Great Lakes Secured Investments Blog » Recession

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.

EARNING HIGHER INCOME IN A LOW YIELD MARKET

Randy Michael — Fri, 20 Nov 2009 15:20:57 +0000

Unless you are a full-time investor—i.e., you don’t rely on a job for your primary income—then your goal is likely to achieve steady income while lowering your risk. But in today’s market, that’s easier said than done.

For one thing, interest rates on bank CDs, money market funds, and even short-term Treasury securities are locked at abnormally low yields.

For example, one-year jumbo CD rates, are just 1.6% while many money market funds pay less than 1%, making life quite difficult for fixed-income investors right now. Other potential threats include soaring federal budget deficits and the chronically weak U.S. dollar.

The once almighty buck continues to lose value against global currencies … DOWN another 14% in the nine months ended September … and if the slide continues at this pace, it could easily lead to higher inflation down the road and potential lost value in EVERY dollar-denominated asset you own.

What options are available for fixed-income investors to deal with these challenges? Here are a few:

Earn higher current yields from a broad mix of income-producing investments. Consider diversifying into a wider range of income producing securities such as corporate bonds or income securities with longer maturities.
Capture gains from shifts in global interest rates. The low rates on safe, income-producing securities that we see in other countries is not necessarily as extreme as what we see in the USA, especially with government backed securities. For example, I was earning a fixed, secured 7.85% on a CD in Australia. And usually these securities can be purchased without having to travel to that country (I purchased mine on the Australian bank’s website).
Provide a hedge against the falling dollar with international fixed income diversification. So, for example, even if you had owned British fixed income securities that were paying the same crummy, low rates that US securities are paying, you would potentially have made an additional 10 percentage points in gains just by fluctuations in the British pound against the dollar!
Seek out “private” offers to invest / lend money for a business. In this cash strapped economy where bank financing is tight, there is no end to the opportunities you have to invest your cash in a new business venture where someone else is running the business, and you’re just the bank. As a side note, even though we generally feel more comfortable lending money to a friend / family member, try to be objective. You may trust they’re intentions are good, but is this really a good business and are they really the right person to manage it. Recently, for example, a friend of mine lent $250,000 to another private individual (that he had no prior relationship with) to start a McDonald’s franchise. Now, since the guy had long been in the fast-food business and he’s choosing McDonald’s (who has a track record, to say the least) rather than, say, Joe’s Hamburgers, I’d say my friend’s investment is safe.
Seek out “private” offers to invest / lend money for cash-flowing real estate (office buildings, apartment buildings, long-term rental houses, NOT flipping!). This is certainly my preferred strategy but it always comes with the same warning: make sure the cash flow of the property is adequate to make a payment to you every month. Yes, we want to check the creditworthiness, financial condition, and experience level of the real estate investor you’re partnering with, but we are more interested in the investment itself and whether it is self-funding. No matter how well intentioned he/she is, we want to know that our payments will be coming from the profit of the property, not from the individual’s job income or life savings.

Not for the faint of heart, please don’t go this last one alone. Certainly Great Lakes Secured Investments LLC can provide you with up to five times the income of other fixed, secured investments collateralized by a property whose cash flow easily covers the payment due you every month.

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!

The U.S. Mortgage Industry–By Its Refusal To Take A Leadership Role In The Foreclosure Crisis—Has Cut Themselves And The Taxpayer A Rotten Deal

Randy Michael — Wed, 09 Sep 2009 01:31:17 +0000

Rather than losing untold billions by mindlessly taking back houses in foreclosure regardless of the circumstances of the customer in foreclosure, you’d think the banks would be proactive in preventing the foreclosure in cases where it is so clearly in the bank’s interest. I mean, at least be willing to listen to your customer. Was the government bailout so lucrative that an entire industry doesn’t need to care about profitability anymore?

After all, it’s not like foreclosure’s an isolated problem. The Mortgage Bankers Association recently reported that nearly 1 in 7 US mortgages is in some stage of distress (either being paid late or already defaulted on). That’s almost 13 million households, an estimated 30 million Americans. It’s the worst this country has ever seen and it’s affecting every type of American!

Meanwhile, the industry is taking billions—soon trillions—in write-downs of property value. Just looking at the two most recent income properties Great Lakes Secured Investments bought makes a great example. In both cases, the house was bought for 80% or so less than what was owed the bank when it foreclosed on last year. And that doesn’t even include the countless other expenses such as utilities, insurance, clean-up, commissions, legal and title fees, etc. that the bank had to incur just to get that miserably low price.

And yet odds are the previous owner would have stayed and continued to make payments if the bank would have lowered their loan balance and payments by say, 40%. The bank could have saved the remaining 40% plus all those other extraordinary expenses and loss of income. You see, increasingly, there’s NOT an income or employment issue behind the foreclosure. Lowering the amount owed on the mortgage and / or the interest rate would have saved everybody a lot of grief and money. After all, I’d lay odds that the previous owner is now renting a similar place for about what the bank should have accepted for a loan modification payment.

But when it comes to banks dealing with customers, no news is good news. There will be no conversation with the bank about alternatives because that’s not the way banks do things. You can’t talk to the bank BEFORE foreclosure strikes. Instead, only after a borrower has already defaulted on the loan and ruined their credit can they get past the Customer Service gate to talk about an alternative to foreclosure. But by that time the opportunity for a win-win solution has passed.

I see this every day of my life: the homeowner with a 20-year perfect credit record, whose house is worth less than half of what it was a couple of years ago. They try to sell their house for a year, expecting no money whatsoever anymore. The housing market has humbled them. All they want to do at this point is walk away with nothing but their credit intact. But they can’t even do that!

This homeowner really has two choices, both of which involve destroying their credit:

a) Endure the hassle of trying to sell their home, this time at a discounted “short sale” price (less than what is owed on their mortgage), knowing they’ll not get one red cent from the sale

b) Don’t bother doing anything except let their house go completely into foreclosure by stop making payments, stop paying taxes, and live for free for up to a year, at least in most states

It’s no wonder most pick “b”. If you’re not getting any money and you’re credit’s getting destroyed anyway, why not live free for a year? (Some people claim that a “short sale” doesn’t have the negative impact on a credit report as a “foreclosure”, but not so).

The banking industry wants you to believe the foreclosure problem is symptomatic of the general economy, because it gets them off the hook of taking responsibility and being part of the solution.

By the way, written on the walls of one of the recent houses we purchased were the words: “we did not want to leave”.