Great Lakes Secured Investments Blog » Real Estate Investments

The Do-It-Yourself Investor in America

Randy Michael — Mon, 15 Feb 2010 15:11:09 +0000

The “conventional wisdom”—interestingly, that which is propagated by investment bankers, mutual fund companies, and the host of other commercial interests that try to sell financial products to us–constantly reassure us that the average American is capable of managing their own investments “just like the professionals”. They make it sound easy.

Not to be overly cynical, but don’t forget that Home Depot claims they can turn anyone into a part-time plumber or carpenter (“you can do it—we can help”). Our government claims everybody can and should maintain their own home, even referring to it as the “American Dream” and “your most important investment”, when the real facts are that a large proportion of the population is physically and financially unable to, nor is it always practical or a good investment. For many people, the American dream has become a nightmare.

In other words, “conventional wisdom” is tainted by the financial interests of the messengers. America is a consumer-driven society, and practices that in many societies are reserved for professionals—things such as home maintenance, vehicle maintenance, and even transportation—are necessarily considered do-it-yourself ventures in America, simply because our economy thrives on convincing the consumer to take it on by themselves. The concept of every John Doe being independent and self-reliant sells well in America, but some things are simply best left to the professionals.

Investing, in my opinion, is no different. The world of financial products available out there—from mutual funds to annuities to stocks to options to ETFs, etc.–is simply staggering these days. Yet the average American’s basic financial literacy—let alone comprehension of these sophisticated financial products—is at an extremely remedial level. Most Americans struggle to understand a balance sheet, income statement, or even credit card statement let alone all this other stuff.

It should therefore be no surprise to you that Merrill Lynch’s version of investing is all about buying their stock funds, while MetLife will tell you to avoid the stock funds and invest in life insurance. The 401(k) was sold to us as another opportunity to make our own choices.

But the joys of choice are vastly overrated. This isn’t about the smarts of the average American; it’s also about how much energy and time goes into keeping an eye on an investment portfolio. Just look at all the lists of “10 things to get right” or “stupidest mistakes” to avoid. (And the multimillion-dollar industry of books and workshops provided by those reassuring pundits and experts.) The average American is way too busy and out-of-touch with a complex and ever-changing investment environment for DIY retirement investing. This is not something you can do instead of texting while driving.

Even the most literate among us face obstacles. First, you have to spend quality time deliberating on the kind of questions that send otherwise sane adults into denial so deep that they don’t even create a will: How long will I live? How soon will my fellow breadwinner die? Once you’ve done all the math (another favorite activity), remember to always read the fine print, scrutinize claims and be proactively skeptical; there are plenty of deadly pitfalls.

The investment industry would have us believe it’s all very simple. But do-it-yourself is better when the stakes are lower: staining your deck, assembling a bookcase, or cooking a meal.

UPDATE: ACHIEVING HIGHER YIELDS WITHOUT EXCESSIVE RISK

Randy Michael — Sun, 17 Jan 2010 16:31:49 +0000

Do you wish there was a coast guard rescuing you from the financial storm?

As we know, the modern-day Fed has reduced interest rates to record lows and has made it clear it has no intention of raising them anytime soon. To many, low interest rates sounds like a good thing and, like cash-for-clunkers or subprime mortgages, the practice certainly has the ability to create short-term stimulus. But the side effects include a declining US dollar, new asset bubbles that must eventually burst, and basically a misallocation of economic resources.

Those things are all concerns for the economy as a whole, but certainly the most “unfair” aspect of the artificially low interest rates is that it punishes savers. By cutting the federal funds rate to a range of zero percent to 0.25 percent, you earn almost nothing on these safe, cash-like investments such as short-term Treasuries, short-term CDs, and money market accounts into the gutter. The price a saver pays for protection of principal is pretty high these days. And yet nobody can disagree that if the American consumer could finally start saving money after decades of over-consumption and excessive credit, much stability could be restored to our currently tenuous economy.

Well, long-term Treasuries are not a very safe bet because the value and safety of those depends heavily on the strength of the nation’s balance sheet. With more than $12 trillion in debt and climbing, I think we can assume the global marketplace for long-term treasuries will continue to respond negatively. And even longer-term U.S. debt, such as corporate and junk bonds, are over priced.

So what type of investments can provide income or growth these days without risking too much of your principal?

Utilities. This includes natural gas providers, electric companies, and telecommunications companies. Now, it’s not like the old days where utilities could be counted on for steady dividends and low volatility, the favored investment of little old ladies. Clearly utilities aren’t recession proof, as we’ve seen with energy and telecommunications stocks. But the swings are typically much less severe than what you see in housing, technology, or manufacturing. And even during the worst downturns, those core businesses still tend to produce cash just because of the nature of the product and transaction.

Many utilities yield at least 5 percent or 6 percent. That’s better than you can get with Treasuries. Besides, the volatility can work in your favor as well. Buy the right stock at the right time and you can earn capital gains along with your yield.

Non-U.S. Fixed Income. You probably shouldn’t keep all your fixed income money in the U.S. The dollar has been falling virtually nonstop for months now. That hurts foreign owners of our debt. But the process works in your favor if you are an U.S.-based investor.

Consider buying foreign, fixed income securities, and as the dollar falls, the dollar value of your holdings will rise. Any principal and interest payments you receive in the foreign currency translate back into more dollars.

Speculating on currency alone is not for the faint of heart, but that’s not what I’m talking about here. Beyond just the currency impact, foreign yields will likely be substantially better than those offered here in the U.S. Bottom line: You can earn higher yields AND get a currency “kicker” by investing in foreign, fixed income securities. Foreign dividend-paying stocks are another alternative. Many yield much more than their U.S. counterparts.

Energy. Recently, the prices of most kinds of energy products– crude oil, gasoline, heating oil, and natural gas—have risen dramatically. But the business of exploring for, producing, and trading energy is relatively high risk. That translates to losses.

However, history shows that even during recessions energy use, regardless of cost, does not stop. So there is always a need to store and transport gas, oil, and other petroleum-based products.

Consider investing in a Master Limited Partnerships (a.k.a., MLP). Since they own many of the storage and distribution networks that energy companies use to get their products to market, they make money whether energy prices rise or fall.

“EQUITY INDEX” ANNUITIES

Randy Michael — Mon, 19 Oct 2009 21:01:32 +0000

With most fixed income investments, there is a high price to be paid for the “security” of fixed income in an investment. Government issued bonds, for example, carry a perception of security—albeit not altogether true—and the price to be paid is low or even negative returns on your investment.

Although a relative newcomer on to the scene of investment products, it would appear that equity index annuities also fit into that category: perceived security, yet very low returns and a requirement to tie up capital for long periods of time in order to achieve anything positive in returns.

Equity indexed annuities are insurance products. Their returns are tied to the performance of stock indexes such as the S&P 500 stock index. The advantage is touted to be that, regardless of the performance of the index, the principal balance of their investment will not decline. It is said that if the stock market performs well, the investor shares in some of the gain. If it doesn’t, the investor doesn’t lose. Sounds like you get to have your cake and eat it, too.

But that protection comes at a price. First, there are surrender charges and other penalties if an investor withdraws early, so changing your mind is really not an option unless you want to lose money. And how to get MORE than a pittance of a return even when you do hold out for the long term? That presents a dilemma as well, since indexed annuities have pre-set caps that limit their gains. If, for example, you believe the stock market will provide 10% returns, the investor in an index annuity gives up much of those gains. On the other hand, if you believe the market will drop by 10%, you will be protected from the decline. So it’s really what happens over the long-haul that matters.

It’s obvious that many investors have taken the bait. In 2008 alone, more than $25 billion was plunged by investors into equity index annuities.

Insurance companies, of course, keep much of the gains when the market is up.

Much of the risk by the insurance companies, for example, is hedged by regularly-changing “participation rates”, which reference how much of the return the index provides can be kept by the investor. As you can imagine, the insurance company gets to change those limits from year to year, usually based on “market performance”.

In my opinion, the biggest negative to this type of investment is rooted in the fact that it is an insurance product. Like most insurance policies, just like in a casino, the rules are somewhat complicated and always changing in an effort to make sure the “house” wins over the long haul. Doesn’t mean there’s never a mutual benefit, but it probably means the benefit will be mutual only if the market does better than average.

And if you feel like you have a handle on whether a market will do better than average, why not just invest in that market, and give yourself the ability to opt in or out, instead of relinquish control of your funds long-term to an insurance company who gives you a “guarantee” you won’t lose in order to keep much of the gain?

REAL ESTATE FOR THE SECURITY CONSCIOUS INVESTOR

Randy Michael — Thu, 24 Sep 2009 02:15:28 +0000

Re-runs of the 1987 movie “Wall Street” have been common these days. I rather think it’s not a coincidence that there is such a resurgence of interest in the movie lately, because it demonstrates the frailty of investments based entirely on over-leveraged and inflated assets whose bubble must burst eventually, almost like a grand pyramid scheme, certainly something that suddenly rings true today with stocks and real estate.

In the movie, corporate raider Gordon Gekko makes untold millions of dollars buying companies, breaking them apart, and re-selling them for more than he paid. He doesn’t really invest in or add value to the companies—he simply speculates on the price appreciation. He convinces his eager-to-get rich quick protégé Bud Fox that hard work and playing by the rules is for the poor, weak, and ignorant. Under Gekko’s wing, Bud also experiences the quick profit potential of buy-low sell-high and begins to lead the life he dreamed of. The dream is short-lived, however.

The movie made famous the expression “greed is good”, and many consider that line to be iconic of an entire way of thinking, at least for the Baby Boomer generation. I, however, think the real moral of the story is in the words that Bud’s father used as Bud was being hauled away by authorities for insider trading: “Create something instead of living off the buying and selling of others”.

Like Bud’s father, I have always resisted the here-today gone-tomorrow income associated with buy-low sell-high, especially with real estate. It’s not that it never works. It’s not that it’s never a win-win. It’s just that, like poor Bud realized, it usually doesn’t work so well.

With real estate flipping, the “system”, for lack of a better word, doesn’t want it to work so well. And where there’s smoke there’s fire. You have to question the underlying legitimacy of any transaction that is so hard to push through because of all the roadblocks put up by the system and the people who are affected by it. It’s obvious the real estate industry doesn’t want it to happen.

Banks, for example, clearly try to prevent real estate investors from profiting through quick flipping by their strict underwriting criterion, like requiring the owner to hold the property for a length of time before agreeing to lend money against that collateral, a condition known as “title seasoning”. Many title companies or real estate attorneys want nothing to do insuring or closing a transaction where the property is being sold more than once in a short period of time. Sellers resent the idea that the investor can make money off buying their house without the investor’s long-term commitment to fixing, managing, or otherwise adding value to the transaction. Buyers think they are overpaying when they find out how much money the seller is making for doing almost nothing. Many national speakers and authors go to great lengths to teach “investors” (and I use the italics for good reason) how to prevent buyers and sellers and their real estate agents from even discovering they are making a profit!

At GLSI, we hold properties for the long-term, not try to sell properties for a quick profit. This implies full-time management of the property and the people, which spills over into benefits to the neighborhood, the community, the tax rolls, the tenant, the contractors, and certainly for investors who lend money against the property. This is not for the faint of heart. It is hard work and can be quite stressful. We have many constituencies to please. But the result? You as lender are not speculating on price appreciation. Because all the parties benefit, there is a monthly income benefit that has the ability to repay the interest on the debt. No smoke, no fire. Gordon Gekko may be a flash in the pan, but our steady revenue stream provides security and high income without speculating on unknowns. This is the only tried-and-true formula in real estate that will stand the test of time.

MORE SIGNS OF UPCOMING DECLINES IN TREASURY AND SAVINGS BONDS

Randy Michael — Mon, 21 Sep 2009 10:55:53 +0000

How are you going to cultivate your finances in these economic times with the rapid destruction of the money balances?

When it comes to foreign creditors selling off their U.S. Treasuries, it seems like they’ll always buy our debt because our bond market is the most liquid, safest warehouse for their money. In the short-term, that’s probably true. But the longer-term trend is much different. Like irresponsible teenagers throwing a party and trashing the house while their parents are gone, the Fed and Washington politicians don’t want to tell their constituency the ugly truth: that the current government spending spree is not only mortgaging America’s future, but will destroy the financial foundations of this country.

But over time, they WILL gradually lower demand for U.S. debt, pushing bond prices lower, and interest rates higher.

Why are foreign creditors trying to avoid U.S. debt? First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect. Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no plan to bring it under control. Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern is rising sharply in places like China. The country has more than $2 trillion in reserves. Perhaps as much as ¾ of that is in US dollars. If the dollar keeps declining, so too will the value of those Treasuries, corporate bonds, and equities. In fact, the former vice chairman of China’s Standing Committee warned that concern is rising, and rising fast.

China’s Ministry of Finance also said that it would sell $900 million worth of government bonds soon. This is the first issue of Chinese government debt targeted at global investors. The idea is to increase international confidence in China’s currency and China’s bond market.

Please don’t disregard this important long-term trend. It’s going to lead to higher interest rates, whether the Fed and Treasury like it or not. That sounds like a good thing if you own those securities, but it’s not…remember, when interest rates rise, the value of the underlying bonds decrease substantially.

For those of you with a long-term horizon in your retirement planning, make sure you understand that it is a near certainty that US savings bonds and Treasury bonds will drop dramatically in value.

At GLSI, we offer up to 10.0% fixed interest, secured by real estate whose cash flow is nearly double that. And when we say secured, we mean secured by a 1st position mortgage. You’re not second or third in line behind other lienholders. Contact us for a truly fixed and secured investment!