Investing 102

[SSLance]

What was the 1986 Federal tax law change called that took away depreciation and killed the commercial real estate market for years and years? In one fail swoop everything changed and many got caught with their pants down.

I was pretty young then but watched my now business partner struggle to stay afloat through those years, eventually losing all of his real estate partnerships except 2 that he still owns today. One never has broke even, the other one is a strip mall that is 100% paid for and hasn't been below 90% occupied for the last 15 years.

Great on site management is key...

[GregWeld]

This is a great discussion -- because for "newbs" it raises the specter of LOSSES... Losses occur for many reasons and can occur in ANYTHING at ANYTIME.

The only money I've ever lost - would be in the sure deals I couldn't possibly loose on. They were going to make fortunes. Easy money.

When you think that way. You're going to get your ass handed to you!

So let's use this discussion to revisit INVESTING 102.

When people tell you to never invest money you're going to need... there's a very good reason for that! You may never see that money again! It might also bring with it DEBT the gift that keeps on giving... that you may be on the hook for.

It's also why "rules" such as the 5% rule should be adhered to. That way - you'll still have 95% left when an investment goes south. Even a complete idiot should be able to pick some winners in a portfolio which will cover the couple of complete losers... We ALL have losers. Get used to it. This isn't a perfect science... and things beyond your control change.

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Why do I invest with a "company" (actually it was ONE guy - that is now Two guys) that picks/prospects/manages/controlling partner when it comes to commercial real estate?? Because I don't know what I'm doing! I want to be "diversified" --- therefore this is another way to diversify. It's NOT in the stock market - therefore it's diversifying my total investment portfolio. I have stocks - commercial real estate - mortgages - and properties I own outright (non commercial and non income producing but that are still assets).

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I will share this info - even though it's not really a rule or whatever..... it's just how MAYBE you all may want to come about in your "thinking".

I didn't suddenly put a couple million dollars into a real estate deal with ONE guy! Hell no! My tax accountant and I had discussed diversifying and "other" income YEARS AGO -- like 20+ -- and he had another client that did these apartments LLC's. He had been the accountant for the guy for quite awhile - and had invested his own money into a couple of these "deals". When a new acquisition came up -- I bought into it -- I think it was maybe 100 grand. A couple years later I bought into another one -- that was 250 grand - I upped the amount because the first one had proven successful. I also now had a better understanding of how these things worked... and had built trust with "the group". My next investment wasn't with this same group ---- hell no ---- I don't want all my eggs in one basket -- and there are MANY companies that do these kinds of deals -- and having been in the first two -- I became aware of others doing this - so I invested with another company. What if the first group became a bunch of crooks? What if they died? What if they weren't as lucky going forward as they had been in the past..... So I diversified with a different group.

You read all the time about people "loosing it all". Generally it was because ALL of their investments were in ONE thing - or with ONE outfit - or with ONE "investment advisor". Don't be the Rob Lowe of investing!

Investing isn't all about hitting a home run. It isn't all about being "lucky". It IS about patience... it is about CONTROLLING RISK... it is about controlling being GREEDY... it is about taking SOME risk while also trying to avoid losses. The losses WILL be there... but you need to control those losses so they don't take you down. Read this again. YOU WILL LOOSE MONEY at some point in something and it will never be the thing you thought you'd lose in. It always comes out of left field. The key is to have that loss not be a big deal. Hurtful - sure - but losses - when you survive them - make you a better investor. Why? Because they teach you not to be so f'n greedy - they teach you to not invest in stuff you know nothing about - they teach you to do better research.... They teach you to say NO to your neighbor/buddy/cousin who has a "can't loose" investment...

[68Cuda]

Originally Posted by GregWeld

Investing isn't all about hitting a home run. It isn't all about being "lucky". It IS about patience... it is about CONTROLLING RISK... it is about controlling being GREEDY... it is about taking SOME risk while also trying to avoid losses. The losses WILL be there... but you need to control those losses so they don't take you down. Read this again. YOU WILL LOOSE MONEY at some point in something and it will never be the thing you thought you'd lose in. It always comes out of left field. The key is to have that loss not be a big deal. Hurtful - sure - but losses - when you survive them - make you a better investor. Why? Because they teach you not to be so f'n greedy - they teach you to not invest in stuff you know nothing about - they teach you to do better research.... They teach you to say NO to your neighbor/buddy/cousin who has a "can't loose" investment...

You had to bring up Bank of America again didn't you... ugly, painful... at one point I just cut it loose. Overall it was about 5% of my total, so with everything else doing good I was fine.

My other, maybe not so painful, was Annaly Capital. I think I broke even, but that means for two years that money made zero net. Great dividends, but the stock was essentially consuming itself to pay for those dividends. The stock price was dropping to match the dividend payout more or less.

Both of those stocks had me watching the market too much. Now I just check in on it every month or so.

[GregWeld]

Originally Posted by 68Cuda

You had to bring up Bank of America again didn't you... ugly, painful... at one point I just cut it loose. Overall it was about 5% of my total, so with everything else doing good I was fine.

My other, maybe not so painful, was Annaly Capital. I think I broke even, but that means for two years that money made zero net. Great dividends, but the stock was essentially consuming itself to pay for those dividends. The stock price was dropping to match the dividend payout more or less.

Both of those stocks had me watching the market too much. Now I just check in on it every month or so.

The hardest part of BUYING --- is Selling. Knowing when to sell -- when the LOSS is eating you up mentally. Nobody likes to take a hit.... we all keep thinking / hoping / wishing / willing "it" to turn around and make us whole. Once in awhile that actually happens. Most of the time -- the "market" has spoken and that market is bigger than "us". There's DIPS --- and then there's "broken". Dips are fun and make you look really smart... Broken -- that beats you down and picks your pocket. Hard to know when it's a dip and when it's broken.

Owning INTEREST sensitive stocks in what we KNOW will be an interest rising market is DEATH. Old saying -- when interest rates rise... the stock market dies... Now. That's a really broad brush and frankly is only true for parts of the market. The key is to understand WHAT stocks might be hurt with a balance sheet of low interest rate bonds/stocks/mortgages.... Annaly (NLY) will be one of those hurt by being caught in the crossfire. I sold my NLY a LONG time ago.

The "mortgage REITS" may be some of the others caught with a book of low yields in a rising market. Really - it depends on how quickly and how far the rates rise.

BTW -- you know I've said it a million times -- the stock you sell at a loss - will climb to the moon half an hour after you push the button. I hate that damn little man on Wall Street. It's okay! Let it go.

Let me know when you - or anyone else - get's it 100% right. I'll give you all my money to invest.

[ErikLS2]

Originally Posted by GregWeld

The "mortgage REITS" may be some of the others caught with a book of low yields in a rising market. Really - it depends on how quickly and how far the rates rise.

I just discovered one of these that I'm researching, New Residential Investment (NRZ). They claim that their portfolio will go up in value if interests rise. I'm still trying to figure out how that will happen and I don't know if I'll ever understand it enough to buy the stock but it pays a 10% dividend right now. I think they buy a lot of mortgages at less than par and then either service it or pool them together and sell them off at a profit once they clean up the pool somehow. They also do a lot of loan servicing, which apparently is a pretty profitable business in itself.

How many of you listen to the company conference call? I've listened to several here recently, COST, KR, HD, NRZ, SNA, LUV and you can learn a lot about the company that way. I heard Cramer recently say that if you own a stock you have to listen to the conference calls. I don't understand all of what they say but I also learn a lot too and get a sense of the attitude of the company heads. I think he might be right. They're not exactly riveting entertainment though.

[GregWeld]

Originally Posted by ErikLS2

I just discovered one of these that I'm researching, New Residential Investment (NRZ). They claim that their portfolio will go up in value if interests rise. I'm still trying to figure out how that will happen and I don't know if I'll ever understand it enough to buy the stock but it pays a 10% dividend right now. I think they buy a lot of mortgages at less than par and then either service it or pool them together and sell them off at a profit once they clean up the pool somehow. They also do a lot of loan servicing, which apparently is a pretty profitable business in itself.

How many of you listen to the company conference call? I've listened to several here recently, COST, KR, HD, NRZ, SNA, LUV and you can learn a lot about the company that way. I heard Cramer recently say that if you own a stock you have to listen to the conference calls. I don't understand all of what they say but I also learn a lot too and get a sense of the attitude of the company heads. I think he might be right. They're not exactly riveting entertainment though.

One of the many reasons I suggest only buying companies you like and use - and or "understand" - and to NOT have too many names in a portfolio. #1 You have to be interested enough in the business to want to be a partner/owner. #2 You have to like the business enough to want to "keep in touch".

Once people understand that a lot of this is purely a mental state... and they realize that they need to have a "connection" with where their money is. They'll fret less and enjoy more.

[toy71camaro]

Great posts fella's... Like reading the new material, thoughts, etc.

[GregWeld]

Some of you have many years left to work - and some are creeping up to retirement age. Funny - it really doesn't seem to take as long as you think it would... I have no idea where the time has gone. Seems like just a couple years ago we were spending the weekends at Toys R Us.... now my kids are 28 and 24. Hardly what you'd call "kids" anymore. It's part of the reason I continue to prod - poke - urge - everyone to start to take part and prepare for what's surely coming!

Since we've moved to Sun Valley Idaho to enjoy the final part of this journey they call "life".... I've noticed a few things, and thought about a few things, that I never did in the "big city". Time moves slower here... relationships move faster! It's a "wealthy" playground... Seems there's three kinds of economies here. The Young - "I just want to <name the fun> Ski... Bike... hunt...get laid" folks... and they wait tables and bartend or fix your skis/bikes. And the uber wealthy that fly their jets in on Friday and boogie back to "wherever" on Sunday evening. And there's those of us that have taken up permanent residence - seeking to enjoy the twilight - doing exactly what the young want to do but can't really afford. Laughing at this thought - but it's mostly true! The young struggle working 3 part time jobs living with 3 others in a 2 bedroom rental, so they might catch some runs when they can... while the "more mature" ski / hike / bike / eat out daily at a far more leisurely pace.

The reason for the long lead in -- is because while we're what most might describe as "quite well off" or some other absurd description... what we really are is "comfortable". I drive by the little airport daily (my shop is just south of it) and I look at the beautiful private Jets and think... WOW! What it must be like to own one of those bad boys! Then I quickly kill that thought with "yeah but it sucks to be them because they came Friday and went back to work on Monday!". It helps to keep me from denigrating myself with "why didn't I do better!". And I guess that's the point of why I'm typing. We're all of different cloth. We have different levels of satisfaction. We have different levels of income. What do we have in common?? All of us WILL at some point need or want to retire.

So what do you want that to look like? You plan to sell "the big house" and move somewhere more affordable? Sounds good... usually doesn't happen. Too many "anchors" - kids - grandkids - friends... Do you see yourself just loading up the motorhome and "heading out" somewhere - only to come back when you're good and ready? I have friends doing that now... So far they've covered most of the western U.S. They have a nice new diesel truck and an Airstream... and they spend a week or so "camping" here and there in "parks" in the cities they want to see. They figure they have to live somewhere - so food is food etc - and the only extra cost are the nightly parking fees. Still - those fees add up! They're $40 or so a night - X's 7 days a week - that's $1100 a month in "extra" expenses!

The trailer friends? They have a SEVEN FIGURE nest egg... and yet they aren't living anywhere near what I'd think someone with that kind of dough would live like! Why? Because ONE MILLION DOLLARS will GROSS them 50 grand a year - which at 20% tax rate will NET them 40 grand a year. Sounds like a lot.... but it's $3,333 per month. With Social Security benefits they're probably NET NET $5,000 a month. House and cars all paid for, no debt. HEALTH INSURANCE is a huge monthly burden! Oh - and then property taxes... and heat and water and groceries... So you can see how that lousy $1100 "extra" for camping fees is starting to take a bite.

So what's my point? My point is, you better figure out what you want those "golden years" to look like... and start doing something about it. It's never too late -- and it's never "enough". But I'll tell ya right now that if you think it's tough to make it every month NOW... Think about what that's going to look like when you're retirement is $60 grand a year and you "only" have a million dollars invested to live on. Pretty daunting - but doable!

[glassman]

Very well said Greg. Understandable and practical. Realistic.

My dad used to have a saying on his refridgerator that said.

"Dreamers build castles in the sky,
"Optimist's live there,
"Realists collect rent from both of them"

It always kinda stuck, the "save a little, spend a little" way. I look back and say the same thing " i coulda done better", but these first world problems jade our minds with greed. I think thats why we call it "managing" our money right?

[toy71camaro]

Awesome post to both Greg and Glassman. Good quote. Great reminders!

I've got 30 years before retirement. It seems so far away, but I can imagine it will come quick!