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Hard Won Wisdom


wealthymattersIn 2001 and 2002 I lost all my money through bad investing. The same thing happened to me on a couple of occasions after that.So why should anyone listen to me about investing? You shouldn’t. You  shouldn’t listen to anyone at all about investing. This is your  hard-earned money. Don’t blow it by listening to an idiot like me.Here’s my experience (and perhaps I’ve learned the hard way about what NOT to do and a little bit about what TO do.

I’ve run a hedge fund that was successful. I ran a fund of hedge funds,  which means I’ve probably analyzed the track records and strategies of  about 1000 different hedge funds. I’ve been a venture  capitalist and a successful angel investor (I was a HORRIBLE venture  capitalist though – but I put that under the category of “does not work  well with others”).I can’t raise money anymore. Nor do I want to play that game. I don’t BS about my losses and everyone else does. So I’m not in that business anymore. It’s too much work to run a fund anyway.

In the past 15 years I’ve tried every investing strategy out there. I  honestly can’t think of a strategy I haven’t experimented with. I’ve also wrote software to trade the markets automatically and I did very well with that. And I’ve written several books on my experiences investing, with topics  ranging from automatic investing to Warren Buffett, to hedge funds, to  long-term investing (my worse-selling book, “The Forever Portfolio”,  which has sold 399 copies since it came out in December 2008, including  one copy for the entire last quarter).Incidentally, why  publish a book called “The Forever Portfolio” during the worst financial  crisis in history. I begged my publisher (Penguin) to postpone but they  couldn’t. “It’s in the schedule” was their magic incantation.  Publishers largely suck. The good news is: they will never make back the  advance. That said, all of the picks in that book have done  excellently since then but the one thing I am proud of is that I made a  crossword puzzle for the book. I don’t know of any other investing book  with a crossword puzzle in it. So, Ok! Let’s get started. Don’t follow any of my advice. This is advice that I do and follow and it works for me.

A) SHOULD I DAYTRADE? Only if you are also willing to take all of your money, rip it into  tiny pieces, make cupcakes with one piece of money inside each cupcake  and then eat all of the cupcakes. Then you will get sick, and eat all of your money, but it will taste thrilling along the way. Which is what daytrading is.
B) I DON’T BELIEVE YOU. MANY PEOPLE DAYTRADE FOR A LIVING. No. I personally know of two. Maybe three. And they work 24 hours a day  at it and have been doing it for a decade or more. So unless you want  to put in that amount of time and be willing to lose a lot first then  you shouldn’t do it.One more thing: when you daytrade and lose money it’s not like a job. When you go into a job you NEVER lose money. If you show up for two  weeks, you get paid. Even if you have been warned repeatedly about  sexual harassment you still get paid. You might get fired but they won’t  take your money.The stock market TAKES your money on bad  days. Sometimes it takes a lot of your money. We’re not used to the  brutality of that and it can destroy a person psychologically, which  makes one (me) trade even worse.
C) WELL, WHO MAKES MONEY IN THE MARKET THEN? Three types of people:

  1. People who hold stocks FOREVER. Think: Warren Buffett (has never  sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells  shares but for 20 years basically held onto his MSFT stock).
  2. People who hold stocks for a millionth of a second (see Michael Lewis’s  book “Flash Boys” which I highly recommend.) This is borderline illegal  and I don’t recommend it.
  3. People who cheat.

I’ve seen it for 20 years. I’ve seen every scam. I can write a history of scams in the past 20 years. Without describing them, here’s the history: Reg S, Calendar trading,  Mutual fund timing, Death spirals, Front running, Pump and Dump,  manipulating illiquid stocks, Ponzi schemes, and inside information.  Inside information has always existed and always will exist.

One time I wanted to raise money for one of my funds. I went to visit my  neighbor’s boss. The boss had been returning a solid 12% per year for  20 years. Everyone wanted to know how he did it. “Get some  info while you are there,” a friend of mine in the business said when he  heard I was visiting my neighbor’s boss.The boss said to me,  “I’m sorry, James. We like you and if you want to work here, then that  would be great. But we have no idea what you would be doing with the  money. And here at Bernard Madoff Securities, reputation is everything”.So I didn’t raise money from Bernie Madoff although he wanted me to work there. Later, the same friend who wanted me to get “info” and “figure out how  he does it” said to me: “we knew all along he was a crook.”Which is another thing common in Wall Street. Everybody knows everything in retrospect and nobody ever admits they were wrong.Show me a Wall Street pundit who says “I was wrong” and I’ll show  you…I don’t know…something graphic and horrible and impossible [fill  in blank].
D) So how can one make money in the market? I told you about: #1. Pick some stocks and hold them forever.
E) What stocks should I hold? Warren Buffett has some advice on this (and I know because I wrote THE  book about him. A friend of mine who knows him told me my book was the  only book that Buffett thought was accurate about him). He says, “if you think a company will be around 20 years from now then it is probably a good buy right now.” I would add to that, based on what Warren does. It seems to me he has five criteria:

  1. A company will be around 20 years from now.
  2. At some point, company’s management has demonstrated in some way  that they are honest, good people. If you can get to know management  even better.
  3. The company’s stock has crashed for some reason  (think American Express in early 60s, which he loaded up on. Or  Washington Post in the early 70s. Or Coca-Cola in the early 80s).
  4. The company’s name is a strong brand: American Express, Coke, Disney, etc.
  5. Demographics play a strong role.

With Coke, Buffett knew that everyone in the world would be drinking  sugared water before long. Who can resist? He also started buying  furniture companies right before the housing boom. He knew that as the  population in the US grows, people will need chairs to sit on.Note that Buffett is not what some people call a “Value investor”. But I won’t get into that discussion here.

F) WHAT ELSE? One time I accidentally got an email that was intended for a famous  well-known investor. It was from his broker and contained his portfolio.  I can’t say how this accident happened but it did.Of course, I opened the email.This is a man who writes about lots of stocks.His entire portfolio was in municipal bonds.I don’t know whether or not municipal bonds are good investments. But I  would look into stocks that are called “closed-end funds” that invest  only in municipal bonds. They usually pay good dividends,  usually trade for less than their cash or assets in the bank, and are  fairly stable (it’s very hard for a municipality to not pay back its  debts for various reasons, some of them constitutional).But do a lot of research into the towns.
I’ll tell you one story. I had an idea for a fund in 2008 when oil was crashing at the end of the year.Stocks / funds that invested in municipal bonds in Texas were getting  destroyed. Somehow, because oil was going down, everyone naturally  assumed that Texas was going to simply disappear. I researched every  municipal bond out there and found a good set of Texan cities that were  being sold off with everyone else even though they had nothing to do  with oil.I pitched it to a huge investor who had told me he wanted to back me on any idea I could come up with.He loved the idea. He loved it so much he told me, “You’re too late. We  already have about $500 million in this strategy and we bought the very  stocks you are recommending.”They went up over 100% in the next six months while the world was still in financial collapse. So he made a lot of money.As for me, I didn’t put a dime into my own strategy and made nothing.
G) SHOULD I PUT ALL OF MY MONEY IN STOCKS? No, because you’ll never know anything about a company and you won’t get the kind of deals that Warren Buffett gets.So use this guideline:

  • no more than 3% of your portfolio in any one stock. But if the stock  grows past 3% you can keep it. To quote Warren Buffett again: “If you  have Lebron James on your team, you don’t trade him away.”
  • no more than 30% of your portfolio in stocks (unless some of the stocks grow, in which case you just keep letting them grow).

G, PART 2) WHAT IF WE ARE IN A BUBBLE?  Bubbles don’t mean anything. We had an internet bubble in the 90s. Then  a housing bubble. Bubbles bubbles bubbles. And if you just held through  all of that, your stock portfolio would have been at an all time high  last Friday. So ignore cycles and bubbles and ups and downs. And NEVER EVER read the news. The news has no idea about the financial  world and what makes it tick. Any investing off the news is like taking  out your eyes because you trust a blind person to drive you to work.

H) MY FRIEND HAS A BUSINESS IDEA. SHOULD I INVEST IN IT? Probably not. But if you want a checklist, make sure these four boxes can be checked:

  1. The CEO has started and sold a business before.
  2. The business is a sector with a strong demographic headwind behind it. (or is that a tailwind?)
  3. The company has revenues and/or profits.
  4. You are getting a really good deal. (This is subjective but you can look at similar companies and what they were valued at.)

I can say this: every time I have invested with this approach it’s  worked miracles. And every time I have not invested in this approach  it’s been a DISASTER. Like, a CLUSTERF*(*K Claudia doesn’t let me invest in a private company unless all four items on my checklist apply. Which is important because I tend to believe in everything people tell  me. So I’m happy to invest in a time portal black hole machine.

I) WHAT DO YOU THINK OF BITCOIN? I think bitcoin has about a 1 in 100 chance of being a survivor. So I have 1% of my portfolio in bitcoin.
J) WHAT ABOUT METALS AS A HEDGE AGAINST INFLATION? No, they have zero correlation with inflation. The best hedge against  inflation is the US stock market since about 60% of revenues of the  S&P 500 comes from foreign countries.
K) WHAT ABOUT METALS LIKE GOLD? DON’T THEY HAVE INTRINSIC VALUE? The only currency in the history of mankind that had actual intrinsic  value was when people traded barley in the markets of the ancient city  of Ur. Since then, we’ve developed currencies that we had to have faith  in their value.Every currency has faith and hope backing it.  When people began to lose faith in US currency (in the Civil War), the  words “In God We Trust” were put on the dollar bill to trick people into  having faith in it.But if you’re going to pick a metal, wait until the gold/silver ratio gets higher than it’s historical average and buy silver.How come? Because silver is both a precious metal (like gold) and an  industrial metal (also like gold, but much much cheaper). So there  actually is some intrinsic value in silver.I bought some silver bars back in 2005. But then lost them when I moved. That’s why nobody should listen to me about investing.
L) WHAT ABOUT MUTUAL FUNDS? No. Mutual funds, and the bank representatives that push them,  consistently lie about the fees they are charging. I know this from  experience.One time I accompanied a friend of mine who had  made some money (she was a model and had a good run for awhile) and was  looking to invest it. She asked me to go with her to see her bank  representative who had some “ideas”. Because she was beautiful, I went  with her to the bank. I didn’t talk at all during the meeting but jotted down every time the bank guy lied. He lied five times.
Afterwards I explained each of the lies to her.What happened? She put all her money with the guy. “He’s practically family”. I can’t argue with a good salesman.But he lied about the mutual funds’ performance that he was pitching,  the fees they were charging, the commissions he was charging, and a few  more I can’t remember now. I wrote an article about it in the Financial  Times back then.Fact: Mutual funds don’t outperform the  general market so better to invest in the general market without paying  the extra layer of fees.  Use the criteria I describe above, pick 20 companies and invest. 
M) WHAT ARE SOME GOOD DEMOGRAPHIC TRENDS?
a. The internet. Yes, it’s still growing.
b. Baby boomers retiring. They need special facilities to live in. They need better cancer diagnostics and treatments.
c. Energy. The more people we have, the more energy we will consume. Go  for energy sources that are profitable and don’t need government  subsidies. Whenever you depend on the government, you could get in  trouble.
d. Temp staffing. Every company is firing people and replacing them with temp staffers.
e. Batteries. If you can figure out how to invest in Lithium, then go for it.
N) IS A HOUSE A GOOD INVESTMENT? Everyone will disagree with me on this but the answer is an emphatic “NO!” It has all the qualities of a horrible investment:
a. Constant extra layers of fees and taxes that never go away (maintenance, property taxes, etc that all rise with inflation).
b. Usually housing is too-large a percentage of someone’s portfolio.  Even just the down-payment ends up being the largest expense of  someone’s life.
c. Usually massive debt is involved. If you can avoid, “a”, “b”, and “c” and don’t mind the opportunity cost  in the time required to maintain your house then go for it. Else, rent,  and use the money you saved for other investments that will be less  stressful and pay off more.
Fact: Housing has returned 0.2% per year in the past 100 years.
O) IF NO HOUSING AND ONLY 30% OF MY PORTFOLIO IN STOCKS, THEN WHAT SHOULD I DO WITH THE REST OF MY MONEY? 
Why are you in such a rush to put all of your money to work? Relax! Don’t do it!  There’s a saying “cash is king” for a reason. I will even say “cash is  queen” because on the chessboard the king is just a figurehead and the  queen is the most valueable piece. Cash is a beautiful thing to have. You can pay for all of your basic needs with it.You can sleep at night knowing there is cash in the bank.I love a stress-free life. When I look back at the past 15 years, the  times when I’ve been most stressed is when I’ve been heavily invested  and the times when I’ve been least stressed is when I had cash in the  bank. With cash in the bank you can also invest in yourself.
P) WHAT DOES THAT MEAN, “INVEST IN MYSELF?” 
a. it costs almost nothing to start a business. Find something people  want and start posting information about it on a blog and then upsell  your services on the blog. Or write 1000 small books about  different topics and publish them on Amazon. You can do this on the side  while you learn and have a full time job and then when you are ready,  you can jump to your other passive streams of income. Note: It takes a lot of work to find “passive” income but when it happens, it’s worth it. 
These are some ideas. There are many others.
b. Invest in experiences rather than possessions. Figure out interesting and unique experiences you can have or places you can go to (but they don’t always have to be places). Experiences pay much higher dividends than an extra TV or a nicer car.
c. Books. Reading is the best return on investment. You have to live your entire life in order to know one life. But with reading you can know 1000s of people’s lives for almost no cost. What a great return!
Q) SHOULD I SAVE MONEY WITH EACH PAYCHECK? No. Just try to make more money. That is easier than saving money. I  find that whenever I try to save money I end up spending more. I don’t  know why that is. I’m a horrible spender, which is probably why I’ve  gone broke so many times.Better to just make more with many  streams of income so you don’t have to worry about going broke. And then  saving will come naturally as you make more money.Don’t  forget that a salary will never make you money. After taxes and the  daily grind, and your exhaustion and the feelings of “I hate my job”,  and then inflation and then new expenses (kids), you will never be able  to save. Avoiding Starbucks every day won’t make you a millionaire,  that’s a fact.I say it glibly, “try to make more money”. I  know it’s not that easy. But in the long run, if you have a constant  focus on alternative ways to make more money, then you will.
R) WHAT ELSE SHOULD I DO WITH MY MONEY? Forget about it.Money is just a side effect of health.I talk a lot about the daily practice I started doing when I was at my lowest point. I know now after years of doing it that it has worked. I’ve done very  well with it, and I started doing it when I was dead broke, lonely,  angry, depressed, and suicidal. I didn’t start it from a position of privilege.And you don’t have to buy my book. I’m not selling anything. Here’s the whole thing: stay physically healthy in whatever way you  know how (sleep well, eat well, exercise). Be around good people who  love you and respect you and who you love and respect, and be grateful  every day. Think of new things each day (or all day) to be  grateful for. “Gratitude” is another word for “Abundance” because the  things you are most grateful for, become abundant in your life.And finally, write down 10-20 bad ideas a day. Or good ideas. It  doesn’t matter. After exercising my idea muscle for six months, I felt  like an idea machine. It was like a super power that just wouldn’t stop.Money and abundance in your life  is a natural side effect of the above. I know this for myself but now  since writing about it for almost four years I can tell you from the  letters I get that it works for others.
S) WHAT’S IN IT FOR YOU? I don’t know. I used to write about money stuff because I wanted  investors, or I wanted to sell books, or get speaking engagements. Now I  want none of that.But I get worried that in a world of  increasing economic uncertainty that more and more people are getting  “stuck” and are scared about what is happening.Too many people I know are nervous and depressed. There’s nothing else to know about investing your money. If your bank  tries to give you any advice just say, “thanks but I’m ok”. If  they want you to put your money in a savings account, even “so you can  get the interest” I would politely decline. There’s a reason they are  asking you to do this and I have no idea what it is but it’s not good  for you.You won’t get rich investing your money but you can do  very well. And if you combine that with investing in yourself, you will  get wealthy. But only if you remember that financial wealth is a side effect of real inner wealth.This is the most powerful investment you can do with your time and your life.You can always make money back when you’ve lost it. But one single split moment of stress and anxiety you will NEVER make back again. Investing in the future will never bring back the past. To be able to sit and not have a million stressful thoughts racing  through your head. To be able to appreciate everything around you for  the abundance it is. Most people think they need to say “thank you” to the world.But the world is constantly saying “thank you” to you for being alive, for creating new things, new energies, new experiences.Every day give the world at least one more reason to whisper “thank you” to you. If you can hear that whisper, everything else, every gift in life, becomes expected. You earned it. Just take it. -James Altucher

 

 


		
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The Importance Of Capital Gains


wealthymatters

Ths IRS releases a list of the 400 highest returns filed in the US.They are known as the Fortunate 400.So how do they get there?-Their money works for them.

The Fortunate 400 make as much as half of their incomes (in blue) from investments, and their household incomes have swung very similarly to the S&P 500 (in red) over the past 100 years.The S&P 500 is a broad mix of 500 stocks across multiple sectors, it is a much more accurate gauge of market sentiment than the more well-known Dow Jones Industrial Average – which tracks only 30 stocks.At the very top of the economy, the 400 richest tax returns analyzed by the IRS take home about 50 percent of their income from capital gains i.e they sell at the top of the market.Capital gains are income earned through investments, and they have shot up 1,300 per cent since 1992.

So are there any repeat names on the list ?-73% of the people make it to this list just once.Only four households appeared every year in the last 2 decades.So who are they?Your guess is as good as mine.For privacy reasons the IRS doesn’t publish these names.

US Wealth Distribution


wealthymatters

wealthymatters

The bottom nine-tenths of the 1 Percent club have about the same slice of the national wealth pie that they had a generation ago. The gains have accrued almost exclusively to the top tenth of 1 Percenters. The richest 0.1 percent of the American population has rebuilt its share of wealth back to where it was in the Roaring Twenties. And the richest 0.01 percent’s share has grown even more rapidly, quadrupling since the eve of the Reagan Revolution.

So where do they have their money?In real estate and bonds.So don’t underestimate their relevance to the wealthy.

A Fact Of Life


wealthymattersWhen a person with experience meets a person with money, pretty soon, the person with the experience will have the money and the person with the money will have the experience.-Estee Lauder

Revenue Questions


wealthymattersThis post is in continuation of these 2:Link.Link.

This post is on how to analyse the key revenue constituents of a profit and loss statement (P&L).

Some companies report the ‘total income’ earned by them within a year as ‘sales’. As an investor,its better for us if we take a company’s integral earnings or core operations only as sales and not the income that is generated from other operations. The latter could include items such income from sale of scrap, income from interest and dividends, forex gains, profit on sale of assets, export incentives and miscellaneous receipts, amongst others.While these items may not be a significant part of the total income, it is still a good practice to follow. In fact, it would be even better if we could further bifurcate such earnings under two heads – other operating income and other income. Details regarding total income are found in respective schedules.

Revenues are generated from sales of goods or services. For companies which have a presence in various businesses, it is a good practice idea to track the change in segment wise/ product wise / business wise revenues on a year on year basis. Look at how the income from each business segment (as a percentage of net sales) has changed over the years. This will give us a good idea how a company’s segments or businesses have been performing over a particular time frame. Read more of this post

IT And The Rupee


wealthymattersEvery 1% gain of the Rupee squeezes gross profit margin by 30bps for tech firms and the EPS falls by 2%

Why Go Private?


wealthymattersBeing the promoter of a public company is seen as prestigious.So why do promoters sometimes opt to make their company private again?The simple answer is often the possibility of Private Gains.Public share holders and promoters often have vastly different perspectives on making money,vastly different time horizons when it comes to harvesting gains,vastly different risk perceptions and holding power.Here is an example:

In early ’13,Dell had  a total market cap of about $22 billion.  They also had about $11 billion in cash, which meant the stock market was valuing the entire business at $11 billion ($22 – 11).  The company had a price-to-earnings multiple of about 8.5.

So the situation was that, if Michael Dell and private equity investors put in $2 bilion, used the cash on the company’s books and borrowed the remaining $9 billion, they could control the entire company without the hassle of having public shareholders.

The flexibility of not having public shareholders would enable Michael to do what has needed to be done for years, and that is massively streamline the company’s manufacturing and sales forces (probably through layoffs), re-focus the core PC business, grow the enterprise and consulting businesses, and make the company generally more Lenovo-like or IBM-like. Read more of this post

Loyalty Pays


wealthymatters.comJob-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched. This monetary reward to be paid by your employer in recognition of your years of service is mandated by the Payment of Gratuity Act. Most establishments employing 10 or more workers fall under the Act.

The amount you get as gratuity depends on the number of years you have served and the last drawn monthly salary. Roughly, you get half a month’s Basic and DA for every completed year of service. Here’s the formula to calculate gratuity: (Number of years of service) * (Last drawn monthly Basic and DA) *15/26. So, if you have served 30 years and draw monthly Basic and DA of Rs 20,000 when you leave the job, you get gratuity of Rs 3,46,154 calculated as (30 * 20,000 *15/26). Your employer can choose to pay you more but the maximum amount of gratuity according to the Act cannot exceed Rs 10 lakh. Amount paid above this will be in the nature of ex-gratia — something voluntary and not mandated according to law.

Read more of this post

The World’s Biggest Life Insurance Policy


wealthymatters

Guinness World Records has announced the World’s Biggest Life Insurance Policy ever issued.

However,neither the record keeper nor the issuer would say who is covered by the massive policy.Dovi Frances, the adviser who arranged the policy, would only say it went to a well-known technology billionaire from California.

The wealthiest of the wealthy often buy life insurance for several reasons.Primary among them are tax purposes.In many countries,a wealthy estate is often hit with a hefty tax bill, and there may not be enough cash to cover it, since many millionaires and billionaires hold their wealth in investments.

This $201 million policy overtakes the previous record of $100 million.It is more complicated than most. It’s underwritten by 19 different insurance companies, each with a slice of less than $20 million. If a single company took the risk of the whole policy they would go into bankruptcy if a claim were to be made.

The yearly premium is in the low single-digit millions.

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