CASH FLOW GARDEN

THE SUB-PRIME MORTGAGE FIASCO.

2012-02-11T09:16:00.001-08:00

Picture of my Mom (Left) when she worked at Paul's Diner.

I Have Posted Several Pictures of My Dad. Mainly because he recently died. Mom has been gone almost 30 years. I have talked a lot about how hard my Dad worked and it seems appropriate that I let you know that Mom was no slouch in this area either. She waited tables about as long as I can remember. I remember how proud she was of her tips as she kept them in a jar on the table. Perhaps that explains why I seem to leave bigger tips than most folks.

A Few Comments About the Mortgage Business. I started originating mortgages in the mid 1980's. The business was very difficult back then, mainly because of the work you had to go through to assemble a package that could be sold on the secondary market. A lot of people think about banks when they think about mortgages. The fact is that, only the large banks can afford to keep long-term mortgages and they often sell much more than they keep.

It Took Awhile. But we slowly gained market share because we added value be helping borrowers decide which type of loan was best for them and by preparing a file that demonstrated to underwriters how qualified the borrowers were to fulfill their obligations under the terms of the note. Our business peaked in 1993 when we made and sold $150 million in loans. We were heavily taxed to the point that, when the business slowed down, we could not keep all the people we hired. It had been my objective to keep these people as long as we could in case the market improved again.

The Government Was Always Involved The Business. They had an implied guarantee that they would stand behind Fannie Mae, Ginnie Mae, and Freddie Mac in case of difficulty arose that made it impossible to repay the bonds they sold to provide the funds to make the loans. This allowed these agencies to sell bonds at lower rates than most private companies. Some time later, numerous non-profit companies came out with statistics that showed that minority borrowers were turned down at a higher rate than non-minorities. This was true even though turned down minorities had the same income as non-minorities that were approved. All of these studies were flawed because they failed to take into account many other crucial aspects of the mortgage approval process. The government imposed a system called the Home Mortgage Disclosure Act (HMDA) that required all lenders to carefully audit each file and report the results to the government proving that no discrimination was taking place. This increased the workload across the board for the mortgage industry. As if that weren't enough, they pushed for relaxed guidelines in most aspects of the business so that less wealthy borrowers could get loans.

Getting a Mortgage Loan Became Easy. It became so easy that it attracted people with very little financial background into the business. They didn't need expertise, just sales skills. Large broker dealers got into the business. They could barely spell mortgage but they could raise money and sell to their vast network of investors. As underwriting guidelines became more and more relaxed, anyone who could fog a mirror could get a loan that they had little ability to repay. Probably the worst culprits in this fiasco were the rating companies that gave these so-called sub-prime loans an A rating, the same given to large companies with a considerable assets and a long term history of meeting their obligations.

This Made Our Services Less Valuable. When borrowers came to me I expended a considerable amount of energy showing them the implications of getting these loans. I made few loans during that time. What makes it even harder to accept is that many of these borrowers went to other companies who told them what they wanted to hear and approved their loans right away. The result of all these irresponsible practices lead to the breakdown that occurred in 2008.

A Concise Summary of Who Is To Blame. Strictly my opinion but here they are.

1. Mortgage Originators. Although a lot of them didn't know the harm they were doing, it was their obligation to find out. The worst players were those who knew but didn't care.

2. The Government. They pushed for more relaxed lending standards so that more people could buy houses. This was a laudable goal but one for which they lacked the vision to understand.

3. The Large Brokerage Houses. They didn't understand what they were encouraging their investors to buy. Again, it has long been their main function to raise money for business through the sale of bonds and securities. Although they should have taken some time to understand the implications of what they were selling, they treated these packages of loans the same as they treated other securities that they had more experience selling. When delinquencies occurred, they had little idea of how to enforce the terms and ultimately recover and market the properties that they acquired.

4. The Rating Agencies. They should have known that these loan packages were risky and undeserving of the high ratings they were getting. The public believes in these ratings as objective opinions of unbiased third parties who understand risk. No longer can we trust their opinions as being objective.

5. The Borrowers. In the final analysis, it is the responsibility of the borrower to understand the implications of the obligation they are undertaking. While lenders need to be able to explain these, and disclose the underlying risks, borrowers should not take their responsibilities lightly. In the absence of outright fraud by the lender, borrowers have little right to expect the government, charities, or lenders to excuse them from the consequences.

This Should Give You A More Comprehensive View of What Went On. Still, it is a vast oversimplification. One thing should be clear. There is plenty of blame to go around. Those who blame the president, congress, or wall street may be partially right but it goes further than that. I am definitely sorry for those who are losing their home to foreclosure but they definitely participated in this fiasco. Hopefully, they will be more prepared next time.

REFLECTIONS ON 74 YEARS..........

2012-01-30T10:00:00.000-08:00

Men of The Storms Family, Circa 1937

This Picture Was Taken Around The Year of My Birth. I doubt that it will interest many other than me. My Dad was the man on the left. Followed by my Uncle Norman, who died when only 37. The short guy on the next right was my Uncle Ray, and the last was my Grandfather, Hardiman Franklin Storms. My grandmother, Dora was already dead of smallpox and buried for several years when this picture was taken.

How Could This Possibly Interest You? There is a good chance it may not. I remember when I was a teenager, I used to find visiting with my grandfather a chore since he only talked about things that happened long ago. What a opportunity I missed. I would give anything for an hour's conversation with him today.

I Was Considered The Brightest Member of The Family. I remember them saying, "That boy's smart, he's going to get himself an education so he won't have to work for wages like the rest of us." Grandpa dug graves, Dad and Uncle Ray grew carnations, and Uncle Norman was a sharecropper, growing crops on the land of others and paying them 25% for the privilege.

I Did Get An Education. I spent many years in universities taking courses in chemistry, psychology, math, and communications. In a way, I proved them right but actually one of the main reasons I spent so much time in higher education was to live up to their expectations. During that time, I found out that I was no smarter than the rest. Later, I found out that it's all "workin for wages." In my professional employment, I have earned money as a chemist, plastics engineer, real estate broker, mortgage broker, and financial consultant. It's been an interesting and varied career.

So What am I Proudest Of? I started at the age of 10, pulling weeds, picking strawberries, sacking corn, and cutting asparagus. I also washed dishes in a restaurant after school. This is blue collar work in its most primitive form. The four guys in the picture above spent their lives doing this kind of work. They got up at 5:30AM six days a week and worked until late afternoon. When they got home, they didn't take naps or watch TV (there was none). They built or added on to their houses, fixed anything that was broken, grew huge gardens, and grandpa even made quilts. My blue collar background taught me more than I possibly could have learned in 7+ years of university education. There can never be dishonor in honest work and I was never too well educated or too smart for any of it.

Why Do I Write This Stuff? I could tell you things that you might find more valuable about things like how to invest, how to borrow, and how to manage cash flow. I will do more of this in the future. I write stuff like this, not because I want to, but because I have to. If no one reads it but me, it will have been more than worth the effort.

GOODBYE 2011

2012-01-17T10:09:00.000-08:00

The Moon Comes Up Over Wildwood

Has It Been A Good Year? Not real sure I can answer that one. I lost one of my heros but I got a beautiful great grandson. I have had a large property vacant all year at a cost of about $20,000 but I got about 15% return from my stock portfolio. We had a terrible drought with my lakefront property becoming a mudfront property but the rains came and brought it back to normal in one night that brought almost 7 inches of rainfall. I could go on for quite some time with good and bad but I'm sure you could do the same thing if you thought about it.

The Rich Get Richer And The Poor Get Poorer. From a long-term perspective that's a stupid statement. If you look at the 1950's, it's pretty obvious that the poor are not as poor as they were then. Sure, some of the rich got filthy rich but many of the poor live virtually as well now as the rich did then. But what about short-term. The near depression of 2008 certainly made most of the poor even more so but look at the rich. On average, they didn't become richer. Granted, some did get richer but statistics show that most didn't. Are many executives over paid? Absolutely. Are they being paid too much compared to what they are distributing to shareholders or paying hourly employees? Certainly. But is it worth chainging to a government controlled economy. Not in my opinion. I don't care about the gap between the rich and the poor nearly as much as I care about the opportunity for improved standard of living for the poor. As long as I am better off, it doesn't bother me than many of the rich got even richer.

Adversity Has Its Benefits. This may sound crazy but I sometimes think the success of our nation has to do with the adversity we faced in the early to mid 20th century. Many worked 6 days a week and felt fortunate to have a steady paycheck. Millions suffered the pains of war, from those who went to fight to those former stay-at-home moms who left children with grandparents so they could work in factories to build weapons to fight the enemy. They did what they had to do and there was no free medical care or long-term unemployment benefits. All this reminds me of Thomas Jefferson's statement to the effect that you can't bring opportunities to the poor by taking opportunity from the rich. Although none of my family is wealthy by today's standards, most have done well. The one thing I have observed for the past fifty years is that they have worked like hell for everything they have.

Where Will The Opportunities Be In 2012. Many will dispute this argument. With perfectly good homes being torn down because there are no buyers, it appears that the last place to espect opportunities would be in real estate. While real estate is definitely a regional market, and some markets may not turn around for a long time, places like Colorado are almost certain to improve drastically because of three factors. 1. Low vacancy among rental units points to high occupancy in the future. 2. Record low returns from short-term treasuries and bank instruments make any reliable cash flow stream more attractive. 3. Reduced inventory due to low production of new units has reduced the supply of homes available to buy to record low levels. Over the years, our research has shown that, when inventories reach record low levels a market turnaround is close by.

The Main Problem With Real Estate. Management of real estate can be a huge hassle. I firmly believe that the use of professkonal management is the only way to go for most who want to be real estate investors. Avoiding the hassles of dealing with rent collections, evictions, and maintenance problems is worth the cost of paying for competent management. Call Susan at 303-996-2010 if you want to discuss the possibility of starting or adding to your current real estate investment portfolio.

GUEST WRITER.

2012-01-12T08:35:00.001-08:00

Things We Won't Talk About. I grew up in a rural area supposedly sheltered from the dangers of city life. As children, we all knew that there were those in the neighborhood who had a sexual interest in us. For the most part, we stayed away from them. Some didn't. We talked to each other about it but we never told other adults. In a reality TV show some years ago, they did several stories about adults pretending to be pre-teens who talked on the internet with men who expressed an interest in sex with a child. They had a constant stream of men who wanted to have sex with these youngsters. While we would like to think these are rare examples, I am afraid it is not.

I am posting this essay by a woman in her 60's who has a need to let others know what happened to her as a child. I have known her via the internet for several years and can vouch for her honesty. I recommend this article for those who want to be more aware of this social problem and the effect that it can have years after it happened. Your comments would be appreciated. The article is unedited by me and based on her thoughts only.

THE INVADED CHILD

“Shhhhh” was what he used to say. “Don’t make any noise” he would whisper,

As his fingers found the innermost secrets of a small girl child. What was he

looking for? Why was he touching her down there? Nobody had ever done that

before. Why shouldn’t the child say anything? He obviously didn’t want

anyone else to know what was going on. But why? What was wrong with what

he was doing? What was he doing when he would back her up against his

body? What was he doing wrong when he would reach down to what she only

knew as something that would be going between her legs? At the time she

thought it was warm and comforting. “I guess my Daddy does love me,” she

would think to herself. This activity must be ok. He is her Daddy now. And

certainly Daddy wouldn’t hurt her. Her Mommy married him. He had

promised her Mommy that he would take care of her and her children. “I must

be safe”, she thought.

Why did the Mommy marry him? I guess she loved him. Why did he

marry her? Did he love her or did he just want some little girls for his

enjoyment. Why does he do this? Does he understand that he is ruining this

little girl’s life? Does he understand that when she grows older she is going to

realize what he is doing today is wrong? Does he care? Does the mother know

what is going on? Does she care or is she afraid if she says something the

marriage will be over. The little girl wonders.

The little girl is all grown up now and is still doing a lot of wondering.

That little girl was me. I often wonder, as I grow older if my mother really did

knew. I will never know. Both of them have since gone to the other side. All I

can do is guess.

I was 2 years old when my real father passed away. I hear stories about

him, good and bad. I don’t think he would have been sexually abusive. I would

hope not anyway. I guess when I was young, I did really love my stepfather to

be. I have no recollection of any sexual activity with him before I was 6. There

might have been but I don’t remember it. I remember that I was excited about

calling my new stepfather, Daddy. It was very important to me to have a

Daddy. And my mom seemed to love him so it should have been ok. I do

remember, though, that my oldest sister did not like him. And when we moved

to the farm she did not come with us. To me that was sad. I loved her very

much and didn’t want her to stay behind. But he said “We are going to buy a

farm” and it was ok with mother. My sister chose to stay behind and stay with

my aunt and Uncle and their kids. STRANGE. So it was Mom and Dad and

us two small girls, my sister, and myself who was 2 years older than I.

I found moving to the farm as both scary and exciting as only a 6-year

-old could see it. I wonder to this day why he wanted to move us so far from

anyone that we knew and loved. He must have had a plan. As I have stated

before, I don’t know if any of the abuse happened before the move to the farm.

My memory doesn’t go that far back.

I can say I do remember for sure at the age of 6 and 7, my Dad had

started his secret activity. I can remember some evenings when Dad went to

bed and Mom wanted to stay up and read or watch TV, I would go into the

bedroom and lie down with Dad. (Normally that would be an absolutely safe

situation for a little girl) I would love to cuddle in moms’ blankets on her side of

the bed. The blankets were always warm and cuddly and smelled like my mom.

I somehow felt some affection from her when I was under those blankets. I

would fall asleep very fast. To this day I have a blanket that I enjoy taking to

bed with me when I am sick or under stress. Somehow it makes me feel better

Our house was very small and only one bedroom so my sister and I

always slept on the hide-a-bed. But until Mom would go to bed we would sleep

in her bed. If we were tired the only choice we had was to sleep in moms bed.

Which you would think would normally be ok. BUT…

Then one night the hand came and started probing. I didn’t know what

to do but I trusted him. I had mixed feeling about what was happening. Was

it wrong? Couldn’t be. My dad was doing it. It was attention and it did feel

good. So then why did I feel something was wrong? Why did he keep shushing

me? What was the secret all about? Mom would come in the bedroom

sometimes during this time. He would stop the movements immediately. But

when she left the room he would start again. Did she know this was

happening? I often wonder. My mother was a very devoted wife and always put

him before her children. Honor thy husband. Whatever happened to honor thy

children?

As time went on there were more secret meetings. The warm hardness of his being always felt good and natural but, though he never penetrated my

inner aspects, it was wrong just the same. Why was it when mom stepped into

the room to get something or to say something, he would stop. Why didn’t she

see what was going on? Was she that naïve or was it that she wanted to ignore

the situation. I will never know. I can only imagine.

As years went by nothing was ever mentioned. When I came to the age

of, “being a woman”, as my mother explained it, the activity stopped. I guess

maybe he thought I would start smartening up.

Oh how I loved him. Why? He had done me wrong. And by that time I

realized that it was wrong. Why didn’t I say anything then? I guess I thought

people would judge me rather than him. I don’t know. Why didn’t I at least tell

my mother? Would she believe it? I don’t think so. She absolutely thought he

could do no wrong. So as time went on I just put it in the back of my mind and

said that it didn’t matter. That it was over and done with and not one would

ever know. But I knew. And he knew.

Growing up I never had what you would call a real hug, or the real love

that a father would normally give his girl child. He was not ever affectionate,

openly. We never talked like a father and daughter. The extent of his talking

was telling us what to do. “Don’t talk at the table. Don’t interrupt when adults

were talking. Don’t chew with your mouth open.” He would pick and pick at

us until the tears started coming. Then he would scold us for crying. Mom

would be hollering at him because he made us cry and the meal would be

ruined. And God forbid if we would waste some food. At the dinner table we

either didn’t talk or we talked about the subjects he wanted. If we interrupted

when he was listening to the news. That was the end of the world.

My sister reminded me of the time we were at the table and he slapped

my hand with the table knife. I don’t remember why and neither did she but we

remembered the incident. He was a very stern man and definitely was the boss.

We never had the chance as children to advance ourselves. Never had any of

the growing up pleasures such as playing a musical instrument. Dad never felt

it was a necessary thing. It cost too much money. Yet he used to talk about

how he used to play the violin. At parties and dances. So why was a violin ok

for him but not necessary for us to learn how? We never owned a bicycle. Dad

always said feet were made for walking on or he would say, “You pedal your feet

off to give your ass a ride”. God forbid we should have it because it was fun.

We had one sled for sliding in the winter. And had that one sled for many years.

Never had an animal that didn’t earn their keep. Like a horse to ride. “Nope,

cost too much” Yet other neighbors around us were just as poor and had

bicycles and horses. Go figure. So again I ask, “Why did I love him?”

When I would spend time with my friends at their homes I used to think

they were so lucky because their Dad would talk to them. And would talk to

me. Real talk. Not hollering. Not criticizing. Just talking. Asking about me

like I was important to him. When he would give his daughters a hug good

night, he would hug me also. I loved spending the nights at their house. I

wished he could be my dad. Sounds silly doesn’t it.

Later in life I realized that the affection that I thought I was getting was

not really affection, but some kind of a perversion. Mother wasn’t very

affectionate either. I do remember when I was ill; I would lay with my head on

her lap and she would stroke my hair behind my ear. That was about the

extent of it. Never a hug. Ohhhhhh how I wanted a hug.

When I graduated from high school and went out on my own, I searched

for a kind of affection that I was missing in my life. I didn’t realize what I was

missing, just that I was missing something. I went through years of searching,

then I had my children. That was the best thing that ever happened to me.

Mother had a fit when I got pregnant with my first child. Dad was quiet. What

was he thinking? He never said a word. He never condemned me for what I

had done. Never expressed anything. Maybe he was thinking it was because of

him. I don’t know if it was. I just knew that for the first time in my life I would

have someone to truly love. And I would never treat my children the way I was

treated.

When my dad got very very ill with cancer, I was the one at his bedside

tending to him in the hospital. Mother couldn’t come to the city every day. I

would go every day and make sure he was ok. When he needed his duties

tended to, I was there for him. Why? I don’t know. I didn’t hate him. Why?

Why did I worry about him so when he was sick? I was the one he confided in

when he was so sick and wanted to die. When he did die, I hurt so badly. I

mourned him. Why? He had done me wrong so many years ago. Did he go to

heaven? Only God knows that. I had a funny dream on the eve of his death

that I never told many people about. I often wondered what it meant. I would

like to tell you about it now.

We were at his funeral. The family was going down the isle in the funeral

procession. As we are going down towards the casket, I spied my dad in

the pews with the rest of the congregation. What did that mean? I took

his hand and led him down the isle. I said, “Common Dad, you need to

come too.” When we reached the casket he stopped dead in his track

and looked inside the casket. He was looking at himself inside the

casket. Dressed only in a hospital gown. No pillows were under his

head, no padding under his body, only wood. He was withered away to

skin and bone. He screamed out, “NO!!!!!!!!” and ran back down the isle,

through all the people and ran out the door. Not attending his own

funeral. After he left the funeral the dream stopped. What did that

dream mean? Did it mean that he was going to be punished? Did it

mean that he would never have peace? I really hope not. I do hope he

had to answer in some kind of way when he got to the Golden Gate, if he

indeed got there. We will never know. I have to put that in God’s hands.

I have never been a super religious person, but I do believe that in his

own way, God will take care of this.

I never felt very close to my mom. I believe she loved me in her own way

but I don’t think she like me very well. I don’t know why. Maybe I felt that she

could have stopped the activity that I now know as being wrong. Why didn’t I

tell her before she passed what he had done? Why should I? It didn’t matter

anymore. She would not have believed me. He was gone. What could be done

now? Nothing. What would it prove? So I kept quiet. Not thinking about it

every day; just once in a while.

When mother was so very sick, both my other sisters told her that it was

ok to go. I couldn’t. Maybe because I had to get an answer to my questions

before she left. But it never happened. She died. We were sad but also happy

for her because she was out of pain. She also died without ever giving me the

hug that I so desperately needed. Just one little hug.

Mother was also not very good at explaining the facts of life to us

children. Sex to her was not talked about. When my sister got her first period,

instead of telling me the truth, Mother said that my sister had cut her leg and

she could not play with the boys anymore. What did that mean for heavens

sake. What would the boys do now to her that she had cut her leg.? It was

very hard for a girl of 9 to figure out. My sister finally told me about the

menstruation after months of me torturing her with questions.

I am writing this at this time just because I need to think things out.

People say “Put it on paper, it’s the best way for closure.” I spoke to my

middle sister about the molestations about a year ago. I told my oldest sister

just a couple weeks ago. She was surprised. My middle sister was not. As I sit

and think about the situation so many years ago, in a little house in the

country, I wondered how many he had done this to. Was there others. Did he

ever try anything with any of our friends? I don’t think so but we don’t know.

Maybe. He was in his 50’s when he married my mom. That is a lot of time

under the bridge that he could have done this to many children. We will never

know. He was also married once before he married my mom. Is that the real

reason for his breakup? He said it was because she ran around with other

men. That to is something we will never know. It doesn’t matter. It’s over now.

I still don’t hate him. I hate what he did to me and it makes me feel

resentful that he took my innocence away from me. And he did. I am also

realizing that I was not the only one in life that has had this happen to. There

are so many men, and women, out there that are destroying the lives of so

many young girls and boys alike. What gives them that right? Some of the men

out there are supposed to be religious leaders. Molesting several boys and girls

over a number of years. Church leaders are condoning this by moving them

from church to church and hiding it under the carpet. We have gym teachers,

school teachers, boy and girlscout leaders and perverts from every walk of life

taking advantage of children every where. Why does the law condone it? They

show that by not doing anything about it? They just slap the hands of the

predators.

“How could you let this happen?” people will ask. Well, at a tender age

such as I was when it happened, I knew no better. As I go through life now, I

look at children, around the age that I was, and I wonder what would make a

person molest a child that age. With there chubby little cheeks and runny noses

and eyes of total innocence. What is it in a young girl or little boy that would

turn a man or woman into a molester? I look at my pictures when I was that

age and I wonder what he saw but an innocent child. What was the turn on? A

sick turn on. I don’t have any idea what could make a grown man prey on a

child but I guess only God can judge. I forgive him because I have to for my

own sanity. But I can’t forget.

I refuse to accept responsibility for what happened so many long years

ago on a little farm in northern Minnesota. I DO know that what happened was

not my fault, it was the fault of a man that was desperate for something. Some

kind of perverted need.

I really hope by writing this and sharing this with other people, I can get

past the anger I have started feeling lately with all the media on this subject.

The predators of young children are sick people. People say, “This has been

going on for hundreds of years.” Maybe we just didn’t talk about it. Maybe it

was a forbidden topic. What ever the case may be, the molestation’s and

pervertedness of the situation needs to stop.

I have been to the cemetery to visit once since mother’s death. She past

in 1992 and my Stepfather passed in 1985. I have no reason to go there. I have

never had a need. I know people judge you if you don’t go but…….. Oh well.

You have to want to go before it does you any good. It would do me no good to

go there, nor Mom and Dad. That part of my life is over. I need to move on and

let that part of my life be in the past now. That is the reason why I am doing

this writing. People say “ Write down your thoughts” “Be truthful”. Well this is

it. My truths.

God bless us all and God forgive those who trespass against us. Amen

BY MARIE PAULSON

TOPINSMAMA@aol.com

DIVIDENDS: THE DOWNSIDE.

2011-12-27T10:30:00.000-08:00

Daughter, Me, Grandson and the New Generation.

One Generation Leaves and Another Shows up. They took this picture the day after I got home from Arizona after saying goodbye to my Dad. In the picture above are Cindy and Zachary, Me, and Lucas Orion Crutchfield. I have this thing about babies and the miracle of life. They are so tiny and innocent, yet they have been programed for survival. Truly a blessing from God.

Are You Tired of Listening to Me Preach About Dividends? I still believe in their usefulness; however, I do believe I should let you know some of the pitfalls of this approach and give you some ideas about how to manage them.

1. The Dividend May Not Continue. I have not hidden this fact; however, the fact that some companies have a long history of quarterly dividends, does not prevent them from reducing them or even eliminating them all together. The past two years have seen strong companies like Pfizer, General Electric, and Dow Chemical cut dividends. General Electric and Dow Chemical CEOs virtually promised continued dividends at current levels only to drastically reduce them a short time later. The lesson here is that, rather than depend on what the executives say, do your own evaluation of the company's ability to continue dividends. Looking at things about the percentage of cash flow the company is paying out in dividends or the amount of cash and debt on the company balance sheet will give you an independent measure of the probability that the dividend will continue.

2. Sell Right After Dividend Cut. This is not a good strategy because not only will your income be reduced because of the dividend cut, the value of your stock will almost certainly drop. If you are unable to predict the dividend cut you stand to lose both income and principal after the cut. In fact, you may be better off buying more at the lower price right after the cut. Statistically, those who buy right after a cut usually do far better than those who sell.

3. Diversification Can Suffer. Although I am not adamant about staying totally diversified, I do believe that concentrating all your investment portfolio in dividend paying companies makes it more difficult to diversify which can increase your overall risk. Unfortunately, many higher dividend stocks tend to be among Real Estate Investment Trusts, Utilities, Master Limited Partnerships, and Business Development Companies. It is difficult to get a diversified portfolio by concentrating on these companies. Even though they pay lower dividends, you are usually well advised to diversify into other industries like telecommunications, energy, and technology Yields in these companies are usually half that of the high dividend industries; however, they still beat the 1-2% paid in banks.

4. Lower Growth Potential. A company that sends out a higher percentage of its cash flow in dividends should be able to earn a higher percentage return on that capital than you can; therefore, in the long term, you might accumulate more wealth by letting the company reinvest your capital than paying you a dividend so that you can reinvest it. This might not always be he case but you should always consider the possibility.

5. Tax Issues. The company has to pay tax on the earnings it distributes to shareholders. You also have to pay tax on the money after you receive it. While dividends received are taxed at a lower rate than ordinary income, this may not always be the case. There is considerable pressure to increase taxes on investment income and the preferred rate may become a thing of the past in an environment where many voters are of the opinion where we need to increase taxes the so-called rich.

I Still Favor Investing For Dividends. But I am aware that there is a downside that has to be managed. Perhaps we can discuss this more in the coming year. Merry Christmas and Happy New Year to all my readers.

TRIBUTE TO MY DAD.

2011-12-11T08:58:00.000-08:00

An Early Family Picture of Me at Six With Mom and Dad and Brother.

Most of You Know This. I lost my dad just before Thanksgiving. He was 92 years old. We were close for all 73 years I spent on this planet. He had just turned 19 when I was born so we grew up together. As I was going through his posessions, I came across a copy of this blog post I made almost five years ago. Although he never mentioned it, it must have been important to him for him to print it and save it all these years. It is as true now as it was then. Although he only had a 7th grade education, he taught me as much as I learned in seven years of university education. I decided there could be no tribute to him that is more fitting than my thoughts of almost five years ago.

Sunday, June 17, 2007

THINGS I'VE LEARNED.

From My Dad. It's Father's Day. All the kids and grandkids have either been over here or called me. I received numerous cards, most quite humorous. I am lucky to have such a devoted family, more important to me now than ever as I approach my 70th birthday in a few months. But the main thing that comes into my mind on this day is my own father and the things he taught me. There is no legacy of material goods that can compare with the value of the things he taught me.

1. When You Make a Mistake, Admit It And Do What You Can to Correct It ASAP.
Before I was born, my mom and dad moved to Kentucky so my mom could be with her mother when I was born. My Dad found himself working in the dark misery of a coal mine. Kentucky was rainy and damp and there was little work to be had besides in the coal mines. When I was six weeks old, they made their way back to Colorado where our entire family was better off.

2. There Is Always A Way. Until I was seven years old, we lived in a series of run-down rental properties. Every thing from converted barns to tool sheds. Mom and Dad had no money to buy a home and not enough income to make mortgage payments. When the Mile High Poultry Farm closed down, the company practically gave away their old chicken coops to anyone who would tear them down. Dad acquired several of them and tore them apart piece by piece. We then removed the nails and used the lumber to build the house I grew up in. I followed him around from start to finish. I had a little crow bar (which I still have) and I did what little I could to help. My mother and I removed nails and stacked lumber while Dad worked on the house. That was almost 60 years ago and the house is still being lived in today.

3. How Much You Earn Is Not Important. My Dad became financially independent on very little income. I still can't figure out how he did it. He was frugal but not stingy. He knew the world didn't owe him anything and he went out and worked for everything he got.

4. Being Poor Is a State Of Mind. When I was 12 years old, I used to cross the road in front of our house and lay in the cool green grass under the apple trees. In the fall there were apples every where and I ate all I could but most of them rotted on the ground. One day I got this great idea and I ran home to tell my Mom we should pick up all those apples and give them to poor people. Mom's reply was "Son, we are poor people." Nobody ever told me. There was always an attitude of "we'll get what ever we need." And we did.

5. Teach Your Children to Take Care of Themselves. I have many clients who sacrifice much of their wealth to care for children who are old enough to take care of themselves. I don't know how he taught me this, but from the age of 13, my pride wouldn't let me to ask my Dad for money. I saw how hard he worked for what we had. I knew I was expected to do the same thing. I did my best to earn my keep. I wasn't always able to do this but I never stopped trying.

I guess this is about the best I can do to pay tribute to my Father on this day. In case you think I am referring to a memory, let me tell you the best part. As I approach my 70th birthay, my father is still here. Not just in spirit but in the flesh. He doesn't walk quite as fast and he gets out of his chair slowly but he is still teaching me. He is showing me how to grow old with dignity and pride. As my brother says, "He'll live to throw dirt on both of us." I hope he does.

UNFORGETTABLE CHARACTERS I'VE MET. THE WARRIOR.

2011-11-19T10:36:00.000-08:00

Her Father Was The Town Doctor. She was a pretty lady just over 30 but her family was disappointed in Helen. The prevailing opinion in 1922 was that any female over 30 that had not yet attracted a mate was missing some important qualities. While that was embarrassing, she had an even more humiliating problem. She was going to have to tell her family that she was with child.

Their Reaction Was Predictable. They were horrified. Within 30 days she was on a train to Kansas where she had some wealthy relatives. She was going to have the baby and come home after a respectable period. The family would have several months to concoct a story as to the origin of the child. This didn't work so well. Poor Helen died from some sort of flu germ shortly after giving birth. They named the baby John and the Kansas family was more than willing to keep the child and raise him as their own; however, the Pennsylvania country doc would have none of that. Within two months, he was on a train to claim his grandson so he could bring him home to raise as his own.

A Pretty Auspicious Beginning For The Warrior. The doc was unable to continue bringing up the baby, hereinafter called "The Warrior". He must have contacted the same nasty flu germ that killed Helen because he died within a month of coming home with the warrior. Ultimately the warrior wound up with the oldest brother in the family who went through adoption proceedings. His uncle didn't raise him like the rest of his "siblings". He was assigned most of the hard work tasks around the farm, one of which was to bring home wild game to subsidize the family meals.

He Was Well Liked In School. Like most of his family, he finished high school which was not entirely common during those times. He still felt like an outsider at home so he joined the army shortly after high school. Because of his excellent marksmanship, he was selected to become a gunner the air corps. After undergoing several months of training in the maintenance and firing of machine guns, he was assigned as a bottom turret gunner on a B-24 in the 492nd bomb group.

The 492nd Was Not Blessed With Fantastic Luck. They had a tremendous casualty rate. The warrior and his crew were one of a very few to complete their quota of 30 missions, two of which were during the invasion period in the vicinity of Normandy. Because of his contribution to his crew's success, he was awarded the Air Medal and The Distinguished Flying Cross. The rest of the 492nd was disbanded after three months due to their huge casualty rate.

I Was Seven Years Old When I Met Him. My father was still in combat in the army when my aunt brought him to our house and announced her intention to marry him. I liked him right away. I thought the jacket he wore with one bomb attached to the back for each mission he flew was more than neat and he spent considerable time teaching me some of the skills he had acquired. He was part of our family for 60 years but almost never mentioned any of his combat experiences until I coaxed some out of him after he turned 80. The big surprise was that this mild mannered gentleman had undergone so many tasks that required courage more than I could imagine. It wasn't until after his death that I found out he had won the two medals given out for distinguished performance.

Alzheimer's Claimed Him Before He Died. Old age related illnesses have no respect for lifetime courage and accomplishment. Dementia began to overtake the warrior in his late 70's and gradually worsened until he could barely talk and he had no idea who I was when he died at the age of 85. I watched out for him during these years and I must confess it was a relief to see this proud man relieved of the burdens of that horrific disease. The plaque you see above was made by my wife and we hung it in his room at the Alzheimer unit. The purpose was two fold: 1. To remind his failing memory of the good he had done during his life. 2. To let those caring for him in his unit know he wasn't just another old man who had to have his diapers changed. Perhaps they might have given him just a bit of the respect he had earned.

We Are Losing His Generation At a Very Rapid Rate. They will all be gone within a few years. War is changing and, although this was a difficult, high casualty war, those of that generation had the comfort of knowing we were all behind them. Perhaps we can do more for the current generation of warriors.

UNDERSTANDING TOTAL RETURN ON INVESTMENT.

2011-11-13T09:24:00.000-08:00

Water Level At the Dock After A Single Night's Rain.

I've Written About This Before. It's a relatively simple concept, yet I am surprised at how few people have a firm grasp on how we are rewarded for risking our capital in an investment. I even find financial professionals who do not have a firm understanding. There are two major sources for our return. 1. Benefits (usually in the form of cash) during the holding period. 2. Benefits from selling at a profit at the end of the holding period. If I told this to an audience at a seminar, I would expect to hear a chorus of "Duh" after those statements. While you may hear a few other suggested benefits such as tax advantages, etc. the first two overshadow the remainder. Here is another Duh statement.

More Is Better Than Less and Sooner is Better Than Later. Again relatively simple; however, there are some strong implications here. It's a relatively simple matter to understand that the sooner you begin to receive cash flow, the lower your risk. Less obvious is the fact that this interim cash flow may be a return on investment or it may be a return of your initial investment. Also, you won't really know which it is until the end of the holding period. To use a real life example from my own portfolio, consider an investment I made in a company called Prospect Energy Capital. My original investment was in May of 2007 when I bought 2000 shares at an average price of 13.50 per share. During this holding period, I have received distributions of $9685. Not a bad return on an investment of $27,000. That is until you look at the current value in todays market. At a current price of $9.45 the value is $18.900 or $8,100 less than I paid. From that point of view, if I sold today, my $9685 in distributions would be considered as a return on investment of $1585 and a return of capital of $8,100. If you have trouble following this example, let me assure you it's relatively simple. Your failure to grasp this concept was more likely do to boredom or not giving a damn. For some reason I enjoy this sort of thing.

Let's Go A Step Further. Suppose I sold today what would be my return on investment. Let's simplify this and say I received my distributions monthly (which I do at present.) My return would be an average of 193 per month for 50 months. This equates to an annual return of 1.61%. Obviously, there is little argument that if I sold today this would be a poor investment. Let's say we didn't receive those distributions and we sold today at $28,585 (current value of $18,900 plus $9685). Our return on investment would be 1.37%. While this is not a huge difference, it does illustrate my point. More is better than less and sooner is better than later.

An Even More Important Point. It isn't just the magnitude of your return that matters it's which is the most important to you. In a high risk environment such as this one. Current income is important as a risk reduction tool. I have clients tell me that they have an adequate income from salary to fulfill their income needs. This can be true for many of the younger folks with relatively stable employment but one point to remember is that current income is important for things other than income to fund your lifestyle. It can be valuable for reinvestment. During the "Tech Wreck" when dividends were considered less useful, many ended up with a drastically reduced portfolio value with no capital to re-invest in stocks at bargain prices.

So Who Would Benefit From Later Rather Than Sooner Income? As I mentioned before, one group that would often choose growth would be higher tax bracket investors with no need for income to fund their current lifestyle. Since there is no current tax on accumulated growth, these are much more tax efficient than stocks with current income. Also, stocks that reinvest their earnings rather than pay distributions should be able to earn more on this capital than the investor who must reinvest these funds. Unfortunately this isn't always the case as some companies can't be depended on to invest this capital in the best interest of shareholders as opposed to management.

The Implications of All This. Some of us have no interest in finance for different reasons such as the lack of capital to invest or the ability to make more money doing something else while they pay to have their investments managed. My position is, whether you manage your own money or have someone else do it, the more knowledgeable you are the better qualified you are to communicate your needs to your investment manager or spot a manager who is acting more in his best interest than yours. I would appreciate your feedback on this post.

UNFORGETTABLE CHARACTERS I'VE MET.

2011-10-22T11:07:00.000-07:00

The Land of My Ancestors in 2010.

We Hunted and Fished This Area. I suppose everyone has an old friend they would like to see again. Mine was from 1950. His family moved across the street from me when we were in the 7th grade. His name was Richard but we all called him Rich. Many labeled him a misfit. He often didn't tie his shoes, buttoned his shirt crooked, and could never seem to get the last bit of shaving cream from behind his ear. Some folks even thought he was a bit slow mentally. I knew better. Especially now that I am 73 years old and have a number of those problems myself.

He Was Always Using Big Words. I didn't dare ask what they meant because I thought he would laugh at me. Because of him, I just about wore out a dictionary. He also had a quick wit that could coax a laugh out of the most rigid sourpuss. No.....Richard wasn't dumb. He just occasionally did dumb things. One incident I will never forget is when he asked his mom if he could drive the family car around the block. He drove clear to downtown Denver, a round trip of more than 15 miles. The next door neighbor, Gayle and I sat frozen in the passenger seats, sometimes frozen with laughter. When we came to a red light, he would start shifting into low gear 50 feet from the intersection. Still, we made it home. Quite a feat for a 13 year old who had never driven before. Of course, he had no license, let alone a a learners permit.

Me and Rich Had All The Answers. We both knew that Franklin Roosevelt was the first president of the country and the man who wrote the constitution. He could have been the heavyweight champ but he had to spend his time being president so he could save the country from depression. We thought it was possible for him to rise from the dead and throw the Republicans out of office so as to avoid another depression which we all knew was just around the corner.

The Most Noble Activity Was Fishin'. We went fishin' as often as we could talk my parents or his into giving us a ride to one of the local lakes. In order to fish, you needed a hook a a line, and bait, but most important, a bobber. Without a bobber, white with a red tip, you couldn't see the fish bite. Rich also followed other principles Fish close to the bank, put your bait anywhere you see bubbles, and if it's big enough to bite, it's big enough to eat.

Our Favorite Fishin' Spot was Near Clear Creek. It was a gravel pit near the creek pictured above. We almost drowned wading the creek to get to that spot. We were carrying our fishing gear in the fast moving water which was shoulder deep. It was much deeper then than it is now and, despite its name, was no where near clear. We only had a few minnows left but it was enough to catch a couple of large bass and three or four reasonable sized crappie. We swore each other to secrecy not to disclose to others the location and the fact that minnows were the preferred bait.

The Things We Didn't Understand Back Then, I Still Don't Understand. One of the biggest mysteries was women. They are still a mystery even though I've married three of them and helped raise three daughters. I can't understand why people harm other people, especially children. I don't know why they had to cut down all the apple orchards and raspberry fields in the valley where we grew up. I don't know why they ran a major interstate highway along the west side of our fishin' hole. And I don't know why the teachers in our school and the adults in our neighborhood wouldn't let Rich be the way he was. Finally, I don't understand death. Why do we go through all these stages from grandchild to child to adult to father to grandfather, only to disappear into eternity. Maybe Rich knew the answer but every time we started to talk about it, we got scared and quit.

Where Ever You Are, Rich, I hope you are still leaving your shoes untied and buttoning your shirt different. I hope you are still spontaneous and creative and possessed of great wit. The trials and tribulations of life have a way of breaking us all into formation. I pray that it didn't happen to you, Rich.

I Found This In an Old Notebook I Wrote In 20 Years Ago. With the help of the internet, I have found Rich. One of his two beautiful sisters is still alive and in her mid 80's and they live in California. It's unlikely that we will meet again. He doesn't see well and I don't hear well so we have a problem communicating. I'm glad he's still alive and I hope he gets a lot of enjoyment from the years he has remaining.

REQUIEM FOR A WATER OAK

2011-10-17T08:31:00.000-07:00

" ....Only God Can Make A Tree." Joyce Kilmer.

I've Always Loved Trees. That's why I live here. Hurricanes Ike and Rita along with a severe draught took 75 of these majestic creatures from us. Since you survived the hurricanes and lived adjacent to the water I was not worried about you. I forgot about the beaver who chewed all around you and removed your bark resulting in what appears to be a lingering death.

You Were My Favorite. You stood guard over my dock and provided shade to those who wanted to spend time by the water. You watched my grandson catch his first fish and my father-in-law catch his last. You watched me tip over in my canoe and get an unexpected cool water bath. Do you remember how I looked all around to see if any of the human species witnessed that. I was relieved that it was only you who saw that display of clumsiness and I was secure in the knowledge that you would keep it a secret.

I Was Patient With You. I lost numerous fishing lures that became totally meshed in your leaves and branches. When friends and family chastised me for these errant casts, I told them I was fishing for the elusive Tree Bass. I never became angry because I knew your benefits far outweighed the cost of a few fishing lures.

Looking At You Today. It fills my heart with sadness. My entrepreneurial neighbor, a Rice University Graduate who prefers to do landscaping work in the woods to corporate life , came by to tell me you were gone . I agreed since I have never seen your leaves turn brown in the 15 years I have lived here. Still, I couldn't bear to have you removed. I am hoping for a miracle. I want to see the brown leaves fall and new green ones emerge. I know I have probably lost a dear friend. If the Boss can find some compassion for you and me, I pray that your greenery can be restored. If not, I will someday have to admit defeat and provide you with a dignified exit from the planet.

WHAT A DIFFERENCE 50 YEARS MAKES.

2011-10-14T15:09:00.000-07:00

The "man" on the left is a proud college boy who was the first in his family to attend college. The man above is the same man after getting his ass kicked by the world many times over. The man on the left thought he was pretty smart to have received
that college degree with a major in chemistry. The man above knows very well how lucky he was to be able to finish college and to graduate with mediocre grades. The man on the left earned his way through school with little help from family or student loans. He was lucky enough to have a job that allowed him to set his own hours and earn enough to pay his own expenses. He also got a grant from the National Science Foundation that paid for his last year.

Timing Means A Lot. College, even at a state supported university, costs many times what it cost in 1960. Retirement plans are often decimated by education costs for kids. In addition, many students graduate with mountains of debt. All this and the majority of students move back home after graduation. When I graduated, I had 20 or so on-campus interviews and 5 or 6 interviews where I was flown all over the country for on-site interviews. The company that hired me spent thousands to move my wife and I from Colorado to Delaware. No such luck today. Which leads me to the major point of this post.

Is College Worth It? I have to question the value of a college education today. Statistics show that the average college graduates earn considerably more over a lifetime than those without an education. I don't question those statistics but you also have to take into consideration that those who attend college have, on average, more ambition than those who don't. There have always been more opportunities for those with higher than normal ambition. Bill Gates and Steve Jobs and countless others have been quite successful without finishing college.

Keep My Opinions To Myself. My daughters have chastised me not to talk this way around my grandchildren. I guess I don't mean to say that I don't recommend college. If you can afford it your children will probably be better off with an education than without. If you have a child with a strong ambition to work in a field that requires an education, it is probably worth it. But if you are having trouble sending your child to college without jeopardizing your financial security, don't feel guilty. There are ways to accomplish educational goals without taking a vow of poverty.

Reflections on a Monday Morning.

2011-10-10T08:43:00.000-07:00

"...When my son is born, and he looks up at me, he will see the man he has helped me become." My grandson expecting his first child in two months.

A Different Approach. My last post about dividends could have been quite useful to those looking for a more stable return on investment than the overall stock market; however, I didn't find it much fun to write. There are a lot of things more important to me at this stage in my life than money; therefore, I have decided to write more often about these things. Let me know what you think.

Working Together Works. Although I was very young during WWII, there is one thing I remember that was different than subsequent conflicts. We were all involved in that war. Most of us had family members in one combat zone or another and the casualty rate was so high that just about everyone had suffered a loss or knew someone who did. There were rationing coupons for gasoline, meat, and other commodities needed to support the troops. Formerly stay-at-home wives worked in defense plants. Old men did the same. Even kids were involved as we collected milkweed pods that were supposed to be used in parachutes. We made tinfoil balls to be processed into a reflective material to drop from airplanes. Even fats were supposed to be saved to be processed into glycerine for explosives.

Even The Press Was Different. Most journalists voluntarily refrained from publishing negative information about the war effort but that wasn't enough. Less than two weeks after Pearl Harbor the office of censorship was established. The government actively monitored news organizations both for propaganda purposes and to prevent leaking of secret weapon information. Freedom of the press was no longer an issue. They also suspended habeus corpus which would have required judicial treatment of anyone suspected of being an enemy of the war effort. In that environment torture of the enemy, no matter how severe, would never have come to light like it has during the war on terror.

You May Agree or Disagree. Contrast that environment with the present. A much smaller segment of our population is directly involved in combat. The average American is sacrificing little for the war effort. We are bitterly divided over the war and a number of issues and, although most claim to be in support of the troops, very little effort is is expended in showing this support. Then, as now, we are in the midst of a serious threat to our way of life. The difference is that now those defending that way of life are largely limited to a small fraction of our population, who's lives are in danger each day. Until we become more united in support of efforts to defend our freedom, it will be in jeopardy.

DIVIDENDS. THE ONLY GAME IN TOWN

2011-10-03T11:48:00.000-07:00

A Decent Return On Your Investment Portfolio Involves Some Risk. I have met with several retirees who have lost 70% or more of their capital. What used to be the lynchpin of American industry, General Motors endured a bankruptcy and the stock holders saw virtually all their capital wiped out. If you had any of that in your portfolio at all, you suffered a major loss. Dividend paying stocks weren't exactly safe since several companies with 50+ years of ever-increasing dividends found it necessary to drastically reduce, or totally eliminate all payouts. Despite these dire circumstances, you either have to forgo any return on your investment (the after tax return on one year CDs is virtually zero or negative) or take some risk. Since I do not have enough capital to sustain my lifestyle without some return on my capital, I chose to take some risk in the market.

Cash Flow Is My Choice. If a stock does not provide some interim cash flow while I am holding and hoping the value goes up, I am not interested. Last December, I put together a sample portfolio of dividend paying stocks to provide some income with what i consider to be acceptable risk. The cost of the portfolio was $199,755 and the anticipated income was $11,950 or 5.98%. The main purpose of this post is to let you know how that portfolio has done since the mid December purchase date. An update of the individual components is as follows.

1. Ameron Corporation, AEE. This is a utility company with an original purchase of 600 shares at $17,130 and a dividend of 1.54 per year. The current value is $17,406 and the annual dividend has increased to 1.56 per share. So far we have colleccted $684 in dividends since the original purchase date.

2. Bristol Myers/Squibb, BMY. This a pharmaceutical company with an original purchase of 700 shares at $18,380 and a dividend of $1.28 per share. Current value is $21,784 and the dividend has increased to $1.32 per share. So far we have collected $693 in dividends.

3. Duke Energy, DUK. This is a utility company that we purchased 1100 shares at $19,300 with a dividend of .98 per share. Current value is $22,143 and the dividend has increased to 1.00 per share. So far we have collected $825 in dividends.

4. Lockheed/Martin Company, LMT. This is an aircraft company that we purchased 300 shares at $20,460 with a dividend of .98 per share. Current value is $21,747 and the dividend has increased to $1.00 per share. So far we have collected $900 in dividends.

5. Medical Properties Trust, MPW. This is a real estate company that owns medical properties. We purchased 2000 shares at $20,240 with a dividend of .80 per share. The dividend is still .80 per share and the current value is $18,520. Dividends have been $1,200.

6. AT&T, T. Most of us know and do business with this company. We purchased 600 shares at $17,526 with a dividend of $1.68. Current value is $21,264 and the dividend has increased to $1.92 per share. Dividends YTD have been $774

7. Health Care Properties, HCP. This is a company that invests in a wide variety of health care related properties. We bought 600 shares for $19512 with a dividend of 1.86, Current value is $21,264 and the dividend is $1.92. So far we have collected $864 in dividends.

8. Kinder Morgan Energy Partners, KMP. This is a company that owns pipelines for petroleum products. We bought 300 shares at $20.775 with a dividend of 4.44. Current value is $22,137 and the dividend has increased to 4.60. This year we have collected $1035 in dividends.

9. Fidelity National Financial, FNF. This is an insurance company that specializes in title insurance. Tha annual dividend was .72 per share. Current value is $21,658 and the dividend has decreased to .48 per share. YTD dividends have been $504.

10. Windstream Corporation, WIN. This is a wireless communication company for which we paid $26,800 and bought 1900 shares. Annual dividend was, and still is $1,900. We have collected 1, 425 so far.

Summary. The total value of this portfolio is now $206,478 or $6,000+ more than our purchase price. Total dividends at the current payout are $11,896 compared to our rate at purchase of $11,950. Seven of ten companies are worth more than the purchase price while
three are down. Seven of 10 companies have raised their dividends while one is lower and two are unchanged. I have not monitored these carefully during the interim which I would recommend any investor do. Chances are I might change one or two of these however, the main reason I have included these is that I believe it should be relatively stable in a highly volatile market. Total dividends paid out by this approximately $200,000 investment year to date have been $8,904. Considerably more than the average 1 year CD. I tend to ignore the approximately $6,000 gain since it could be up or down depending on a number of factors. That small gain could disappear or increase depending on investor sentiment.

TEN THINGS I'VE LEARNED ON FACEBOOK.

2011-09-16T12:14:00.000-07:00

Many Think It Is a Waste of Time. I must admit, I was one who thought it fell into The Get A Life category. Maybe it is a bit of a time waster but I've learned a number of things that, taken together, have made a significant change in my life. Here, in no particular order, are ten of them.

1, Facebook is Not Just For The Younger Generation. Our kids and grandchildren may use them for flirting and gossiping with their friends which doesn't mean as much to most of the older among us but the older generation may have an even greater need to stay in touch with the outside world. Neuroscientists have learned that the aging brain is capable of learning new things that can keep it biologically and psychologically healthy instead of unavoidably deteriorating as we grow older. One of the most important factors in the health of the aging brain is social contact with others. As elders find it more and more inconvenient to leave the home environment, Facebo0k can be a valuable resource in avoiding elderly decline.

2. People You Found Interesting Fifty Years Ago Are Still Interesting Now. I ran across a friend from 50 years ago, John, whom I haven't seen since high school. We had a few common interests together back then and enjoyed spending time together. Even though we went somewhat different directions after high school, we met on Facebook and now have totally different interests but we still connect on many different levels. My relationship with John has added numerous benefits to my life.

3. Blood Bonds Are Extremely Important. I ran across a cousin, Marlene and her husband, Clarence on Facebook last spring. She came from a very religions family and I did not and we had virtually no reason to meet again since we last visited over 60 years ago. It also turned out that her husband Clarence and I had never met but he and I were also cousins through a different branch. Our visits together have been high points and have added immensly to my life in the past year.

4. You Have An Opportunity To Meet People You Might Not Have Met Otherwise. The other day, I met with Josh, a 23-year old veteran of combat in Iraq and Afghaniston. We met on Facebook and decided to have lunch together so I could have a chance to become more knowledgable on what our young men go through over there. He was very willing to share, even some things he found uncomfortable to recall. I came away more knowledgable and even more appreciative of those young men who put their lives on in our behalf.

5. People Are Often Willing To Share Some Intimate Details With Others. Kim started to work in our company when she was 19. She was a brash young lady and knew virtually nothing about our business. She became a huge asset to us in a hurry but I have rarely seen her since she left us over twenty years ago. When we became friends on facebook, I had a chance to follow her through a period of unemployment, a serious injury to her daughter, motorcycle trips across country, and some of her political views. Her frankness and "what you see is what you get" attitude leaves it even more like she's my daughter than she was 20 years ago.

6. You Even Get To Know Family Members Better. My brother married his wife 35 years ago. Even though I saw her on holidays, weddings, and other family events, most of our time at those events I spent with my brother and his two sons. Since we met on facebook, I have learned of her immense admiration for plants and animals around her mountain home and of her relationship with with God which forms a central part of her life.

7. Genuine Love can Exist Between People Who Have Never Met. I have observed this between long-time online friends. I had considerable doubt that this could happen but my observations of some of the interactions have convinced me that this is true. I guess I am now convinced that love can take many different forms and everything we thought to be true may not be.

8. What Can Appear to Be Genuine Love Can Be A Fantasy. I read about a chat room relationship between a male named "Marine Sniper" and a female labeled "Tall Hot Blonde." They both sent very appealing snapshots of themselves and they talked extensively on the telephone, even engaging in phone sex, whatever the hell that is. A third young man also became involved causing lots of jealously. In the final analysis this third man was the only real one of the bunch. Unfortunately, he was killed by "Marine Sniper" who turned out to be 46 years old. His picture was genuine but taken 23 years ago. When police talked to "Tall Hot Blonde" they found out she was 45 years old, married and mother to the young lady in the bikini photo that she claimed was herself. Which brings me to item 9.

9. In Addition To Love, Genuine Hostility Can Form. The previous example illustrates this. In less serious case, I posted a joke (not a dirty one nor hostile one) on an online friend's page. One of her older friends, who obviously did not understand the joke, replied saying that I wouldn't have made that reply if I "knew the lord." Later she replied and she said she didn't understand what I meant but she didn't appreciate it and dropped me as a facebook friend. If she didn't understand the joke, why did she not appreciate it. Again I should emphasize that the joke wasn't dirty, hostile and didn't contain any hostile innuindos. I still don't understand what anyone found offensive but I decided it wasn't worth pursuing.

10. Facebook Can Be A Place to Showcase Your Talent. One of my friends, Sue paints beautiful pictures of horses that show an amazing facility for the use of color. She takes pictures of the paintings and puts these on Facebook. I don't know if her pictures are an economic success but there is no doubt that she is a talented artist.

This Post Represents a Departure from my Original Subjects. Your feedback is appreciated.

AMERICA WAS WRAPPED UP IN A BLANKET OF RAGE.

2011-08-29T11:04:00.000-07:00

Been Distracted Lately I won't bore you with the details of why I have been distracted from my practice of a weekly post. Let's just say I have been driven to start again by some of the things I have experienced lately.

A Blanket of Rage? Read the title page about America being wrapped in a blanket of rage. Who said that? Michael Moore? Rush Limbaugh? Actually it was neither (I'll tell you who said it in a later paragraph) but it describes the environment today. Despite my strong efforts to stay away from hate speech, I do find myself getting angry at some of the things I hear, like "Let's take these sons of a bitches out and give America Back to America Where it Belongs. (James Hoffa) There have been comments from the left that Fox News cut out some parts of the speech to make it look like a call to violence. as opposed to what he really meant, that we should vote the Republicans out of office. (I might remind him that they already did.) Violence or voting booth, I know hate speech when I hear it. I probably should look for something equally offensive from the other side but I'm sure there are plenty who will do that for me.

Mr Hoffa Wants More Union Jobs. Actually, I agree with him. I want more jobs for everyone. What Mr. Hoffa and his constituents haven't done is tell me how to make American Labor competitive with the BRIC nations. (Brazil, Russia, India, and China). We are in a global economy and both labor and management have to get more bang for our labor buck if we are going to re-create the job market in America.

Who Said The Title Quote. It was Bob Dylan and he has yet to state his political preference. The time he was referring to was 1968. Racial strife, assassinations, anti-war demonstrations, and sit-ins capped off by the Kent State killings. We are not yet in a situation that serious and I sure hope it doesn't come to that. A common thread to both times is a long-running war which becomes more unpopular by the day.

You and I Both Know What Changed Everything. The September 11 attacks. You know my favorite memory of that day? I remember looking out my 9th floor office window and seeing a man on the freeway overpass waving a huge flag on a six foot pole. Cars driving by were honking and blinking their lights. Many would think that the flag waving was a meaningless gesture. I understood. The poor flag waver just felt he had to do something to express his love for the country. I wanted to do something myself to show my support. Three years later, the flag waver was replaced by folks standing on that, and similar, overpasses with large signs that said, "Bush Lied, Thousands Died." Or at election time, signs said, "Fire The Liar." How did we move from all pulling together on 9-11 to half of us hating the other half a short time later. Frankly, I really don't know but I know its bad for our country. Hate hurts the hater as much or more than it hurts the hatee. We all suffer from what is going on today.

The Terrorists Accomplished More on 9-11 Than Most Of Us Realize. Not only did they kill almost 3000 of us and destroy some major landmarks and symbols of freedom, they started driving a wedge between us. We all differ about how to manage the war on terror or even whether we can call it that but there is one thing I bet most of us can agree on:

DON'T LET THE BASTARDS WIN.

REAL ESTATE AS AN INVESTMENT

2011-06-29T15:12:00.001-07:00

Does This Look Like a Drought? Lush and green as my back yard looks, we are in the middle of the worst drought I have seen in this part of the country. The humidity is often so high here that we seldom have to water. Not this way now. I have to water somewhere virtually every day. It's around 100 degrees and the humidity is 50% as opposed to high 90's and 70+% in normal times. We are about 20 inches below normal rainfall for the first six months of the year and we won't be able to have our normal fireworks display because of fire danger. Fires have already destroyed several thousand acres of timber in this area.

What About Our Investments? I haven't talked much about investments in recent months, in fact, I have been so busy with life that I haven't posted much about anything. Hopefully, I can get at least three or four posts per month for the rest of the year. I am still favoring cash flow over depending on capital gains from our investments but the main question is where are we going to get that cash flow in the future. Many of my clients are wary of the stock market and are depending on withdrawal of capital to fund their life style. This increases the odds that you will run out of money before you run out of life. I am in a similar situation myself but I'm determined to improve it in the future. The biggest risk I see in the stock market is that much of the recent gains have been fueled by the federal reserves' loose money policy which is scheduled to tighten in the near future. This means that we are looking at the potential for inflation which is always a problem for the stock market. If you don't have the stomach for another correction, better lighten up in this area. That doesn't mean get out altogether because I don't claim 100% accuracy when it comes to something as in-exact as an economic projection.

Fixed Income Investments? Bonds are unlikely to provide a reasonable return on investment in the current low interest rate environment. If you buy longer-maturity bonds you will get a higher interest rate but you run the risk of losing market value when rates increase.

Which Brings Us To Real Estate. I bet there are many out there, who have seen the value of their homes and investment properties drop 20-40%, and think I am crazy. I won't go into tremendous detail but here are some reasons why I think investment in single-family homes is a wise move at present.

1. Prices Are Down. When the market was hot and heavy I received many calls from investors who wanted to get into the market. Prices were so high that I was unable to find properties that I would project to bring a decent return. If you were using me as a real estate advisor at that time, the best deals were the ones we didn't make.

2. The Rental Market is Strong. During the recent bubble, anyone who could fog a mirror could buy a home; therefore, we had a challenging rental market. You have heard me say many times that it is tenants who drive the investment property market. Vacancy rates in Denver, Colorado are approaching 5%. This means that the supply of qualified tenants exceeds the supply of well cared-for properties and excellent potential for higher rental rates in the future.

3. There Are Still Tax Advantages to Real Estate Investments. Not only can you get decent cash flow in this market, you won't have to pay tax on all of it. You can delay taxation until you sell the property. Even then, you will be taxed at a lower capital gains rate. If you decide to sell and buy another property, there are a number of techniques to allow you to defer, or even avoid, taxation. I few years ago, one of my clients sold a property and carried back a note for part of the proceeds. Not only did this allow him to earn interest on money that would have gone for taxes, he now owns a mortgage that pays him 8%. This is an excellent return in this market. It is my opinion that the note is worth more than the principal due because of this high yield.

4. There is A Strong Potential For a Rebound In Values. The population is increasing and there are few new properties being built. This makes it highly likely that properties will increase in value when the current inventory of unsold homes is absorbed. While there is no way to accurately predict when this will happen, property owners will be paid to wait. Current cash flow is higher now than at any time in the past few years and there is a potential for even higher rents in the future. Qualified borrowers can borrow at favorable rates and tenants will make the payments on your behalf.

A Few Cautionary Notes. Real estate investment is not for the faint of heart. Before buying a property, make sure you have a liquidity reserve to carry you through unanticipated vacancy or maintenance expense. Make sure you have a qualified management company to lower your risk of tenant problems. Don't look for very low down financing. This is a two edged sword and can increase your risk of disaster. Mortgage payments must be made whether or not your tenant pays the rent or you have unanticipated expense.

I'm In Town For Much Of July. If you want to discuss ways to add real estate to your portfolio, give me a call. My cell phone is 303-902-3940 or you can call Susan at Westmont Companies 303-996-2010. She always knows how to find me.

LIKE IT OR NOT, CHANGES ARE COMING

2011-06-04T12:05:00.000-07:00

The Picture Above Is What I See The Right After I Get Up. Perhaps it is why I am so nostalgic lately. I am grateful that there are some things in my life that change very little. Although I have to expend some effort to keep it this way, most of it occurs automatically with little help from me.

Other things Are Changing Very Rapidly. A number of these changes are inevitable and can be very frightening because some long time fixtures of our society are virtually disappearing.

1. The Post Office. Regular mail (snail mail) is disappearing. As the older generation disappears, virtually all written communication will be via computers. So much nicer to write something that you can send around the globe in seconds rather than days. Of course, we will still need to move objects and packages but Fed Ex and UPS can handle that much more efficiently than the government.

2. Checks. More and more of us pay our bills by internet. It's way too inefficient to use paper that must be carried around from place to place to conduct commerce.

3. Newspapers. As a means of disseminating news, newspapers are way too slow. Between television and the internet, there is little need for print media to be carried around and thrown in people's yard. Dad with his morning paper and coffee is a thing of the past.

4. Books. In a very short time, electronic books have exceeded printed material. My daughter was here recently with her Kindle bragging to me that she was carrying an entire library of 150 volumes in her purse. Although it pains m to say this, it appears that thi is much more efficient
than my present method of keeping reading material which requires book cases in every room and a dust collecting system that causes my wife to sneeze every time she gets one down.

5. Conventional Telephones. My first cellular telephone was confined to my automobile and cost over $1000 (on sale). It only involved voice communication and you paid by the fraction of a minute each time it was in use whether you contacted the party you wanted to reach or not. The hardware is now cheaper and more versatile. The younger generation takes their cell phones with them when they move away from home and few bother to hook up conventional telephones in their new environment. Telephone companies are doing very little to maintain and improve the infrastructure of their conventional telephone business. Talk to even low level phone employees and they will tell you that land lines are the least profitable segment of any communication company's business

6 Television as it currently exists. TV networks are not serving the public well and it appears obvious to me that commercials are becoming more and more prevelant. Cable subscrptions are becoming more and more expensive, yet their revenues are down. At the same time, video games and and internet entertainment are competing more and more for entertainment time. In the future, virtually all television sets will have a computer terminal and internet connection with programming through the internet.

Most of These Predictions are Common Sense. But common sense predictions have helped my investing success immensely over the years. Think about it. What kinds of companies may be successful over the years in view of these trends? Certain tech companies? Transportation companies? Electronic companies? The current investment environment is pretty risky. Companies that have had dominant positions in some industries might be at risk (Remember General Motors?). It's going to take some thought and attention to avoid losing money on some of the companies that will be impacted by these trends.

THE IMPORTANT THINGS IN LIFE.

2011-05-03T11:41:00.000-07:00

Can You Take A Picture of Love? Photography is based on simple scientific principles. It has nothing to do with anything but physical phenomenon. Love is not a physical phenomenon and, although I have tried to formulate a physical definition based on things I learned from my chemistry and biology courses, any definition I could come up with is woefully inadequate. There is no adequate definition to describe love as a physical phenomenon but I know what it is when I see it. Look at the picture above. You might describe the photograph as one of a beautiful young mother and her new born daughter. A very poor description. It is a picture of love. One that tells us what really matters in this life.

I Was Brought Up To Believe You Have To Fight For What You Get. I was born into poverty but I was blessed with parents who encouraged me to roll up my sleeves and work to achieve my goals. I was born into a country that provided me with ample opportunity to do so. Social Security records show I started working at age 13 and have worked every year since although some of you might not define what I do now as work. I am now 73 and I realize that much of what I have worked for is valueless. I can't take it with me when I leave this world and wouldn't want to if I could.

So What Do I Own Worth Taking With Me. With the exception of a few guitars, nothing I can pack up and take from place to place. The answer lies in the picture above. It's relationships and the love that goes with them. I still spend time with people I knew in childhood. During the past two years, I have met people online and formed relationships that I value highly. I have seen posts on facebook that shows the high value certain others place on love. I suppose it is idealistic to wish we could form an entire world society based on love, but you can form a series of core relationships based on love and mutual respect. These will serve you well throughout your life.

I Am A Bit Embarrassed. Some of you may find this to be a bit hokey. I admit I find it a bit that way myself. Still, I find it boring to always be talking about money when there are so many more important things. I will probably be in Colorado soon. Send me an e-mail or call my cell phone (303-902-3940) if you want to get together.

WHO DO WE BLAME FOR OUR PROBLEMS?

2011-04-11T08:53:00.000-07:00

It's All George Bush's Fault. No. The Fault Lies With Obama. There was a recent series of posts on Facebook where several posters argued as to whether George Bush or Barack Obama was at fault for the current economic malaise. This reminds me of my own upbringing. We were Democrats from head to toe. There was no room for argument. Herbert Hoover caused the depression we barely survived and FD Roosevelt got us out of it. In every subsequent election we voted against Hoover and in favor of Roosevelt, even though both had been dead for several years. It was that simple. I would be a Democrat when I became old enough to vote. Through out high school and into college, I saw no reason to change my plan as my high school teachers and college professors somehow began to let their preferences creep into their lectures. Not only did I know I was right, I could advance a series of arguments, relatively well constructed, to defend my position. Where Are We Now? As I looked at the series of Facebook arguments, it became obvious to me that things have not changed. Each poster had a very simple answer as to who was responsible for our current situation. One side claimed that Obama has failed to take the necessary steps to remedy our situation because of his lack of leadership skills while the other side claimed he was doing as well as he could be expected because of the mess that Bush left us in due to his lack of intellect and willingness to lie to get what he wants. Which one is to blame. Bush? Obama? Both? We all have our opinions. The real facts are that none of us have access to enough information to know. Both Bush and Obama had access to a host of skilled advisors and more facts than any of us could access in a lifetime. The success or failure of each president will depend on a number of factors beyond their control. For example, Clinton was a highly popular president who produced a budget surplus for which he gets the total credit. This is despite the contribution of Reagan who gets credit for the fall of the Soviet Union which allowed Clinton to cut the military budget as a result of the decline of the cold war. Bush gets total blame for getting us into war in the middle east. This is despite the fact that an overwhelming plurality of congress approved that war. The surplus turned into a deficit for a number of reasons, not the least of which was 9/11 and massive additional expenditures to keep us safe. The Bottom Line I still have my opinion and I'm sure most of you do too. But neither of us can assume that we know enough about all the factors involved to put forth a simple answer or offer a simple solution to a problem that is far too complex to be solved by a simple solution. We also have to look at the voting public who continues to expect the government to provide things for us that we can't provide for ourselves. Want a nice house, a new car, all the gasoline you need, and a low stress job with an income that provides more than 90% of the wage-earners in the world can't afford? Want all of this guaranteed by the government? Ain't gonna happen folks. Beware of any politician who claims to be able to provide it for you. What Does This Mean To Your Finances? No doubt, the government has an influence on your financial future and this is the main thing I'm interested in. There is little or no reward in safe investments. The FED is keeping interest rates low and providing liquidity to the market by increasing the money supply. This is likely a temporary situation that will eventually cease as those funding our deficit will decide they don't want to keep providing us with goods and services that we can purchase with dollars of ever decreasing value. The correction may be prove to be painful to investors. For this reason, I am staying with my same old arguments. Stay with investments that provide income. The most critical factor in evaluating your investments should be how likely is that income to continue. On my next post, I will discuss the real estate market and how you can profit in the current situation. The Picture At The Top. This is a flower bed that we planted when Hurricaine Ike blew down a cluster of Magnolia trees. Rather than try to replace those trees we decided to take advantage of the increased light to add a little color. The bright red flowers are called "Knockout Roses" which I had never heard of but which provide more color than I expected. One of life's pleasant little surprises.

TEARING DOWN FRUITDALE SCHOOL

2011-04-04T14:10:00.000-07:00

Recent Picture Of Clear Creek A Major Fruitdale Landmark

All I Needed To Learn I Learned At Fruitdale School In my last post, I talked about a phenomenon known as "Creative Destruction." It's a process by which our society can change for the better. Dr. Jack Makens, a friend of mine from high school sent me two examples from the Denver Post. One of these articles was about the Fruitdale School, the place where I obtained my first 8 years of education. I loved that old school where I learned a lot from several dedicated teachers. There is now a controversy as to whether or not the old building will be torn down. It was offered to the Wheat Ridge Historical Society for the modest sum of ten bucks. The society turned it down because it could not afford the estimated $225 per square foot it would take to remodel it. Several local citizens oppose the destruction of this school because it has been a landmark in Fruitdale Valley for almost 100 years. The building was designed and built by Temple Buell, a prominent Denver area architect. He hired several local farmers to work on the construction. I considered joining in the effort to protect the building but then decided that the significance of that school was the people I encountered there, from classmates to teachers. My memories of those days will always center around those people rather than the old red brick structure.

Another process most likely scheduled for destruction is the teaching of cursive writing (longhand or script to most of us). This is being replaced by "keyboarding skills." I never used cursive after obtaining my college degree since I learned how to print very rapidly as an air force radio operator. My guess is that cursive will gradually disappear from our culture. I, for one, will not miss it.

I'm not sure all this destruction and replacement represents an improvement. At the end of the street where I lived, there was a trolley track where you could ride down town for a dime. We used it a lot during the war when gasoline was in short supply. It was a handy way to get where you wanted to go if you wanted to go to an area near the track. Every few blocks was a green colored station with a roof where you could wait. I won't mention other uses for those buildings but I'm sure your imagination will serve you well if you think about it. The station, tracks, and trolley cars have all disappeared and those who use public transportation can stand out in the cold and catch a bus. If they hadn't constructed I-70 where those tracks ran, they might still be viable for light rail.

An Update On Intel. One common investment mistake I have made is that I am reluctant to sell a stock just because it drops in price. I have invested in companies that I rode all the way from my original price to virtually zero as I held and waited for the price to rebound. Fortunately, I recovered much of my original investment via option premiums and dividends but I would have a much larger portfolio if I had just followed the old adage of "Cut Your Losses and Let Your Profits Run." That is much easier said than done but I surely could have done better than I have. I decided on a somewhat different strategy with Intel. Although I still think it is a good company, the fact that it has dropped almost 10% since I bought it, I decided to take my loss and bail out. Well, almost bail out. I sold my 1000 share of Intel for a $1700 loss. Some of the loss was recovered from profits of $1239 in option premiums and $181 in dividends received for a net loss of $280. Just in case my decision to get out proves erroneous, I purchased an option which gives me the opportunity, but not the obligation, to repurchase my 1000 shares at $22.50 per share any time between now and January of 2013. I paid $1680 for this privilege. This allows me an almost unlimited upside potential should Intel suddenly reverse fortunes and go to unexpected heights with a downside of only $1680.

It is my opinion that option strategies are a valuable tool in the management of any investment portfolio. I would advise virtually any serious investors to learn the basic principles of option investing. Many, if not most, investment managers and stock brokers advise against their use because some don't know enough about them and others are afraid that their clients will become too aggressive and lose money. For this reason, broker dealers require that their investors obtain approval from a designated options principal before they are allowed to trade in this area. While many investors have lost considerable sums speculating in options, others find they can be a valuable tool in managing risk. In the present environment I have limited my own investment choices to those companies that offer attractive option opportunities as well as sound fundamentals.

DIVIDEND PORTFOLIO UPDATE

2011-03-27T10:42:00.000-07:00

My Favorite Restaurant I couldn't resist showing you a picture of my favorite restaurant, The Tschoupitoulas Steak House. It's also in one of my favorite towns, Crockett, Texas, The home of the Camp Street Cafe and Store, which is neither on Camp Street nor is it a Cafe and store. It is the home of my favorite music venue and is owned by my favorite cowboy poets/musicians, The Gillete Brothers. One of the pioneers of country blues, Lightnin' Hopkins used to play on the streets there in the early 1900's. The picture next to the cafe is a sample of what's happening to small town America. Alan Greenspan would call it an example of "Creative Destruction" which describes how older/obsolete institutions are destroyed so that newer, more efficient institutions can take their place. I suppose I may also be an example of these old/obsolete intuitions that are being destroyed to make room for the youngsters. In any event, I am grateful for places like this and not sure every example of creative destruction is all that creative.

On The More Practical Side. I told you I would give you periodic updates of the portfolio I put together last December to illustrate alternatives to risk free examples. I am not sure how long I am going to keep publishing these updates. One of the advantages of portfolios like these is that you don't have to watch them every day. I hope you don't find these updates too boring.

1. Ameren Corporation (AEE). Investment amount was $17130 and current value is $16524. Dividends since January 31 are $234.

2. Bristol Meyers Squibb (BMY). Investment amount was $18360 and current value is $19103. No dividends were received this quarter.

3. Duke Energy. (Duk). Investment amount was $19,300 and current value is $19,602. Dividends of $275 were received this quarter.

4. Lockheed Martin (LMT). Investment amount was $20460 and current value is $24,111. Dividends received were $225.

5. Medical Properties Trust (MPW). Investment amount was $20240. Current value is $22140 with dividends of $400.

6. AT&T (T). Original investment was $17,526 and current value is $17310. Dividends received this quarter were $258.

7. Health Care Properties (HCP). Original investment was $19512 with current value of $22038. Dividends this quarter were $282.

8. Kinder Morgan Partners (KMP). Original Investment was $20777 and current value is $22137. Dividends this quarter were $339.

9. Fidelity National Financial (FNF). Original Investment was 19,570 and current value is $19,306. Dividends this quarter were $168.

10. Windstream Corporation (WIN). Original Investment was $26,860 and current value is $24,491. No dividends received this quarter.

The Bottom Line. As of today's date, the total value is $206,762 as opposed a total original investment of $199753, Dividends this quarter were $2181. Since our original investment four months ago, we have earned total dividends of $3,964. This is equivalent to an annualized return of 5.95%. Approximately 3 times as much as you would have earned on a one year CD. In addition, we would have received a preferential tax rate. Of course, you could sell out and get a capital gain of $7,000+ but I would prefer not to count that since it may disappear should the market correct in the future.

Just A Sample. This is the kind of portfolio I would recommend for conservative investors who want current cash flow. If you have a highly paid job, are several years away from retirement, and have a higher risk tolerance, I might recommend something more aggressive; however, I believe now is the time for most investors to be more conservative and, even if you don't need income to live on, you might want to collect cash flow to take advantage of better opportunities that may arise in the future.

IMPORTANT VISITOR ON IMPORTANT MISSION

2011-03-20T09:49:00.000-07:00

Azaleas and Dogwoods. The picture at the left shows two of Betty's favorite flowers. The bright azaleas are easily visible in the lower left hand corner while on the right, near the middle is a dogwood tree. You have to strain to see it. Unfortunately, pictures by an amateur photographer seldom do it justice. It is sort of whimsical and graceful and adds a lot to the landscape. Legend has it that dogwood trees used to grow large until they were used to construct the cross on which Christ was crucified and thereafter they were never allowed to to grow large enough to construct an instrument of crucifixion again. It's an interesting story but, as far as I know, it doesn't appear anywhere in the bible.

On A More Serious Note. On March 4, a very important Admiral from Norway visited this country. Rear Admiral Trond Grytting, who had most recently served for several years as the key officer in charge of Norwegian-Russian military contacts, was on an important mission from the king of Norway. While our first guess might have been that this was in Washington DC, we would have been wrong. Instead he showed up at a convalescent center in Silsbee, Texas, a small town a few miles from Wildwood. His mission: To present a royal honor from the King of Norway to Leif Oistad, a longtime neighbor of ours here in Wildwood.

It Was Almost 70 Years Ago. Leif was recruited by the US Army to serve with the 99th Mountain Battalion on a highly secret mission behind enemy lines in German occupied Norway. In his first job, he instructed his fellow soldiers in skiing since he had been a skier practically since his birth in Norway. The second job was much more dangerous in that they parachuted behind enemy lines to conduct sabotage operations. Before traveling overseas, he requested that, since he was likely to give up his life for America, he would prefer to do it as an American citizen. The story has it that his citizenship papers were delivered within an hour.

Their Mission Was Successful. Leif received two bronze stars along with several other medals and awards too numerous to mention. Before retiring to Wildwood, he worked several years as a captain of several seismic research vessels for Shell Oil. While many details of their mission WWII mission are not known, I would venture a guess that the mission involved much more than blowing up a few rail lines since it justified a visit from an important representative on a mission from the King of Norway. I have heard rumors of an atomic energy related operation but can't justify repeating them since they are just that.

I Have Wanted To Pay Leif A Visit For Some Time. We visited a few times when we met outdoors but I never got around to visiting him to discuss some of his adventures. That's very unfortunate since Lief died last Thursday, March 17. This isn't the first time I have neglected to take the time to get to know someone that I could have learned a lot from. Our time here is so important and the most important thing we can do is interact with our fellow human beings. We are losing our heroes at an alarming rate and we must insure that their story lives on.

HURRY UP SPRING

2011-03-15T08:03:00.000-07:00

Back In Texas. I'm back in Texas and it looks like spring is coming on fast. Azaleas blooming, yard turning green, and temperatures over the next 7 days are expected to be in the 80's. It can't come too fast for me. The weather is getting brighter but the economic environment seems pretty gloomy. Problems with nuclear reactors in Japan appear to be on the verge of disaster, union/government relations in Wisconsin are at a historic low point, and gasoline is predicted to hit four bucks a gallon. I remember a song in the 1970's called Goodbye Easy Street. That had to do with the Arab oil embargo and the anticipated demise of cheap energy. It appears that the pessimism of that era was 40 years early. Could we be in that situation again?

Ask The Energy Department. It was in the Jimmy Carter Administration that we founded the department of energy. They did a lot of really valuable measures such as lowering the speed limit to 55 mph, instituting full-time daylight saving time, and issuing bulletins advising us to stop using hair dryers and power lawnmowers None of these appeared to work too well so now we have the EPA empowered to help out in order to keep us from adding too much carbon dioxide to the environment and raising the average temperature a fraction of a degree. Of course, we have those curly light bulbs that we have to call out the national guard if we drop and break. Those are due to be mandatory in a couple of years. Just when we were about to ramp up our nuclear power plants to reduce greenhouse gasses, we have this huge earthquake to remind us that, nature has ways of surprising us with new disasters that we have absolutely no way of anticipating.

Bottom Line. Don't depend on the government to solve your problems. They would if they could but they don't know how. I just drove back and forth to Colorado and spent as much for gas as an airplane ticket. In addition, I spent two hundred bucks on motels. At least, I didn't have to sit two hours in a space the size of a linen closet and I could come and go as I please. Add the $165 I spent for a speeding ticket in Decatur, Texas and you can see that it cost me twice as much to drive than it would have to fly. There are ways to hedge against rising energy costs. One of those is to invest in companies in the energy business. If energy prices go up the price of your energy stock increases to help cover the cost of your increased gasoline.

What The Government Could Do. Our government wants us to do things to stop our dependence on foreign oil. So do I. They want us to look at hydrogen as an alternative source of energy. So do I. They want us to look at vegetable oil as a source of replacement for diesel. So do I. They want us to get energy from the sun, wind, and the tides. So do I. So how do we differ? I want us to improve our production of conventional energy via improved technology for exploration and production. They don't. I believe we can become energy independent while we develop these alternative fuels. They don't. I believe their regulations inhibit the production of fossil fuels forcing us to give money to countries who hate us. They don't. Until we make energy independence a priority, whatever the source, we might as well dissolve the Department of Energy and use the money to reduce the federal deficit. That department has squandered huge sums of money and we are just as dependent on OPEC as we were 40 years ago.

COLORADO TRIP ALMOST OVER.

2011-03-02T17:08:00.000-08:00

About Time To Head Home. I have been in Colorado in excess of two weeks. I haven't cashed any checks as a result of my trip here but I have opened some new possibilities and I have rejuvenated my spirit as a result of some of the things I have done. I saw a number of friends that I have missed more than I thought. One of the high points was spending an afternoon with a cousin that I have not seen for 60 years. She was a bright teenager last time I saw her and she is just as interesting to be around now as she was 60 years. Her husband, who I never met is also related to me through another branch of the family. He is a fine gentleman. Say what you want about Facebook but I would never have found them otherwise.

Update On Intel. On January 18, I told you about a hedged investment I made in Intel. At the time I told you I would keep you informed as to the performance of that investment. To refresh your memory, I bought 1000 shares of the stock at 21.07 per share last November. At that time, I sold an option to buy those shares from me at 22 in mid-February. I got $630 for that option. The $630 went into my account and I was free to spend it however I wished. Just before exploration, the stock was selling for just over $22. If I had done nothing, I would have lost the stock at $22 a share for a net profit of $1630. That would have been a satisfactory result for a 3 month investment of $21,070. Not a barn-burner but still almost 8% for three months.

Another Alternative. I bought the option back for $195 leaving me a profit of $435 and I didn't have to sell the stock. I also sold another call at $520, this time with a strike of $23 and an expiration of April. This is just another example of what you can do to manage a covered call position once you establish it. Another factor, I received a dividend of $180 today. Granted, these aren't huge dollar amounts but they add up and with only $21,000 at risk it appears to be a prudent investment. I still think Intel is a great buy at the current price of $21.49 and I have generated $1135 in cash flow to buy groceries. I will let you know how things look on or before the Mid April expiration date of the stock.

This Is Not A Lot of Work. You can get by with checking this position once a day once you've established it. In my last post, I talked about information, analysis, and intuition. Establishing a position like this and monitoring it helps develop your intuition to make more money in the future. I am always glad to hear from my readers. Let me know what you think.

INFORMATION VS UNDERSTANDING.

2011-02-20T22:58:00.000-08:00

Dumb Money Still Buying? One of my recent blog entries (January 18) discussed hedge funds and their vast research materials including computer programs designed to screen for investment opportunities. One reasons small investors are often considered at a huge disadvantage is that they lack access to these sophisticated tools to manage their investments. Sounds pretty hopeless for the little guy doesn't it? Fortunately, as I said in that post, I am not convinced that is the case.

One Problem With The Information Age. The main problem with the information age is that we think we need vast amounts of information to make any kind of decision. When I completed a commercial real estate certification 25 years ago, I learned to carry out all kinds of calculations to evaluate real estate investments. We did everything from discounted cash flow analysis to sensitivity risk analyses. I was enthusiastic about trying these. I had high hopes that I could add them to determination of cap rate, GRM, expense ratios, and a whole host of other information I had previously learned how to collect. One place I hoped to use this was with a good friend from Germany who had developed a million + net worth in real estate. Using one of the first property acquisition candidates we located, I went back to my office and spent an afternoon applying all my new techniques. The next day I met with my client and showed him all these new analyses. He didn't compliment me on my thorough analyses, he just sort of ignored it.

The Same Thing Happened Again. The information was difficult to understand and few clients paid a lot of attention to it. Since my attempts to use this to communicate with with clients were unsuccessful, I decided to develop the information for myself in order to become a better consultant. After a year of using this information, I decided it had limited use. Why was that the case? 1. Most experienced investor clients made their decision relying heavily on intuition. While, many academics and consultants make fun of intuition, many clients have relied on it for some time and become very successful using it. 2. There are already dozens of quantitative tools to evaluate real estate investment. These can be done in minutes instead of hours and tell you 95% of what you need to know to make a successful investment. The more sophisticated tools involved making assumptions and projections about the future. Even if the more complex calculations can be carried out successfully, the assumptions you make about the long-term future are subject to wide variation and are unlikely to be accurate over longer periods.

Blink. This is the title of a book on this subject by Malcolm Gladwell, a writer for The New Yorker magazine. He studied several situations where it turned out that gathering too much sophisticated information did more harm than good. One of these was an east coast hospital emergency room. Whenever they had a patient come in with chest pains, they had a set of tests designed to determine whether or not it was a cardiac event. The series of tests was quite reliable; however, the time required to conduct all these tests was time that treatment had to be delayed. A statistical analysis of all the tests showed that they could cut the number of tests by 75% and do almost as well as with the full battery. The new, abbreviated test scheme saved money and lives. Gladwell cites several other examples in his book. Fortunately, this example could be statistically validated. Some of the other examples were totally based on intuition. Intuition that could not be taught because the person using it didn't really know how he was doing it. An example of this came from a tennis fan who could predict with amazing accuracy whenever the server was going to double fault. His results were statistically validated over a long period but the predictor couldn't tell you any observation that allowed him to make such a prediction. One of the main observations in Gladwell's book is that often we don't need more information, what we need is understanding. I believe this is an area that we need to think about in the information age when we can be so busy collecting and organizing information that we don't stop and look at what we are collecting in a critical fashion. The term "paralysis by analysis" comes to mind.

Still In Colorado. Learning some things here as I try to tackle a couple of problems using the same principles I have talked about here. Call my cell phone 303-902-3940 if you have any questions or comments.

BOREDOM, DEPRESSION, AND GROWING OLD.

2011-02-11T12:48:00.000-08:00

A Blessing Or A Curse. I still don't know whether my exceptional ability to recall things that happened years ago is a blessing or a curse. I may not know where I left my keys last night but I can tell you about my first day of school when they asked us to count as far as we could. I stopped at 13 because I was embarrassed at all the attention. Donald cried, Melvin counted to 100. These flashbacks come to me when I least expect them. I remember one of my first classes when I was a psychology grad student in the 70's. I was assigned a paper about the problems males face in adjusting to changes in the social environment. I wrote a paper entitled Chauvinist Pigs. I thought one of the problems men face would be growing old and losing their physical strength. I was in my 30's at the time but it was one of my fears. I knew I would eventually have to face it but for now I would do what I could to live each day to the fullest without worrying about the future.

The Future Is now. I can no longer avoid it. I am a totally different person now than I was then. I have financial independence and freedom that I never dreamed of. (Not as abundant as a couple of years ago). I live in surrounded by nature with wildlife, vegetation, warm weather, and I can cool off in the summer and keep warm in the winter. Still, there is occasional boredom. How can I be bored in a place like this? I guess its time to call a spade a spade (Not a damned shovel like 40 years ago). It ain't really boredom folks, it's depression. Another memory just flashed through my mind as I heard the voice of Lou Holtz, former Notre Dame football coach at a motivational speech in San Diego. "Nobody wants to hear you whine."
He was right. I am not going to take anti-depressants nor ECT (electro convulsive therapy). That's what Earnest Hemingway did in 1961 just before he committed suicide. It might work for some folks but it didn't work for him and I don't think it would work for me.

This Is my Existence. Flash back to 1976. As a psychology graduate student, I was working as an assistant to a professor doing group therapy. Most of the participants in the group were in their early 30's and in the midst of some life crisis. The group leader asked each one to tell of all the things bothering them. As each one finished, he had them repeat the phrase, "and this is the existence I have created for myself. I remember this phrase to this day and I tend to repeat it to myself when I find myself complaining about something. I am living the path I chose. I created it for myself. I can change it if I wish. One thing I can't totally control is that I have a finite time left to exist and my body is a device that will wear out. We all face that fact and none of us can change it.

What About The Next Life? There is some evidence of an existence after this one. I have studied this issue and I must admit there is more evidence that it is true than not, but it is not the kind of evidence my scientific training has taught me to require before accepting something as fact. Frankly, I don't expect to find a concrete answer but I must continue to look. I don't believe anyone can know the answer beyond a shadow of a doubt. I have decided the best strategy for coping with the aging process is one of living in the here and now. Another principle I learned in my psychology training was the tendency towards "catastrophic expectations." Many times we imagine some future event as much worse than it turns out to be. That tendency keeps us from enjoying the present. Like the picture above. There is a beautiful woodpecker and if you look closely, you can see a cardinal in the lower left hand corner. Those lush green leaves are Magnolia leaves. Betty took this one a few days ago, somewhere around the day I was bored/depressed. On that day, I didn't allow myself to appreciate that scene. I may fall into that trap again some day but I will minimize it by appreciating the existance I have created for myself. On my next post, I will talk about personal financial strategies again. Thanks for reading.

CONFLICT. AN UNAVOIDABLE PART OF LIFE.

2011-02-06T11:09:00.000-08:00

It Starts Right Away. Before we learn to walk and talk we are exposed to conflict. It may start with our first experience with solid food. We love applesauce but our caregivers want to feed us pureed spinach. It tastes awful and we reject it by spitting it out, even though we are hungry. We do our best to make our wishes known but they continue to to force that sickening green stuff on us. We can't communicate well enough to tell them we don't want that and we don't even know that it is our best interest to go ahead and eat our vegetables. Neither of us can understand the other but we do the best we can to manipulate the outcome until we either get what we want or capitulate. We have just had our first experience with conflict and there will be many more throughout our lifetime. This first experience and those to follow will serve to help us develop what is known as our "conflict style."

What Is Your Conflict Style. Without going into how it is developed (no one really knows for sure), we all have our own style for dealing with conflict. There are aggressive/assertive styles, passive styles, and avoidance styles. Undoubtedly there are others and some that combine several styles. It is best for each of us to study our own particular style and recognize what we do as we face various types of conflicts. In my own case, I am a conflict avoider. I tend to do whatever I can do to keep from getting into a conflict. This works in some instances but it also will tend to keep me from accomplishing my objectives if I allow it to take total control. Some weeks ago, I told you about receiving a lawsuit summons from a firm representing a home owner association for money they claimed I owed. The suit was for more than $2,000 and it was my belief that it was totally without merit. After several letters were exchanged, neither of us had budged. I was also aware that there was a lien on the property involving a judgement against the prior owner that was of record prior to my owning the property. That lien was for $4,800. It was questionable as to whether that lien was collectible. I believed that I would have probably won in court but, in reality, neither side would win because of the costs of the suit. If I followed my usual avoidance style and allowed them to proceed in court without my resistance, I would definitely lose by default. If I hired an attorney to do battle in my behalf, attorney fees would be more than the amount of the dispute. If I contacted them with an emotional outburst, I might force them to go to court for the principle of the thing. I had no choice but to prepare the best argument I could and confront the issue. The bottom line was that I gave them $1,000 that I didn't think I owed them to drop the suit and release the lien. It was the only practical way to get it over with. This is an abbreviated version of what happens in disputes between individuals, business entities, and countries. Here are some typical steps involved in resolution of conflicts.

1. Assessment. Take an objective look at what's going on. Try to keep your emotions out of it. One thing I learned in graduate school was that the first side to get emotional in an argument is usually the loser. It signals that they have run out of logical arguments and are forced to resort to tactics like name calling, yelling, and threats. If you know this and are able to keep your wits, you have a good chance of winning. Take a really close look and try to assess your odds of a favorable outcome.

2. Look At The Other Side's Position. Steven Covey has written that we are well advised to "Seek first to understand and then to be understood. Try to understand the motivation of the other side, what they stand to gain and what they stand to lose. By knowing this, you will demonstrate that you are willing to consider their arguments. This will make them more likely to listen to your side as well. It will also let you know what issues they are likely to yield on and what they will probably stand firm on.

3. Be Soft on People Issues. Treat the other side with respect. Look them in the eye, smile occasionally and let them know its about the issues and not the people. Give them an opportunity to save face whenever possible.

4. Be Firm On The Issues. In case you were thinking that this is an article on "Negotiations For Wimps." you should know that its OK to be firm on the issues. Before beginning, it is a good idea to make a list of all the issues involved. I am most familiar with real estate negotiations where some of the issues are purchase price, financing, inspections, needed repairs, closing costs and a whole host of others. Some of these may be less important to you and, while you may offer concessions on others, it is a good policy to ask for something in return before making the offer.

5. Be Careful of Strictly Positional Bargaining. It's typical that each side starts with more than they want with each making slight concessions until they meet in the middle. While this can work, its so common that both sides know that the other side is asking for more than they want with the intent of meeting in the middle. This may end up with an agreement that may be somewhat worthwhile with neither side accomplishing their objectives. Look for something more creative than this.

6. Be Patient. In many real estate transactions, there is a formal written offer. Often with a date in which a response is required. Within that time frame, a counter offer is often received with a date in which a response is required. Real estate agents and generally push for a response within the required time frame but it is often a good opportunity to reduce the other side's expectations by failing to respond in time. In reality, the person making the offer may withdraw it at any time before it is accepted and not be bound by it. Sometimes, it is better to wait and let the other side wonder what you are likely to do. This extends to other types of transactions in which it is better to build tension rather than another counter offer right away.

8. Look At Other Avenues. The focus of this is that the principals are negotiating between themselves. Our approach is transactional but many disputes aren't. When a negotiated settlement is not forthcoming, it may be best to utilize the help of a mediator who is trained at advising both sides from a neutral position. Rather than go into detail on this, it is best that either sides investigate how this works and determine of it is applicable. This is often used in divorce and other very contentious situations.

Hopefully, This Helps. Too often we jump into conflicts with little preparation. If this article causes you to think twice and prepare to to seek a resolution in your best interest, it will have accomplished my objective. I welcome your feedback.

INCOME PORTFOLIO UPDATE.

2011-01-31T11:34:00.001-08:00

Monitor Your Portfolio. On December 19, I posted a sample portfolio with a yield that far exceeds that of money market funds and CDs. I didn't necessarily recommend buying that for your account but I was of the opinion that, long term, it would outperform any of the so-called zero risk portfolios. At the time, it would have cost you $199,753 to purchase that portfolio. The following is a summary of the current value of those companies and the income you would have received to date.

1. Ameren Corporation (AEE). Investment amount was $17,130. Current value is $16,800 and we have received dividends of $234.

2. Bristol Meyers Squib (BMY). Investment amount was $18,380 and the current value is $17,500. Dividends received are $231.

3. Duke Energy (DUK) Original investment was $19,700 and the current value is $19,800 with $275 in dividends received.

4. Lookheed Martin (LMT) Investment amount was $20,460 and current value is $23,700 with no dividends received yet.

5. Medical Properties Trust (MPW). Original Investment was $20,240 and current value is $22,000 with $400 in dividends received

7. AT&T (T). Original cost was $17,526 and current value is $16,200 with no dividends received.

8. Health Care Properties (HCP). Original cost was $19,512 and current value is $22,200 with no dividends received yet.

9. Kinder Morgan Energy Partners (KMP) Original cost was $20,775 with current value of $21,540. No Dividends received yet

10. Fidelity National Financial (FNF). Original cost was $19,570 with current value of $19,600 and dividends of $168.

11. Windstream Corporation (WIN). Original cost was $26,860 with current value of $24,700 with dividends of $475 received.

The Bottom Line. Total current value is $204,040 with dividends collected of $1,783. While our potential gain of $4,000 is certainly better than a potential loss, remember that the purpose of the portfolio is to generate income. It is comforting to know that we could sell today, and have over $5700 in capital gains and dividends but that gain could disappear overnight. The dividends are now yours to keep. By way of disclosure, I own T, HCP, and KMP. I have owned BMY amd FNF in the past.

The picture at the top was to remind me of more happy times. Bob Brougham, a lion in the real estate investment industry, passed away last night. I am lucky to have had him as a mentor for 30+ years. Ms. Betty really looks good in that picture, I was more like the Flying Nun in that cowboy hat.

TOUGH TIMES AHEAD?

2011-01-25T14:55:00.000-08:00

Changes In My Lifetime. In one of my earlier posts, I quoted one of the problems we must overcome in the future is the unstainability of our consumer lifestyle, purchased with government and personal debt. No matter what our economy does, it is my opinion that we can't continue to live the way we are living. The house in the picture is the one my family moved into in 1947 when I was 9 years old. This picture was taken last year and, with the exception of a bedroom and a bathroom, which we added in 1948, it still looks about the same now as it did then. We really felt we were living in luxury after the addition of that bathroom, not that we had two bathrooms like most folks have now, it was that we had one. That's right, there was an outhouse in the back. Mom and Dad had a bedroom and my brother and I slept in the living room. Know where the lumber came from to build the house? We bought several chicken houses from the poultry farm down the street and salvaged the lumber from those to build this house.

Sound Familiar? Sounds like what the old folks used to tell us about walking miles to school in waist deep snow. Sounds like I was really deprived but actually, I wasn't because that was the way many families lived. Looking closely, you can see why I didn't have to shovel snow off the sidewalks. There were no sidewalks, no TV, no microwave, no garage door opener (no garage), no air conditioners, no cell phones, no computers, no satellite dish, and no gasoline powered yard tools. The reason is that most of these things hadn't been invented yet. We didn't miss having those things because we didn't know what they were. This brings me to a point that I have been hearing for years. "Luxuries, once sampled, become necessities." This is undoubtedly true. Even the less affluent among us have at least one television and nobody pushes a lawn mower any more. Just about anyone with a garage has a garage door opener. You could fit three of the houses like the one my dad built into the one I own today (not large by today's standards).

I Am Not Suggesting that We Live Like The Way I Grew Up. We have earned an improved standard of living from the 1940's but perhaps we've gone too far. The best evidence of that is the proliferation of mini-storage buildings that we rent to keep the stuff we have but can no longer find room for in our houses. Last night I saw a TV show about estate sales. We spend years collecting treasures only to have our children sell for a fraction of what we paid, give to charity, or throw in the trash. Most of us can live on less without a huge sacrifice. Advances in technology have allowed the average among us to live better than the wealthy did when I was growing up.

We Complain About Excessive Government Spending. We all want to eliminate fraud and waste in government and undoubtedly there is plenty of that to cut. Unfortunately, trimming the fat won't be enough to stop our unsustainable federal borrowing practices. We will have to cut lean also. I love my social security and medicare. I think I deserve it because I paid for it. I have never sat down and gone through the exercise of determining what I would have if that money had been invested at a market rate of return in financial assets but, whatever the reason, the government has promised me more than they can deliver. Medicare is the best health insurance I have ever had. I can walk into the doctors office, get treated, and walk out the door without paying a dime. Even when I was a struggling college student, I couldn't do that. This is a great, but unsustainable, benefit. A ten dollar co-payment would allow the government to pay the doctors a little more while still retaining some to keep from passing a huge burden to grand children. People complain that we aren't getting cost of living raises, what would happen if they cut benefits by 3%? A person making $500 a month would lose $15 and someone making $2000 a month would lose $60. That would be a huge help to the system and most retirees could afford that to keep from passing this huge debt to our heirs.

Imagine What Would Happen If They Did That. Those who sponsored the legislation would be thrown out of office no later than the next election. People feel entitled to what they have been promised (thus the word, "entitlements"). It may not be fair, but things like this are what needs to be done. We don't need the government to promise us even more things that they can't afford, we just need them to admit that they can't afford what they have promised us already and tell us what has to be cut. This is a fantasy. Most likely, it will never happen.

A Sign At The Grand Canyon Tells It Like It Is. It says "Don't Feed The Animals. They will become dependent on human food and lose the ability to forage on their own." If we figured that out for wild animals, why can't we figure it out for ourselves. We have trained our citizens to depend on government handouts yet we think we can sustain these handouts while 47% of our population pays zero federal taxes. Not only that, we want to pay even less. It is my belief that we will have to attack our fiscal problems from both ends. More taxes and less spending. The sooner we start making these tough decisions, the less traumatic it will be when we have no choice.

A SUCKER IN EVERY GAME?.

2011-01-18T14:34:00.000-08:00

Who Is The Sucker? There is an old adage that if you are in a game for an hour or so and you look around the room and don't see who the sucker is, its you. I've been looking around the room and I don't know who the sucker might be. Is it me? Tha American Association of Individual Investors (AAII) reports that it's last investor survey shows that 56% of its members believe the market will be higher 6 months from now. I am a member of AAII and I would have responded the same way. What does that mean? In a recent article in Energy and Capital, Nick Hodge writes "Unless you run a mutual or hedge fund or otherwise have access to the advantages of institutional buying, You are the dumb money." Both the Wall Street Journal and Barrons report that the dumb money has returned to the market. I guess that means us. Perhaps they are right but I never left. Further, I am not leaving.

Am I The Sucker? Maybe so but I'm not the biggest sucker? The biggest sucker group left the market at the bottom because they could no longer stand the pain. That was pretty close to the exact bottom of the market. The next biggest sucker group believe they can predict where the market is going. That includes those who believe that a complex software program written by a bunch of MIT graduate students can tell you when to unload your over-priced stocks on a bunch of suckers and run like a rabbit out of there. Many have tried at that game and failed.

Does That Mean I Believe We Are Still In a Bull Market. I will admit that it isn't a good idea to pull out all the stops and buy a aggressively. There are a lot of factors that we all need to be aware of. The Energy and Capital article points out some facts that should give us pause.

1. The cost of providing food for 6.9 billion people continues to rise.

2. There are water shortages currently affecting 2 billion people.

3. The American consumer lifestyle is not sustainable nor is the debt it has created.

4. The price of oil is rising and it is inevitable that we will some day have to find other sources.

5. Our military/industrial complex is too large.

6. American labor cannot compete with the BRIC nations.

7. Too many Americans depend on the government for benefits that they have been promised but will not be able to collect because the government lacks the ability to pay. (Added by me).

How Is That For Pessimism. I don't mean to tell you to jump into cash but you really do need to monitor these things and use caution in your investment policy. This is a time to stay vigilant, cut your living expenses, and invest with extreme caution.

HEDGING YOUR BET

2011-01-09T15:27:00.000-08:00

Reducing Your Investment Risk. There are a number of things you can do to reduce your risk of loss if you invest in the financial markets. If you are lucky, you can hedge your bet and increase your income at the same time.. I have talked about this one particular technique several times over the 4+ years I have been writing this blog. The best way to illustrate this is to describe an investment I recently made.

I Recently Bought Some Intel. I won't go into the details of the due diligence I conducted before buying this stock. Let's just say it is a company that has lost value in the recent market melt down and has rebounded in subsequent months. A cursory examination shows that the company's earnings have rebounded more than the market price. For those who know virtually nothing about the company, it is the leading company in the production of computer chips which are used in everything from i-pads to elevators to automobiles. A few things I like about the company are as follows: It sells for 11.17 times earnings, much less than the average of the past 10 years. The earnings are growing at a rate of 11+% per year. They have 21+ billion in cash which they can pay out to stockholders or invest in attractive opportunities which may occur. This cash adds a measure of stability in a volatile economy. They pay a dividend of $0.63 per year which is around 3%, considerably more than you could receive on a savings account. Based on this information, this is ample reason to buy the company for a long term hold in my account. My opinion is that 3% yield and potential appreciation to a higher price justifies taking my money out of a money market account that pays virtually nothing and making the investment. Still, market volatility is such that i wanted a bit more insurance against loss due to market fluctuation.

Using Options To Reduce Risk. After buying this company at 21.07 per share, I sold an option which allows some one the right (but not the obligation) to buy the stock for me at $22 per share on or before the expiration date in mid February. For granting this privilege, I received $0.63 per share. While this doesn't sound like much, it is 3% of the 21.07 I paid for the stock. This means that the stock can drop from the $21.07 I paid to $20.44 and I will not suffer a loss. Instead of selling a 22 call, I could have had much more downside protection by selling a 21 call. Since I was relatively bullish on the stock, I wanted to participate in, at least, some of the upside if the stock increased in value. Does all of this sound like a lot of work for a small profit on a $21,000 investment? Look at it this way. I invested in a stock that I wanted to own. If the stock rises to $22.00 before expiration date, I receive an option premium of $.63, a profit on the shares of .93 and a dividend of .16. This is a total of 1720 on a $21000 investment, a return of 8% for 3 months or an annualized return of 32%. There are numerous other options for managing the investment. Looking at today's price of 20.7 for the stock and .21 for the option, I could terminate the investment for a very small gain of $47. If I just bought the stock alone, I could get out with a loss of $386.

Nothing Earth Shattering Here. You might be of the opinion that this is much ado about nothing and I would have a hard time disagreeing with you. On the other hand, now that I have a position in the stock, other opportunities will follow. If I stay in the stock and the price doesn't rise to 22 within the next month, I could keep the $630 option premium I received, get the dividend on March 1, and repeat the process again by selling another option. I will follow my policy of letting you know at major decision points what my management policy is. Hope it proves profitable and interesting.

Tragedy in Tucson. I always take it personally when someone kills a duly elected government official. In 1963, when John Kennedy was killed, I was heartbroken, not because I thought he was such a great president, but because, right or wrong, he was my president and an attack on him was an attack on all of us. I feel the same way about Ms. Giffords. The person who attacked her, and killed all those people, attacked us all. Some people may be able to forgive that but I certainly won't.

EVALUATING INCOME PRODUCING INVESTMENTS.

2010-12-29T09:15:00.000-08:00

The Second Step In Income Investing. In one of my previous posts, I listed several stocks that had passed my screen for income producing investments. At that time, I warned that this list was not a recommended list since it takes one more step to determine whether the investment is a suitable candidate. I have selected one of these investments to illustrate the evaluation process I use. The company I selected to demonstrate the process is Fidelity National Financial (FNF). The information given here comes from Yahoo Finance, which provides sufficient statistics to begin the evaluation process.

Step One. Overall View Of The Company Business. FNF is basically an insurance company. (Not to be confused with the company that provides mutual funds and asset management for investors.) By far their dominant insurance product is title insurance, which they market directly to the real estate industry and also through other title agencies who conduct the search, closing, and escrow function and receive the lion's share of the title insurance fees. The company has a good reputation in the real estate industry. In one of my past lives I owned a title insurance agency and did business with this company. The experience was positive. It does help to have some experience with a company your investing in but it is not required.

Step 2. Basic Financial Information. This information will give you an idea of the the relative size of the company and the average volume of shares traded on a daily basis. FNF has an overall market cap of 3.11 billion and an average of 2+ million shares per day are traded. This means that the company falls into the medium category in terms of size and a sufficient number of shares trade per day that it is unlikely that you would have any difficulty in liquidating your shares should you need access to your funds right away. This is an obvious advantage over a long-term CD or annuity which would cost you a substantial early surrender charge. Commissions for the sale of 1000 shares at a discount brokerage house could be as low as $7.00, virtually negligible compared to CD's or annuities.

Step 3. Some Important Statistics. These are things you should know about just about any company you buy. 1. Price/Earnings Ratio. (P/E). This company sells for 10.3 times earnings. A relatively low ratio. I believe this indicates that the company is not over-valued relative to its ability to produce revenue. 2. Price to sales ratio. The annual sales of this company are almost twice the market value with a price to sales ratio of .55. 3. Price to Book Value. The company sells for less than its net worth with a ratio of .9. All these ratios indicate that the company MAY be a bargain. These low ratios also indicate that the market opinion of the growth prospects for the company is low. This is pretty much to be expected since the company growth prospect is pretty much tied to the real estate industry which is disarray right now.

Step 4. Financial strength. In view of the dim prospects for the real estate industry, it is important to have some idea of the ability of the company to continue operating in an unfavorable environment. 1. Cash. The company has cash assets of almost $338 million as opposed to long and short term debt of $802 million. This combined with annual sales of 5.9 billion appears ample to fund dividend payout and operating expenses. 2. Debt to Equity Ratio. The total debt of the company divided by the shareholder equity is 23.2%. This is an indication of good overall financial health. 3. Current Ratio. This ratio is the ratio of short-term debt divided by short-term assets such as cash and other assets that can be liquidated easily to produce cash. This value is .39, Again relatively low for the industry. From these statistics you can determine that the company has the ability to sustain operations in a relatively hostile environment. If you believe that the current environment will stay the same or improve over the next 5 years, this is a relatively favorable situation.

Step 5. Dividend Sustainability. Since your objective is a stable income stream, this is the most important step in determining if the investment is right for you. The most important factor here is the payout ratio which is the dividends paid divided by the reported earnings. FNF has a ratio of 49%, a figure below 50% is relatively healthy and a figure above 100% indicates you might look for a dividend cut sooner rather than later. You might also look at the dividend growth history. Many investors believe this is more important than the current dividend yield; however, if you need income to pay the bills today, this isn't the case. FNF has a negative dividend growth rate. They cut it from $1.20 per share in 2007 to $.60 per share in 2008. This is a negative factor; however, the fact that they have already began to increase it again to the current level of $.72 is an indication that management believes they should have little trouble in maintaining it at that level. My opinion is that these factors are overall positive for the sustainability of the dividend.

Overall Opinion. This is a suitable investment for my portfolio. I believe they can maintain the current dividend. I also believe there is a potential for future price appreciation and dividend increases. All this will depend on a rebound in the real estate industry. I believe that will happen gradually even if the economy doesn't rebound a great deal. The fact that there are few properties being built means that the supply will eventually tighten resulting in an improvement in the supply demand ratio.

Caution. Remember, I said that this is a suitable investment for my portfolio, not yours. Just about any investment is suitable for some portfolios. Whether or not is suitable for yours depends on a number factors such as age, other assets you own, and your current cash flow situation.

Last Post of 2010. I have been writing this blog since 2006. More than 4 years. If you are one of my new readers, I might recommend you look at some of the older ones. You may find some ideas that benefit your financial situation. Would be glad to hear from you if you do. I plan to continue this blog through next year if my health holds out. Here is to a successful year for all of us.

A CHRISTMAS WISH, WRITTEN WITH SARAH TEAGUE

2010-12-21T08:05:00.000-08:00

A Wish For My Friend. There are a lot of opinions about facebook. Most folks consider it a place devoted to superficial conversations. That was pretty much my opinion until I read a post by Sarah Nell Teague. It was well written and aroused my curiosity. I contacted her and, before long, I was made aware that she had an obsession that had dominated her life for more than 15 years. Before you jump to conclusions let me tell you what happened to Sarah.

Her First Born Daughter, Heather, Has Been Missing Since 1995. Picture yourself in that situation. You told your daughter goodbye on a hot summer day not knowing it would be the last time. Would you be willing to let go and get on with your life after a few days? A few months? A few years. Would you assume that she is dead and her body hasn't been found? Would you cling to the hope that some day she might turn up alive? How many scenarios could you imagine under which you might find her again either dead or alive? Would you feel guilty that perhaps you weren't protective enough? Did you put her at risk because of the people you brought into her life? Can you give up and try to get more out of your life without the daily torture of deciding what else you can do? I know my answer. I would be forced to do the same thing Sarah has done for the past 15 years. Stop a minute and think about it. What would you really do? If I do that, those thoughts quickly become way too hard to allow to continue.

A Few Facts. This post is about the present and the future and not about the facts surrounding Heather's disappearance. You need to know a quick summary to have a reasonable understanding. 1. A man has claimed to have witnessed Heather's abduction. 2. There are other reports that have resulted in identification of a suspect. 3. That suspect committed suicide when an attempt was made to arrest him. 4. After the suicide, few attempts were made to search the suspects property. 5. The suspect's wife took the fifth amendment when questioned about the case. 6. Over the years there have been several leads about the case, some of which reported that Heather is still alive. 7. Sarah has attempted to run down each lead with negative results. 8. The only person arrested and brought to trial has been Sarah (for harassing the suspect's wife and she was found not guilty). A note of caution. I have not thoroughly investigated these facts and some may not be 100% accurate.

My Christmas Wish. Here are some things I would like to see done. 1. I am not sure that the Kentucky State Police (KSP) has done all that can be done to determine exactly what happened to Heather. Perhaps a full time investigator could interview witnesses, talk to the suspect's wife and offer her immunity to testify so she couldn't claim she needed silence to avoid incrimination. 2. Heather's story needs to be told. I wish an investigative reporter would investigate the situation and arrange publication so that the story would receive much wider publicity ( I am not an investigator nor a journalist and don't have the skills to undertake such a venture. 3. The most important of my wishes is for Sarah to have a repreive from all the anxiety. It would be a great time to enjoy her devoted family and many friends. Think about the Christmas miracle and the beautiful world we live in. I will offer a prayer and beg everyone who reads this to do the same. You take a few days off, Sarah.

Here Is An Unedited Paragraph in Sarah's Own Words.

Another year without our Heather (written by Sara Teague)........How have we survived another year without knowing where our Heather is? I would say two things: by the grace of God,and like my grandmother used to say...'by the barely'. And God knows this is not contradictory. He knows how every day has been spent in prayer and in belief that 'today could be the day that Heather comes home'. He knows the heart ache and the tears that are daily also. He knows the 'someone that knows' the truth and He knows that someday every question I have asked of Him will be answered. Every one of them.I know that He chose me to be Heather's 'mommy'. I know that He also prepared me for this tragedy in many ways. It was on the third week of searching for my first born daughter, Heather Danyelle Teague, that I realized how much He loves me. Precious gifts in the form of three boxes were brought to me. On this day, I had climbed up an oil tank in search of Heather. Down below were a few searchers...some old friends, some new ones. As I climbed up this oil tank, I heard a familiar voice saying..'Heather is small enough that she could fit in that opening'...'Oil does preserve a body'....I envisioned before I opened that tiny lid that I would find Heather...her hair floating in this tank...I would have Heather back.She was not on the beach, in the woods, hurt, as I had hoped for days. Heather was not in that empty refrigerator. Heather was not in Illinois and she had not had an abortion. Heather had not been in the well that I almost fell in. And Heather had not been near that old grave...no...that 'thing' that looked like a finger, was not a bone at all. So...surely, this search would be over and Heather would be here. The 'me' that had been afraid of heights, went right up to the top of that oil tank. The 'me' that had been so afraid to find Heather....not alive...was praying for strength to just open this lid and to be able to look down. I remember being at the top of this oil tank and right before I opened it, it was as if the heavens opened up to me. I whispered, 'Help me, Lord'. And he did.Not only did he help me, he sent me gifts for my braveness. Under the full moon that night; I looked through boxes that had been delivered to me. I had just told the searchers/friends that we were 'playing hard ball'. ( Even by the third week, I knew something just wasn't right). Standing at the door, was a young man with Heather's ball glove in his hand.Oh, I had so longed for something of Heather's. I grabbed it and I thanked him. He said, 'You haven't seen anything yet. I have three boxes that were left in the attic where you used to live'. I asked everyone to leave me alone with these treasures. In these boxes were precious, precious gifts: one red and blue little shoe that Heather had worn on her first Christmas, some of her baby teeth, a dress that I had made with'HEATHER' in ricrac, ( I smiled as I thought to myself..'I actually let her wear this?'). In the bottom of one of the boxes was a journal that I had written to Heather when she was 23 months old. An entry dated August 25, 1974read, 'I am so afraid a big man will someday take my Heather away'.The reality of 'my reality' startled my very breath...On August 26,1995,when Heather was 23 years old, that is what we had just been told had happened. I felt God's love! I felt a strength and a purpose that God knew I needed. I knew that I had not only been chosen to be Heather's' mommy'; I had been chosen for this search also. Oh, how He loves us~So...today, 15 years and almost 4 months later...I am standing on His Word..Matthew 10:26, which says that there will be nothing hidden that won't be revealed.Every word in my vocabulary has been changed and rearranged. I have confidence in the progress of this search. I have many documents that have been revealed to me through the years. I have taped conversations that are so damaging to the story we were told that hot and blurry Saturday...And this I know: What we were told happened August 26, 1995 on Newburgh Beach in Spottsville, KY. is not what happened at all.

SAMPLE INCOME PORTFOLIO.

2010-12-19T10:35:00.000-08:00

Sorry I Missed Last Week's Post. Trying to tie up loose ends and traveling from Colorado to Texas kept me relatively busy last week so I missed that post. I will post at least once more before Christmas and another before January 1 to wind up the year.

Investing For Income A few weeks ago I blogged about the difficulty of trying to eliminate all risk from your investment portfolio. I talked about a couple with a modest $200,000 portfolio who had confined their investment activity to certificates of deposit and how their income from those CD's had dropped from $20,000 per year to virtually zero over a 20 year span. At this point they are often forced to withdraw principal in order to survive. This means they are in danger of running out of money before they run out of life. This is one of the reasons why the 65-70 age group is the fastest growing bankruptcy group in the country. I promised you that I would soon post a sample portfolio that produced spendable income without excessive risk. To produce this sample portfolio, I used the screener provided by the organization I use to buy stocks for my own portfolio (Options Express). There are numerous others since virtually all online companies have a program for screening stocks. I entered the following perameters. 1. Dividend yield, at least 4%. 2. Daily Sales Volume, at least 250,000. 3. Price/Earnings Ratio, Not to exceed 20. The search returned 65 companies. From this list I selected 10 properties. They are listed as follows in no particular order:

1. Ameron Corporation (AEE). A utility company selling at 28.55 paying 1.54/year dividend. 600 shares would cost $17130 and pay a dividend of $924 per year.

2. Bristol Myers Squibb (BMY). A well known drug company, selling at 26.26 and paying 1.28. 700 shares would cost $18380 and pay $896 per year.

3. Duke Energy (DUK). A well-known utility company selling at 17.54 per share and paying .98 per share 1100 shares would cost $19300 and pay $1098 per year.

4. Lockheed Martin Company (LMT). A company that makes aircraft and defense items. It sells at 68.22 per share and pays a $3.00 dividend. 300 Shares would cost $20460 and pay $900 per year.

5, Medical Properties Trust (MPW). A company investing in properties for lease to the medical industry. It sells at 10.12 per share and pays .8 dividend. 2000 shares would cost $20240 and pay $1600 dividend.

6. AT&T (T). A very well known company in the communications industry. it costs 29.21 and pays 1.68 dividend. 600 shares would cost $17526 and pay a dividend of $1176.

7. Health Care Properties (HCP) A company that invests in nursing homes, assisted living centers, rehabilitation centers and conventional medical use properties. It sells for 32.52 and pays a dividend of 1.86. 600 shares would cost $19512 and produce income of $1116.

8. Kinder Morgan Energy Partners (KMP) A company that owns pipelines for the transportation of petroleum and natural gas properties. It sells for 69.25 per share and pays a dividend of 4.44. 300 shares would cost $20,775 and produce income of $1332.

9, Fidelity National Financial (FNF). A title insurance company operating nation wide. It sells for 13.98 and produces a dividend of .72. 1400 shares would cost $19,570 and produce income of $1008.

10. Windstream Corp. A wireless communications corporation selling for 14.14 per share and paying a dividend of 1.00 per share. 1900 shares would cost $26860 and produce income of $1900 per year.

Summary: The total investment would be $199,755 and the income would be $11950. This portfolio has the following advantages: 1. A much higher income than a bank CD or an annuity. 2. You can sell all or a fraction and have your money in 4 days with no penalty or surrender charge like a CD or annuity. 3. Often these companies may increase the dividend so there is upside in the income. 4. Potential for increase in share prices. 5. A preferential tax rate on income and capital gains. There are disadvantages such as 1. Potential for losses if you have to sell at a time when prices are low. 2. Dividends are subject to elimination or reduction if the company does poorly. 3. You need to check on prices, earnings, and company news at least twice a month.

A Word of Caution. This represents a cursory evaluation. In order to select one of these stocks for my portfolio or one of my clients, I would need to spend 20 to 30 minutes finding out more about the company including factors like book value, earnings, potential for earnings growth, cash flow, and growth trends. Perhaps I can do a later post to describe the due diligence process in selecting a company for investment. I will continue to monitor this portfolio on a monthly basis and report the results. At the end of the year, we can compare portfolio performance to the overall market, CD, and annuity returns. Should prove interesting.

SENIOR CITIZEN BANKRUPTCY.

2010-12-05T11:43:00.003-08:00

An Alarming Situation. Our elders (Omigod that includes me) are filing bankruptcy at an alarming rate. I recently announced this via a facebook post but I have continued to think about it since. Large credit card bills, prescription drug costs, uninsured medical expenses, increasing energy costs, and trying to support children who have not yet learned to care for themselves are among the most common reasons. The magnitude of this problem is illustrated by the fact that bankruptcy filings for those under the age of 55 has steadily dropped over the years but it has steadily risen for those over 55. Bankruptcy for those in the 75-84 bracket has risen over 400% since 1991. One bankruptcy attorney I talked to told me that he seldom had a client over 65 when he started his practice 30 years ago, now they represent the majority of his practice with his oldest client being over 90.

Failure To Plan? The old cliche says that most people don't plan to fail. Instead they fail to plan. My experience is that many seniors are in serious financial condition despite the fact that they have been very conservative in their planning. In fact, those who have insisted on low risk investments are often in the most serious condition of all. In 1989, it was possible to invest $200,000 6-month certificates of deposits and receive 10.4% interest or $20,800 a year. While this isn't a lot, when combined with $12,000 or so a year in social security, frugal retirees could live rather well on this amount. In 2000, it was still possible to get 6.9% or $13,800 per year. Combining this with cost of living adjusted social security left the frugal retiree in reasonable shape with a minimal amount of belt tightening. Even as late as 2006, it was possible to get 5.5%. This has continued to drop until the present time, it is difficult to get 1% without extending maturity out to unreasonable levels. The only remaining alternative that most conservative investors have is invasion of principal.

Credit Card Debt. The fact that that most seniors filing bankruptcy list credit card debt in excess of $20,000 is often cited as evidence of irresponsible consumption. This may be true in some cases; however, it is often the result of using credit cards to cover living expenses during difficult times. Prescription drug costs are becoming an ever increasing expense for many seniors. Social security drug benefits provide some relief but many enter the so-called doughnut hole, in which no benefit is available, early in the year. It is not unusual for two seniors covered by medicare part D to spend more than $8,500 in a given year for uncovered expenses. Rather than go without much needed drugs, many are forced to use credit cards to cover that expense. As credit card debt piles up, the next step is to delay payment on necessary expenses such as utilities and telephone. These pile up until there is an imminent danger of shut off.

Management of Post-Retirement Finances. One of the first things financial advisers learn in the education process is reduction of investment risk through diversification. Unfortunately, most diversification techniques involve diversification of assets. This is important but not as important as diversification of income. The key issue for those nearing retirement is how to replace income from full time employment with income from other sources. If we have several sources of income we are less vulnerable to abrupt reduction in income from a single source. Those considering retirement, either voluntary or involuntary, within the next 5 years should begin income planning sooner rather than later.

How Do You Diversify Your Income Sources? In my next post, I'll give you an example of a $200,000 portfolio structured for the production of income from several different sources. Some of these may surprise you.

DO YOU KNOW WHAT A RARE EARTH IS?

2010-11-29T12:37:00.000-08:00

First A Definition. Rare earths are a group of 17 elements with names you probably have never heard of. They have not found wide use in the economy despite he fact that they aren't really that rare except when compared to iron, copper, and aluminum which are found in relative abundance. During the past few years their applications have increased mainly because they can be made into very strong, permanent magnets that are highly useful in the manufacture of several somewhat high-tech applications such as batteries, for wind turbines, hybrid cars, and guided missiles.

Why Are They In The News? Because China controls 90% of the World's supply. We have been buying virtually all our rare earths from China at a price cheaper than we could make them ourselves. This still wouldn't be a problem except that China has decided that they may need to conserve their supply and cut their exports of these elements by 72%, leaving the rest of the world to cope with the resulting shortage on their own. Investment bankers have been promising investors huge returns for investing in companies that have been formed to exploit Non-Chinese sources of these materials. One such company is Molycorp, a NYSE company with headquarters in Colorado. Molycorp is no neophyte in rare earths. They have been mining a concentrate which can used to extract these elements for a number of years. In a recent public offering they raised $379 million to expand their operation from mining concentrate to one in which they take the concentrate to the individual elements and then to finished magnets. They claim they have improved these processes to allow the production of the finished product at less than currently available in China.

There are several companies that have announced their intent to expand their rare earth business. I have not researched them all but, if you are looking to get in on the ground floor, it might make sense to diversify into this area. Despite the hype from the investment banking community, I believe that these are high risk investments and there are a number of variables that may not be evident as yet. Still, this might prove to be an interesting investment for those willing to devote a small amount of their portfolio to a high-risk investment. I plan to continue to research companies in this field.

Considerable Conventional Energy Exploration in Colorado. Despite pressure from the environmental lobby, a number of companies are looking to exploit oil and natural gas from a formation in Colorado known as Niobrara Shale. This formation encompasses land in Colorado, Wyoming, Kansas, and Nebraska and is in it's infancy. Still, it is being compared to to the Bakken Shale in North Dakota and Montana. This formation has made a tremendous contribution to the economy of North Dakota. A host of small and large companies are working in this area and producing both oil and natural gas. Hopefully, this will get by environmentalists to produce energy that will be desperately needed until we can come up with more economical renewal sources.

What About The Conoco Corporate Center. It's been at least a year and possibly two since I learned of Conoco's acquisition of 400+ acres of land near Louisville to be used for construction of a world class corporate training and research center. The eventual employment target is 7,000 employees which should mean a billion dollar impact for the area. Despite all the hype, I noticed that the total project is anticipated to take 20-25 yeas to complete. Thanks a lot. I would be almost 100 by then. The good news is that construction is scheduled to begin in time for completion of phase 1 by 2012. Hopefully, I'll live long enough to see at least some of that project completed.

I Will Be In Colorado Late This Week. Call my cell phone at 303-902-3940 to arrange a meeting.

ADJUSTING TO NEW REALITIES.

2010-11-22T09:01:00.000-08:00

My Outdoor Home.

It's Been a Tough Year For A Lot of Us. With the year drawing to a close, it's time to begin planning for next year. Taking a look at our assets, we often overlook the most important one: The ability to generate income. Over the past five years, I have often written of the plight of those who have undergone a big shift in their income due to job loss. Most of my clients have been high earners over the years and most of those who have lost jobs have found the adjustment quite difficult. The biggest problem is that re-entry into their previously high-paid career is virtually impossible. I have always recommended that high earning clients recognize that their biggest risk is the possibility of loss of high employment income. In previous years, many of those have told me that they were somewhat "bullet proof" in this regard. This attitude no longer prevails and the need for security is replacing the desire for luxury as paramount in the mind of pre-retirement clients. Talk show host, David Ramsey has developed a large following among those who agree with his slogan that "A free and clear house has replaced a BMW in the driveway as the most desired status symbol". I'm not sure that this statement fits everyone but does appear that it fits a lot of those who find that they can no longer keep up with the expense of making large monthly payments on luxury items they wish they no longer owned. A very wise client of mine once said "You can always trade money for stuff but it is much more difficult to trade stuff for money."

Now Is A Good Time To Evaluate Your Strategy. At this point, I am talking to highly compensated individuals who are still employed. Those who have lost jobs are not without hope but will require a different strategy. If you still have a job, even if you think you are secure, ask yourself what you would do if that income were to suddenly end. There is no "one size fits all" strategy, I can give you a few ideas but they may not fit your situation. The best thing you can do is spend some time with a spiral notebook and brainstorm the possibilities. Here are some common problems.

1. Benefits. How will you replace your health insurance? Will your family be vulnerable without your company paid life insurance. Are you insurable? You may not have disability insurance if you are no longer employed and it will be difficult to purchase if you are not.

2. Liquidity. If you don't have adequate investment income to pay your monthly expenses, you will need to have some assets that you can liquidate to cover these expenses. This could present a problem for many of those who liquidated their investment portfolio to purchase one of the annuity products that promises a guaranteed minimum return with some upside if the stock market does well. Without commenting on the merits of this investment, I can almost guarantee that withdrawal before the maturity date will involve a substantial withdrawal penalty. While you can always withdraw from a qualified plan such as a 401-k or profit sharing plan, you will have to pay a penalty if you need a substantial sum. It may be preferable to live on credit cards at the end of the year in order to push the income into next year when your overall income will probably be less. The bottom line is that adequate liquidity is your most important insurance against financial disaster. Guard your liquidity reserves with your life.

3. Debt Service. It is probably inadvisable to liquidate your qualified plan assets and pay a penalty to pay off debt but you need to look at ways to manage this debt. If you were one of those who took out a 15-year loan to get a lower interest rate, perhaps you might prefer lower payments. Even if you get a slightly higher interest rate, you definitely lower your risk by taking out a 30-year loan as opposed to a 15. I have seen more people in trouble because their payments were too high than due to a longer payoff period.

4. Develop New Skills. Consider ways to develop new skills. Look at ways to develop other marketable skills. Not only can it help you stay employed at your current employer it could provide ways to generate earned income if you do become unemployed.

Parting Shots. These are just a few points to consider. More than anyone else, you are in a position to look at the risks you face and develop a plan to deal with them. Can't say I'm making much progress towards my health goals. Will talk more about them next week.

WHAT IS A CAREGIVER?

2010-11-15T14:26:00.000-08:00

Fall colors amid the greenery

An Accidental Discovery. One afternoon as I was moving around on the internet, I wandered into a chat room. My pre-conceived notion was that people who spend time in chat rooms fall into the "Get a life category." There were 10 or so people in this chat room titled "Caregivers" or something like that. I was welcomed right away and invited to stay. They asked me if I was a caregiver and I told them I handled some of the personal and financial affairs of my aunt and uncle who lived in an assisted living center in Denver. Apparently, that qualified me. One thing that impressed me was the quality fellowship that existed in this group. It kind of reminded me of when I would stop in the afternoons at Dairy Queen on my trips through Texas. There would often be a large table full of folks drinking coffee and talking about country life. I used to love eavesdropping. I remember one farmer talking about the cost of feeding his cattle and asking if his neighbors thought he could get food stamps for them. Another time, I remember a bunch of farmers in straw hats and overhauls talking about the hard drives and random access memory on their computers. I think chat rooms like the caregiver group are sort of an offshoot of the afternoon coffee clubs but without the coffee.

What is a Caregiver? In the beginning, my definition of a caregiver would have been someone who takes care of one or more disabled persons who can no longer care for themselves. There were several like that in this chat room. Some were professional caregivers, the most common being nurses; however, the majority were individuals who had cared for spouses or family members during an extended terminal illness. One of the older men in the group had spent several years, taking care of a spouse for several years after having a stroke. Another, man had spent several years taking care of an aging parent. He often spoke of the toll those years had taken on his life. One retired RN spent years taking care of her mother and was now engaged as a volunteer rehabilitating injured animals. Most of the participants were no longer involved in this activity since the care recipient had since died.

What impressed me most about this group was the bond between these individuals. Most had never met face-to-face and those who had did so only briefly. The word love was used frequently and this puzzled me since I had difficulty with the concept that people who knew each other only in cyberspace could really love each other. It was several years ago that I started visiting this "room." There is a designated time that the participants have set aside to meet and I usually try to attend most of the time. I do consider these individuals as friends, one of which I have visited several times via instant messages and discussed numerous problems that each of us may occasionally have.

The main reason I have included this story is that my definition of a caregiver has changed over the time I have participated in this group. The reason for this is that I have discovered a common thread among the participants. My theory is that they are caregivers, not because they spent time caring for another person, but because they continue to do things for others. There are countless examples among this group of people. Common characteristics are unselfishness, empathy for others, strong sense of community, and a strong set of principles. If we think about it, we all know people who fall into this category. The bottom line is that you aren't a caregiver because of what you do. It's because of what you are.

Not Much Progress. When I weighed in on Sunday, I weighed the same 167 pounds that I have observed for three weeks. In addition, my glucose levels remain higher than normal. These results illustrate how we can let our health deteriorate to the point that it becomes very difficult to manage. I have allowed this to happen over an extended period and now I realize how hard it will be to change it. There are two principles that apply to my future prospects. 1. Tenacity. When we find a goal to be very difficult to accomplish, we often decide that it is no longer worth pursuing. 2. Stupidity. Continuing to do the same thing while looking for a different result is stupid. I am not going to give up and next week I am going to try some different tactics. I will let you know how this works next week.

REFLECTIONS ON A SUNDAY AFTERNOON

2010-11-07T11:08:00.000-08:00

This Picture Look Upside Down? It isn't. Actually its a picture of the water. If you look in the upper right hand corner, you can see the white swan that is on land. With the exception of the tree branch in the center, the remainder is in the water, as a reflection of the blue sky, clouds and trees. I love the way the lake changes the landscape. On some days, the texture of the surface is ruffled by the wind and on days like this one, the surface is so smooth it's hard to tell what is real and what is a reflection. Another thing different about the appearance of this post is the type size which I increased as an accommodation to one of my readers who told me it was difficult to read. Hopefully this will help.

Did You Get Out Of The Market Last Year? If you did, you did it against my advice. It's very difficult to stay in a falling market hoping it will get better. A lot of my clients could no longer bear the pain of seeing their assets drop to levels that we had previously thought impossible. If you will read my posts I did warn that the market was vulnerable prior to this drop. While we changed our strategy prior to the drop to reflect our decreased optimism, (We raised more cash and moved away from high P/E stocks) we were still vulnerable and took a hit along with everyone else, although perhaps not as much. What hurt us the most was that some companies in our portfolio with a long track record of increasing dividends cut or eliminated the dividend. Some did this within weeks of announcing that they were totally committed to continuing their dividend policy. There are ways to determine which dividends are most likely to be cut and we will monitor those more closely in the future.

The Market Averages Have Increased By 80% Since March of 2009. If you got out close to that date, you were likely to have cemented in a huge loss. We had several clients who did that. As I have preached for years, there are market forces that prompt you to sell when markets are low and buy when they are high. I will admit that I don't know how to predict the markets well enough to be either 100% in or 100% out at any given time but when everyone says "run for the hills", its probably time to begin buying again. I do not know how much the current market trend will last but I predict that we have another 3-4 months of strong markets. This prediction is based strictly on statistical principals which show that from September to the first of the year, the markets show the strongest increase of any other period.

Having Trouble With Weight Management. I weighed in at 167 again this morning. Despite constant efforts to eat less, I still weigh the same as I did last week. Glucose levels are also about the same. I had to give up and do some occasional injections during the day to keep it down. I am still not giving in totally and will work even harder next week to drop some weight and reduce insulin levels.

IT ALL STARTS AT SUNRISE

2010-10-31T14:15:00.000-07:00

I've been Watching This Tree. This picture was taken last fall and I am waiting for a repeat performance this year. It's been 15 years and I never cease to be amazed at the beauty that surrounds me here. This is but one example. This picture was taken at sunrise before sunlight floods the back yard. I can't claim to have done many good works in my 72 years on this planet, so I guess all this is truly a gift, for which I have done nothing to deserve. Just don't tell me it is a random occurrence.

Understanding Real Estate. One thing we may not often consider about real estate. Property values are inextricably linked to interest rates. Some of you might think you know the reason for this but maybe there are other reasons that aren't so obvious. When it comes to personal residences almost everyone gets a mortgage to buy the house. Lower interest rates usually mean more people can afford to buy. This increases demand and causes prices to rise. That's simple. But what about the buyer who pays cash and intends to rent the property out for a monthly income? The value of the income stream received is higher in a low interest rate environment. This is part of what's going on right now. Suppose you have $200,000 to invest and you are in need of income to help cover your monthly expenses. If you can rent the property for $12,000 a year after expenses for the next 10 years, you will receive total income accumulation of $120,000. If you buy a 10-year government bond at the current rate of 2.61% you will receive less than half that or a total accumulation of only $52,200. Give the huge difference in return, you might even be willing to pay an extra $20,000 for the real estate.

What if the property produces no rental Income? Do lower interest rates increase the value of real estate that produces no rental income such as raw land. Consider a case of a $100,000 lot that you might want to buy and hold for resale in two years. In the current environment, you can choose to buy a risk free 2 year treasury bond instead but your yield will be only 0.4%. This means that you will lose out on $800 in interest waiting for the market to improve. Perhaps you might be willing to pay an extra %5,000 for that land.

Wait A Minute! Here we have the lowest interest rates of the past 50 years and we all know property values have been going down not up. So how can low interest rates favor higher real estate values. Nothing is simple. I never said that interest rates were the only factors that affect property values. There are other factors at play right now. Probably the biggest factor is the relatively low rates and low qualification standards of the past 10 years. This pushed property values to unrealistic levels as people rushed out to buy properties at values they couldn't afford. Builders rushed to produce more inventory. When it became obvious that home owners couldn't make the payments they promised on contracts they signed, an additional source of inventory became available: foreclosed properties. This made it unprofitable for builders to build new homes and large numbers of construction workers, mortgage originators, and title company employees lost their jobs. Employees in related industries such as lumber, furniture, and concrete also lost jobs. This offset the benefits offered by low interest rates.

Is There An Opportunity Here. I believe there is. If you have a diversified investment portfolio and you can buy a property at a reduced price with a substantial down payment and a low interest mortgage, the rental market is strong and you can receive a decent cash flow while you wait for prices to recover. Now is probably a good time to divert some of your other investments into real estate. This isn't a strategy for a low income employee with twenty grand in the bank and little else but it is a good use of funds for stable investors with an adequate liquidity reserve.

Not a Good Week Health Wise. This morning I tipped the scales at 167, same as last week. I can also see that my blood sugar levels, although acceptable in the morning get much higher during the day and I will not be able to continue at these levels without taking more insulin, a situation I have wanted to avoid. The bottom line is that I made little or no progress. I can not let this discourage me from reaching toward my goal. I will work harder next week. There is a plaque on the wall in Betty's office that says, "Let us run with endurance the race that God has set before us." Hebrew 12:1. I'll remember that as I go through next week.

IT'S SUNDAY AFTERNOON. WHERE ARE YOUR CHILDREN

2010-10-24T11:52:00.000-07:00

Beautiful Sunday Afternoon. I love it when the blue sky and clouds reflect into the water. Helps me relax and makes me think about the important things in life. I was going to communicate about the effect the rising stock market is going to have on the economy over the next year but I recently received a message from a friend about a lead she received on the possible whereabouts of her missing daughter. Her daughter didn't disappear in the last few days.....Or even in the last few months. It has been fifteen years since she last saw her. This is just one of the many leads she has followed up during this time. I won't mention her full name yet but she is from Madisonville, Ky and is well known in those parts. While I am willing to help her in just about anyway I can, including writing a story for the world to hear, i am not sure I am the best person for the job. In any event, my heart aches for her as she tells me that she is about to run down this recent lead about a girl in a mental hospital who claims to be the missing daughter. Although it is likely that this lead will be a blind alley like so many others she has followed over the years, her words to me were a simple, "I have to know." More than anything she has said, these simple words let me know a fraction of of the anguish she has felt for so long. Those of you who have children of your own, no matter how old, put your self in her place for a few minutes....If you can stand it. Another simple set of words that ring true are, "No child should ever be just missing." No matter what their condition, they should be found so that the family can welcome them back or give them an honorable goodbye.

Stories About Missing Children and Young Adults Abound. I guess I haven't paid a lot of attention to them up until now. Let's all take a moment to recollect where our children are. Let's also say a prayer for Sara that she can find an end to her soulful journey of the last fifteen years. I wish I knew what I could do to help her. I will try to keep you informed of any progress in future posts.

I Promised To Keep You Up To Date About My Other Journey. Since my last week's post, I only lost another pound. This is probably more realistic than my previous weekly result of five pounds. Still, 167 lbs is certainly much better than close to 180 a year or so ago. The bad news is that my H A/1c is still 7.7. Much too high and certainly a level that damages my body. They won't test that again until January. It is important that I receive a better result at that time.

THE VALUE OF AN EDUCATION

2010-10-17T19:33:00.000-07:00

Memoir From 1960. I'm sitting in a first-class seat on a United DC-7, wearing slacks, my only white shirt, one of my Dad's ties, and a sport coat I got for Christmas when I was in the 8th grade. I am traveling to Wilmington, Delaware to interview for a job at DuPont, the company that promises "Better Things For Better Living....Through Chemistry." I can't believe I'm about to graduate from college with a degree in chemistry and DuPont wants to hire me so bad that they are willing to fly me first class to Delaware for an interview. I'll never forget the flight attendant (they called them stewardesses in those days) who comes up to our seat and asks us what we want to drink. I don't have a clue so I follow the lead of the grey haired man in the next seat and order a scotch and soda. The first taste almost leaves me in need of the "barf bag" in the seat pocket in front of me. Despite the initial shock, I manage to down two drinks and feel like it doesn't matter how long it takes to fly from Denver to Wilmington.

The details of the next day are not important. What is important is at the end of that day when I sit in front of the massive desk of the research director and he offers me a job at a salary that is more than my dad had ever earned. While I am trying to swallow, he tells me that I can expect to double that within five years. Here I am, 22 years old, and that day represents the high point of my career as a research chemist. It was all down hill from there. I did double my salary in five years but I expected that. I found out that what I thought was a huge salary didn't buy nearly what I thought it would and the necessity of going to work on a regular schedule was highly restrictive to my freedom. Even though those were "the good old days," they still didn't meet the expectations of a young man coming out of poverty who had expectations that a college degree was the key to the American dream.

Fast-Forward Fifty Years. I recently heard some statistics that 80% of college seniors expect to move back in with their parents after they graduate. This is up from 67% four years ago. I am not sure I believe that these are exact numbers but my experience tells me that far more young people are entering college these days and graduating into far less opportunity with each passing year. Way too many of my friends and clients still have the responsibility of providing food and shelter for adult offspring. Often, these are not young adults. Some are in their late 40's. You might ask, what is the reason for this? Although I have some ideas, I can't claim to know what the answer is....but I know what it isn't. It isn't depending on the government to solve the problem. Each of us has a unique set of problems that require unique solutions. It is up to us to help our children determine their educational and career path. I have been far more lucky than smart in this area but I know that failure to make the right decisions in this area can make life far more difficult for both parents and kids. The government can't solve all our problems and we need to take responsibility for ourselves. Could part of our recent economic problems lie with those who have come to look towards the government to care for us rather than go out and work to solve our own problems. History has shown us that American ingenuity resulted in products and strategies that have put us ahead of the rest of the world. Many of these solutions didn't come from brilliant ideas but from hard work and grinding out results. The efforts of entrepreneurs like Bill Gates and Steve Jobs have resulted in an improved quality of life and higher productivity for all of us. They had the initiative and drive to accomplish great things and neither had government grants or affirmative action to help them get an education.

Speaking Of Solutions. I promised to keep you informed of my progress towards controlling diabetes. My theory is that dietary control and weight management will provide the solutions I seek. In that regard, my weight has dropped from 173+ to 168 in the course of a week. Periodic blood sugar checks indicate that I am doing about as well without three insulin injections a day as I did when I was taking these shots. At this point I am still taking 50 units of time release injections at night. So far, the biggest problem with blood sugar control has been hypoglycemic (low blood sugar) episodes at night. The journey has only begun. I'll let you know of my progress, if any, next week.

I AM NOT A DIABETIC.

2010-10-09T17:04:00.000-07:00

Don't Call Me A Diabetic. I have diabetes but I never did like calling people names just because they have a disease or disorder. When you call me a diabetic, you are adding a label that makes it my identity. In 1995, I was told I was about to develop diabetes. I weighed about the same then as I do now and I ate whatever I pleased. They told me that I either had to change my lifestyle or I would be subject to all the complications that develop with diabetes. These include, blindness, loss of limbs, heart disease, stroke, and overall reduced life span. As a result I went on a drastic diet, reducing the amounts simple sugars, animal fats, and overall caloric intake I consumed.

Great Results....For Awhile. I lost almost 20 lbs, brought my blood sugar to normal levels, and eliminated the blood pressure medication that I had taken for 10 years. I considered this quite an accomplishment but I bragged too soon. My weight gradually increased and I had to resume the blood pressure medication. They put me on oral diabetes medication. Although I would have preferred not to have taken this medication, I guess I considered this a small price to pay to live the way my friends and family lived.

Things Got Worse. Within five years, the oral medication was no longer sufficient to maintain my blood sugar at normal levels. Although I resisted, they warned me that I was facing the danger of some severe complications if I didn't do what was required to bring my blood glucose levels down. To make matters worse, they warned that once I begun to experience these problems it would be too late to reverse them. This reminded me of what happened to my grandfather who spent his last 5 years with no legs. He also suffered a stroke and no longer recognized any family members. They gave me a free supply of time release insulin and some needles and told me to try nightly injections for a month. The results were excellent and, although I had really wanted to avoid the needles, I decided the shots didn't hurt too much and a single injection at bed time was not too high a price to pay to avoid ending up like my grandfather.

Fast Forward Five Years. The nightly injection of time-release insulin is no longer sufficient to keep glucose levels within the desired range. They decided that the best way to remedy the situation was for me to test my blood sugar at each meal and inject myself with a fast-acting insulin before eating. I gave up and decided to try it. Again, it was not painful but it severely cramped my style. I did what they said........sorta. On my last visit, after being on this regimen for 6 months they asked me to wear this device that would give them a continuous reading of my blood glucose levels. Then they could tell me more precisely when to make these injections and in what quantity. It was at that point that I decided to try something on my own.

Here Are Some Steps I Plan To Take. 1. Strict low carbohydrate diet with an emphasis on protein. 2. More diligent exercise levels. 3. Eliminate fast-acting insulin injections. 4. Lose at least 15 lbs. Why am I telling you this? Because I plan to write about my progress once a week and going on record with my plans should provide some extra motivation to stick with it. Another, more important, reason is that I think improved awareness of diabetes risk factors might benefit my readers. Diabetes is approaching record levels in this country. Granted, better detection and monitoring is responsible for part of this; however, obesity and inactivity are other major factors. Type two diabetes levels are endangering our children as they are developing this at far earlier ages than in the past.

Weight Loss Is a Major Issue For Now. My friends tell me I don't need to lose weight. When I went on a major weight loss program 20 years ago, my friends told me I looked like "a refugee from the Bataan death march." That being said, I know losing some weight would be beneficial. As of today, I weigh 173.5 lbs. I will write again next Sunday and report my progress. Another major factor is called hemoglobin A1c, which is a measure of average blood glucose levels over a 3 month period. As of my last visit to the clinic this level was 7.7. Over 8 is considered dangerous and the real goal is 6.5 or less. A new result will be available after October 21 and I will report that then. In the meantime, I will work on my weight and report on the results. This should take less space than this post and I will resume writing about our financial choices in this most difficult of economic environments.

MY NEW RULE FOR REAL ESTATE INVESTING

2010-09-28T09:18:00.000-07:00

An Interruption It's a cool Sunday evening. I am on my patio at our Colorado townhouse getting ready to grill a couple of steaks. Virtually out of nowhere a man appears and asks, "Are you Phillip Storms?" When I say yes, he hands me a document which I immediately recognize as a summons. I tell him thank you and he leaves. While this is somewhat of a surprise, it isn't totally unexpected. The homeowners association of a condominium I own has filed suit to collect $2,000 that they say I owe. Since I am a member of this association, in effect, I am suing myself. Without going into detail, there is little doubt in my mind that this suit is totally without merit. Since 2006, when I acquired this unit as as a foreclosure from a friend (or should I say a former friend) to whom I loaned money, I have been paying over $400 a month in HOA dues. This is an astronomical price for a 2-bedroom, 2-bath, 1025 sq foot unit and you might think that this is a luxury unit with many amenities. Not so. The units are run down, the clubhouse/pool is one that you wouldn't want your family to use and landscaping is barely maintained. The only saving grace is the location, a few blocks from light rail and in a relatively popular area of town.

How Did This Situation Occur? The short answer is mis-management by the homeowner association and, again, it is not necessary to go into detail. A major advantage of real estate investing is that you have a fair amount of control over the outcome of your investment. You can decide what improvements you might make to increase the rental income available from the property; you can decide the proper rent levels to maximize occupancy and increase cash flow; and you can decide; what steps you can take to increase the value. If you buy AT&T stock you can only hope and pray that CEO, Randall Stephenson earns his $7.3 million salary and makes the right decisions to maximize cash flow and share value. Not the case with real estate, you are not only an investor, you are CEO of your own company. If you own within a homeowner association, you give up most of this control to a group with many members who have no clue as to how to manage and maintain properties for maximum liveability and sustained property value. Your ability to control the destiny of your property stops when you walk out the front door.

How Could This Situation Have Been Prevented. I broke one of my existing rules when I made the loan on this property. That rule was to make loans only on properties I would buy at a price equal to the amount of the loan. When I made this loan, I really didn't want to own the property. Instead, I depended on the ability of the borrower to make the right decisions to maintain the value of the property and protect my investment. This has never been a good policy for me. The second rule is a new one. Do not make loans or acquire properties with homeowner associations who make most of the decisions affecting the value of your property.

Perhaps This Sounds A Bit Extreme. You may have notice that the title of this post is My Rules For Real Estate Investing. This doesn't mean that they should be your rules. In almost 5 years of publishing this blog, this is probably the first time I have described one of my investments that turned out to be a disaster. I am embarrassed to describe this folly to you but I think the ability to think about what could go wrong with an investment is often more important than the ability to think about what can go right. I recall one quote that I included in a previous post that said, "The ability to manage the unintended consequence of an unsuccessful investment is one of the most important abilities an investor can have." If you are thinking about making a real estate investment that has a homeowners association be sure to thoroughly investigate that association and decide what additional risks the HOA might impose. If you are like me, you will probably decline the investment.

MANAGING YOUR ASSETS IN A MARKET FULL OF RISK

2010-09-24T09:25:00.000-07:00

"Forget the return ON my investment. What concerns me is the return OF my investment". Will Rogers (I think).

Return of vs Return on. This is probably one of the most misunderstood terms in investing and one of the biggest sources of argument between me and one of my very astute clients. It is best illustrated by an example. Suppose you make a loan of $100,000 to a friend with interest at 10% per year and the entire amount due in 10 years. If this is compounded annually he will owe you $259,374. If he comes to you at the end of 10 years and says I have managed to scrape up $100,000, its all I have and all I will ever get. I would say you got your money back. My client would say you have a big loss. I am not saying you made a good investment nor is your purchasing power preserved but you got your money back. Your return on investment was zero and your return of was 100%.

Let's recast this loan into one involving annual interest only payments at 10,000 per year. If we assume the friend comes to you at the end and says I have no money to pay your principal but at least you got your money back via the annual payments. Again, your return on investment was zero and your return of investment was 100%. These are relatively simplistic examples but they illustrate an important point. Remember I said your return on investment was zero and this was a poor investment but you put out 100,000 and you got back $100,000.

Let's Compare The Risk Levels. Which would you prefer? To go through 10 years and get your entire principal back or to receive $10,000 a year for 10 years and get no return at the end. From a total return standpoint, they are equal but if you think about it, the $10,000 a year scenario is far superior from a risk standpoint. This brings me to the key point of what I have been writing about for the past 5 years. The sooner you begin to get cash flow from your investment the lower your risk. Sitting on an investment for 10 years not knowing whether you will get what you have anticipated doesn't work. Especially for an investor in the later stages of life. Of course, I am aware that taking taxes into account, the conclusions are reversed but I still maintain that the lower risk of the cash flow scenario is worth a lower after-tax return.

Here is Another Scenario. Suppose in the last scenario, you have received $10,000 per year for 10 years and all you can collect at the end is $40,000. You have received a total of $140,000 and your return on investment calculates to be 5.30% compounded. So despite the fact that you only received 40% of your investment at the end, the interim cash flow more than makes up for this and your return is positive. Suppose this was a 20 year year loan and you received $10,000 per year for 20 years and $40,000 at the end. Your return is 8.80%. These bring me to two more conclusions. 1. When you receive interim cash flows from an investment, you really don't know whether they represent a return ON your investment or a return OF your investment until the investment is terminated. 2. The longer the investment continues and the more interim cash flows you receive, the less important the final payment becomes.

Do You Find This Boring? I wouldn't blame you if you did. That's part of the reason I seldom write about topics like this because, in my book, the biggest sin is boring. It's not boring to me. It's fascinating. The utility of these few points says a lot about planning your investment strategies. It's not just about getting the highest return possible on your investment, its about getting the type of return that meets your needs. If you are entering retirement, in a relatively low tax bracket, with an aversion to risk, it is far better to get the majority of your return in the form of interim cash flow (there are exceptions). If you are a high-tax bracket younger investor, you might want to have the majority of your investments in vehicles that allow you to build wealth with no interim tax consequences.

This Probably Leaves You With Questions. I would be happy to answer these via comments to this post or via e-mail or in person. Feel free to contact me at 303-902-3940. I will be in and out of town but should be back in Texas by mid October. I look forward to your comments.

SHOULD YOU INVEST IN REAL ESTATE?

2010-09-20T10:27:00.000-07:00

Some Things You Should Know. There are a lot of things you should know before you invest in real estate. Probably the first of these is that virtually every one should invest in this area and part of the puzzle is to pick the investment vehicle that is right for you. While I have discussed most of these at one time or another I will confine this discussion to direct ownership as opposed to more passive investment vehicles such as real estate investment trusts (REITs) or tenants in common (TICs). There are also several property types from single-family homes to office buildings. Take my word for it, unless you are an experienced, high net worth investor, now is not a good time to venture into commercial properties. While you might buy one of these at a bargain price, it may be difficult to find and retain tenants to provide rent to cover operating expenses and debt service. Unless you have adequate reserves it might be difficult to hold on to the property until a strong market cycle allows you to sell at a favorable price. In the final analysis, the single-family market seems to offer the best combination of return and safety. We will confine the rest of our discussion to single-family home investment.

Is This A Good Time? The financial press is filled with articles that tell you that housing prices still have a considerable distance to fall before the market stabilizes. Is this true? In reality no one, including me, knows. To make things even more difficult, there is a tremendous difference between various regions of the country. In addition, there is a difference between different regions of the state, and even between different regions of a given metropolitan area. If you read national publications, the most common theme is that housing suffers from two major difficulties. 1. Excessive inventory of houses for sale and 2. Negative equity. This places a burden on sellers. There is heavy competition from other sellers and it is impossible for even desperate sellers to offer their property at a bargain price if that price is significantly lower than the amount owed on the property. If you offer a seller $150,000 for a property in which he owes $200,000, chances are he doesn't have $50,000 to pay out of pocket in order to sell the property.

Where Are The Opportunities? Despite all the negative publicity about housing, there are some opportunities for those willing to seek them out. The main opportunity in the Metro-Denver area is strong tenant demand. Investors sometimes forget that it is tenants that drive the investment market. Five years ago, real estate prices were increasing rapidly, and my phone constantly rang with investors looking to diversify out of financial markets into real estate. I informed most of them that high vacancy rates made it too risky to invest in real estate at that time. Now the situation is reversed. In Denver, the vacancy rate for single-family housing is less than 4% and for apartments the vacancy is in the 6% range. Our experience tells us that such low vacancy rates provide pressure on rental rates making future rent increases more likely.

Interest Rates Are Low. Although credit requirements are strong and fewer buyers can qualify for loans, those who can qualify will find rates favorable. Lenders are motivated to make loans to buyers with good credit, stable income, and higher down payments. Although there are always seminars about buying real estate with none of your own money, it is only the more entrepreneurial buyers who should venture into these areas. One thing to remember is that low down-payment financing adds a lot to your risk. You have to make those mortgage payments even if your property is vacant and the value of your property is below your acquisition price.

Housing Starts are Low. In most areas of the country, builders are producing little in the way of new inventory. This makes it more likely that any excess inventory of properties for sale will eventually be absorbed. Further, since it takes awhile for builders to re-enter the market, it is unlikely that this situation can rapidly reverse itself. In the early 1990's when the supply-demand balance began to reverse it took over a year for building to pick up. In the meantime those who owned houses were able to take advantage of very high appreciation rates. Unless you are in an area that is chronically depressed, this situation is likely to recur.

Some Initial Steps. 1. Know your finances. If you have a portfolio of financial assets and ample liquidity to provide for emergencies, this market might be favorable for you. 2. Know your market. Evaluate the market you are considering. If there is a very large inventory of properties for sale and few recent sales, don't buy unless you know the rental market is strong. The quickest way to evaluate the market is to find out how many properties have sold within the past year. Divide that number by 12 to determine the average sales per month. Then divide the total number of properties for sale by that number. This will tell you how long the current inventory will last. If there are 12 sales during the past 12 months, that means during the average month, 1 property sold. If there are 36 properties for sale, the inventory would last for 3 years or if there are only 2 properties for sale that means a 2 month supply. Our experience shows that when the inventory is more than a year supply, the market is depressed and less likely to appreciate. When there are less than 6 months supply, market values should be increasing. 3. Study the rental market. How many properties are for rent? What is the asking price. Don't be afraid to call on some of the properties being offered to find out the asking price.
4. Take a look at what's available. Look at a few properties, estimate the rental income and expense, figure out what your debt service will be and determine your potential cash flow. If it doesn't show at least 4-6%, look at alternative ways to finance or pass on the deal. If there appear to be some opportunities, check with a lender to make sure you are qualified for financing and proceed with caution.

This Is Scratching The Surface. I will go into more detail in a later post. In this very difficult investing environment, you can't afford to ignore opportunities to improve your situation. I think real estate may offer those opportunities.

RESTORING HONOR.

2010-08-28T11:44:00.000-07:00

These Are Scary Times. I know I promised to write about finance on my next post but after watching Glen Beck's Restore Honor Rally I am compelled to put my thoughts in writing. I know there are many who disagree with Mr. Beck's behavior and I am certainly not prepared to defend all of it. I am also not prepared to judge his motives in staging this rally; however, I saw little in the way of hate speech and negative politics this morning. I'm pretty sure that anyone who watched it carefully came away with an opinion. I had a flood of memories afterword and I wanted to put some of them out for your consideration.

I Will Always Remember The Morning Of September 11, 2001. The sight of the world trade center buildings coming down is burned into my memory. The anxiety I felt when I learned that the center of our military operations was attacked and there was another plane headed towards Washington is still with me when I think about it. Strangely enough, the most vivid memory comes from later that day when I walked out on the balcony outside my 9th floor office. I looked down towards the freeway and saw a lone figure standing on the overpass waving a huge American flag towards the cars passing underneath. Thinking about it still brings tears to my eyes. Here was one lone citizen who absolutely had to do something to express his feelings about his country. Those terrorists didn't attack George Bush or Bill Clinton, they attacked you and me, and, from that day forward, we have never been the same. Think about it. Think of your last trip to the airport when you had to take off your shoes, throw away your toothpaste, and walk through a metal detector just to get on an airplane. Think about the young men and women who had to leave their families and swelter in the heat to look for those terrorists. Think about the small children who will never know one of their parents because they died in places who's names we can't even pronounce.

Fast Forward 3 years. Three years later, I was driving down that same freeway and there were several young folks standing on that same overpass. They were holding a sign that said "Bush lied, thousands died." I am ashamed to admit I rolled down my window and gave them the finger as I drove by. Today, I think about the contrast between that young man who stood waving the flag as a sign of love for his country and the young man holding the sign accusing his president of being a liar. Whether you believe the President lied or not, there is no mistaking the hate in that sign. While I reserve the right to comment for or against the policies of our politicians, I have resolved not to participate in that kind of hate, tempting as though it may be from time to time.

Did The Terrorists Win? There is no doubt that they inflicted a horrendous blow to our country. Think of the human and financial cost incurred in the aftermath of that event. It is still being felt today. If you have become frustrated in the hassle of our airports, you are feeling the effects. If you lay awake worrying about the size of our huge federal deficit, you are feeling the effects. If you are anguished by the thought of our younger generation torn away from their families and in constant danger, you are feeling the effect. We don't have to let the terrorists win but it is not impossible that they might. It's time to stop all the hate and work together to keep our country strong.

I Have Been Called A Super-Patriot. Most of those who called me that definitely didn't mean it as a compliment. In my view, there is no such thing as a super-patriot. You either love your country and are willing to sacrifice for it or you don't.

I Saw My Nephew At The Rally. I watched it on TV. My nephew has gone from a shy four-year old who used to hide under the bed when we came to visit to a dedicated family physician. Was it a co-incidence that I saw him among the 300,000 or so who attended that rally. I think not. Would he be proud if we labeled him as a super-patriot. I think so.

ART WITH A PURPOSE.

2010-08-26T08:54:00.000-07:00

Our Colorado Trip Is Almost Over. One of the main reasons we came up here was to tie up some loose ends on our real estate investments, catch up on some miscellaneous business and spend some time with family. A few things kept us from doing this as well as we would like, one of which was an illness that kept my wife in the hospital for a few days. Other obstacles like a burst hot water heater cost us some time in cleaning up the mess. Still, it has been a very enjoyable trip. As expected, I got to spend some quality time with family and take several spiritual journeys down clear creek, the land of my ancestors. What was unexpected was the enjoyment I got from associating with several individuals in the music business.

Down On The Farm Guitars. This is the name of a new guitar venue opened on the grounds of White Fence Farm. It is run by two of the most genuine people I know, Reed and Alice Bennett. I met Reed Bennett when I responded to an ad for a guitar he had for sale. We developed a kinship right away, I suspect because of our love for guitars for more than just the music they produced. I guess we're both part of a group labeled by musicians as "gear geeks." There is something inspirational about the aesthetics of the instrument. It took me awhile to figure out what it was but the answer is simple. More than just a musical instrument, a guitar is a work of art and those who produce them, called luthiers, are artists just as much as painters or sculptors. Reed and Alice have a wide variety of instruments in their store but less than half of them are for sale. Reed has developed such an attachment to some of them that you could never talk him into selling them. They do have a variety of instruments for sale, some of which are in the collectible category and should represent good investments for the future. Another excellent feature of their store is that they invite local musicians and groups to play under the grape arbor adjacent to their building. The time I have spent at Down on The Farm Guitars has been one of the high points of my trip. You can find out more about this unique store at http://downonthefarmguitars.com

I Have Always Wanted To Build A Guitar. Several years ago I decided to build my own guitar. After some preliminary due diligence, I decided that I was not cut out for this kind of endeavor. Still, I am fascinated by the process in which these instruments are created and always look for opportunities to meet the artists who create these instruments. Yesterday, I drove across town to pay a visit to Herb Taylor. Unlike most luthiers I have met, Herb really does consider himself an artist and he has a degree in art and a background as an art teacher to prove it. Rather than try to sustain himself as a "starving artist" he obtained a masters in computer science and worked as a software engineer until he retired in 1994. For the past 10 years, he has been making one-of-a kind stringed instruments, everything from mandolins and bouzoukis to guitars. I was particularly impressed with an archtop guitar made of redwood. It is an example of elegant simplicity with most of the beauty coming from the clean lines and beautiful wood. I also liked several of the "flat top" guitars he made. All of his guitars are unique creations and derive most of their aesthetic qualities from the unusual wood he collects. One aspect of the creation which is not totally under his control is the sound qualities of the finished product. He freely admits that he is unable to design an instrument that can match the sound of any other instrument. I played several of his guitars and didn't find any with other than excellent sound quality. Just about anyone with a decent bankroll can acquire an excellent Martin or Gibson guitar but if you want a unique instrument that is yours alone, you might want to talk to Herb. Check his web site at http://www.herbtaylor.com.

A Few Words About The Markets. One of the reasons I have not spent a lot of time talking about the financial markets lately is that there is little change from week to week even though there are some really bad days and a few good days. This kind of market is perfect for the strategy I employ. While there is little in the way of appreciation to brag about, option premiums and dividends have provided me with above-average returns. If you want to discuss how to apply some of these techniques to your own portfolio, don't hesitate to give me a call.

TWO PATHS TO WEALTH.

2010-08-23T15:35:00.000-07:00

Before I Begin This Post. I should emphasize that this is strictly my opinion, based on my observations over the years. It is not based on scholarly research and there is plenty of room for disagreement. The first task is to describe my definition of financial independence and some of you may find plenty to disagree with already. My definition is that financial independence is the ability to lead a lifestyle that provides for the needs of my family with freedom from "woeful want" (I got that term from my mother who often told me that "Willful waste makes woeful want)." From that definition you can determine that financial independence can be different for two people with differing needs and wants. I can live with that. Given that definition, lets start with the most common path pursued today.

Work and Strive For Abundance. This is the path I decided on as a pre-teenager. Here are some of the things you can do if you choose this path.

Get A Good Education. While many may achieve an abundant lifestyle with little education, most parents advise their children to take this step. Statistics have shown that those among us with more education earn, on average, more income over their lifespan than those with less. These statistical methods may be somewhat flawed, still the prevailing opinion is that education is directly correlated with income.

Choose a High Paying Career Field. Some career fields pay more than others. Engineers earn more than teachers and computer scientists earn more than sociologists. Entrepreneurship pays well for those who are successful; however, starting your own business is usually a second step in a career path.

Make Aggressive Investments Using Leverage. All debt is not bad. If you can earn more on your investments than the cost of borrowed funds, you can magnify your rate of return and build wealth rapidly. Of course there is more risk. If your investment doesn't pan out, you have to pay the money back anyway.

Buy Nice Things, Lots of Them. Nice houses, cars, and other toys will give you the appearance of success and make others want to do business with you. If you don't have the cash, borrow it. There is an old saying that states, "Fake it until you make it." If you can convince yourself that these possessions mean you are competent, you will appear more confident and more people will think you are competent even if you aren't.

Thousands have become successful using this technique. Others have found themselves facing bankruptcy, prison terms, and there are some suicides among this group. It is obvious that this path can be stressful but there is no doubt that many have become very wealthy choosing it. The upside potential of this path is much higher than the other I will describe, particularly when measured in terms of total wealth accumulation. It also has a higher downside when measured in terms of overall life satisfaction.

Practice Frugality And Simplicity. There is an old saying that if you will live for 20 years like no one else will, you will be able to live the rest of your life like no one else can. I know several individuals who have achieved financial independence this way. There is no shortage of happiness among this group. Much of the benefit of financial independence arises from freedom from worry and not necessarily the expensive possessions you can buy. I have a client who achieved a windfall from a successful investment and was able to buy an expensive car and a large, luxurious house. Several months later he learned that the expensive house and car didn't bring him near as much happiness as the fact that he no longer had to worry about about how he would pay his living expenses each month.

Get the Best Job You Can Find and Keep it. You can build equity in a job by staying in one place, working hard, and being loyal to your employer. There are exceptions to this in the event that you find your loyalty isn't reciprocated. The best thing to do in this case is to move somewhere in which it is. While this isn't as easy to do as it used to be, it still pays off for a lot of employees.

Start Saving Early and Leave it Saved. Someone once asked Albert Einstein what was the most amazing thing he had learned about the universe. His reply was "compound interest." As an example, let's assume a 25 year old starts saving $200 a month at 5% interest. At 65 he will have accumulated $305,204. If he decides to draw out his $2400 at the end of year one, his nest egg at 65 will be $288,013. That $2400 withdrawal shrinks his nest egg by a little over $17,000. The $2,400 spent now costs 7.2 times that at age 65.

Remember the Buffet Rules. One of the most successful investors of all time, Warren Buffet says that there are two rules to successful investment. Rule 1. Don't lose money. Rule 2. Don't forget rule number 1. If you choose this wealth building path you will have to keep your risk low in order to avoid losses.

Shop Carefully and Buy Only Bargains. Look for sales. Don't be embarrassed to buy used, particularly cars. The new car buyer bears the lion's share of depreciation for the privilege of being the first owner. Buying used vehicles can add a considerable amount to your net worth over your life span.

Take Care of What You Have. If you walk into a lot where my father's car is parked, it will catch your eye as the nicest in the lot. It is a sixteen year old pearl white Buick with a blue cloth top that looks like it just rolled off the showroom floor. You can still have pride of ownership without laying out huge sums of money for car payments every month. The same holds true for your house. A little extra effort keeps your home value at the top for your neighborhood.

This Includes Your Health. My father has spent virtually no time in the hospital over his 91 years. He has eaten healthfully and exercised faithfully for six days each week. There is no doubt that this requires considerable time and effort. The choice is yours. Either spend your time staying healthy or waste your time being sick.

Don't Borrow. It is difficult to invest in totally safe investments and earn a higher return on investments than your borrowing costs. Even deductible mortgage interest is more expensive than most investments of equivalent safety. If you follow this strategy it is a good idea to strive for a free and clear house. This means buying less house than you can qualify for and developing a plan for early repayment.

I Know What Most of You Are Saying. You don't read this column to be told how to scrimp and save your way to success. It's not my style either but these economic times may call for different strategies. Having to cut back on your lifestyle can be painful but its not the end of the world. I have known several folks who have done well this way and, as a group, they are more satisfied with their life than the first group. Of course, the two strategies I describe are the extremes. There options between the two and you can choose the ones you want to follow. I'll go back to my normal style on my next post.

CARE AND FEEDING OF THE BRAIN.

2010-08-07T13:02:00.000-07:00

The Power of Positive Thinking. What do Napoleon Hill, Og Mandino, Mike Dooley, and Tony Robbins have in common? They all believe we can shape our future by controlling our thoughts. This is but a small sample of individuals who have written or spoken on this topic over the past 50 years. Many entrepreneurs, sales people, and religious leaders subscribe to these theories; however, others who might like to believe remain skeptics. You can count me among the latter group.

Enter The Neuroscientists. In recent years, a large body of research has been conducted that shows that the positive thinking gurus may be on to something. Most of this research comes out of academia and was conducted by doctoral level researchers, many of whom were MD’s. A notable example comes from the University of Pennsylvania where Dr. Martin Seligman heads the Positive Psychology Center and Dr. Andrew Newburg directs the Center for Spirituality and the Mind. Both have published books and research papers as a result of their research into this area. Their approach is strictly scientific. Although I have read the work of several others, these two attracted my attention the most.

What is Brain Plasticity? For many years, scientists have known that the brain will physically change in response to a number of factors. This ability is known as plasticity. It is a remarkable ability and is much more prevalent in man than in the so-called lower animals. Dr. Newburg has used modern research tools such as PET scans and MRI to track these changes. His research shows that spiritual practices such as prayer and meditation cause physiological changes in the brain. These changes can be permanent and generally beneficial. One of the interesting aspects of the research into prayer is that changes occur regardless of the religious characteristics of the person praying. Buddhists, Christians, Jews, and Muslims all achieve similar results. While I don’t claim to understand the details of the anatomical changes that occur (even the researchers lack complete understanding), the result of these changes is a reduction of activity in areas where primitive emotions such as fear and anger reside. These emotions interrupt your ability to be rational. In addition, you lose the awareness that you are acting in an irrational way. Spiritual practices result in an increase in areas crucial for empathy and compassion. Extensive research shows that individuals who regularly engage in spiritual practices are generally less prone to depression, have stronger immune systems, and overall have longer and more fulfilling lives.

Where Am I Going With This? Dr. Newburg has given us a list of ways to exercise your brain to increase it’s effectiveness. I will list the three most important for your consideration. In order of ascending importance, they are as follows:

3. Aerobic Exercise. Physical exercise strengthens all areas of the body and the brain is no exception. Studies have shown that it enhances relaxation and spiritual well being. It lowers the risk of circulatory diseases as well as mental disorders such as depression. Dr. Newburg cites one study in which an exercise program has the equivalent benefits of twelve sessions of psychotherapy. You may be skeptical of some of the research stated by Dr. Newburg (as am I) but the overall body of research provides overwhelming evidence that exercise is very beneficial to our physical and mental well being.

2. Dialogue With Others. Most neuroscientists agree with Dr. Newburg on the importance of dialogue with others. Dr. Newburg states that “Any form of social isolation will damage important mechanisms in the brain and lead to aggression, depression, and various neuropsychiatric disorders". I have noticed this among some of my aging friends who gradually withdraw as they age. Undoubtedly, the brain has evolved as a social organ and needs the nourishment of social contact for continued health.

3. Faith. This point surprised me the most of all the others but it is what correlates the beliefs of several neuroscientists with the positive thinking advocates. We all have choices to make which will affect our physical, emotional, and spiritual health. In reality, these choices are nothing more than educated guesses. There will always remain some degree of uncertainty but the degree with which we can have faith in our beliefs is of primary importance to our mental health. Research has shown that, even irrational belief in is better than no belief at all. Remember the placebo effect in which a sugar pill can cure up to 30% of most physical and emotional disorders.

Whether You Think You Can Or You Think You Can’t, You’re Correct. I don’t know who came up with this saying, but much research shows that it is true. I have taken a course on physiology of the brain and read several books by neuroscientists on the how the brain works. What I have learned shows me how very little I know. While these books have been written for non-professionals, I sometimes feel that they are still beyond my ability to comprehend. I will continue to read new publications in this area and re-read what I have already read. The ability to do this is one of the benefits that come with the freedom of getting older. I am grateful for these benefits.

WATCHING THE VIX.

2010-08-02T15:23:00.000-07:00

I Hate To Be Boring. One of the biggest sins a writer can commit is to be boring. I would almost rather be dead wrong than boring. As I contemplate this post, I can picture the eyes of many readers glazing over because they don't care about the VIX. Unfortunately, I think it is of sufficient importance that I can't afford not to give you the opportunity to know what it is and how it can affect your investments.

Definition: The VIX comes from a calculation by the Chicago Board of Options Exchange (CBOE). It is a measure of the implied volatility in the market place. A high number means the market is more volatile than normal while a low number means less. High numbers usually occur in falling markets while low numbers usually occur when the market is rising. As a rule, most investors consider the VIX as a measure of fear in the investment community. At high fear levels, option demand picks up as more folks try to hedge their bets. You can buy put options which give you a right to sell at a given price. If the price of the stock drops, your loss is limited to the strike price of the put minus the premium you paid when you purchased it. You can also sell a call against a stock you own in order to earn a premium to offset part of the loss should the price drop.

Implications. Some investors use the VIX as a means of predicting highs and lows in the market. An old rule says when the VIX exceeds 40, the market is nearing an oversold situation and a rebound can be expected. Conversely, when the VIX is below 20, the market is approaching an overbought situation and a correction is anticipated. Although I use this rule, I consider it just another data point and would encourage investors not to place too much credence in these numbers. For example, in the debacle of 2008, the VIX went right past 40 into the 80's. This level is unprecedented in all the years in which this number has been published. If you had been depending on a bottom in the 40's, you would have found that you had a considerable period of falling prices before a turnaround occurred.

Another implication is that option prices will be higher when the VIX is high and lower when the VIX is low. Although each security has its own volatility levels, a general rule is that you should be buying options when the volatility is low and selling when volatility is high. If you own a stock and are considering writing calls against it, you are better off doing this at periods of high volatility. At that point, call buyers are willing to pay higher premiums and you will make money if volatility drops and you will have more downside protection if the stock price drops. At times when the VIX is lower, you might consider buying options instead of the stock.

Understanding The VIX Can Give You An Edge. While this information can give you a bit of an edge over investors who ignore it, it will probably not make you wealthy. Other fundamental and technical data is necessary for sound investment decisions.

This is My 150th Post or Close To It. I have enjoyed writing this blog and interacting with my readers. While I still have topics in mind for future posts, I would invite my readers to suggest others. You can send me an e-mail or comment in the comment sections. I will post most comments as long as they are in good taste and not too hostile.

REAL WEALTH.

2010-07-25T16:06:00.000-07:00

I Am Interested in Creating Wealth.
But lately I have been thinking more and more about real wealth. The picture on the right illustrates the kind of wealth we can all enjoy whether we have money or not. Our world is filled with so many wonders, everything from trees and flowers to little miracles like the one in the picture. Like so many others, I have spent so much time trying to create financial wealth that I have not taken enough time to enjoy the non-material kind. I plan to remedy that situation in the time I have left.

Re-Distributing The Wealth. To quote the president, " When you spread wealth around, everyone benefits." Many of us disliked that statement but it is true. Even the most conservative among us wouldn't want to live in a country where most of the residents live in poverty while a small percentage live in luxury. The question is, how far should we pursue the objective of spreading the wealth? Viewed from another angle, it appears obvious that if we tax high earners and give their earnings to the low earners, we may reach the point where it becomes less beneficial to work hard and produce more, and more beneficial to enjoy the fruits of the labor of others. Where do we stand in this process? You decide.

Our Tax Code Has Always Spread The Wealth. Since the beginning of the income tax, high earners have paid more than low earners. Not just on an absolute basis but on a percentage basis as well. We labeled the Bush tax cuts as "tax cuts for the rich" but is this really true? I was blown away by recent data that showed 47% of Americans will pay no income tax in 2009. It was also astounding that a family of 4 can earn $50,000 and pay no taxes. In fact, they will receive tax credits that exceed the tax they pay. Many of my readers will not believe this, so here are the cold hard facts. 1. The standard deduction is equal to to $11,400. 2. Personal deductions are 4x$3650 or $14,600. 3. This leaves $26,000 in taxable income and a preliminary tax obligation of $2,640. 4. Tax credits are $1,000 per child or $2,000. 5. The stimulus package allows $800 in credits, leaving the "taxpayer" receiving a check for $160. Granted, a family of four earning $50,000 per year isn't getting rich, they aren't reduced to eating dog food either. They receive the benefits of an educational system, public safety, infra structure, and national defense. All paid for by someone else. Looking at the top 10% of wage earners, they earn an average of $$366,400 per year and pay 73% of all income tax. If this isn't spreading the wealth, I don't know what is. I believe that one factor that allowed our country to surpass others in economic growth is the fact that it is possible for us to work hard and keep enough what we earn to enjoy a high living standard. If we keep an excessive burden on the high earner group, they may decide that they aren't being adequately compensated for their efforts and join the pay no tax group. When we reach that tipping point we can say goodbye to job formation and economic growth. We can also expect a lower living standard for everyone.

YOUR MORTGAGE AND YOUR RETIREMENT

2010-07-19T09:22:00.000-07:00

Magnolia Blossom Symbol of The South.

I walked out of my front door on a sunny morning and came face to face with a beautiful, fragrant, magnolia blossom. I love magnolia trees and have 15 on my main lot. This makes me different than most of my neighbors who often think of these trees as a nuisance because they shed leaves all year and its harder to keep your lawn neat. I would rather have the glossy green leaves and large white flowers than a neat lawn anytime.

Your Mortgage and Your Retirement. Over the years, my main specialty has been advising clients on how to select the right mortgage product for their particular financial situation. One of the main points to consider about your mortgage and your retirement is whether or not you want to pay off your house before you retire. In my initial financial training, I was taught that funds necessary for retirement should include the amount necessary to pay off your mortgage. Initially, I bought into this issue; however, over the years I have been open to more possibilities. The bottom line is that the answer will depend on a number of factors. Some of these are as follows:

1, Where will you Get The Funds For Repayment? If you have to cash in funds from a 100% taxable retirement plan, be sure you consider the tax implications first. If you are in the 25% tax bracket, you will have to withdraw more than $265,000 to pay off the mortgage. Not a good idea for most folks. Tax implications of retirement plans aren't the only ones you have to worry about. If you are holding stocks in which you have a large capital gain, be sure to determine how much you will net on an after-tax basis before making the move. If you have enough cash sitting around in bank deposits to pay off the mortgage, you will certainly get a higher return from paying off the mortgage than you will get on those deposits. Another possibility for older borrowers is a reverse mortgage. While you don't exactly get rid of the mortgage, the reverse mortgage will allow you to get rid of the payments. I don't know about you, but its the payments that bother me, not the mortgage.

2. What Are Your Liquidity Needs? If most of your retirement income is from relatively stable sources like annuity payments, company or military pensions, and social security ( maybe not as stable in the future as you think), you have less need for liquidity than those who must rely on investment income. Some retirees have excellent income but few assets. I have certainly seen more borrowers in trouble from lack of liquidity than I have from a mortgage that is too high. One way to pay off a small first mortgage is to utilize a home equity line of credit as a liquidity source. You pay off the loan with the funds you already have and replace your liquidity reserve with the home equity loan. If you use this strategy, make sure you only draw on the line for genuine emergencies. All too often, I have seen borrowers who use this strategy only to wind up with a large home equity line because they used the funds to purchase consumer items or pay for home improvements.

3. What Is Your Risk Tolerance. A well known financial talk show host says that, "the paid-for house has replaced the BMW in the driveway as a status symbol." While this is true for many borrowers with low risk tolerance, it is possible that you may be able to get a higher return on your investments than the mortgage rate. If you insist on a high degree of safety, you will not be able to do this; however, if you are willing to take moderate risks, history shows that a diversified investment portfolio will outperform the rate you are paying on your mortgage. There are many who would argue with this statement and give examples of recent performance of the markets to support their argument. I agree, but from a strictly statistical point of view my statement is true.

4. The Main Issue is Cash Flow. I'm sure you expected to hear this from a writer of a blog entitled Cash Flow Garden, but cash flow is still a big issue in this decision. You may reach retirement age with a small loan, a great interest rate and a short time remaining. The problem is that the short term requires high principal payments for a substantial period after you retire. For example, $90,000 at 4% with 10 years remaining requires a payment of $911 per month. In order to make these payments with income from a 5% after-tax investment, you would have to have $218,640 in investment capital. Keeping this mortgage represents a serious drain on your cash flow in the earliest years of your retirement, a time when you have the energy to make good use of your new freedom. If you keep the loan and repay it at the current rate, you will be 75 before it is paid off. Trust me, your ability to enjoy leisure time diminishes as you pass 70. You need the cash flow now and, if you can't find the money to pay it off, you should consider a new loan for a longer repayment period even if the interest rate is higher. For example, if 30-year rates are at 4.75%, a new 90,000 first mortgage would cost you 469 per month giving you an extra $442 a month to increase your retirement enjoyment. Increased tax benefits will increase this cash flow.

There Are Many Other Issues. None of these arguments may make sense to you and I would caution that there are no "one size fits all" recommendations. Hopefully, my comments will encourage you to take some time to study your situation thoroughly before utilizing some rule-of-thumb to make a decision that deserves a thorough analysis. To quote a long-time colleague of mine, Ray Benton, "Rules of thumb apply only to thumbs.

SUNSET AT THE LAKE.

2010-07-13T09:45:00.000-07:00

The Picture Speaks for Itself. This is one of the most beautiful sunsets I have seen. It appears to be the result of a combination of water vapor, clouds, and light, having occurred right after a moderate rain storm. Of course, you might want to say that God created it and sent it to us.

Hedging Your Bet With Options. I know I have talked a lot about options; however,I doubt that many of my readers have tried to apply them to their investment philosophy. Some don't want to bother, while others stay with the notion that options are too risky. The best way to demonstrate the conservative nature of an option strategy known as covered calls is to give you an example of my own experience. I little less than two years ago I bought 1000 Shares of AT&T. A year later, I bought another thousand shares. Unfortunately, my timing wasn't the greatest and the shares are now worth only 25.05 for a paper loss (since I haven't sold) of $6,100. To lose $6,100 from my investment portfolio would be a disaster for me; however, there is more to the story. Over this ownership period, I sold numerous calls (which give the purchaser the right to buy my stock at a pre-specified price). For this, I received call premiums of just over $7900. Subtracting that from my loss gives a profit of $1,800. Looked at another way, I started with 2000 shares and I still have 2000 shares but I received $7,900 cash flow in the interim. I also received $3,700 in dividends for a total cash flow of $11,600 that I could re-invest or pay my utility bills if I choose. This illustration demonstrates 2 things: 1. The conservative nature of some option strategies and 2. The importance buying investments that produce cash flow rather than depending on buying at a low price and selling higher.

Who Is A Racist. In a way, we all are are racist to a certain degree but many of us have made considerable progress in overcoming bigotry and judging people as individuals rather than as members of a racial or religious group. Still, we receive virtually no credit for the progress we have made since I was a 10-year old at Fruitdale School. That's why I feel insulted when backers of the current president accuse me of being a racist when I disagree with his policies. Likewise, I resent those who would call me a racist because I want to control who is allowed to come into our country. Jessie Jackson views LeBron James as a runaway slave. I view him as a young man of many talents who used his freedom to move to a position more suited to accomplishing his goals. Which one of us is a racist?

I Will No Longer Avoid Controversy. There is considerable controversy in our society. Both right and left leaning voters have strong negative opinions about the other. Both are entitled to their opinions and I plan to use this forum to state mine. Readers can feel free to comment. I reserve the right to eliminate those who exhibit excessive hostility in response.