Slow Wealth


With the stock market down you’d think it would be the perfect time to invest in the stock market but many companies are cutting their 401k match, changing plan options to save money and in some instances, eliminating the hassle altogether.    Many people are also taking pay cuts so in order to make up the difference in take home pay, many will cut back or eliminate the 401k plan contributions.  Isn’t a buy and hold strategy predicated on continuously buying into the market?  How’s that happening now?  Let me guess, companies will re-instate matches when the Dow soars past 14,000 right?

My thesis has been that as soon as the market pops to say 11,000 there’ll be a huge sell off as baby boomers opt to eject from the market to preserve whatever is left of their wealth before they retire and I’ll standby that thesis until I see anything different.

Given the tumultuous returns of the stock market the past 15 years and the mediocre performance of the 401k, I’m going to go ahead and call the 401k terminally ill and near death.   If you want to look at one alternative, take a look at www.ETFCoveredCalls.com because it’s almost time to get back in the market.

I had lunch with an old friend I hadn’t seen in a while and we started talking about investments and the market. It seems my buddy has had enough of the stock market and essentially cashed out and bought some rental properties with his stock market money. I asked him why he did what he did and he explained that in his lifetime he’s seen the crash of 87, the dot com crash of 2001 and the recent crash of 2007.

Three major crashes in a period of 20 years and it doesn’t look like things will get better anytime soon. “What if we have a lost decade? What if it’s two lost decades?” he asked my thoughts on the matter.

I wholly agree with him, I have yet to have anyone adequately explain how the American economy is going to cope with 80 million boomers who will be retiring over the next decade. Even if all boomers work well into their 90’s, the skill set needed for the 21st century isn’t going to be with this group and retraining will prove extremely difficult.

I actually plan on doing something similar and purchasing some type of rental properties in the near future and my investment philosophy is to buy quasi-long and immediately profit from short selling. I don’t know any other way to make money off of the stock market except to reap immediate my own home grown dividends via ETF Covered Calls.

He doesn’t plan on returning to the stock market after being burned three times in twenty years. His philosophy is that a rental property can be insured against damage, it can produce income, and it won’t disappear into the ether like the trillions that have vanished recently in the market.

I’ve spoken to others who are smitten too and don’t plan on it but they haven’t taken their money and plunged into real estate yet.

The 401k deed is done.  After some number crunching I’ve decided to lower my 401k contributions from max of $16,500 for 2009 to 6% with a 6% match for the 2009 year which will be ~20k for 2009.   I also decided to push all new contributions and matching funds into money market and a bond fund, hoping that the money will be preserved.

I am primarily focused on the preservation of these funds for future investment at some point in late 2010 or perhaps 2011 so I’m ok with the fairly mundane choices.   I have also decided to stop all deferred comp contributions into a 409a plan because these funds are technically “assets” of the company until they are paid out to me at some point in the future.   It doesn’t take a rocket scientist to figure out that if a worst case scenario emerges, this money can disappear forever rather easily.

The changes will result in a higher paycheck most likely over $1k per month in extra income but I’m not sure because the tax structure hasn’t been officially released for 2009.   I’ll take the extra cash and hold on to it and perhaps build a secondary emergency fund.  It’s time to batten down the hatches and stock up on cash.

There are many approaches to saving, investing and cash flow operations on a personal level that I’ve read over the years.  Most center on tight budgets, frugality and self-deprecation but I prefer to focus on capital investment and hedging.

In hedging, I often calculate and create investments to offset anticipated expenses to realize a net gain or  at the very least, break even on cash flow.   To illustrate an example, I’ll use the popular iPhone scenario.   Because of my boycott for the rest of the year, I haven’t actually purchased an iPhone but I have looked into the cost and started thinking about my hedge.

The iPhone cost, as best I can determine will be:

  • iPhone (8gb) – $199
  • iPhone Plan –  $70/month
  • Total Cost over two years – $1,879  (armortized cost of iPhone = $78.29/month for 24 months)

So if it’s going to cost about $1900 to own an iPhone and pay for the monthly service then I need to find a way to come up with the money for that.  While some will offer up suggestions like “make your own soap at home” to save $5/month and a hundred other tortuous tasks to save a few bucks, I prefer to think of where I can come up with the money to pay for the iPhone and service plan.

Most of this money will go to AT&T and I know that AT&T pays a regular dividend so it makes sense to research how I can get money out of AT&T while I’m giving them money.  In 2007, AT&T consistently paid $0.355 cents per share dividend and in 2008 AT&T paid a dividend of $0.40 per share.

We don’t want to assume that AT&T will pay at the high end of the dividend given the current economic turmoil so let’s use $0.30 per share dividend  as a conservative measure.  So how many shares do we need to own to make up the anticipated $78.29/month in negative cash flow?

If the divided is $0.30/share and we need $78.29 then $78.29 / $0.30 = 260.972 shares.

AT&T is currently trading at approximately $24 per share so $24 x 260.972 = $6,263.33.

So in my scenario, I would likely buy 300 shares of AT&T ($7,200) to pay for the cash outflows of an iPhone plan.   If that’s too steep a price, there are other methods using covered calls to lower the initial cash outflow.  Since we’re talking about a two year plan, it would be possible to sell January 2011 $25 calls to reduce the capital outflow by $5/share but the risk exists that your shares can be assigned and you’d lose the dividend cash flow.

What is the net result here?  The net result is a “free” iphone & monthly plan by careful capital investment.

I could spruce up the deal by getting $10,000 in credit card arbitrage at zero percent for 12 months, investing it in 400 shares of AT&T @ $24/share, earning the dividend, paying for the iPhone plan and then paying back the minimum on the credit card until the bill comes due and paying it off or rolling the debt onto another credit card so I finance the whole thing free and get a little kickback.

I know, someone will post a comment like, “just don’t buy an iPhone and you could save $2000…invest that at 6% for a thousand years and you could be a billionaire” while technically true would deprive me of the coolness of an iPhone today and would deprive AT&T, Apple and others of jobs, revenue and ROI.

This works well for virtually anything, buying a GE fridge, look into GE stock; buying Proctor & Gamble goods weekly, look into P&G stock; buying electricity montly, look into XLU.    Of course, if buying individual stocks, do your research and stick to the long term players or better yet buy the equivalent ETFs so you can diversify yet still capture cash flow.

It’s just one of the many ways to get rich slick.

It occurred to me that one of the key corner stones of my wealth could be attributed to one thing: leverage. I know what you’re thinking, “oh great, leveraging is very risky, I don’t have that tolerance” but that’s where you would be wrong.

I have actually leveraged many things to achieve the wealth I have today. The first leverage took place when I borrowed money to get myself an education. It wasn’t just a college education, although that helped, but it was a cumulation of all the other education and training along the way. The returns here have been astronomical when you consider the median salary out there is 40k compared to the income I currently generate.

The second thing I leverage is money. In the past, I didn’t really consider borrowing as a method to growing wealth but it turns out the more money I seem to borrow at low (or zero) interest rates and leverage into higher returns in the stock market or in bank CDs, the faster my wealth accelerates. There is risk here but it is calculated and managed risk which is factored into the leverage.

The last and most commonly used leverage is time -most people build their wealth by leveraging time. You know those “spend less than you earn” types that tell you to invest in mutual funds over the long haul and you’ll get somewhat rich. Well, it’s true to an extent, the caveat is making sure inflation doesn’t eat away at your wealth as you leverage time.

So what are the three key things to leverage to get rich? Knowledge, Money & Time. If you’ve ever read the profiles of most of the billionaires (Carlos Slim, Warren Buffet, Bill Gates) and understand how they accumulated their wealth, you’ll realize that they all leveraged knowledge, money and/or time to get where they’re at today.

I just read a mind blowing article and I’m writing this post about it which won’t show up till Friday. I’ll have time to digest the material over the next two days to make sure I want to continue with this post but here the link to the original article.

The premise of the article is simple. If you love index funds and are an investor for the long term for say 20 to 30 years then why not simply double down on a leverage ETF that tracks an index like the Dow, S&P 500 or Russell 2000?

If, as an investor, you firmly believe that markets will grow, on average, 10% year over year then why not double down with a leveraged ETF?

Over the past year, we’ve seen the Dow dip from 14k down to 12k and back up to 14k, if dollar cost averaging is great when investing with index funds then 2x leverage should be better no?

I’ve almost convinced myself that over the long term, my portfolio needs to include at least 10% in a 2x leveraged index ETF. Yes, I know that if the market drops it’ll be 2x drop but when it recovers it’ll be 2x climb back up right? Over 30 years, the ups/downs will average out but instead of 10%, I’ll be making 20% right?

Can anyone point out a flaw?

I received a message about all the high priced items I’ve been purchasing recently and its given me pause to reflect on where I’ve been and where I’m at now. A little less than twenty years ago, I was a struggling student trying to get by in life at $4.20/hour. I ended up working my way up to $7/hour thinking this was sooo much more money than $4.20/hr; I felt so rich at $7.00/hr.

Flash forward to today and over the past 10 months I’ve spent $4000 on a bed, $700 on Wii and accessories, $2000 on Mac, $4000 on HVAC for my home, a $40k car, and a bunch of other things that I haven’t even blogged about such as vacations, home remodeling expenses, etc.

My investment strategy and salary have allowed me to do one thing that makes all the difference: not worry about paying for all these things. Pretty much everything I have bought has been paid for with cash reserves or with 0% arbitrage money which I can easily pay off if the banks ever decide to jerk me around with the APR.

Over the years, my spending habits and patterns have changed significantly.

As a struggling college student, I used to shop at Wal-Mart, today I shop at Costco.

I used to scheme to get the lowest cost item by using rebates, coupons, discounts, wait for sales, etc., now I buy what I want when I want it.

I used to buy beer to drown my sorrow and depression at not having any money, now I buy expensive wine to celebrate my successes.

I used to take “vacations” back home and flea bag motels, now I take vacations around the world at some of the best hotels and resorts.

I used to buy and drive 10 year old cars, now I buy cars new but I do keep them for 10 years 😉

I used to rent a small one bedroom apartment in the hood, now I own a two story five bedroom house with an insignificant mortgage and on my way to a half million to million dollar home.

I used to eat $0.39 tacos at taco bell, now I eat $50 Fogo de Chao buffets.

I used to buy Windows PCs and Laptops, now I buy Apple products.

I used to worry about a $10 check bouncing and having to pay a $25 NSF fee, now I worry about keeping less than 100k at a bank for fear of losing it if a bank goes under.

I used to worry about borrowing money, now I borrow $50k on a whim on a credit card to speculate in the stock market.

This post isn’t intended as a boast but to illustrate that anyone with hard work and determination can transform his/her life into something better. I went to college on Federal & State aid along with a scholarship and some student loans and have NEVER stopped learning or trying to improve myself. While many will tell you to “spend less than you earn” as a way to financial wealth and freedom, I prefer to “earn more than you spend” so that spending money is never an issue.

Every investment activity starts with an idea.   I’m going to walk you through how I pick up investment ideas on any given day.  I’ll run through this in a hypothetical scenario but it will apply just the same.

Hypothetical:  You work for company XYZ which has 700 employees.   You have money vested in your company 401k plan and profit sharing plan.  You have some extra money and you’re looking for some investment ideas.  Your CEO just announced that due to phenomenal growth they’ll be adding 200 more employees over the next year so you will all be moving to a new building in 4 weeks.

Four weeks later…..

Because your company completely moved from old location to new location they pretty much left everything behind and purchased all new “stuff” for your new office.

Day 1 – You arrive at your new building and the first thing you notice is how beautifully magnificent the new building property glimmers in the sunshine.  You notice the parking lot is nearly full and the building features a cool food court.

Ding! Investment Idea 1 – You notice a sign that reads, “This property is owned and managed by Glimmer Properties. Ticker Symbol: GP”

You walk up to your new office area and the first thing that hits you is that new office furniture smell.  Leather and Oak aromas fill your palette as you glide through the hallways.

Ding! Investment Idea 2 – Many of the tags are still attached to the furniture so you take a look and notice that everything is manufactured by Leather & Oak Furniture.  Ticker Symbol: LO.

As you sit at your new desk you notice your brand spanking new phone.  The phone has a curious logo that reads, “22nd Century Phones” and has a tag line “VOIP Capable.”  You are not entirely sure what all that means but you do notice that everyone has this phone and your company just bought 1000 of them.

You call up your friend to tell her about your new digs and your cool new phone and she mentions that they just got the same new phone system too!

Ding! Investment Idea 3 – You look up 22nd Century Phones and find ticker symbol: TCP

You’re ready for your morning coffee so you head on over to the break room.  You are taken aback by the four huge vending machines.  The first vending machine sells a new energy drink call “Mega Energy” and you notice that the machine is already flashing “Sold Out.”   The second vending machine is selling iPods, Pre-Paid Cell phone cards and some cell phones.  The third vending machine sells snacks and the fourth sells regular soft drinks.

Ding! Ding! Ding! Investment Ideas 4, 5, 6 – Research Vending Machine manufacturer, research energy drink, research cell phone Company.

You head back to your desk and notice a tiny metallic box on your desk.  You’re not sure what it is but there is a button that reads POWER.  You push the POWER button and notice your LCD screen flashes on.  You realize that the tiny box is your new computer.  You flip over the tiny box and it reads, “PicoNano PC – the most energy efficient PC in the world” and below that it reads, “Manufactured by PicoNano.”  You look around and notice that everyone has one of these new computers.

After your machine starts up you notice that the computer screen is a little different.  This computer isn’t running your typical “Windows” software but something called “SecureOS” that looks nearly identical to Windows but it’s a little different.  You get the feeling that it’s more secure.  The software is made by a company called “Spinach Inc” and its ticker symbol is SPIN.

Ding! Ding! Two more investment ideas right here.  PicoNano and Spinach Inc.

You realize that your company has just spent some serious cash on relocating to a new building, buying new furniture and office equipment.  You know they could afford it because your bonus last year was 20k and you look forward to the company’s continued growth.  You also realize that the company employs some of the best people in the country and they’ve clearly researched and analyzed the benefits of each of the products you are now using at your desk and the company expects a great return on their investments.

By simply observing your every day environment and activities you’ve managed to pick up 8 investment ideas on your FIRST day at work at your new building.

At this point, you’ll have a couple of choices for lunch.  Go out to lunch and giggle about nonsense with your co-workers or order in, sit at your computer and start researching these companies as possible investments for your extra cash.

Tomorrow we’ll see how Day 2 will progress.  Preview: You’ll be having your first conference room meeting, you’ll be making some copies, and you will go down to that food court for lunch.

I wasn’t completely satisfied with my earlier post today.  Something kept bothering me about the whole “spend less than you earn” mantra and I couldn’t put my finger on it until now.  As long as inflation exists the cost of everything will always go up, you will ALWAYS need to spend more no matter what unless you’re willing to let your standard of living deteriorate considerably.  Education will cost more, housing will cost more, food will cost more, and everything else will cost more tomorrow than it does today.  Your goal in life should be to MAKE MORE THAN YOU SPEND and not spend less than you earn.  This is my new mantra:  MAKE MORE THAN YOU SPEND!

I’m always amused by advertisements claiming 50% off or 75% off of a product with a strong proclamation that you will SAVE money!  You can easily save 110% by not shopping at all; you get to keep 100% savings of not shopping and you save another 10% in gas, vehicle maintenance, tolls, parking and other “shopping” related expenses.  Part of my strategy, like everyone else with a finance blog has already pointed out, is to spend less than you earn.

I must admit, however, that the higher your income the easier it gets to spend less than you earn and this seems to escape many people.   I won’t hit you over the head with the “spend less than you earn” mantra because I think overall, while a good strategy, it is wholly unrealistic for most people.   All too often, co-workers, friends and family I speak with aren’t living lavish lifestyles flushing money down the toilet; they struggle in large part because their income levels aren’t keeping up with the cost of living: medical expenses, insurance, taxes, and inflation; all these things take their bite and it is unrealistic that you’ll frugal yourself into lower medical expenses, lower insurance, lower taxes and lower inflation.
I will say that in addition to “spend less than you earn” you need to INCREASE your INCOME!  Preferably, having multiple streams of income to offset expenses should be your goal.

How do you increase your income levels?

Invest in your education!  Whether you go back to college for an undergraduate degree, a second undergraduate degree, a graduate degree or other professional development such as industry certifications, the world is full of limitless possibilities.

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