Everyone is always looking for an edge when it comes to equities. Wall Street has its celebrities just like the film and music industries, and Warren Edward Buffett is probably at the top of the list when it comes to following people who may have the best insight into where the market is heading. If you're just getting into stock investing and don't know about Berkshire Hathaway, it's one conglomerate you will want to research. They own substantial stakes in other companies like American Express, Coca-Cola, Apple - so much that when they buy or sell millions of shares in these companies it impacts their stock price. Conversely, when these companies do really poorly, the value of the Berkshire Hathaway portfolio can swing by several billion dollars each day.
Yes!! That's several billion dollars. Warren just released his annual letter to shareholders a few hours ago which is always something those in the industry like to read. On this page you can find all the past letters to Berkshire Hathaway shareholders - click 2018 to read the one that just came out. Most real estate investors and money managers will sometimes recall having fond memories as a child playing the game Monopoly. I was not one of them. My absolute favorite was The Game of LIFE from Hasbro. If you have never played this game, it is a must have to play at least once. The objective as you might guess is going through a mock-life where you start out with almost nothing and have to make decisions along the way regarding college, career, marriage, having kids, saving, going on vacation, and other events all the way to death. You may spin the wheel and find out your got a promotion at your job, then on the next turn get into a car accident where you have to pay out a lot of money from your nest egg. Once everyone reaches the end of the game at retirement, everyone pays their debts and adds up their wealth. The player with the most money at the end of the game wins!
This game not only mimicked life fairly well, incorporating all the key events that most people must face, but it was a great conversation starter when played as a family. You could discuss questions like, “Do I go to college and incur the debt, or do I take the path of a trade school and start generating income immediately?” But what made this my favorite game was really what happened at the end. There was a scenario where even if you had been behind in wealth the entire time, if you got lucky and guessed the right number on your final spin, you could win the entire game. I remember playing this game with my brother and grandfather when I was probably no older than 9 or 10 years old. I was behind the whole game and was on my last spin. I picked my birthday as the number that would come up and was right, winning the entire game. I’ve won $1000 at a Realtor event, I’ve won gift cards and other drawings with worse odds, but for some reason this one event sticks with me above all others. My guess was no better than picking numbers at the roulette table in Vegas, but getting the right number was a step change for me. It didn’t come until the very end, but it came when it was most important. I realized that it was never too late to make an amazing come back. There are many lessons to take away from The Game of LIFE, that can help us in the real game of life. Step changes do happen. Setbacks do happen. And yes, there is a little luck that will be needed in order to be super successful at anything. It’s easy to take life too serious and try and control every outcome. But if you step back and take life for what it is - treat it like a game; you’ll probably be happier along the way. Even if you achieve financial success at the very end, you may have friends, family, or even a charity that can benefit years after you’re gone. It’s exciting to watch your portfolio grow and hit major milestones. Even if you start with a few hundred dollars, it’s a big deal when you hit $1,000, then $10,000, then $20,000, and so on... 'til your first million (smile). If you’re familiar with our investment philosophy you know why it’s important to have slow growth stocks and real estate in your investment plan. Without those investment vehicles you could see even larger swings in your portfolio on the order of 20% or more in one month. With the advent of ETFs and cryptocurrencies, one of my greatest fears is that the stock market is becoming more like Vegas with each passing day. People begin to get numb to large swings and expect it. You shouldn't get into this bad habit if you want to build generational wealth. As your portfolio grows you need to get more comfortable looking at daily swings, but if you ever get used to 30-40% swings on a regular basis then you’re probably an amazing day trader and don’t need to read this blog. The swings we’re talking about are on the order of 5-10% and I expect that this WILL become the norm in the next 5 to 10 years. If we just take a 5% swing in one day, it sounds like such a small number when you only have $1000 in the market - a 5% drop is only a $50 loss for the day. But when you have a $50,000 portfolio, then you’ve suddenly loss $2,500. A $2,500 loss is a big deal, especially when you’ve built your portfolio quickly. You have a tendency to want to not lose a single dime. But keep in mind this comes with the territory. A small percent of a really big number is a lot of money. If you’re living entirely off of stock investments and lose say 5% on a $1MM portfolio, that’s $50,000. That’s more than many people make in a year. That’s the equivalent of an experienced school teacher working a whole year and not getting paid. Say you plan on living off your million dollar portfolio, using the money from dividends and stock appreciation each year to never touch the million dollar base. If you expect a 6% return then you’re living off of $60K each year. That’s really good for someone who gets to retire early at say 35 or 40 years of age and do nothing. Now let’s say the stock market has a bad year and your portfolio is now worth only $900K going into the next year. Even at the same 6% interest rate you now only take in $54K at the end of that year. Even if you are now comfortable with larger swings in your portfolio, that’s still $6,000 less for expenses that year. That’s $500 a month less - the equivalent of a car note, cable television and cell phone expenses, or even a good percentage of your mortgage if you still have one. This is why people who practice the principles of FIRE look for every cost savings they can find and don’t buy new cars or carry $200 cell phone bills each month. So the lesson here, start getting comfortable with changes in your portfolio each week. Investments can’t constantly go up each day the way we get older each day. Just don’t get too comfortable, use slower investment vehicles to ride out the slower times. For extra financial safety, start adopting more frugal habits at an earlier age, it will make life easier and more enjoyable than trying to live like a king until your 60, then being stuck at home trying to pay off your bills each month in retirement with a fixed income. Arbitrage - The practice of taking advantage of a price difference between two or more markets.
Many people think of arbitrage when it comes to currency trading or even bitcoin prices on different exchanges. But probably one of the oldest forms of arbitrage has to be the buying and selling of real estate in different markets. I remember moving to Texas on a short term job assignment in my early twenties. At the time, California was going through one of it’s booms and one of the top executives at the company was casually telling my coworkers over lunch how he was able to buy two homes in Texas for the price he would sell his home in California. If you ever wondered why it’s so easy for the rich to get richer, here is one of your answers. Buy at the right time in the right market and then take those gains to a burgeoning market to have your wealth grow like a virus. This was over twenty years ago, and California home prices are even higher now and Californians are still coming to Texas in droves. Just look at Toyota North America moving their headquarters from California to Plano, Texas just north of Dallas. As I sit here writing this post, House Hunters Renovation is following a couple looking at an 860 square foot bungalow for $599,000 in Eagle Rock, California (Los Angeles). The difference in properties across states is truly draw dropping. Even having been in real estate for many years, I still struggle to grasp the home prices in California and how people pay for properties. Being from the east coast, I say the same thing about New York. The Times just had a short article on 11 Hoyt, a 57-story condo in Downtown Brooklyn where just a studio residence will go for over $600,000. If there is one tip I would give college graduates it would be to travel and even live in different cities early in your career. Find out what you like and don’t like and this will help you put together a plan to live and work in your ideal place. Going from an expensive market to a cheaper market is always a great move if you enjoy both cities equally and can take advantage of the cost of living differences. I’m right at the halfway point in terms of how long most people work in their careers and I can’t even imagine moving to a more expensive market now. With college around the corner and a recent health scare, I’d much rather stay where I’m at and continue investing in more real estate before the prices go higher. I’ve been to California many times, and love many areas of the Golden State, but it’s just not in the cards unless I become a dogecoin millionaire. I recently started reading 1500days.com - If you're not familiar with this guy, he basically describes his story as this:
"My main goal* was to build an investment and cash portfolio of $1,120,000* in 1500 days**, starting from 1/1/2013 and ending in February of 2017. I made my goal in 2016, my 1500 Days are over, and I’ve left my job." Mr. 1500 still blogs regularly to teach people how he maintains his lifestyle now that he's retired. Recently he posted how he lost a lot of money (on paper) due to the recent downturn in Facebook stock. It's a great example of the importance of not only diversifying your stock portfolio, but even your streams of income. Our opinion is that you have money in stocks, and real estate (REITS and physical single family homes). If you're really lucky, maybe you have a side business or partnership as well, that brings in a third income stream. Having a few income streams allows you to have some more risky bets like catching the upside when things go well in the stock market, but also a pile of more stable money to minimize losses so you can still pay the electric bill even in the worse months. Read about Mr. 1500's Facebook loss here. |
StpChgWelcome to StepChange (StpChg). A blog about personal finance, small business, and investing. Looking for the real estate blog Knew Home? Archives
May 2020
Categories
All
|