Make your money work hard so you don't have to!
Follow a 31 yr old Real Estate Investor seeking freedom from the shackles of the 9-5 job as he meanders through real estate investing, stock & commodity trading and looking for businesses.
The Orlando Sentinel has sad story about condo flippers in Miami. They put down $100,000 on a pre-construction condo and now either they lose their deposit or they close on a $585,000 1 bedroom condo thats worth less than $500,000.
The sad part is that people fall for these get-rich quick schemes in every cycle. It happened in Miami during the last boom. It happened in the stock market in 2000. Its been happening regularly for over 400 years in every country. If these flippers had only read Extraordinary Popular Delusions and the Madness of Crowds, they would've realised that they're not geniuses, only the last fools to be left holding the bag.
Unfortunately, I was once such a fool. Taken in by the stock market in 1999 and fooled in 2000. Luckily I learnt my lesson early in life when I had little to risk and many years to implement my new found wisdom. I feel sorry for those that learnt this lesson late in life like the retirees of Enron. Life isn't fair.
But that doesn't mean you do not do your homework. Your job as an investor is to know your investment inside and out. But also you need to understand the psychology of investing. Human psychology is the common uniting thread across all investment sectors. If it weren't for human intervention, stock prices would move only 4 times a year - after quarterly earnings are released.
Read all you can about the economy, the stock market and the world in general. Eventually you will become a better investor.
It all started with having an open mind and buying a route from someone who had lost interest for well below what it was worth.
You'll see this theme repeated in many successful investment stories.
Every so often you'll see ads in the local paper about the company that sells large office-type vending machines holding a presentation. Apparently, the charge $1000 each and it takes a long time to recoup your investment. Most of the buyers give up and sell them for $100-$200 each and the second owner usually has better luck.
GeniusTypes kept his initial investment low by understanding how to value the business to begin with. He thus guaranteed his success by keeping a large margin of safety.
He immediately saw where he could cut costs to increase his net income. He also followed up on some leads and expanded his route and thus the value of his business.
Also note how he takes the positive aspects from Robert Kiyosaki's books and doesn't dwell on whether the book is based on fact or fiction.
Even though the past few sessions in the stock market have been rather choppy, the yield on the 10 year treasury has steadily dropped over the past several weeks.
Ever since the subprime mortgage issue led to a global liquidity crunch and subsequent stock market correction, the yield has been steadily dropping. This means that large institutions have been selling equities and moving money into safe US treasuries. It doesn't matter if they get only 4.5% (as of today's closing price), but at least they know they'll get the principle back.
There seems to be a repricing of risk in the market. Any stock that is deemed to be risky has dropped in the past 6 weeks.
On the other hand, safe stocks like Warren Buffett's Bershire Hathaway (BRK) has been rewarded and its stock price is up nearly 10%.
Lets see how long this flight to safety continues. If you have the courage to be greedy when other are fearful, you can make a lot of money.
Here's a really, really good video on how the carry trade works and what implications it has on global asset prices and the global financial stability.
I think the carry trade will have to reverse at some point in the near future. Trees do not grow to the skies and financial excesses do not last forever. When the average man on the street with no financial education starts talking or investing in a particular sector, it usually marks the end of that run. (In 2000 I overheard my hair-dresser talking about internet stocks - I should've sold then. In early 2005, I overheard some guys at the movie theater talking about getting into the local real estate market - I sold then and I'm glad I did!)
With Japanese housewives partaking in the carry-trade now, I think its safe to say that we're pretty close to the end of the cycle of cheap, easy money. I sold some USD and bought Yen and I've also invested some money in Japanese investments (a REIT and a stock ETF).
According to a recent article by Barron's Magazine title The Cramer Effect (& Defect), readers who follow Jim Cramer's stock picks from his show are more than likely to lose money in the long run.
We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks — Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.
When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from YourMoneyWatch.com contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.
CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections — about 12 a week — that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.
It turns out that CNBC did its analysis incorrectly, and that the stocks beat the S&P by 0.4% in one month and 1.2% over two months. CNBC measured the stocks' performance against the average performance of the S&P year-to-date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren't held for the full one- or two-month holding period that CNBC claimed.
More important, the stocks fell short of the S&P by a statistically significant 2.2% through last week.
Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?
Then there's the day-after-pop phenomenon. Our analysis of Cramer's picks over the past two years, from YourMoneyWatch.com, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days (see chart). This offered an opportunity to make money — 5% to 30% a year — by selling Cramer's selections short.
Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks — a trade that he'd jump on if he still were at a hedge fund. "If you short the bump, you will do well," he said last week. "I've said it on the show many times."
I really don't think people should be taking stock tips from a guy who has about a minute to analyze the stocks on his show. He may be a really smart guy but how can he properly evaluate a stock in the short time period he has?
I hope there aren't too many people who base their stock investing solely based on his recommendations. But if they're that ignorant or lazy, I guess they get what they deserve!
I started lending money on Prosper.com about 10 months ago. I started out with a total of $1900 in my account. I've been mainly targeting people with D and E credit who seem have steady jobs but got into the payday loan trap and can't get out. My average interest rate is about 19.4% right now and I usually lend out the minimum $50.
I've been reinvesting all the interest payments I've received. So far I've made loans to 40 people and I've had 2 defaults and 1 currently late loan - two of which were from Prosper's auto-pay, which I don't really recommend using. One of the defaults had a B rating!
Currently my account is worth about $2106, which gives me an annualized return of about 13%. Not bad at all.
If I don't have any more defaults, this might increase slightly. Even if I get 1 more default, I should still get an annualized rate of 9%, which is about twice what I get in a savings account.
Why should Visa and Mastercard make all the money!
Previously, I had mentioned a $2,500 book by Monhish Pabrai called Mosaics:Perspectives on Investing and how I was hoping I could find my own signed copy to hawk on Amazon.
Well, I did find it and after jumping through several hoops I was finally approved as a seller on Amazon.com. (Don't know what the issue was, just some technical difficulties on their end).
Not only did I find a signed copy, I also happened to have an unsigned copy too!
I'm selling the autographed copy for $2,395 (don't want to be too greedy!). Here's the link on Amazon.com. If anyone's interested, contact me directly and I'll let it go for $2,200 with free FEDEX shipping.
I'm not sure what sort of people buy these kind of books. But I know they exist. Someone spent $395 and bought the unsigned edition a few days ago. I know that for a fact because I got a $23 commission from Amazon on the sale of that book(thanks whoever you are!).
Last week, hell froze. The Financial Times reports:
In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labeled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more.
"We are seeing things that were 25-standard deviation events, several days in a row," said David Viniar, Goldman’s chief financial officer.
Losses in the Goldman fund could go over $1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do math for the Pentagon. Then, he discovered that he could make billions running a math-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August...and now Simons says, “we cannot predict the duration of the current environment.
So apparently, math whizzes find they don't know which way the market is going, despite all their fany financial modeling and risk calculation and mitigation through the use of derivates.
No matter what kind of math you do, sometimes things take you by surprise.
According to Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable , improbable events with infinitely small odds of occurrance seem to occur every so often, especially in the financial markets. And with disastrous results!
And if this wasn't enough, Sentinel Management Group, with $1.6 Billion under "management" has frozen access to Money Market Accounts! According to the Chicago Tribune,
"If you attempt to withdraw money from Sentinel, they will tell you they will not honor that request," said lawyer Jeffrey Barclay, who represents some of the futures brokers and investment pools whose money is frozen at Sentinel.
With $1.6 billion under management, Sentinel had advertised itself as an ultrasafe cash manager for people in the futures industry, corporate treasurers and well-to-do individuals.
Now the company is saying nothing publicly and has taken down its Web site. "We are not taking any media calls," said a person who answered the phone at Sentinel on Wednesday.
The U.S. government is on a burning platform of unsustainable policies, and practices with fiscal deficits, chronic health care underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David Walker, comptroller general of the U.S.,issued the unusually downbeat assessment of his country’s future in a report that lays out what he called chilling long-term simulations. These include dramatic tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of U.S. debt.
Drawing parallels with the end of the Roman empire, Mr. Walker warned there were striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an overconfident and overextended military in foreign lands and fiscal irresponsibility by the central government.
Very chilling indeed!
Before you start thinking that David Walker is some crackpot lunatic, here's his bio straight off the US Government Accountability Office website.
As Comptroller General, Mr. Walker is the nation's chief accountability officer and head of the U.S. Government Accountability Office (GAO), a legislative branch agency founded in 1921. GAO's mission is to help improve the performance and assure the accountability of the federal government for the benefit of the American people. Over the years, GAO has earned a reputation for professional, objective, fact-based, and nonpartisan reviews of government issues and operations.
While having that M.B.A. might give you a boost, the reality is that the degree generally isn't a guarantee or indicator of your future success. Business success has more to do with leadership, talent and a drive for excellence than it does with having a degree from a prestigious university. An M.B.A. can help you get your foot in the door, but according to Peter D. Crist, chairman of Crist Associates executive search firm, "it's instinct, it's hard work, and it's raw intelligence" that will really help you get ahead.
It references this article in Businessweek, which is also worth checking out.
One of the newsletters I read regularly is from John Mauldin who doesn't think its likely that China will follow through with their threat.
China has an estimated $900 billion in US dollar reserves. There is no doubt that if they did decide to sell a few hundred billion here or there, they could push the dollar down against all currencies and not just the renminbi. That would also have the effect of increasing US interest rates on not just government bonds, but mortgages, car loans and all sorts of consumer credit.
Given the current state of the credit markets, that is not something that would be welcome. But it is not likely for several reasons. First, it is not in their best interests to do so. It would hurt the Chinese as much as the US, as it would devalue their entire dollar portfolio and clearly do damage to their number one export market - the US consumer.
Secondly, it is unlikely that the US will actually be able to get such legislation passed into law. Even if such legislation passed Congress (an admitted possibility) it would be vetoed by President Bush. That means that any real change would not be possible until some time in the middle of 2009.
The renminbi has already increased almost 10% in the last two years since the Chinese started their policy of a crawling peg. For reasons I outlined at length a few weeks ago, it is likely that the Chinese are going to increase that pace over the next two years, for their own internal reasons. A higher renminbi valuation helps them slow their economy down from its way too fast pace of growth that is evident today. (If you would like to see that analysis, click here.)
By the time any real legislation could get passed, the renminbi will be very close to the level where the China bashers in Congress want to see it, if it is not already floating. Hardly enough to want to start a trade war at that time.
But let's look at what the bi-partisan economic illiterates in Congress are actually advocating. First, they whine about lost American jobs. But a 25% higher renminbi is not going to bring any manufacturing jobs back. China is no longer the low cost labor market. There are other Asian countries with lower labor costs. We just will not be able to competitively manufacture products that have high unskilled labor costs.
But we will continue to manufacture high value added items in a host of industries where skill and talent are required. Even though manufacturing as a percentage of US GDP is down, our actual level of exports and manufactured products is up by any measure. It is easy to write about the closing of a plant, and it makes the headlines, but the fact is that free trade has created more jobs by far than we have lost.
Secondly, if our cost of imports were to rise by 20-25%, that cannot be understood as anything but inflationary. And it would not just be Chinese products, but the products of all developing countries. Many Asian countries manage (manipulate) their currencies to keep them competitive against each other and the Chinese. You can bet that if the renminbi rises another 20%, there is the real prospect that they all will.
And much of what China and the rest of Asia produces is bought by those on the lower economic rungs of the US ladder. So, if Congress gets its way, they would be advocating putting pressure on those least capable of paying higher prices. But no one lobbies for the little guy. Congressional members can pander to their local unions and businesses without having to answer for what would be higher prices.
And higher prices means more inflation which means that interest rates have to be higher than they should, which means higher mortgage rates, etc. Protectionism has a very high cost. Free markets create more jobs everywhere.
Finally, we should hope the Chinese continue to allow their currency to rise slow and steady. Neither country needs the turmoil a rapid rise would induce. The world needs a stable China. We are watching world credits markets freeze up because things went very bad very quickly in the relatively small subprime world. A 20% drop in the dollar in a few months would be even more catastrophic. Senators Lindsey Graham and Chuck Schumer are competing to be this century's Smoot and Hawley that creates a depression from trade wars where none should be.
The danger in all this is that politicians who have little economic literacy create a hostile environment with their rhetorical poison, with both sides feeling the need to play to their "home crowd." That is a very dangerous environment.
It won't happen, but I would like to see the following question asked in the presidential debates to those (like Hillary Clinton, Obama and Dodd, etc.) who basically advocate a weaker dollar.
"Why are you advocating a weak dollar policy? Why do you want American wage earners to pay 25% more for the goods we buy from foreign countries? Do you really think there is no connection between the value of the Chinese currency and the rest of the currencies of the world? Do you think American consumers need to send even more money overseas and get less for our dollars? Do you think the American consumer is so well off they can afford to pay more and that it will have no affect on the US economy? Do you realize that a 25% lower dollar will mean a rise in world oil prices? Do you think there is no connection between the value of the dollar and US prosperity?"
Despite Ben Bernanke's optimism that the sub-prime issues wouldn't spread to the rest the of the economy, not only is it spreading to the rest the of the economy, its become our favorite export to global economies too!
The resulting liquidity crunch has already begun. Many banks just announced that they'll no longer accept loans through brokers. This is to reduce the additional cost of having a middle-man.
Washington Mutual also announced that its Jumbo loans would be priced at 8%. OUCH! Basically, WAMU is having a tough time reselling these loans on the secondary market (to unsuspecting pension and hedge funds) so they've jacked up the rates on these.
As of 2007, a jumbo loan (in most parts of the country) is a loan thats over $417,000 for a single-family residence.
Unfortunately, with the median home price in San Diego is over $500,000. (Not sure of the exact figures but its dropping from the peak). This means the average family has a jumbo loan on their median-priced home.
It was ok when rates where 4.5%, but now when rates are at 8%, the corresponding home payment will jump 43%!!!! I don't know about you, but I'd be looking to move if my home payment rose 40%+.
I think as the rates rise and loans become more difficult to get, home prices will start falling faster than they have in the past 2 years. Many people are still in denial about dropping home prices in SoCal - but this looks like the beginning of the end. I wouldn't be surprized if rates fall another 25% of where they are today.
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
China has been subsidizing the consumption of the US consumer & homeowner to the tune of nearly $1 Trillion. They send us all kinds of stuff and in return we give them pieces of green paper that aren't really backed by anything, except the promise to pay more of the green stuff!
And now, to appease special interest groups clamoring about loss of manufacturing jobs, our 'faithful' senators are trying to pass a bill enacting trade tariffs against China in retaliation for currency manipulation. The good thing about special interest groups are that they are usually represent single-agenda constituents. The politicians give them the one thing that they want, and they're assured their vote. And if they can spread the cost of giving them the thing they desire over a large base, less people are likely complain.
In this case, the cost is higher inflation for all of us. And if China follows through with its promise, you'll see much higher interest rates that will negatively affect the housing industry and the economy pushing us into recession.
We're currently experiencing an economy divergence. A poor country like China is lending money to our government by buying our Treasury notes. You could say its effectively funding our government spending. This is enabling us to enjoy the low-interest environment of the past several years.
This is not a normal occurrence. Typically rich countries lend money to poor countries. This phenomena should result in a natural rebalancing of the currencies where China's currency strengthens against the US Dollar. Given time, this will occur without any help from our politicians.
Henry Paulson, the US Tresaury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".
Yet another example of why the government shouldn't interfere in economic policy. It usually never does any good, it creates friction and the burden always falls on the tax-payer.
Meanwhile, Hillary Clinton in a show of brilliance said
foreign control over 44pc of the US national debt had left America acutely vulnerable.
Great, maybe Bill can fork over the $50 million he's made and buy up some of it.
.![[Graph of 10 Year Treasury Yield over past 3 months]](http://bp0.blogger.com/_E09Nv_jsQcQ/Rte4UOvveOI/AAAAAAAAAFw/OSfHloMkDyQ/s1600-h/10+Yr+Tbill.png)
