Author Archive
Doctors and Real Estate Investments
What would making $1.5mm a year look like? How about living pay check to pay check, and one bad real estate deal away from bankruptcy.
This is exactly what happened to one physician before he became my client. He is a partner of a very large practice and brings home more than $1.5mm a year, and yet he has only $100,000 in his bank account. If he stops working today, the money will run out in three months.
How did he get into such a quandary? In short, real estate.
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Financial Plan for FB Employees
My friend Sally has a friend who is a software engineer at Facebook. The recent Facebook IPO made him a millionaire, many times over. According to Sally, he is overwhelmed by this sudden wealth and wondering how to deal with this mountain of money.
I have a suggestion: put the money in nine buckets.
Let me explain. All you newly rich Facebook employees need is a framework to deal with your money. It is a 3 by 3 box. Horizontally, it is divided into Need, Want, and Aspiration. Vertically, it is divided into Short, Med, and Long.
Need, Want, and Aspiration
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1. Facebook is a great service to help you keep in touch with friends and family. But a great service does not equal great investment.
2. When was the last time you clicked on a Facebook ad? I can’t recall when I ever did. The click-through rate for Facebook ads is 10% that for Google ads, for good reason. Google ads are delivered at the moment you have actionable intent, while Facebook ads are delivered when you don’t want any distraction.
3. As more and more people use mobile devices to access Facebook, this will present a big challenge since it is nearly impossible to display distracting ads on tiny mobile screens.
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Facebook Scam Hits Close to Home
Posted on: May 14, 2012
Facebook Scam
Two months ago, I got a call from client of mine, who asked my opinion about an opportunity to invest in pre-IPO Facebook shares. He explained that he and his business partner were offered the opportunity to invest in a private fund that will hold Facebook shares.
I know nothing about these funds, but I told my client to stay away. As a general principle, I always steer my clients away from private funds unless they run the funds themselves. The reason is very simple: these are unregulated vehicles where there is no government oversight and there is no transparency whatever. You don’t know what monkey business they do with your money. Most business people intuitively grasp that if the private deal is about starting a restaurant; but once the deal is about buying Facebook shares, many of them throw caution to the wind.
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They don’t necessarily overlap
I met Joseph in a startup networking event. He was trying to attract investors for his latest venture. He has an impressive resume: he founded a tech company that was later sold for tens of millions of dollars in the 1980s.
I was immediately struck by the “never say old” motto of this 75-year-old entrepreneur. But one thing did come across as odd: he was trying to raise a mere $500k for his new venture. Why didn’t he just fund the venture out of his own pocket?
A few months later, I invited him to a charity fundraising dinner where the ticket is $100 per person. He finally admitted to me: “Michael, I don’t have an extra $100 to spare.”
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10. An investment rule for young people
9. Irrevocable life insurance trust
8. Is P/E ratio a useful stock valuation measure?
7. Bill Gates: 11 Things You Don’t Learn in School
6. Recession and stock market performance
5. Variable annuity fees you don’t know you are paying
4. Why asset class diversification is superior?
3. Bonus depreciation: Congress wants businesses to invest in 2011
1. Profit from Harry Dent’s prediction? think again!
Also see Top 10 last month.
Get informed about wealth building, sign up for The Investment Scientist newsletter
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Two months ago, we bought another investment property.
Read Condo Agreement!
The condo with two bedrooms and two baths was being sold through a short sale. The asking price was only $80,000. We did our research; the condo could rent for $1,300 per month in the market. So it’s a no-brainer.
At the time, there were four other bidders. We decide to be aggressive and employ an escalation clause. We would bid $80,000, but if someone bid higher than us, we would increase the bid by $500 increments, up to limit of $95,000.
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Don’t Be a “Muppet”
Posted on: April 4, 2012
A Muppet
If you had a busy March, you are forgiven for not paying attention to Greg Smith’s open letter explaining why he is leaving Goldman Sachs. In his “resignation” letter, the Goldman Sachs executive sheds a bright light on the culture of this premiere Wall Street investment bank. Let me quote at length:
What are three quick ways to become a leader?
a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
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10. Irrevocable life insurance trust
9. America’s top financial advisors: how they are made?
8. An investment rule for young people
7. Recession and stock market performance
6. Bill Gates: 11 Things You Don’t Learn in School
5. Variable annuity fees you don’t know you are paying
4. Why asset class diversification is superior?
2. Bonus depreciation: Congress wants businesses to invest in 2011
1. Profit from Harry Dent’s prediction? think again!
Also see Top 10 last month.
Get informed about wealth building, sign up for The Investment Scientist newsletter
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Maintaining Financial Wellness
Posted on: March 28, 2012
[By Tom Warburton] We view the primary component of ‘Maintaining Financial Wellness’ to be ‘Maintaining Access To Currency’. Think about this a bit. Wealth is really irrelevant if you don’t have currency!
Think about all of the companies that were Asset Rich, Cash Poor and ended up on the shores of Bankruptcy. Lack of currency sunk the ship.
Imagine that you owned $100,000,000 worth of land in the Brazilian Rain Forest – BUT – there were no buyers! Lack of currency is a huge impediment when it comes to paying the bills.
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Achieving Financial Wellness
Posted on: March 25, 2012
[By Tom Warburton] So…how do we achieve ‘Financial Wellness’?
This exercise sends us on an initial quest to ‘Figure out How Much Money We Need’ and how to ‘Accumulate That Amount’.
Maybe you’ve seen the advertisement on TV where the guy is ‘trying to figure out his number’. The neighbor has a number under his arm and the comic figure of the commercial thinks his number is ‘A Gazillion’!
Well – we think we’ve figured out what ‘The Number’ is for most folks. As a general guideline:
- Multiply Your Net Monthly Need By 300.
If you are 65, the above will be close. (Of course, individual age, health, facts and circumstances vary, so, we would need to meet with you to confirm the accuracy for you – which we are happy to do.)
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What is Financial Wellness?
Posted on: March 22, 2012
[By Tom Warburton] Our view for a working definition for Financial Wellness has been forged as a result of discussions with hundreds of folks. We start our discussions with this question:
- What Is Important To You About Money?
This leads to a variety of responses, and, frankly, there appears to be a strong correlation between age (or maturity or wisdom or whatever) and the answers our question solicits.
- Youngsters Often Say Things Like:
- I Like Money So I Can Buy Stuff
- Older Folks Often Say Things Like:
- I Don’t Want To Outlive My Money
- I Want To Take Care Of My Family
- I Like To Give It Away
- Money Gives Me Freedom
- Money Lets Me Live The Way I Want To Live
- Money Represents Security…However Illusory
So – when it comes to defining Financial Wellness, permit us to synthesize the responses of folks as the following:
- Financial Wellness Exists When A Family Or Person Can ‘Live Worry Free The Way They Want To Live For As Long As They Live‘
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[Guest Post by Christopher Guest] I have seen a number of articles declaring approximately 70% of all Americans do not have a will. If they died, that would mean the distribution of their estate would be controlled by intestate provisions. In my February 2010 Newsletter, I discussed the basics of intestacy. For those in second marriages, the importance of drafting an estate plan and not succumbing to the intestate provisions is very important, as demonstrated below.
As I mentioned in 2010, there is an order of priority in which beneficiaries inherit assets under intestate statues. Order of priority is governed by the familial relationship of the beneficiary to the decedent. In other words, family members related closer to the decedent generally get a share and cut-off those family members not as closely related. But, every state’s laws are different when determining this order or degree of familial closeness.
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I am not a big fan of IPO shares. Research has shown that IPO shares usually underperform seasoned shares by about 2% a year. Business owners tend to time their IPOs at the optimal time for them, not for the future shareholders.
With Facebook (FB), there are so many people chasing so few shares that the IPO will create a “Winner’s Curse” effect – whoever wins the shares will end up overpaying for them.
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Juggling Investment Odds
Posted on: March 6, 2012
Investors crave certainty, but the future is never certain. Prudent investment requires juggling odds. Here are the types of odds that go into my decision making process.
January Barometer Effect
When the market records a positive return in January, the odds that it would record a positive return for the rest of the year are 90%. If not, the odds drop to 50%. This January, the market had a positive return.
Seasonal Effect
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10. Portfolio rebalancing returns
9. How to tell if you financial advisor is a crook? Very easy
8. America’s top financial advisors: how they are made?
7. Variable annuity fees you don’t know you are paying
6. Recession and stock market performance
5. Why asset class diversification is superior?
4. Bill Gates: 11 Things You Don’t Learn in School
2. Bonus depreciation: Congress wants businesses to invest in 2011
1. Profit from Harry Dent’s prediction? think again!
Also see Top 10 last month.
Get informed about wealth building, sign up for The Investment Scientist newsletter
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