Tag Archives: focus

Meeting A Different Donald: Real Estate and Ways to Invest

Most people, if not almost everyone, has heard of Donald Trump. As the 45th president of the United States, he has been a real estate developer and the previous host of the Apprentice show.

But have you heard of Donald Bren? He grew up as the son of two relatively successful parents. His father was a movie producer and real estate developer like him. His mother was a civic leader. After majoring in Economics and Business a the University of Washington, Bren attempted at Skiing in the Olympics but had to quit due to an injury. In addition, Bren became an Officer in the U.S. marine Corps.

After that he took a $10,000 loan out in 1958, he began developing and flipping homes until he had built up a business which he sold. He started another one, sold it, and then took the proceeds to buy a third stake in the Irvine Company. He eventually bought the outstanding ownership and now has a net worth of over $16 Billion.

Donald Bren took one path to real estate. But there are others. I want to briefly cover the three main ways you can approach real estate investing.

1. Direct Investment

A direct investment in real estate, like what Donald Bren did, involves purchasing property either directly or through a business entity. Either you focus on property appreciation, resale, or cashflow. With these metrics in mind, you seek to partner with others to produce above-average returns over the long-term. This is what Bren did.

2. Indirect Investment

The second, more modern way to invest in real estate is less direct. With an indirect investment you buy a company that invests in real estate. Usually this is either a REIT (real estate investment trust) or some sort of real estate syndication.

3. Hybrid

The last option is some sort of mix. It involves partnering with others so that you own the real estate but you don’t necessarily control management of it directly. An example might be a partnership between a handful of people in which you own, say, 20% of the upfront investment. You put a shared investment with say, 2 other people. One person is in charge of management, and the other two people sit passively by but provide the capital.

A hybrid between direct and indirect is usually less risky but also less financially rewarding if your investment becomes a success.

Conclusion:

Part of investing in real estate is understanding yourself. How much involvement do you want? Often the answer is not much, but for those adventurous few, you never know, you might become the next Donald Bren.

The Stock Market is Falling: What Should I Do?

The last few weeks started as a few percent decline in the market. As gurus and commentators covered it, they viewed the decline as a temporary, week-long or even a few day-long event. However a few weeks later here we are, still waiting and wondering when the market will rebound.

As a long-term investor this is exciting for me. Not only have stock declined roughly –% from their high, they continue to fall to increasingly discounted prices. Everything might not be a bargain at this point, but after falling about 9% the market is a lot closer to reasonable pricing than it was a month or two ago.

So when prices drop like this, what should an investor do?  They should do what the best investors do – find good companies and buy them at favorable prices. This might mean waiting and watching for a good company to drop below your perceived value it.

But for index and active mutual fund investors slowing dollar-cost-averaging into the market may make the most sense. Understand that the market will come back. It’s just a matter of how quickly it does.

Different Stock Investing Strategies

I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.

1. Stock Index Mutual Funds

There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.

2. Actively Managed Mutual Funds

Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.

3. Value Investing

This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.

4. Day Trading

This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.

5. Random Strategy

This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.

Conclusion:

Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.

Lending Investments: Are They Worth It?

When it comes to investing money for retirement two of the most common investments are stocks and bonds. Today I want to focus on the latter.

When it comes to investing in debt investing there are a few main types which I will briefly mention:

1. Corporate Bonds

These are a form of debt security that is issued by a corporation. Because they aren’t backed by the government, there is a higher risk and therefore higher yield associated with this kind of loan. There are many forms of this kind of bond.

2. Government Bonds

These can refer to Treasury Bills (T-Bills) which are debt securities lasting less than a year, Treasury Notes (T-Notes) which are debt securities lasting between 1 and 10 years or Treasury Bonds which are debt securities lasting more than 10 years. In addition there are also something called Treasury Inflation Protected Securities (TIPS) which involve lending money to the government in return for small payments and ultimately principal that is indexed to inflation.

Under this category I will also place Government agency bonds. These are bonds that are issued by Government Sponsored Enterprises (GSE’s) and/or Federal Government Agencies.

Bonds issued by GSE’s usually have the following characteristics: 1) A small return that is slightly higher than treasuries because 2) they have credit/default risk. Examples of Government Sponsored Enterprises: Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Home Loan Mortgage Corporation (Fannie Mae).

The second kind of agency bonds, which are issued by Federal Agencies have the following characteristics: 1) less liquidity and therefore 2) slightly higher yields than treasuries but 3) are backed by the full faith and credit of the United States. Examples of government agencies: Small Business Administration, Federal Housing Administration and Government National Mortgage Association.

3. Municipal Bonds

Municipal bonds are debt securities issued by states, cities, counties and smaller government entities. There are two types, General Obligation Bonds (Bonds issued by small local governments that are backed by their full faith and credit), and Revenue Bonds (Bonds backed by specific revenue sources like tolls). These will always have yields higher than government bonds because of the slightly higher risk.

4. Bank Debt Assets (mortgage-backed, asset-backed and collateralized debt obligations)

This is a type of asset-backed security that is secured by a mortgage or collection of mortgages. It can get complicated to explain but for now you just need to know that banks and financial institutions usually own these.

5. Peer-to-Peer Lending

This is by far the most recent debt invention. Peer-to-Peer lending refers to a means by which individuals give and borrow money to each other usually over the internet to produced higher returns than can be given by other bonds or get a loan they otherwise couldn’t get.

Conclusion:

So should you invest in lending investments, and if show which ones? The answer really depends on your goals, risk profile, capacity for risk and the options available to you. Talk to your finical advisor about this or refer to one of my upcoming posts on the subject of asset allocation.

3 Forces Standing Between You and Your Financial Goals

Time

Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).

Goals

You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.

Inflation

Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!