should watch this segment. He basically says that you must be willing to put in at least one hour a week for every stock you own, and sell if real problems develop in the business. Some red flags to look for are:

•Accounting Irregularities - This is the big one, sell first ask questions later. Think Enron.
•New Major Competition – An example of this would be Garmin (GRMN) and Nokea. GRMN was selling at around 120 when Nokia bought Navtech basically announcing that it was entering the GPS Navigation business around 6 Months ago. Today GRMN is selling for 43. I had bought GRMN a while back with the intention of holding for a long time, but sold immediately when I read this news.
•Price Wars – If a company you own gets involved in a price war with a worthy competitor in a key business segment it may be time to sell. An Example of this would be Intel and AMD. Intel stock had a phenomenal rise until AMD came along; it hasn’t done much since except trend down. Google “Intel AMD price war” if you want a history. The earliest article I could find was may 30 2002. The best way to get a visual picture of what a price war will do to a stock is to go to the interactive charting on yahoo and do a chart comparing INTC to the S&P with the MAX time frame. This will show INTC beating the S&P with a 6000% gain since 1986. Now run the chart from MAY 2002 (The first mention of a Price war with AMD) until today. The picture is quite different with Intel showing an 18% loss against a 35% gain for the S&P.
You may have other metrics that you use including discounted cash flow models, Sales or earnings growth rates, profit margins, or dividends. The point is you watch your investments and have the discipline to admit mistakes when you are wrong. How Many times have you heard “it’s not a loss unless you sell?” This is just pure B.S. because the whole time your money is in a dog stock you are losing the opportunity to be making money elsewhere. Time is money and as you alluded to in thought #14 time is not replaceable. That doesn’t mean you rush out and sell a stock just because the price went down. Dips in price are great buying opportunities if you have done your homework and are confident in the company’s long term prospects.

Shawn I do not have a blog but I am active on the Motley Fool Discussion boards and Have a MYCAPS portfolio under the name tomtat1. You can check my ended picks on GRMN if you doubt what I was saying above. A MYCAPS portfolio at motleyfool.com is a great way to judge whether you can beat the market or not without putting your hard earned money at risk. It keeps up with your score based on relative performance to the S&P 500 and rates you against all the other investors playing. This site is also great for getting investment ideas. You will have to sign up to get in but it is free. Just be prepared to get bombarded with ads for their news letters as this is how they make their money.

Re: 38 random thoughts on building prosperity

Steve (Brip Blap) — Wed, 30 Apr 2008 07:43:44 -0000

@Thomas: I can certainly see how you could interpret point #4 that way, but I probably should have been more clear: I do think buy and hold is the best strategy, and I don't think mutual fund investing is better (although for the non-serious investor who's unwilling to put time into research, I think it is). What I meant was that if you want to be an active trader, moving in and out of positions constantly, there's not much chance most investors can outthink the professional trader, who has far more institutional ability to take on risk and who can access information that we wouldn't have access to.

But all that having been said, you're right - big mutual funds are limited by their size and investor confidence. An individual investor who's willing to study and buy businesses, rather than day trade, can beat the market.

Hopefully that clarifies what I meant! I do think buy and hold is the best strategy, even if someone applies it to mutual funds and not stocks.

Re: 38 random thoughts on building prosperity

Thomas Tatzel — Mon, 28 Apr 2008 15:08:38 -0000

Steve,

I would like to discuss another one of your thoughts on building prosperity. It is # 4 Buy and Hold. While I believe in buy and hold investing, you seam to be saying that you can’t beat a mutual fund so you might as well buy one. I think an individual investor can do better than most mutual funds for three reasons.

One, mutual funds are limited in their flexibility due to size, actions of there shareholders, and stated objectives in the prospectus. You are much more nimble as an individual, and thus you can get out of an investment quickly when you realize that you have made a mistake. Also I like buying stocks when they are cheap (like now) and selling when they are expensive; but mutual funds often do just the opposite. The Fund manager might not want to buy stocks at any given time, but if the money is pouring in (as is often the case at market tops) and the fund’s prospectus states they will be 90% invested in stocks, they have no choice. The same holds true in the reverse. When stocks dip many shareholders cash in forcing a fund manager to sell stocks at the absolute worst time.
Two, you can save a lot of money in fees by investing yourself. Those thousands of employees you mentioned are not free; you pay for them in the expense ratio you pay. You also pay for the fund companies advertising to bring in more shareholders (to the detriment of existing ones in many cases).
Three, most fund managers follow the herd, and this is a sure way of getting mediocre results. If you are a fund manager, it is often too risky to go against the pack because you are judged by relative performance to your peers. It is much safer for them to just buy what everybody else is buying.

In conclusion, I believe in Buy and Hold investing. I am not a believer in mutual funds. If you want your money managed by a professional with the flexibility to do as he wants I would suggest buying shares of a company that makes money by investing in (or Buying) other companies. Some examples are:
Berkshire Hathaway (BRK-A or BRK-B) – Warren Buffet
Danaher (DHR) – The Rales Brothers
Leucadia (LUK) - Ian Cumming & Joseph Steinberg
All three are well devesified and have phenominal long term records.

Re: 38 random thoughts on building prosperity

Dave (ChiefExecutiveRockStar) — Wed, 23 Apr 2008 15:51:11 -0000

@Psherer, Thomas, BripBrap

Great points made in this post; for example. It's ESSENTIAL to not brush past Curmudgeon's comment (above), one's mindset is really the foundation for wealth and prosperity.

Tactics and techniques WILL falter if governing principles aren't followed. One example: the above mentioned concept of debt as a tool. In fact, most "Debt" used as a tool is not debt; it is liablity. Liability that is offset by assets. If Thomas owns a $100,000 house, puts 30K down and has $70K in liability, he also has a note against the property (asset) for $70K. The "Debt" is zero. Debt is when there is no value to back it up other than a persons promise to create value at some future date.

I really enjoy many of BripBrap's suggestions. Many of them, tho, apply to consumers (as consumers, we consume as much or more value than we produce) and offer 'techniques' for prospering while not altering the mindset to that of a producer (producing more value than we consume). When the mindset/perspective is altered, the habits change more easily. Overall, great post; thanks for sharing your perspective. I'll check out your other stuff, too.

-- Dave, ChiefExecutiveRockStar

Re: 38 random thoughts on building prosperity

Shawn@MoneyBrick — Tue, 22 Apr 2008 02:49:29 -0000

@Thomas... that is amazing advice! I've read all about real estate, but nowhere have I come across the concept of keeping your debt always at the 70/30 ratio. That's weird - how come I have not heard of this? It sounds excellent, however, and thanks for sharing that with us! Do you have a blog, by the way? (Where you write about amazing stuff like this?)

Re: 38 random thoughts on building prosperity

Steve (Brip Blap) — Mon, 21 Apr 2008 23:15:01 -0000

Fair enough. As I've said in other posts, I'm no expert on real estate investing and you've convinced me that a blanket statement condemning debt isn't fair. I'd still say most people will do better without it, but you're right - if you can use leverage properly it can definitely multiply many times.

Very thoughtful comment, Thomas, and a very good analysis. Thanks! And Pscherer, I cede the point!

Re: 38 random thoughts on building prosperity

Pscherer — Mon, 21 Apr 2008 16:56:39 -0000

Having just finished my taxes I can also add to Thomas's list, the of benefits of depreciation. The buildings depreciation can completely shelter the income that your leveraged building throws off. Tax free until sold and even then if exchanged delay gain until cashed out. Some thoughtful debt is essential to becoming wealthy. Not consumer debt, but planned and carefully invested debt.

Re: 38 random thoughts on building prosperity

Thomas Tatzel — Mon, 21 Apr 2008 16:47:34 -0000

Steve in your response to Pscherer you said

@Pscherer: I haven’t done an extensive study of it, but I think my argument would be that it’s hard to get wealthy WITH debt.

I would argue that it is hard to become wealthy without Debt. It takes money to make money and if you don’t have it, you need to borrow it or bring in partners. Debt has gotten a bad name because so many people misuse it. If you are going into debt to live beyond your means (and this includes buying a house you cannot afford) then obviously it is a bad thing. But when looking for capital for a business Debt is usually cheaper than equity. The reason being that an equity investor (such as a venture capitalist) requires a premium for the extra risk that he or she is assuming. Also interest payments on debt can be deducted from a businesses bottom line reducing its tax burden. Therefore; the proper mix of Debt to equity in a business can actually lower its cost of capital and make it more likely to succeed.

Nowhere is this more evident than in real-estate. Lets say that you have 100K to invest in real-estate and you define success as a 15% Return on invested capital (not unreasonable as you are going to be putting in many hours, you should demand more than the historical10% a stock index fund would bring). Say you put the 100K into a building that throws off a 6% yield after expenses and appreciates by 5% per year. This will never be a successful investment (15% Return) without the proper amount of leverage (Debt). Say with that same 100K you buy a building with 70% Debt and 30% equity (the Debt being @ 8.5% interest rate). You now have an asset valued at 333K the building will have no yield as the cash flow from rents will go to paying the interest on the loan. However; the same 5% appreciation in the building will give you a 16.65% return on invested capital (333K x .05 / 100K). Add to this the fact that in the all equity example you will be paying taxes on your 6% yield, while in the 70% debt scenario you will never pay a penny in taxes on the money you take out and you get the true value of using debt in real-estate investing. The key to taking money out of this investment without paying taxes is that every time you refinance the building bring your debt/equity level back to 70/30 and pocket the extra money. You pay no taxes because technically you have not made any money you have simply taken out a larger loan on a building that has gone up in value. But in reality you will be amazed at the amount of money you will receive by doing this. If you ever sell the building you will owe capital gains tax on the difference from your cost basis, but this rate is usually lower than your income tax rate and you will owe it in the all equity example if you sell that building too.

Re: 38 random thoughts on building prosperity

Shawn@MoneyBrick — Sat, 19 Apr 2008 12:31:07 -0000

Nice post and lovely comments!

5. I especially like the comment about having an iPhone 40 years from now. Well, maybe in two years, when you're looking to upgrade to iPhone 2.0, you can lock it away in a metal box and one day it'll become a priceless antique?

14. I totally, totally agree.

19. Wait... don't you know that those who look good actually earn more over their lifetime? No joke... I read it in TIME or maybe Newsweek? Anyway, thinking that you're going to become a pop-star or a model is a sure waste of time, because those things are tournaments where only one person out of hundreds wins. BUT, I think that investing your time into certain skills (languages, etc.) and into self-grooming are definitely worth it.

23. Oh! I love this one. I just hate it when I get totally defined into a certain occupation just because I have the prerequisites.

28. The Chinese have a saying, "Family is family and business is business." So, the Chinese are totally willing to borrow and lend family and friends money, but it's in the culture that the things are separate. If I lend my brother money, he'll definitely be paying me interest, and it wouldn't be rude of me to ask for it back if he is taking too long to repay. I think that lending to family and friends could work, given the proper laying-out of rules beforehand.

Keep up the interesting posts!

Re: 38 random thoughts on building prosperity

Pscherer — Thu, 27 Mar 2008 12:59:02 -0000

Not so regarding Trump, when his famous "issues" came up in the 90's
He was on the hook personally for over 900 million of debt. His Company also had much more true, but he had been forced to personally guarantee some of that debt exceeding 900 million.
Now in regard to my original comment, do you personally own a home? That is debt--good debt. You do not have to be wealthy to own a home, certainly in the US most people can own a home if they have a job and little to no "bad" debt i.e. credit card, consumer debt. Consumer debt as your rule points out will kill you. Going to bars, smoking, gambling will also kill your wealth just as surely. As you point out, what is the true cost of that new shirt or dress when you factor in debt costs and loss of future income? I don't argue with you about consumer issues at all. My contention is that (good)debt that pays you a monthly income is not bad debt. Those that use debt wisely can become very rich and you don't have to be wealthy; just use good debt intelligently.
Oh and the name is pronounced Pscherer the P is silent.

Re: 38 random thoughts on building prosperity

Steve (Brip Blap) — Thu, 27 Mar 2008 06:08:06 -0000

@Pscherer: I haven't done an extensive study of it, but I think my argument would be that it's hard to get wealthy WITH debt. Once you're wealthy, leverage becomes a vastly different type of tool than what most of us are exposed to now (credit cards, mortgage, etc.). I am certainly willing to say that the type of debt Trump has is different than what I have (it does not put HIM on the hook, just Trump Enterprises) and his famous debt-leveraging happened long after he built his wealth - which was, of course, inherited in part. But yeah, I believe that people who are building prosperity steer clear of debt - at least personal debt.

Re: 38 random thoughts on building prosperity

Pscherer — Wed, 26 Mar 2008 21:51:29 -0000

NO NO NO, no debt? Do you really believe that wealthy people have no debt? Name one wealthy person with no debt. Trump is billions in debt, most wealthy people have huge debt. The key is having debt that brings you income, not credit card debt that destroys your wealth. You cannot create great wealth without debt. Qualify your rule.

Re: 38 random thoughts on building prosperity

Joe Smith — Fri, 21 Mar 2008 23:17:06 -0000

"Invest early and often. $100 invested at 8% for 50 years will be worth $4,690. $100 at 8% invested for 40 years will be worth $2,346. 10 extra years means twice as much money. Start investing today."

Great list, but you need to redo the math on the above situation...

Re: 38 random thoughts on building prosperity

atrix — Fri, 21 Mar 2008 22:18:54 -0000

I love the idea and tips share in the article here ..

Re: 38 random thoughts on building prosperity

JR — Sat, 15 Mar 2008 18:38:50 -0000

Interesting and thought-provoking article with some good advice. To be fair, here's some alternate perspective on some points. 1. Not sure what your point is here. 2. SECOND 10%. The first 10% (BEFORE tax) should be RETURNED to God. That's IN ADDITION TO any charitable giving, political donations, etc. By the way, 90%? Right. Hold onto that dream. Let's be honest about the challenge. By the time you return your tithe to God, give to charity (something that even poor people should do -- the Talmud states that even beggars are required to give alms), pay taxes, and save money, there's not going to be anywhere close to 90%. That doesn't excuse us from the tithe, charity, etc., but we need to be honest that we will have to do with much less than 90%. This is harder advice to follow than it sounds, but worth striving for. 10. Fantastic advice. 11. Thanks for cheering up those of us who can't find a bad match, much less a good match. :) 12. Good advice if all you care about is money (short-term money at that -- a home- or private-school education can be a great long-term investment). But if you do use a public school, at least use some common sense and proactively monitor carefully what your children are taught. Remember, it is impossible to teach without teaching religion, philosophy, ethics, and a theory of origins. What beliefs are being taught at your school? 14. But don't underestimate the importance (and power) of downtime. It's OK and good and healthy to waste some time occasionally. Even necessary. Besides, if I hadn't been wasting time surfing the net, I wouldn't have read your blog. 15. Yes you can. (Thanks for adding to inflation and the health care "crisis".) Reality check: Use "the genius of 'and'". Make your health a priority, AND be financially responsible about it. 16. Right-on. 17. Doesn't work for everyone, but for many people this is great advice. 18. And half is just showing up. And half is vision. And half is hard work. And another half is also vision. (Proverbs 29:18 states, “Where there is no vision, the people perish.” Good advice for individuals also.) And half is self-denial. Did I mention vision? 26. People should be required to write this down 10 times a day every school day when they are growing up. 30. If you think investment option A without fees will grow approximately 50% over a set number of years, and investment option B with fees will grow approximately 80% after fees, go with B. Of course, good luck predicting future earnings. However, there are some wise options which do not depend on one hot-shot manager, and which charge a reasonable fee. These will be a good choice for some folks. Don't develop an unhealthy fetish about avoiding fees. All else being equal, you should avoid fees. But when is all else equal? Besides, if no one would let anyone else make any money off of them, we would all be living in caves. Just be smart about it. 31. And untaxed. 35. GREAT advice. 37. Only if we get stupid and let it get expensive. Warmer climates are not new and generally are beneficial and less expensive. We have a bunch of power-hungry politicians, and unscrupulous money-grubbing business "leaders" and "academics" who are "playing to the cheap sears" and using Chicken Little arguments to scare us into overreacting to something beneficial which we cannot control.

Re: 38 random thoughts on building prosperity

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Re: 38 random thoughts on building prosperity

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Re: 38 random thoughts on building prosperity

Thomas Tatzel — Mon, 10 Mar 2008 11:06:35 -0000

Great list!!!!

I Agree with almost all of it. I would Amend Comment 6 about debt though. The rule I use is never use debt to buy a depreciating asset. Only use debt to buy assets that you strongly believe will create wealth after taking into account all the costs associated with that asset. Several uses for debt that meet this rule are a college education, starting a business, or buying a house. In fact I would argue that if you do not come from a wealthy family, responsible use of debt can help you become financially independent.