Tag Archives: investing

Warren Buffet: How a Sixteen Year Old Turned $5,000 into almost $1B

Almost everyone has at some point heard of the famous figure Warren Buffet. However did you know that Warren’s success didn’t just start as an investor. Mr. Buffet actually began making strides towards his massive fortune in his high school years.

In high school he was making more than a lot of his teachers by running a pinball machine business and delivering papers. At the age of sixteen he had amassed five grand. $5,000 at his age would be the equivalent of around $60,000 today! He was just sixteen.

While most of us can’t redo our high school years, childhood or even college experience, we can chose to adapt many of the principles that Warren did in his younger years and implement them long term.

There are three things that we can use from Warren’s life to make changes today:

  1. Win Friends and Influence People

Warren implemented (not just read) this book. Simply reading it and taking daily action to change behavior and habits can go a long way in making your life a more successful one.

2. Understand the time value of money

Warren, even in his teen years, didn’t squander his cash on toys, games or nice clothes. He understood that a dollar today could be worth $30, $100 or (in his case) $1000 in the future.

3. Be entrepreneurial

This doesn’t mean you need to start a company or quit your day job. Just like Warren, you can figure out creative ways to make side money. If Warren Buffet at the ages of 13, 14 and 15 could figure out how to make side money, then you, as an adult can figure out how to do the same.

Conclusion:

Warren Buffet is extraordinarily rich. I can’t tell you that you’ll be as rich as him. I can’t even guarantee that you’ll have $1M. But I can guarantee that you’ll grow as a person and become richer then you are now if you implement these three steps.

Try them, you may find that they actually work.

Maximizing Your Tax- Advantaged Money: How Much You Need to Make The Most of Tax-Free Money

Some of the best tax-advantages are provided by the government for retirement. For example just the 401K alone lets you put aside $19K per year into your employer-sponsored retirement plan. In addition you are allowed to contribute $6K (as of 2019) into an IRA. You can also open these accounts as a Roth account.

A Roth account, whether 401K or IRA allows your contributions to grow tax-free after you pay taxes upfront. This is in contrast to the traditional 401K and IRA which each are contributed to pre-tax but only grow tax-differed. Meaning, you aren’t taxed until you decide to take your money out.

But in addition to these two massive tax-advantaged accounts, you are also able to set aside an additional $3.5K into an HSA(Health Savings Account) account. The account is for the purposes of health expenses. However if you decide, say, when you’re 65 that your HSA is large enough and that you won’t need all of it, you can take out as much as you’d like for non-health purposes. The only catch is that the withdrawal is taxed.

So in essence your HSA can become a glorified IRA if you decide you don’t need it for medical expenses!

Each of these three options together amount to $28,500 a year. In order to take advantage of the full benefit you will need to earn about $85K to $95K in most states so that you can still pay your living expenses.

The bottom line: there are many options for tax-advanced money. It just comes down to making enough and budgeting wisely. So what do you think, is it possible for the average personal to maximize their contributions?

What is Personal Finance

What is personal finance? And Why does it matter?

Those are two very interesting and important questions to ask as one either begins their life as adults, or being asking questions they’ve never approached before. For the past five months or so, this blog has predominantly been centered around personal finance, both the investing side, as well as the money management side.

I realized that before I continue this journey with all of you, I need to take a moment to explain what Personal finance actually is. Personal finance clearly deals with how individuals manage their money.

While the topic briefly touches on the analysis and performance of businesses and organizations for investment purposes, it predominantly centers around the individuals’ approach to managing each dollar in and each dollar out.

Personal finance answers questions like:

What are my financial goals? What use do I have for money? What should my investment approach be? How much do I need to be saving? How large should my house purchase be? Should I buy this trinket or save the money?

Many of these questions are simply answered through quiet reflection or by asking your friends and family for feedback. However, some of these more complex questions like how to invest your money, or how to craft a financial plan can often be better answered by a financial advisor.

Why does personal finance matter? 

There are three basic reasons why you should pay attention to your finances:

1. Money has impact

2. Money can be complicated

3. Money is emotional

While we of course don’t have the time to go into the details of Personal Finance in one blog post, I hope this gives you a great picture of what this topic is all about.

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.

Are Commodities A Good Investment?

When it comes to discussing investment options, commodities often pop up as something that is seen as a gamble. But are commodities actually a viable investment?

Commodities

There are a few basic kinds of commodities. There are metals like gold and silver. There are gas-type resources like oil and gasoline. There are animals like cattle and pigs. And then there’s also grown commodities like wheat and corn.

Commodities as an Investment

Not only are there many forms of commodities, there are also different ways of investing in them, take gold for example. If you were interested in investing in gold, you would have a few options to consider. The simplest route would to buy a gold bullion ETF, but you could also purchase gold bars and physically store them, or you could even buy gold jewelry and other gold-based products.

Generally as a whole, commodities are simply a resource used in the means of production, that is valued based on simple supply and demand. By very nature, the price of various commodities aren’t specifically predicable because of the way in which commodities are traded. Just like stock prices can’t be determined on a short-term basis, commodities are very volatile even in long periods of time.

However, this brings us back to our original question, should one invest in commodities? First off, I wouldn’t consider commodities a real investment because resources, just by themselves, aren’t growing enterprises that produce cashflow or even profit. So if one is going to discuss “investing” in these, let’s call it what it is: speculating.

My option speculation is that speculation as a whole is generally a bad idea for long-term investing. However if one considers the prices of certain commodities there are predicable supply-demand patterns that arise. Gold for example, has done considerably well in times of economic panic.

Overall, commodities aren’t a wise “investment” choice for the majority of investors. However as part of a broad portfolio, it might not be bad to put a 5% or 10% stake in gold as a hedge against economic disaster. Ultimately the choice depends on the individual.

Inflation Force: Is the U.S. Economy Turning to the “Dark Side”?

Often the anticipation of rising levels of inflation is met with a negative connotation. “How can the general rise of prices ever be good?” people ask.  We tend to view inflation as a negative force, or even as a predictor for economic disaster. This is especially easy to understand because the last decade has had relatively low inflation. It’s been years since inflation has gone over 3% for sustained periods and concerns are starting to rise; what does this mean for our lives?

Inflation

What is inflation? Inflation, as Google defines it, is “a general increase in prices and fall in the purchasing value of money.” As the Federal Reserve takes actions like quantitative easing (essentially making more money) and raising rates, this produces an overall increase in the rate of inflation.

As a result the cost of rent, food, gas and common household goods generally rises. Isn’t this all bad? Yes from one perspective it is. It’s easy to see how an increase in broccoli or fuel prices hurts the single mom who is struggling or the family trying to save up for that family vacation.

Almost everywhere in the economy, costs rise as a result of inflation. But there is another side to this. When prices of goods rise, what does this mean for businesses? Well, business are usually the entities who sell the goods and therefore they usually “profit” from rising prices. However this increase in dollar profit doesn’t necessarily translate to a net increase after adjusting for inflation.

What this means though, is that businesses profits generally, at the very least, increase with inflation. What this does do is cause stock prices to naturally rise as earning and assets raise in price to match the inflation. So stocks, naturally are a built in inflation hedge because over long periods of time they usually increase, at a bare minimum, with the rate of inflation.

This truth of rising inflation is partially an inevitable inconvenience or problem for consumers but it is a completely normal and in some ways beneficial aspect of business development. To take advantage of it one must own a business though.

There are many more ways that inflation is impacted and has impact. But what I want you to get out of this is that inflation is actually a good thing for equity investors. Investing in stocks is not only a great move before adjusting for inflation, but after inflation it becomes a beautiful hedge against the “evils” of this powerful economic force.

Fundamental Vs Technical Analysis

When it comes to picking specific stocks for investment, there are two ways to analyze them. The first is Fundamental Analysis.

Fundamental analysis the process of examining a company’s “fundamentals”. This means you look into their balance sheet, their income statement and the statement of cashflows. You look at the concrete facts about the company.

Ask questions like, is this business profitable? Do the facts suggest it will increase profitability in the next few years?

What kinds of debts (short-term and long-term) does this business have? Will it be able to pay them?

What weaknesses are there to this business and its market that could challenge its position? What are its strengths?

The second type of analysis is Technical Analysis. This involves projecting the stock price based on the trends. You look at the 50 day moving average, and even the 200-moving average. This is more of a charts and trends-based analytical process.

Overall, for long-term investors, fundamental analysis is the way to go. Not only does Fundamental analysis involve more logical and foundational decision-making, it is also the strategy used by some of the best investors in the world like Warren Buffet. Overall, if you’ll wondering which strategy is best, consider your purpose for investing.

Stock Market Sectors: Is This a Wise Investment Move?

There are some investment advisors who scare away from the idea of sector investing. However, with adequate research, one might find that certain areas of the overall market tend to outperform others in various economic seasons. But is the risk of overexposing ones’ self to sectors worth it?

Before I answer this question I’d like to list the 11 major stock sectors:

1. Industrials

2. Real Estate

3. Consumer Discretionary

4. Consumer Staples

5. Healthcare

6. Financials

7. Tech/IT

8. Telecommunication

9. Utilities

10. Materials

11. Energy

Before someone considers investing in specific sectors, they must recognize that over time there are periods and seasons in which one sector performs better than others. Some of the worst sectors to own in bear markets is Technology stocks like Google, FaceBook, Apple, Amazon and Microsoft. However as times get better, this sector usually outperforms the rest of the market.

My recommendation is to not invest in specific sectors and sector funds unless you are comfortable risking a significant portion of your portfolio. If you do decide to invest in sectors, pick one that is both posed to do well over the next few months as well as the next decade. You want both the fundamental and technical analysis working in your favor. Overall, stock sectors can be a very lucrative strategy for investing.

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.