tag:blogger.com,1999:blog-31048404286576806382024-02-20T07:03:09.916-08:00EPIC INVESTORRandom ideas about investing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.comBlogger87125tag:blogger.com,1999:blog-3104840428657680638.post-54046325313159625362017-09-10T19:55:00.003-07:002017-09-10T20:00:47.194-07:00Real Estate Investing Online, Part IV: The Returns<div style="text-align: left;">
<a href="http://www.epicinvestor.com/2015/08/real-estate-investing-online-part-iii.html" style="text-align: justify;" target="_blank">Last post</a><span style="text-align: justify;"> of this </span><a href="http://www.epicinvestor.com/search/label/real%20estate" style="text-align: justify;" target="_blank">series</a><span style="text-align: justify;"> was a little over two years ago. I figured it's about time to update the series with what really matters: the returns.</span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I posted in the <a href="http://www.epicinvestor.com/2015/06/real-estate-investing-online-part-i.html" target="_blank">very first post</a> that the returns for that first year was around 4% but that over time I expected those same investments to yield around 12-15% annually. So, now that it's been over 4 years of investing, were my expectations realistic? </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Yes, pretty close, but a bit too optimistic.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
My actual annual returns now (2017) from <b>all</b> of my investments, including many from 2017 that are just starting up, has already returned <b>12%</b> this year. And the year is not over yet. So, I was right at that lower end of my expected returns, possibly a bit higher.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Let's see what contributes to the returns and how I compute these numbers.</div>
<div style="text-align: justify;">
<br /></div>
<h2 style="text-align: justify;">
Breaking it down</h2>
<div>
In year one I told you that my returns were right around 4%. Turns out that's a typical low-end over the last four years. In aggregate, over the last four years, I've consistently gotten around 6-8% from all deals open for one year (the average is 7.5%). This includes deals that are simple buy-and-rent and those which require remodeling. 6-8% is typical for year 1.</div>
<div>
<br /></div>
<div>
The full average returns by time since first investment is as follows:</div>
<div>
<br /></div>
<div>
<b>Year Average Returns</b></div>
<div>
0 1.8%</div>
<div>
1 7.5%</div>
<div>
2 8.9%</div>
<div>
3 20.7% </div>
<div>
<br /></div>
<div>
Some observations about these returns:</div>
<div>
<br /></div>
<div>
1) As alluded before, year zero has low returns because many deals take a while to start returning and many others (e.g. rehabs, fix-and-flip) do not start returning until renovations/construction is complete.</div>
<div>
2) Year 3 is particularly robust because many equity deals target a 3-year hold, returning all investment plus appreciation at the end.</div>
<div>
3) My investment mix is not 100% equity (more on that later), so for some deals the points above do not mean as much.</div>
<div>
4) Note that it's implicit in the numbers above that there were four year "zeros" and only one year "three" so far as I've been investing in these online deals for four years. </div>
<div>
<br /></div>
<div>
Now, let's look at returns based on cash flows per year. This is different than the analysis above because I look at how much cash was returned from an outstanding capital invested in a given calendar year as opposed to bucketing everything based on their start time. Invested amounts (the denominator) carries over from one year to the next unless the deal exits.</div>
<div>
<br /></div>
<h3>
Calendar Returns</h3>
<div>
<b>Year Returns</b></div>
<div>
2014 4.6%</div>
<div>
2015 5.1%</div>
<div>
2016 6.5%</div>
<div>
2017 11.9%</div>
<div>
<br /></div>
<div>
Here again we see the same trend: low returns early on and a jump on year 3. </div>
<div>
<br /></div>
<div>
You may notice that 2017 is lower than year 3 in the previous table, even though there is only one year 3, which is 2017. That's because 2017 is year 3 for deals that began in 2014, but it's also years 0, 1 and 2 for more recent deals -- hence a weighted mix of returns (also, 2017 is not over yet). In other words, the calendar returns include cash flows from any deal that year, regardless of when they began.</div>
<div>
<br /></div>
<div>
So, going forward, I now expect returns to be more in the <b>11-14%</b> range, assuming I keep adding new dollars and re-investing old dollars into new deals. If I were to stop investing, I'd expect returns to go up for 3 or so years and then trail off, eventually dropping to zero as they all exit.</div>
<div>
<br /></div>
<div>
Of course, we've been on a bull market and it will not continue forever. So, going forward, results could very well be much worse.</div>
<div>
<br /></div>
<h3>
Investment Mix</h3>
<div>
I mentioned above that I have a mix of deals, not just equity investments. The mix has changed over time too. Here's the current snapshot by deal type, weighted by currently-invested dollar amounts.</div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg94_I7NQpUyDh4Ws_sUVvDAisY9CDm-JraiDiXkGlFRQ7PePWKVHHa-xoNWAB6h3imQvPuzTvy9ar4SJkf_l538hbGoIj1AotAOAh8sLdoSFEtDcuaexiblrWTRN2kXcRDCYOnXUHiLVhp/s1600/chart+%25282%2529.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="371" data-original-width="600" height="197" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg94_I7NQpUyDh4Ws_sUVvDAisY9CDm-JraiDiXkGlFRQ7PePWKVHHa-xoNWAB6h3imQvPuzTvy9ar4SJkf_l538hbGoIj1AotAOAh8sLdoSFEtDcuaexiblrWTRN2kXcRDCYOnXUHiLVhp/s320/chart+%25282%2529.png" width="320" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div>
I won't discuss the rationale for this particular mix right now. For a reminder of what each deal type entails, please see <a href="http://www.epicinvestor.com/2015/06/real-estate-blog-post-part-ii-triaging.html" target="_blank">part II</a> of this series. </div>
<div>
<br /></div>
<div>
The point here is that equity is still the bulk of the investments and was the sole type of investment in the first few years, hence why we see a pronounced effect at around year 3. As of late I have made several debt deals because they offer immediate returns, which helps smooth out the lumpy returns achieved by equity deals. They're also more robust to downturns, which I expect will happen at some point in the future. Preferred equity is similar to debt in which they offer immediate yields, usually higher than debt, but also with more risk.</div>
<h3>
<br />Min/Max</h3>
<div>
Another important pair of numbers to look at are the minimum and maximum returns so far. More the min than the max, I'd say. So far, no deal has gone negative. But I've had one deal return exactly zero -- I got my investment back and a tax headache to deal with, but no loss of principal (maybe a tiny loss due to how taxes are computed).</div>
<div>
<br /></div>
<div>
As for the current max, it was an equity deal that returned an annualized 30%.</div>
<div>
<br /></div>
<div>
So, there you have it, a detailed analysis of my returns so far.</div>
<div>
<br /></div>
<div>
If you want to start investing online, I'd look first at <a href="https://realtyshares.com/" target="_blank">Realtyshares</a>. I'm a fan of their platform and an early investor in them (I own shares of the company). My returns above are for investments done in their platform, plus a few others. Over 50% of my currently-invested dollars are with Realtyshares as of this writing.</div>
<div>
<br /></div>
<div>
Happy investing.</div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-63046966719815169522015-08-26T21:42:00.001-07:002015-08-26T21:42:49.568-07:00Real Estate Investing Online Part III: Tips, Tricks, Caveats and Final ConsiderationsParts I and II of this series on online investing in real estate deals discussed <a href="http://www.epicinvestor.com/2015/06/real-estate-investing-online-part-i.html" target="_blank">the basics</a> and <a href="http://www.epicinvestor.com/2015/06/real-estate-blog-post-part-ii-triaging.html" target="_blank">what to look for</a> in these deals. Now, let's talk about the little details that make all the difference and not obvious when one is just starting out.<br />
<br />
<br />
<b>K-1s and minimum investment size: opposing forces</b><br />
<b><br /></b>
In almost all cases when investing in real estate online, one will be a member of a partnership for tax purposes, as a limited partner. As such, you will receive a schedule K-1 at some point and you'll need to file that with your tax returns. Just like investing in MLPs or some commodities ETNs.<br />
<br />
So far, so good, right? No big deal?<br />
<br />
Except that if you use an accountant to file your taxes, many of them will charge you <i>per form </i>(or equivalently, per hour). That means that for every new RE deal you invest, you could be paying $50-$100 or more to file your taxes. And if your investment size is as small as say, $1000 on a deal that pays say 8% annually ($80 per year), you could be keeping just $30 of these $80, minus the tax you owe once you pay your accountant.<br />
<br />
So, just keep in mind that very small investments sometimes are not worth the trouble at tax time. If you do taxes yourself, this is less of a concern, but still, it's one more form to file and it will take some of <i>your</i> time, which could be better spent doing something else other than tax.<br />
<br />
<br />
<b>Multiple States, Multiple Headaches</b><br />
<div>
<b><br /></b></div>
Online deals are great because one can diversify and invest in a state across the country from where one lives, thus hedging bets about local economies and the RE market across the US. However, this very diversification comes at a cost: tax preparation costs again.<br />
<br />
Each state has a different requirement for when one should file, even if you're not a resident of that state. For example, Oregon has a low threshold of just $4,600 of income per year for married couples. If you earn money from an RE deal in Oregon, you will be liable to pay taxes there even if you never set foot on the state.<br />
<br />
Filing tax in multiple states is not only a headache, but it's more cost too as a CPA will have to research that state's laws. Even if you use software like TurboTax, you will incur the cost of filing with a new state. So, keep that in mind when choosing to invest and when deciding the minimum amount of your investment.<br />
<br />
Oh, and, of course, you're liable for the taxes due in that state. So, make sure you factor the state tax rate into your required returns before you invest.<br />
<br />
Luckily, there are five happy states that won't require you to file anything because they do not tax personal income: NV, FL, WA, WY, and TX. But then again, check with your tax professional as things change and I'm not a tax specialist.<br />
<br />
Finally, consider your tax consequences when you invest in national or regional funds. These are funds that invest all over the US or in a given broad region like mid-west or east coast.<br />
<br />
<br />
<b>Get familiar with capital calls and dilution terms</b><br />
<b><br /></b>
Many operators retain the right to make a capital call -- that is, request more money from investors in proportion to their original investments. Say, if a deal is underfunded or incurs losses or extra expenses not budgeted for, the general partner (GP) may tell the limited partners to pony up more money. And, as is often the case, those who do not put more money in will have their shares of the partnership diluted in some non-linear way.<br />
<br />
The dilution can sometimes be 15-30% more than if you simply didn't add more money in subsequent rounds. For example, let's say there are 10 investors and they each put $1000 for a $10,000 deal, and there's a capital call later for another $1000 per investor. Normally, each investor would add $1000 and each would keep their 1/10th of a $20,000 deal. However, with some dilution clauses, if someone does not contribute the extra $1000, their share would not simply go down to 1/20th as you'd expect. It could become 1/25th, 1/30th or less, depending on the dilution penalty clause.<br />
<br />
There is also the possibility that a non-contributing member could be automatically given a "loan" from another investor. In this case, some contracts specify that the "defaulting" (non-contributing) member needs to repay the lending member at a rate of interest of X%. This interest will be taken out of the member's distributions or even principal if the distributions are not enough to cover the implicit interest.<br />
<br />
These dilutions terms are not very common, but I've seen quite a few of them. So search the documents of the deals for "dilution" and "capital call" and understand thoroughly what you're getting into. I've found that emailing the operator also works and most are willing to explain the terms in more details if you're having trouble with the legalese.<br />
<br />
<br />
<b>General Partners as Free Riders</b><br />
<br />
Generally, the general partners will invest in the deal some percentage of what they're looking to raise. Obviously, the more they invest the more their interest is aligned with yours. And as I've explained in <a href="http://www.epicinvestor.com/2015/06/real-estate-blog-post-part-ii-triaging.html" target="_blank">part II</a>, investing alongside a GP who is also an investor, not simply a fee-taker operator, is a good thing.<br />
<br />
Most GPs will invest some percentage. But whose money are they putting up? It could be your own money that they're co-investing with you -- so they're getting a free ride (and probably laughing at you at your own expense).<br />
<br />
I explain.<br />
<br />
Remember the acquisition fee we talked about in part II? Well, some GPs will openly declare that they will use that fee to make an equity investment in the deal. Meaning: they're charging you what I consider to be a borderline abusive fee to then turnaround and dilute your investment some, just so they can say they're co-investing in the deal. But in reality, they're taking no economic risk in doing so. These operators are just operators, not investors. Don't get me wrong: They might be great operators and they might generate great returns for their investors. I've invested in one such deal and it's working fine. But I strongly prefer when GPs are real investors in deals and are exposing their own money.<br />
<br />
<br />
<b>Keep in mind you are the Limited Partner</b><br />
<br />
This is common to all deals: you're the limited partner and you have little to no say in how the asset is managed and operated. That's great when things are going well, but it's useful to always think of worst-case scenarios and how you'll recover your money if something goes bad.<br />
<br />
Imagine, for example, that a debt deal goes bad. If you have first lien on the property, you may think you're covered: "I take my part of the asset and sell it". Right? However, first lien debt is not exactly like a bank mortgage. First, you don't control the terms. Second, you can't threaten to ruin the borrower's credit score. And most importantly, you're one of many investors so even in cases where you may vote (typically, in case of default you have some limited rights), you still need to reach consensus with other borrowers. So, imagine what other investors will think when the borrower decided to negotiate a 50% haircut. Maybe you don't agree with it, but you may not have final say.<br />
<br />
There's not much you can do as an LP. So, choose the operators wisely and don't settle for mediocre returns. There's a reason they need to offer you more than what they would pay a bank for a "normal" mortgage. Make sure this margin is not too thin, because you have limited recourse in case something goes bad.<br />
<br />
The sites that offer these deals are not in the business of foreclosing or negotiating with operators when things go south. These platforms may or may not help you, but that's not their business. So make sure you build your own defenses as much as possible in terms of due diligence and margin of safety.<br />
<br />
<br />
<b>Debt: Repeat borrowers, good or bad?</b><br />
<b><br /></b>
Many sites offer debt deals these days. You may see borrowers asking for as little as $200k to rehab a house and flip or to buy one or two properties, improve them and rent out.<br />
<br />
Many of these operators have been doing this for a long time. Experience is great. But it also could spell trouble: how can you be sure these operators are not over-leveraging themselves and borrowing more than they can handle?<br />
<br />
It's true that each deal has its own terms and guarantees. But can a bad deal somewhere else in their portfolio cascade to yours? Typically they're separate legal entities, so you might be protected that way. But often times these debt deals come with a personal guarantee from the borrower -- a line of credit if you will. But this guarantee is often the same one for all deals of an operator. So it's not much of a safety net if many deals go wrong.<br />
<br />
Just something to consider. Look at the history of each operator on your platform of choice to have an idea of how much they're borrowing and what they offer as guarantee and whether you think that guarantee is enough of a safety net for all the deals they've listed. More deals is not always better. It can be, but don't just assume it is.<br />
<b><br /></b>
<b><br /></b>
<b>Payment In-kind</b><br />
<b><br /></b>
This is not a big deal, but some operators reserve the right to pay you "in-kind". Meaning, they will give you the asset(s) instead of cash. One such operator I contacted said it is rare they need to do this, but they reserve the right in case the market is not conducive to a sale.<br />
<br />
In most cases, I'd just prefer that the time frame for the deal gets extended instead of receiving the asset directly. But it's a choice the operator will make for you. Again, as the LP, you won't have much say and you'll need to deal with other investors if you're given the asset directly. Just make sure you're okay dealing with it.<br />
<br />
<br />
<b>Be wary of indirect language, unnecessary complexity and general sneakiness</b><br />
<br />
Most operators are straightforward and most deals are reasonably easy to read if you've read a few of them -- even for someone not versed in legalese like me.<br />
<br />
But then there are deals that have hundreds of pages and things that are defined in addendums, appendices or left unspecified or unclear. For example, I've seen deals where there's a hurdle rate for investors, after which there's a catch-up phase for the operator. But the catch-up amount was not specified until later in an appendix. This may be because these deals use template documents or for whatever reason. But I generally prefer a straightforward document that is easy to read and has everything spelled out nicely and up-front. Not in footnotes or appendices.<br />
<br />
Another tell tale sign of potentially too much ass-covering language: if the word "fee" appears as many times or more than there are pages in the document.<br />
<br />
I can't list all of the things I've seen nor give an exact formula for what unnecessary complexity and sneakiness means. This is something one needs to learn by reading multiple deals. And sneakiness and complexity are subjective and personal things.<br />
<br />
Try searching the documents for words that matter to you as an investor: "fee", "dilution", "guarantee", "capital call", etc and read around these sections. Sometimes you'll be surprised by what you find out lurking in subscription documents.<br />
<br />
<br />
That's all for now. Happy investing.<br />
<br />edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com1tag:blogger.com,1999:blog-3104840428657680638.post-34535127534353469452015-06-29T09:00:00.000-07:002015-08-26T19:20:11.463-07:00Real Estate Investing Online Part II: Triaging Deals Online<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<a href="http://www.epicinvestor.com/2015/06/real-estate-investing-online-part-i.html" style="line-height: 1.38; text-decoration: none;"><span style="color: #1155cc; font-family: Arial; font-size: 14.6666666666667px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Last time</span></a><span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">, we talked about some of the basics of real estate investing online and how I’ve been using online platforms for over a year to generate an income-focused portfolio.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This time, let’s talk about some of the things to look for and be aware of when investing in real estate online.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How investors earn money from real estate deals</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Real estate deals online have several dimensions. First, one needs to understand the difference between a loan (debt) versus equity.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Equity vs loan (debt)</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Most often, I see deals that are equity deals. This means you’re investing in buying the property advertised. If it’s a rental property (commercial or residential), you can expect to get some income from rents. For rehabs (fix-and-flip), you’ll likely see returns after the property has been sold. Same thing if it’s a new construction. Typically, equity deals have some upside in the end, even if they pay a distribution (say, from rent). </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Equity deals also have a downside: if the property fails to generate enough income, you may not get your distribution. And if something bad were to happen and the operator defaults on the bank loan (most equity deals still take out loans with banks to buy the properties), then you likely would not get your investment back.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Debt, on the other hand, is a loan to the entity buying the property that pays a fixed interest but with no upside upon sale of the property. Loans typically offer a higher annual payout than equity investments. Loans also are often structured in a way such that the investor would get his/her money back first in case of default, before the operator and equity investors. Note, however, when making a loan investment, be sure it has a </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">first-lien</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on the property, before any bank or other investors. Otherwise, you’d be running an even greater risk of loss of principal, which needs to be matched by a higher payout or other risk-mitigating factors.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: I tend to prefer to have upside and thus invest in equity deals primarily, but I do invest in debt when it offers a solid return with a decent risk profile -- I avoid debt to buy a single family home for example, but find it more acceptable when doing so as part of a fund or a multi-tenant property.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">IRR vs Cash Flow (or Cash-on-Cash)</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Internal Rate of Return (IRR) is the annualized return one gets after the property has been held for a few years and then sold. For example, if your share of a property is bought for $1000 and it pays $100 per year in rent for 5 years and is then sold at the end of the 5 years for $1500, the IRR to the investor is the $500 collected in rents (5 years x $100), plus the $500 appreciation ($1500 - $1000), plus the principal back ($1000), annualized over 5 years, for that original $1000 investment. Thus, this means an IRR of 2000/1000^(⅕) = 14.9%</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But note that for the first 5 years, the investor did not get these 14.9% every year. So, IRR does not mean money in your pocket every year, even though it’s an annualized rate.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Cash-on-cash is the money in your pocket every year. These are the $100 per year you’d get in the example. This translates to a cash-on-cash return of 100/1000 = 10% per year.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When looking at deals, it’s important to look at both numbers. IRR will tell you what your average return will be. It’s important for it to be a high number, certainly higher than what you could get out of stocks or bonds. I personally look for 15-18% in most cases.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">One needs to be aware that a lot of the IRR is due to property appreciation, which is very hard to predict, specially for long hold periods, say over 5 years. So one needs to balance a high IRR with an equally healthy cash-on-cash return. I like to see the two numbers being closer together rather than farther apart, for a balanced deal without a lot of my return coming from hypothetical appreciation. It’s easier to predict cash flow from rents than price appreciation -- though, neither one is guaranteed, of course.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I typically look for cash-on-cash of at least 8% and currently I’ve been looking for even higher returns, given that interest rates are expected to go up soon, which means that in a few years a return of 8% is likely not to be as attractive as it is now that “safe” rates are very low. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But it’s all a balance, of course. A very high and realistic IRR might make up for a relatively low cash-on-cash.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A quick note on another metric, the </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.6666666666667px; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>equity multiple</b></span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: that is simply your overall return after the hold period and sale of property all combined into one big multiplier of your initial investment. In the example above, it’s </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2x</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, because one would get out $2000 for an investment of $1000 after the hold period. It’s essentially the same information one gets from the IRR, but compounded over time. I’ve trained myself to understand the compounding effect of IRR, so equity multiple does not give me any new information. But it does put things in perspective a little bit. For example, if the equity multiple is 1.2x for a hold period of 10 years, that’s a terrible investment, as one would be getting a total gain of 20% after 10 years. Likewise, the IRR on such a deal would be 1.8%. So, looking at the IRR usually suffices for me.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: I typically look for cash-on-cash of upwards of 8% and a believable IRR of 15% or more. These required numbers will go up when interest rates go up.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How deals are structured</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Commonly, real estate deals online have a “waterfall” structure of returns. A deal might be structured such that investors get 80% of the returns and the sponsor of the deal (the operator) gets 20%, beyond their own investment.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">More commonly though, investors will get 100% up to some preferred return or “hurdle” rate. A typical structure might look like this:</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="margin-left: 0pt;">
<table style="border-collapse: collapse; border: none; width: 624px;"><colgroup><col width="*"></col><col width="*"></col><col width="*"></col><col width="*"></col></colgroup><tbody>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><br /></td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Hurdle Rate</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Investors</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Operator</span></div>
</td></tr>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Preferred return</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">8%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">100%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">0%</span></div>
</td></tr>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Thereafter</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><br /></td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">80%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">20%</span></div>
</td></tr>
</tbody></table>
</div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It’s also common for deals to differentiate between cash flows and capital events (i.e. sale of property, cash out refinance, etc). </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And sometimes there are multiple tiers of returns, such as this (real) example below:</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="margin-left: 0pt;">
<table style="border-collapse: collapse; border: none; width: 624px;"><colgroup><col width="*"></col><col width="*"></col><col width="*"></col><col width="*"></col></colgroup><tbody>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><br /></td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Hurdle Rate</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Investors</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Operator</span></div>
</td></tr>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Preferred return</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">7.5%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">100%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">0%</span></div>
</td></tr>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Tier 1</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">18%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">75%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">25%</span></div>
</td></tr>
<tr style="height: 0px;"><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Thereafter</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><br /></td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">50%</span></div>
</td><td style="border-bottom: solid #000000 1px; border-left: solid #000000 1px; border-right: solid #000000 1px; border-top: solid #000000 1px; padding: 7px 7px 7px 7px; vertical-align: top;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">50%</span></div>
</td></tr>
</tbody></table>
</div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The example above is interesting because it gives the operator an extra incentive to go beyond that 18% hurdle rate and thus collect a larger fraction of the money to themselves. I don’t mind that, because it means a higher return for me too. Just beware of 50-50 splits right after a low hurdle rate. I’ve seen these deals too.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In real estate lingo, the operator’s split is commonly called the </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">promote</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. It’s similar to what hedge funds call </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">performance</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> fee. A good return structure is crucial to align investors and sponsors. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Fees</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If there’s one guiding tenet in all I do when investing and consuming is this: minimize paying fees. Fees not only eat into returns, they potentially create a misalignment of interests between investors and the operators. But not all fees are bad. Let’s discuss them in turn.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Property management fees</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Normally, operators charge a property management fee. They are fees paid to a third company or sometimes the operator directly, for making sure rents are collected, the property’s conditions are kept in shape (toilets unclogged, gardens landscaped, etc). Those are necessary, so don’t mind them.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In fact, most operators I’ve studied charge a very reasonable property management fee, between 4 and 5% of rents collected. This is actually why I prefer to join a professionally managed deal online than buy my own property and hire a property manager -- they would cost me 8-10% typically. But seasoned operators have scale and thus their fees are quite reasonable. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: Make sure to look for </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">property management fees</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> around 4-5%.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Asset management fees</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now, asset management fees are the ones I don’t like. These are fees for keeping my money, like mutual fund and ETF expenses. I often see them in the 1-2% of assets range. Some operators will charge less and a few don’t charge them at all and at least one I've seen charges a fixed rate. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The reason these fees turn me off (besides eating 1-2% of my returns) is because the operators get paid even when the deal goes south, which is the misalignment of incentives I was talking about. A flat fixed fee is okay, as they need to pay for accountants and office staff. But the work does not become more expensive with extra money. It might be proportional to the number of investors, but not with the number of dollars necessarily. I would not be opposed to a fee on a sliding scale, where it goes down with higher amounts invested -- which is similar to a flat fee anyway.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Another reason why an asset management is bad is because it is typically beyond paying for the accountants, lawyers and secretaries. Most deals, if you read the fine print, say that the company investing in the property -- most commonly a separate entity than the sponsor itself -- is responsible for all reasonable expenses. So, my understanding is that all the overhead of running the deal is paid by all investors already. This makes an asset management fee just an extra way to compensate the operators regardless of how the investment performs. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: Avoid </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">asset management</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> fees like the plague.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">One-time fees</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Many deals have an acquisition and/or a disposition fee, oftentimes around 0.5 to 1%. These are justified in some cases because these fees are paid to brokers and other companies employed in finding the properties in the first place. However, one needs to inquire operators about these fees, as they’re not always meant to reimburse third parties, but instead are an “incentive” for themselves -- sort of a self-congratulatory high-five for putting the deal in place. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In some cases, these fees are used to fund the operator’s part of the equity in the deal. This means that the operator does not need to put up its own money into the deal. They instead charge an acquisition fee to fund their portion. Think about it: they take your money to fund their participation in the deal, as an equal partner to you, plus their promote. Seems unfair, no? It is.</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I believe that the bulk of an operator’s returns should come from their equity investment alongside you, the investor, and in part from their promote. It should not come from auxiliary fees or asset management fees. I don’t expect them to work for free, obviously. But in many cases the entity formed to operate the deal is paying all incurred expenses directly anyway and the sponsor will get its performance fee (the promote) as compensation for working on the deal. A </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">fixed-amount</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> asset fee on top is not unreasonable. This structure of compensation is what I would want for me if our roles were reversed and I was operating one of these deals. Anything else seems greedy and unfair. Several operators follow this approach. Some don’t even charge a promote and instead are equal partners to you. Our incentives are truly aligned, as they should be. Long and prosperous lives to them.</span></div>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: Inquire about the use of acquisition and disposition fees and avoid them if you can. Prefer operators that are investors themselves and are getting their returns from their investments mostly and not from selling you deals in which they have little or nothing at stake.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com4tag:blogger.com,1999:blog-3104840428657680638.post-29650264817870401852015-06-17T23:37:00.002-07:002015-08-26T21:43:21.307-07:00Real Estate Investing Online - Part I: The BasicsOver the past year and a half, I have been investing in many real estate deals online, via websites like RealtyShares.com and RealCrowd.com. I’ve done quite a few now -- over two dozen -- and I have learned a lot about investing in real estate online. I thought I’d share a few things with my dear readers.<br />
<br />
Thus, over the course of the next several weeks, I will write about my experience with these online marketplaces, the nuances of different types of real estate investments and the gotchas and pitfalls to watch out for.<br />
<br />
Let’s start with some of the basics first: Why invest in real estate, how to invest online and the differences between two of the online investment sites I use.<br />
<br />
<span style="font-size: large;">Why invest in real estate</span><br />
<br />
I’ve <a href="http://www.epicinvestor.com/search/label/real%20estate" target="_blank">expounded on real estate investing</a> before on this site. Basically, real estate investing has a few interesting properties:<br />
<br />
<ol>
<li><b>Leverage</b>. It’s easy and relatively cheap to use leverage to acquire properties, via a mortgage. Leverage will increase returns, if properly used.</li>
<li><b>Income</b>. A property allows one to derive income from, via rents. This is not always true with say stocks, which may or may not pay dividends.</li>
<li><b>Control</b>. Owning a property outright may allow you some wiggle room to control how much income you derive from it. One typical way of getting more income is by increasing rents when appropriate or by rehabbing the property to make it “worth” more to tenants, thus allowing for higher rents. Owning a dividend-paying stock or a REIT is great, but you ultimately have little control over the dividend.</li>
<li><b>Tangibility and simplicity</b>. It’s relatively easy to “see” a property and value it through comparables and rental income. This is often not the case with large companies and their complex balance sheets and cash flow statements.</li>
<li><b>Tax and depreciation</b>. Oftentimes, the tax treatment on real estate can be constructed in beneficial ways, by taking deductions on the mortgage and depreciation and by using tax laws such as <a href="https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031" target="_blank">1031 exchange</a>.</li>
</ol>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 14.666666666666666px; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">All told, real estate often yields a solid stream of income with relatively low volatility. Of course, there are disadvantages too such as not having as much liquidity as with stocks and bonds and the added headaches of owning a physical structure that decays over time and needs maintenance.</span></div>
<div>
<span id="docs-internal-guid-8c07de79-0558-90c4-f6c5-1d22071480b3"></span><br />
<h1 dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 10pt;">
<span id="docs-internal-guid-8c07de79-0558-90c4-f6c5-1d22071480b3">
<span style="font-family: 'Trebuchet MS'; font-size: 21.3333333333333px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">How to invest online</span></span></h1>
<span id="docs-internal-guid-8c07de79-0558-90c4-f6c5-1d22071480b3">
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span id="docs-internal-guid-8c07de79-0558-90c4-f6c5-1d22071480b3"><span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Gone are the days one had to go see a realtor, stop at a bank and at a title company to buy real estate. Now this can all be done online, sometimes in a matter of a few seconds. Sites like RealtyShares and RealCrowd are making these investments very easy to make. Here are the US-based sites that I know of:</span></span></div>
<span id="docs-internal-guid-8c07de79-0558-90c4-f6c5-1d22071480b3">
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://realtyshares.com/">RealtyShares.com</a> - Invest as little as $5000. Equity, debt.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://realcrowd.com/">RealCrowd.com</a> - Deals starting at $25,000.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://realtymogul.com/">RealtyMogul.com</a> - $10,000 minimums.</span></div>
<div dir="ltr" style="margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: 14.6666669845581px; line-height: 20.2399997711182px; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: Arial;"><a href="http://prodigynetwork.com/">ProdigyNetwork.com</a> - Manhattan only. $10,000 minimum.</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://fundrise.com/">FundRise.com</a></span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">I have first hand experience with the first two, RealtyShares (in which I am also an investor) and RealCrowd. I will describe my experience with them. Both have many similarities, such as in how they present deals. They simplify the selection process by showing investors what they’re investing in. They show pictures and descriptions of the properties, financial terms (returns and fees), and the types of deals they are: preferred equity, equity, debt. </span></div>
<h1 dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 10pt;">
<span style="font-family: 'Trebuchet MS'; font-size: 21.3333333333333px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">How online sites differ</span></h1>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Despite their similarities, RealtyShares and RealCrowd have big differences too. The biggest one I see is how they trade-off fees for ease of investing. </span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Fees </span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">RealCrowd does not charge investors a fee to invest, while RealtyShares will typically charge 1% to administer the deals on behalf of investors. However, that cost comes with some benefits too, such as not having to deal with various operators and their individual preferences and quirks (see below).</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Transparency and Complexity</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Investors in RealtyShares don’t need to deal with operators (the companies that sponsor the deals). Everything is done through a separate entity -- an LLC -- for each deal. RealtyShares deals are investments in an LLC that pools money together and subsequently invests in the deals the operators promote. This means RealtyShares is responsible for collecting checks and providing investors with statements and their end-of-year tax documents (typically K-1s). In my experience so far, everything has been standardized with RealtyShares. They make it easy to see my returns with an integrated dashboard and they deposit payments directly to my bank account. </span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">With RealCrowd, payments to the operators and distributions from them need to be dealt individually with each operator. RealCrowd does not track my returns for me. If you invest with only one or two operators, that’s not a big deal. But I have a dozen or so deals with RealCrowd and some operators pay by wire transfers or ACH and some send me checks in the mail. They each require a different way of funding their deals, which must be initiated by me. RealtyShares, on the other hand, will ACH the money to and from my chosen bank account automatically.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Operators on RealCrowd communicate with me directly, which is good for transparency, but it can also be messy as some prefer to call me on the phone, others send email and a few insist on sending me physical letters, making it more complicated to keep track of updates. Also, they each send their tax statements in different ways and at different times. I had three K-1s that were delayed and hence forced me to file for an extension on my tax returns. RealtyShares, on the other hand, sent me all the K-1s on-time and in one fell swoop.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Deals on RealCrowd, however, are more transparent, as one gets to see the exact terms the operator is offering and read all the paperwork associated with deals first hand. Investors also get to communicate directly with operators and have their questions answered from the horse’s mouth. RealtyShares investors are investing in a proxy deal which RealtyShares itself operates, which in turn has terms similar to those originally offered by the operators.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">The trade-off here is clear: one pays for standardization and ease of use.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Minimums</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">RealtyShares typically has deals starting from $5,000. Sometimes, a few deals can be found for as low as $1,000, especially when deals are near closing and there are only a few spots left. </span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">RealCrowd deals are more expensive, starting at $25,000 and oftentimes minimums of $50k or $100k have been seen.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Deals on RealtyShares tend to close more quickly too which can be good and bad: good because you put your money to work faster. But bad because I’ve seen deals fly-by in a few hours, making it really hard to do my due diligence and read all the disclosures.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">My experience so far</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">I have done about two dozen investments so far. A few more of my deals were on RealtyShares than on RealCrowd, but I invested slightly more money via RealCrowd, given their higher minimums.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">I have not noticed any difference in quality of deals between the two sites so far. Deals on both sites have done mostly well and all are functional. No deal has defaulted in over a year that I’ve been investing in them. Most are already paying back regularly. But there are a few deals on both sites that have delayed their distributions more than they had anticipated. I’m not concerned though as complications are part of the process of investing in real estate and all operators have been open about their difficulties so far.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Partial Returns So Far</span></span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">Total returns are hard to speak of as the exact accounting for depreciation, losses, fees and taxes play a role in computing them. Many deals offer 7-10% cash-on-cash with expected total return after the holding period of around 15-18%. But there are deals offering 12-14% fixed payment with little or no upside. And as I said, some deals are not yet paying, making it hard for me to know exactly what my real payoff will be. </span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">So far, I have gotten about 3% return on all my disbursed dollars -- </span><span style="font-family: Arial; font-size: 14.6666669845581px; line-height: 20.2399997711182px; white-space: pre-wrap;">meaning, I got 3% back from what I’ve paid into deals in 2014, not accounting for any depreciation or tax breaks.</span><span style="font-family: Arial; font-size: 14.6666666666667px; line-height: 1.38; white-space: pre-wrap;"> That may not sound so great, but many deals that closed in the last 6 months have not yet paid a distribution. If I include only deals that closed in 2014, my partial returns on disbursed cash have been about 4%.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">However, if I continue to invest in deals at this rate and they continue to offer the current mix of return -- cash distributions and expected returns upon sale of properties -- I roughly expect a steady stream of about 12-15% returns as some deals close out (sell appreciated properties) and others continue to return cash in the form of collected rents.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">I will provide an update on returns by the end of this year to see where things stand.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">In the next post, I will talk about things to look for and how I triage investments on these sites. And then after that, I will explain some of the pitfalls to avoid and things to look out for with these deals.</span></div>
<br /><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: Arial; font-size: 14.6666666666667px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Disclosures</span><span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;">: I’m a minority investor in RealtyShares. I’m not authorized to speak on behalf of the company. This is my own opinion as a real estate investor. I was not compensated in any way by any of the parties mentioned here.</span></div>
<div>
<span style="font-family: Arial; font-size: 14.6666666666667px; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
</span></div>
edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com3tag:blogger.com,1999:blog-3104840428657680638.post-51653109583288658642012-12-31T13:22:00.000-08:002012-12-31T13:22:19.083-08:003 Dividend Payers on Fire SaleHere are three stock ideas for value and dividend investors. All three are cheap by most measures.<br />
<br />
<b>Cliffs Natural Resources (CLF)</b><br />
<b><br /></b>
Cliffs is an iron ore miner. Iron ore price is low due to low demand, especially from China, which for years has been the top buyer of iron ore. Cliffs is currently yielding north of 6%. They more than doubled their dividends back in April 2012. CLF is trading at close to book value of estimated available resources and a P/E of just 6.<br />
<br />
<b>Risks and Opportunities.</b> Should demand for iron ore pick up again, CLF will benefit. However, prices can stay low for a long time, or even go lower. There's a ton of pessimism around miners in general and specifically around iron one. Prices are sensitive to China's economy as well as a global economic recovery. The silver lining is that China's own sources of iron ore are of very low quality and as such once China is back at building its infrastructure full steam, they will have to buy good quality iron ore from one of the global producers and so CLF's boat will be lifted with the high tide.<br />
<br />
<b>Investment Thesis. </b>CLF is a risky bet, but one that could payoff handsomely for a patient investor. Meanwhile, should they continue to pay dividends, there's nothing to complain about the current yield. Demand has to pick up again, eventually. Timing is key though -- now could be early to invest and they could remain depressed for years and even trim the dividend. I recently started a position and am currently adding to it on pull backs. Look for prices below $36.<br />
<br />
<br />
<b>Intel (INTC)</b><br />
<b><br /></b>
Intel is a juggernaut in microprocessor and chipset manufacturing and a leader of its group. It's currently yielding 4.6% and has paid dividends for decades and raised it for the last 9 years. Its 9-year compounded annual return based solely on its dividend growth has been 27%. The stock price has not followed accordingly, but their earnings did just as well, with a compounded annualized return of 20% for the same period. With a historic low P/E of just 9, it's currently offering a juicy dividend on the cheap.<br />
<br />
<b>Risks and Opportunities. </b>Intel has missed the mobile wave so far as most cell phones and tablets out in the market do not use Intel's technology. This trend is dangerous for Intel, but I believe fears are exaggerated for a couple of reasons. 1) Intel has always caught up to competition even when it wasn't the leader. Almost a decade ago, AMD had better performing, lower cost and lower power chips than Intel, but Intel managed to catch up and dominate again. It's highly dubious Intel won't produce an ARM-like chip for cellphones and tablets. 2) Tablets and cellphones are becoming more compute-hungry and that brings the market closer to Intel's turf. 3) It's misguided to think that mobile computers replace big computers. That might be true at home and office, with tablets replacing desktops, but for every few cellphones and tablets a big server must exist in the cloud somewhere. Datacenters are the playground of Intel and these are constantly growing. Demand will not go away for big and powerful chips.<br />
<br />
<b>Investment Thesis. </b>Intel is a clear winner. It has traded for a large premium for a very long time. Its best days are still ahead of it and current low prices are bound to disappear. I recently started a position and am still adding to it, mostly via at-the-money naked put options. Prices below $20-21 offer the greatest returns and yield.<br />
<br />
<b><br /></b>
<b>Entergy Corporation (ETR)</b><br />
<b><br /></b>
Entergy is an electric and gas utility in the northeast and midwest. Entergy has paid dividends for decades, raised it most years and bought back its own stock at various times in the past years. It's currently yielding 5.3% and has a P/E of 16. It has grown dividends a compounded annual rate of 9% over the last 10 years and its earnings have appreciated by a similar amount.<br />
<br />
<b>Risks and Opportunities. </b>With the global slowdown, ETR has suffered too. Demand for energy has weakened, especially in the industry-heavy midwest. However, growth and energy are synonymous -- as one cannot happen sustainably without the other. Once growth returns, ETR will continue to prosper. It's currently the cheapest it's been in many years, approaching levels not seen since 2004 and some brief moments during the 2008-2009 crisis.<br />
<br />
<b>Investment Thesis. </b>I have been following ETR for years and have never made a move due to its relatively rich valuation. I believe this current weakness is temporary (a mere reflection of the poor state of the world's economy) and its fundamentals have not changed. I've started a position at around $63 and am looking to add more at this level or below.<br />
<br />
<br />
<b>Final words</b><br />
<br />
<b>CLF</b> is the riskiest of the three, but also offers the most potential upside. Invest carefully and with a long-term view. <b>INTC </b>and <b>ETR</b> offer the most down side protection, especially ETR, which is as stable as utilities come. INTC offers good down side protection, but as with all technology leaders, watching for new developments is crucial. Should it fail miserably to make inroads into mobile devices or see its lead in the server market erode, things could turn south fast. I put the odds of that happening at low, though.<br />
<br />
<b>Disclaimers: </b>This is not intended as financial advice. Do your own homework and consult your financial adviser. I own all three stocks mentioned above.<br />
<b><br /></b>edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com2tag:blogger.com,1999:blog-3104840428657680638.post-77824945927552432752012-05-31T21:49:00.001-07:002012-05-31T21:49:39.129-07:00Novartis Looks Cheap. But...Pharmaceutical company Novartis (NVS) looks attractive right now from some financial angles. But is Novartis a great company to own going forward? Judging from its history of earnings and dividends, it seems to either lack good management or a defensible business moat. But I'm getting ahead of myself. First, let's look at why it might be cheap.<br />
<br />
<b>Why NVS might be cheap: Dividend Growth Model</b><br />
<br />
For the last 12 years (the most data I have available), NVS increased its dividend an annualized 16%. That's an amazing track record!<br />
<br />
However, one should be skeptical of this record being achieved in the future -- especially because its earnings have only grown an annualized 7% during this period.<br />
<br />
Still, let's assume the current dividend can grow at a 6% clip going forward. If we require a 10% return on our investment, that means that a fair price for NVS is around $62. Given its market price is currently $52, that's a nice discount.<br />
<br />
If we instead insist on an 11% return, then the fair price drops to $49. So, the current price is no longer a bargain, but it's close.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoD2Pb9RkrfYzFiTE8UR4jwVDClWi4BjuuuEfuE3lWHQlPQCMHXg6eyg-rJqVrkwW7TsBDFlWAbwLrWVRiU-yNiSOntj1PGupfT-x-JmJ749_4M2TS7qgYFiwqaCyKwtIVY4sFXTcAH4uM/s1600/nvs_growth.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoD2Pb9RkrfYzFiTE8UR4jwVDClWi4BjuuuEfuE3lWHQlPQCMHXg6eyg-rJqVrkwW7TsBDFlWAbwLrWVRiU-yNiSOntj1PGupfT-x-JmJ749_4M2TS7qgYFiwqaCyKwtIVY4sFXTcAH4uM/s1600/nvs_growth.jpg" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Dividend growth model. Source: S&P</td></tr>
</tbody></table>
<br />
<b>Why NVS might be cheap: P/E analysis</b><br />
<br />
Assuming NVS is neither growing nor shrinking, we can assume it will continue to earn what it has earned on average in the last five years.<br />
<br />
Averaging the last 5 years earnings we get $3.62 per share. Now apply a P/E multiple of 15x, which is approximately NVS' historical average and the industry's average and also the current market average, then we get a fair price of $54. Not too far off its current price -- about a 4% discount.<br />
<br />
Now, to consider an investment, one must look at how long time shareholders have fared and whether the company has shown good results.<br />
<br />
<b>Why NVS may not be such a great company</b><br />
<br />
Let's apply the Buffett test. I attribute this test to Buffett because I first heard this from him, but Ben Graham has written about it on his various books too. The test is very simple: has the stock price of the company shown $1 or more in return for every $1 retained (and not distributed to shareholders)?<br />
<br />
In NVS' case this is a big no. Let's look at the numbers, summarized by the table below.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_SwVi2JdJF9c_c6DBlyQDagCvLjesg5mzqy5WKZr-KJQyaZD1WLX6Z1TKXO6NHcn1Pe0eN6t9IbCr4CQ4xlkY_npvJGMazOaSMjsjwbHj8ukQJLyfxCqrCQkPIkSOxNOpeDAgPY8g-q7T/s1600/retained_jnj_nvs.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="73" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_SwVi2JdJF9c_c6DBlyQDagCvLjesg5mzqy5WKZr-KJQyaZD1WLX6Z1TKXO6NHcn1Pe0eN6t9IbCr4CQ4xlkY_npvJGMazOaSMjsjwbHj8ukQJLyfxCqrCQkPIkSOxNOpeDAgPY8g-q7T/s400/retained_jnj_nvs.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Retained Earnings. Source: Morningstar.</td></tr>
</tbody></table>
<br />
In the last five years, NVS has had about $66B in free cash flows (operating earnings minus capital expenditures). Over the same time, it paid out about $26B in dividends, thus retaining about $40B in earnings. However, what has happened to these $40 billion? They were mostly spent on acquisitions. Have the acquisitions been successful?<br />
<br />
Well, let's see: the stock price in the last five years should have grown by 40/2.42 (billion shares outstanding) = $17 per share.<br />
<br />
And yet, the stock market doesn't show that growth. In fact, the stock has gone nowhere in the last five years. From 2007 to 2011 the stock went from $59 to $57. Not only that, but NVS also blew most of the $4.6B it had on hand in the beginning of 2007.<br />
<br />
But perhaps the market is mispricing the stock now, you ask?<br />
<br />
Well, if you believe our analysis above, the current fair price is between $62 and $49. Nowhere close to the implied price of $76 ($59 -- stock price in 2007, five years ago -- plus the $17 it retained).<br />
<br />
So what's wrong? Perhaps management is not that capable. Perhaps the acquisitions haven't paid off yet but may in the future. Or maybe the company's business model is just not great.<br />
<br />
Maybe the industry is at fault?<br />
<br />
Well, maybe. It's a highly competitive industry and highly unpredictable, given the various status of pipelines, patent expiration and generics. Take JNJ for example, which is in the same industry. Its numbers aren't much better: JNJ's stock price hasn't gone anywhere in the last five years, but our calculation would suggest it should have grown by $11 during during these five years (for JNJ, at least, the balance sheet is in better shape and a lot of the retained earnings show up as cash).<br />
<br />
Why didn't NVS's number materialize, I can't say. But at a first glance, it signifies either poorly-timed (or poorly-priced) acquisitions or inefficient management, possibly combined with a tough environment for pharmaceutical companies.<br />
<br />
<b>Conclusions</b><br />
<br />
NVS looks cheap at these prices and could reward shareholders looking for a growing dividend income. But given its lackluster past in share price growth and poor track record of creating value for each dollar retained, shareholders should not expect significant price increases in the near future. Current shareholders should consider pressing management to increase the dividend, instead of using the cash on malinvestments.<br />
<br />
<b>Disclaimers: </b>I own NVS at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com1tag:blogger.com,1999:blog-3104840428657680638.post-7982284932160445262012-05-07T23:37:00.002-07:002012-05-07T23:40:13.242-07:00Berkshire Hathaway's Shareholders MeetingThis past weekend Warren Buffett and Charlie Munger fielded some four dozen questions from shareholders, analysts and reporters on things as diverse as the shares buyback, how to become a successful investor and the notorious "Buffett rule".<br />
<br />
<div class="separator" style="clear: both; text-align: left;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiDNLdLTKKGV17GWSg09oOREGgoPXZPsQZmbH7W73WVqJ7G0ipMDeMTLfo0mB1Faxo96stkI0Zqu6Bo3d3uzl0z_RaV0-Q1x3fhLmlP4yEk5lOkLdMuFq_DkQ1HHruB9Ewca005g9yUxI-/s1600/buffett_stock.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img align="left" border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiDNLdLTKKGV17GWSg09oOREGgoPXZPsQZmbH7W73WVqJ7G0ipMDeMTLfo0mB1Faxo96stkI0Zqu6Bo3d3uzl0z_RaV0-Q1x3fhLmlP4yEk5lOkLdMuFq_DkQ1HHruB9Ewca005g9yUxI-/s200/buffett_stock.jpg" style="margin-right: 20px;" width="181" /></a><b>Prostate cancer</b></div>
<br />
I expected that this year the main topic would be Buffett's heatlh, given that he recently announced he's got prostate cancer. But it was barely mentioned during the meeting, except for when Andrew Sorkin asked him how he was feeling. Buffett said he was great. Munger took issue with so much concern about Buffett and not much about him. Munger claimed he probably had prostate cancer too, but he wouldn't let anyone test him. That made the crowds laugh.<br />
<br />
<br />
<b>How to be a successful investor</b><br />
<br />
In two separate questions, shareholders asked Buffett what he would do if he were starting today, what to buy and what to avoid. His advice for someone starting now would be to start early, build up a very good history of returns quickly and raise money to buy entire companies. He said he would have started earlier and sped up his early career to achieve what he has achieved later with Berkshire. The later part of his career he wouldn't change.<br />
<br />
He again referred to chapters 8 and 20 of the <a href="http://www.amazon.com/gp/product/0060555661/ref=as_li_ss_tl?ie=UTF8&tag=ei055-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0060555661" target="_blank">Intelligent Investor by Ben Graham</a> as the two most important chapters one should read to be good investors. His ideal MBA course would teach students how to value companies and how to think about markets, which are exactly the topics of these chapters.<br />
<br />
As for what to avoid, he mentioned again one should steer clear from IPOs, since those tend to be done at the best time <i>for the company</i> and not the investor and they are typically hyped by media and analysts due to the fees associated with their sale. "Special promotions and commissions almost guarantee prices won't be cheapest", said Buffett.<br />
<br />
Buffett would also avoid buying medium or long-term sovereign bonds from any country, including the US, right now.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoNuV6-t8spKAoy8bwaDhMqf8PclEpSFFUEfpJ9SuXJXmVR3Iijc55yeUhZ7hLJct1ISw332tm0DhRcFQ9n1M3XGVkGroPGrT-KgN6JL4xYEbMfzHaqpH930TlOfuwGXi5IXV6qDpG5i7d/s1600/buffett_2012_sm.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="190" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoNuV6-t8spKAoy8bwaDhMqf8PclEpSFFUEfpJ9SuXJXmVR3Iijc55yeUhZ7hLJct1ISw332tm0DhRcFQ9n1M3XGVkGroPGrT-KgN6JL4xYEbMfzHaqpH930TlOfuwGXi5IXV6qDpG5i7d/s320/buffett_2012_sm.jpg" width="320" /></a></div>
<br />
<br />
<b>BRK buyback and dividend</b><br />
<br />
As is already usual, a shareholder asked why a buyback instead of a dividend and Buffett again explained that a dividend is not as tax efficient for shareholders as a buyback.<br />
<br />
He's willing to buyback stock in unlimited amounts, so long the stock remains at or below 110% of price-to-book ratio, which significantly undervalues it, and that he keep at least $20 billion of working capital -- that's Berkshire's safety net.<br />
<br />
When asked about the buyback and why he implied the stock was undervalued but he never let shareholders know when the stock is overvalued, Buffett explained that it would make for a very awkward moment if he were to publicly announce when Berkshire stock was overvalued. Makes sense.<br />
<br />
He also answered a question on why the BRK was undervalued now and whether it was due to the "Buffett rule" he proposed. He didn't speculate on why it was so, but just said these are things that happen in the stock market.<br />
<br />
Another shareholder asked him whether a dividend would help stabilize the stock price and reduce volatility by setting a floor for the stock and Buffett vaguely replied that in fact it wouldn't, that volatility happens for dividend payers too and that a dividend could also help increase volatility, but he didn't elaborate.<br />
<br />
<b>Gold</b><br />
<br />
I sent journalists a question about gold, but they didn't ask it. Luckily, a shareholder asked a related question pointing out that gold has outpaced the return of BRK stock in the last 10 years.<br />
<br />
Buffett, always with numbers on top of his head, replied that the price of gold and BRK 47 years ago where $15 a share and $20 per ounce, respectively and that now BRK/A trades for $120,000 while gold is at $1600. The problem, he explained, is that people look at short periods of when a security or asset had a strong return and try to extrapolate from it. (Granted, 10 years is not exactly a short period, but Buffett is a very long-term investor.) Both Munger and him emphasized again that productive assets are better than inert ones -- and they are more fulfilling and rewarding to hold, because one can see them grow and produce wealth, while inert things like gold remain the same forever.<br />
<br />
This is a very controversial point and I will just add that the distinction does not need to be black and white. Buffett is a businessman and likes to invest in companies. In the long run, an investment in well-managed companies at the right price should outpace the return of gold. But gold has its place in a well-diversified portfolio, especially because it's so hard to pick well-managed companies and buy them for the right price. So, sometimes a return of zero (after inflation), which is what gold offers, might be a good thing, when the economy is in trouble.<br />
<br />
<b>Buffett's personal account</b><br />
<br />
When asked why he owned JP Morgan Chase for his personal account but Wells Fargo for Berkshire's account, Buffett explained that securities laws would see a purchase of the same stock in both accounts as a conflict of interest. He likes Wells Fargo more than Chase, but he is not allowed to buy Wells Fargo for his personal account, so he buys his second-best idea instead. He said he reserves his best ideas for Berkshire, always.<br />
<br />
<b>Purchase of a newspaper</b><br />
<br />
A shareholder asked why he bought the Omaha World-Herald paper if he had said a while back that newspapers are a dying industry. The shareholder insinuated that Buffett might be self-indulgent by buying his home town's paper. Buffett then explained that he bought it because that particular newspaper has a very tight local community around it and local newspapers are still a reasonable business. No one buys a newspaper for looking up national news, stock quotes or classifieds anymore. But for local news, obituaries and other local information, they can be useful. Another good local paper is the one he already owns, in Buffalo, New York.<br />
<br />
<b>Google and Apple</b><br />
<br />
Asked about technology, Buffett explained that both Apple and Google are incredibly profitable companies with large margins and they will probably do well 5 to 10 years from now. They are hard for competitors to dislodge. But he wouldn't buy either because he doesn't have any edge on studying them. He wouldn't short them either. Charlie said they have a <i>reverse </i>edge in analyzing deeply technological companies such as these giants.<br />
<br />
<b>How fast will the economy grow</b><br />
<br />
While not a fan of predicting the future, Buffett entertained a question about how to get a 4% return per year. He said that GDP tends to grow with the population (my note: plus changes in efficiency typically due to technology) and so anything more than a 1% real (i.e. after-inflation) return would be already a wonderful result for such a mature economy as the american one. Charlie agreed. At this rate, they added, the economy would double every 72 years or so and with inflation an indexing portfolio should double every generation.<br />
<br />
<b>The "Buffett" rule</b><br />
<br />
Buffett clarified that his proposed tax rule is meant to correct a deviation that has been increasing in the recent years. Currently, out of the top 400 highest individual earners in the country, a full 131 of them pay a tax rate below 15%. Years ago this number was only 16. This shift has been made possible by various loopholes and tax breaks given to the rich. He suggests a way to fix that so that he himself should be taxed at a higher rate than his secretary, Debbie.<br />
<br />
<b>Energy policy and foreign oil</b><br />
<br />
Munger was vocal about people thinking about "energy independence" the wrong way. He thinks we should use foreign oil first and conserve our own oil for later. Most people get this backwards and think of energy independence as extracting our own oil to avoid buying foreign oil.<br />
<br />
In summary, it was again a very useful trip. Every year I learn something new, though, the main tenets of his investment methodology are repeated every year. But since repetition leads to solidification, that's not a bad thing.<br />
<br />
<b>Disclosures: </b>I own BRK at the time of writing and I will probably own even more by this time next year. :-)<br />
<br />
Follow me on <a href="https://plus.google.com/u/0/118341780887919303873/posts" target="_blank">Google+</a><br />
<br />edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-37476956432349360092012-03-24T12:52:00.000-07:002012-03-24T12:55:13.786-07:00Two High-Yield Dividend Payers Worth a LookIt's hard to spot a bargain these days, especially with the markets so fairly-priced as they have been in the last year or two. So, it's no surprise the two names I'm currently interested in are highly controversial. However, I do believe they're worth a serious look. Here they are.<br />
<br />
<br />
<b>Telefonica (TEF)</b><br />
<br />
Telefonica is a fixed and mobile phone operator based in Spain. Over 60% of its revenues though, come from outside of Spain. A huge chunk of it (43%) comes from Latin America and within Latin America, Brazil is its biggest market with a 43% share of the LatAm market.<br />
<br />
Here are some fundamental stats. TEF has:<br />
<ul>
<li>An attractive dividend yield of around 12%.</li>
<li>Grown dividends at a compounded 23% annually for the last 7 years.</li>
<li>Grown earnings at a compounded 12% annually for the last 10 years.</li>
<li>A 10-year average earning P/E multiple of 12.</li>
<li>A current P/E multiple of only 3.6.</li>
<li>Sales (top-line) growth of 8% over the last 10 years.</li>
<li>A book value that has see-sawed in the last 10 years and is pretty much unchanged.</li>
<li>An average return on equity (ROE) of 25% with about 7x leverage.</li>
</ul>
<div>
Valuation:</div>
<br />
Assuming the stock will go no where for the next foreseeable future, but assuming earnings will continue to grow at least at an 8% annual clip and dividends follow suit with a 7% annual increase, the intrinsic price of the stock on a purely dividend-growth basis should be around $21, with a 15% annual rate of return.
<br />
<div>
<br /></div>
<div>
That is, <b>the price at which an investor would receive a 15% annual return is $21</b>. </div>
<div>
<br /></div>
<div>
Currently, the stock is trading for $17, so it's a screaming buy assuming the company is not about to jump off a cliff. For the current price and same assumptions, one would be getting a 17% return on investment from its dividends alone. Any capital appreciation would be icing on the cake.</div>
<br />
<br />
<b>AstraZeneca (AZN)</b><br />
<br />
AstraZeneca is the U.K. based pharmaceutical company that manufactures known drugs such as the popular cholesterol-lowering Crestor, among many others. It's been having some pipeline trouble recently and struggling to keep inventing new blockbuster drugs. It has gone through a $2.4 billion restructuring that has so far cost $2.5 billion to implement. It had 92 new drugs in its pipeline at the end of 2010, but 34 have been dropped so far.<br />
<br />
With an aging global population, the growth story is that health care will continue to be a big part of people's expenditures. To counter, competition from generic drug makers is heating up, with some generic manufacturers speculatively launching clones even <i>before</i> the original's patent expiration happens, on a gamble to challenge the patents in court.<br />
<br />
Blackrock, the big investment outfit, just recently bought 6.45% of the company.<br />
<br />
As for fundamentals, AZN has:
<br />
<ul>
<li>A high yield, 6.5% dividend.</li>
<li>Grown dividends at a compounded 16% per year for the last 10 years.</li>
<li>Grown earnings at a compounded 12% per year for the last 10 years.</li>
<li>A 10-year average-earning P/E multiple of 13. </li>
<li>A current P/E multiple of only 6. </li>
<li>Sales (top-line) growth of about 8% annually for the last 10 years.</li>
<li>Book value that has grown at a 12% annual rate for the last 9 years.</li>
<li>An average return on equity (ROE) of 34% with about 2.2x leverage.</li>
</ul>
<div>
Valuation:</div>
<br />
<div>
Assuming the stock will go no where for the next foreseeable future, but assuming earnings will continue to grow at least at an 8% annual clip and dividends follow suit with a 7% annual increase, the intrinsic price of the stock on a purely dividend-growth basis should be around $35, with a 15% annual rate of return. </div>
<br />
That is, <b>the price at which an investor would receive a 15% annual return is $35</b>.<br />
<br />
<div>
Currently, the stock is trading for $45, so it's a bit pricey for the conservative assumptions above. For the current price of $45 and same assumptions above, one would be getting a 13% return on investment from its dividends alone. Again, any capital appreciation is pure extra goodness.</div>
<div>
<br /></div>
<br />
<b>Wrap up</b><br />
<br />
Both stocks are trading close to their 52-week lows. With the current economic climate in Europe being negative, I wouldn't be surprised if they continue to slide in the near future. I will be sure to be buying more on pull backs. As Buffett always says, if the steak is cheap, buy more.<br />
<br />
As usual, do your own homework before investing.<br />
<br />
Happy investing.<br />
<br />
<b>Disclaimers: </b>I own TEF and AZN at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-10727317534207947772011-09-16T21:47:00.000-07:002011-09-16T21:49:04.876-07:00Should you buy YHOO now?I recently asked this question on my <a href="https://plus.google.com/118341780887919303873">Google+ page</a>. I got some comments there and a few good ones privately emailed to me or in other forums. Here's the wisdom of the crowds, colored with my own perception and understanding.<br />
<br />
<b>Pros</b><br />
<br />
<ul>
<li><b>Traffic. </b>YHOO still attracts a lot of eyeballs. It's one of the top 3 destinations on the web where people spend time. So, the potential is there for more revenue.</li>
<li><b>Valuation.</b> About $1B in earnings expected this year, which would put the forward P/E at a reasonable 15.</li>
<li><b>Leadership.</b> Shakeup could provide new steam for company.</li>
<li><b>Low expectations.</b> $3B in cash, $14B in total equity and a total market cap of only $18B. Market expects little of this company going forward.</li>
<li><b>Buyout.</b> Private Equity companies are already negotiating a buyout, which could lift the shares.</li>
</ul>
<div>
<br /></div>
<div>
<b>Cons</b></div>
<div>
<ul>
<li><b>Downward trajectory. </b>YHOO has been declining in traffic, revenues and pretty much everything else for a while now. This is hard to reverse.</li>
<li><b>Lack of innovation. </b>Enough said.</li>
<li><b>Talent. </b>Outflow of talent is certainly higher than inflow. This is a chicken-and-egg problem: it's hard to attract talent when the company is sinking, but hard to turn it around without new talent joining the workforce.</li>
<li><b>Limited upside. </b>Any buyout will probably not pay a lot of premium for YHOO, given that they have few other options at this point. </li>
<li><b>Risky.</b> Since YHOO is not exactly a super-bargain, risking real capital to hold the stock just to watch it go lower is, well, risky.</li>
</ul>
<div>
What do you think?</div>
</div>
<div>
<br /></div>
<div>
I decided to pass. Mostly because I think the turn around story is flawed and the buyout one is more likely, but with limited upside. However, buying some call options could be a good strategy, depending on valuation. I'm still to look at those.</div>
<div>
<br /></div>
<div>
<b>Disclosures</b>: No financial interest in YHOO (neither long or short) at the time of writing.</div>
<div>
<br /></div>
edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com2tag:blogger.com,1999:blog-3104840428657680638.post-80863574424054224212011-08-21T19:15:00.000-07:002011-08-21T19:15:01.945-07:00Is GM a Buy?I recently had a discussion about investing in General Motors (GM). I thought I'd share that discussion succinctly here.<br />
<br />
<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHaJGh4bFR1Lc8ia8Z2ODhiMGXIHcGQKQyZv6CMHl1sRYi6ryXKVx_rGEAMvehFCMX5VJSx-enP9RVKLoFi29ZEpJXz5iCIWcimIyuEJcUUTNRbmPDatTnb-V-9_bgwfypHwi9YnpL8aDV/s1600/GM-Logo.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHaJGh4bFR1Lc8ia8Z2ODhiMGXIHcGQKQyZv6CMHl1sRYi6ryXKVx_rGEAMvehFCMX5VJSx-enP9RVKLoFi29ZEpJXz5iCIWcimIyuEJcUUTNRbmPDatTnb-V-9_bgwfypHwi9YnpL8aDV/s200/GM-Logo.jpg" width="200" /></a></div><b>Pros</b><br />
<ol><li>GM is now profitable.</li>
<li>Trading close to book value. Buy the assets, get the income stream for free.</li>
<li><a href="http://online.wsj.com/mdc/public/page/2_3022-autosales.html">Car sales are up year-to-date</a>.</li>
<li>Car manufacturers <a href="http://www.reuters.com/article/2011/01/12/retire-us-autoshow-advertising-idUSTRE70B6IH20110112">are stepping up ad spending</a>, so this could spur even more sales.</li>
<li>The government has taken an interest in the company (the taxpayer still owns about 26% of GM). This could put a floor under the stock.</li>
<li>GM has experience in alternative ("green") fuels and electric vehicles, which is the current trend these days. </li>
<li>Insider buying is positive. The <a href="http://gmauthority.com/blog/2011/08/gm-ceo-dan-akerson-purchases-10000-more-shares-of-general-motors-stock/">CEO keeps buying shares</a>.</li>
<li>Internal organization is <a href="http://gmauthority.com/blog/2010/03/gm-announces-major-organizational-changes-to-gm-north-america-with-org-chart/">very different now</a> than it was before bankruptcy. </li>
<li>The company is making progress towards fully funding its pension plan. The "hole" came down from $17 billion to just around $10 billion in the last six months.</li>
</ol><br />
<b>Cons</b><br />
<ol><li>The "free" income stream from the pros reason number two above can easily be destroyed by a downturn, poor management or more government intervention.</li>
<li>Government still owns about 26% of the company. History shows that government is terrible at handling companies (see Post Office and and Amtrak for examples).</li>
<li>Alternative fuels and electric cars are not the specialty of GM. There are better-equipped competitors out there that, albeit smaller, could eat GM's lunch in this growing sector (think Tesla, BYD).</li>
<li>GM does not yet pay a dividend.</li>
<li>The company's pension plan is still underfunded by a non-trivial amount ($10 billion).</li>
</ol><br />
Overall, I thought I'd take my chances and started a small position in GM.<br />
<br />
<b>Disclaimers</b>: I own GM at the time of writing.<br />
<br />
edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-24449913399550689742011-05-05T22:15:00.000-07:002011-05-06T22:08:26.955-07:00Notes from Berkshire Hathaway Shareholder's Meeting<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipogbvRUXDdYbZWEbIavJt0bRp0MJ0jaEc_-DkrNm4kMVje5CVcGstQvFpGzL94O2Ee1uxnuobe9QDd_JNeX-u6PJvPQs73ypUbjzw0TiUGA64Oey9ZqW3mqxyDj1E2JWvqbf304cS56uw/s1600/buffett.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br />
<img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipogbvRUXDdYbZWEbIavJt0bRp0MJ0jaEc_-DkrNm4kMVje5CVcGstQvFpGzL94O2Ee1uxnuobe9QDd_JNeX-u6PJvPQs73ypUbjzw0TiUGA64Oey9ZqW3mqxyDj1E2JWvqbf304cS56uw/s1600/buffett.jpg" /></a></div><br />
<div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Once again, as became known as "Woodstock for Capitalism", Warren Buffett and his partner Charlie Munger fielded questions from shareholders and journalists from all around the globe. With an audience north of 17,000 people present in the Qwest center in Omaha, Buffett, 80, showed he's still in decent shape and perfect wit by withstanding a grilling session that lasted for about 6 hours.</div><div><br />
</div><div><b>David Sokol</b></div><div><br />
</div><div>Buffett started clarifying his mistake at publishing a press release about David Sokol, the Berkshire manager who bought shares of Lubrizol in the days leading Berkshire's offer to purchase the company outright, pocketing an estimated three million dollars. </div><div><br />
</div><div>Buffett explained why his much criticized press release was too positive on Sokol. Buffett felt like publishing a press release only criticizing David for his "inexcusable" mistake would be diminishing all the great work Mr. Sokol's done for Berkshire. Mr. Sokol did great things and Buffett didn't want them to be lost because of this one mistake. </div><div><br />
</div><div>Buffett also said he does not believe a man who was paid handsomely over many years (last year his compensation was US$ 14 million) would act in bad faith to earn another 3 million. He believes Mr. Sokol's lack of proper disclosures were an oversight, not an act of bad faith. But that nonetheless, they were inexcusable. </div><div><br />
</div><div>He then went on to mention Mr. Sokol's altruistic personality. When Berkshire first bought MidAmerican, Buffett offered a $50 million package to Mr. Sokol and $25 million to Greg Able (another executive at MidAmerican). But Mr. Sokol refused to accept such split and suggested a 50-50 split between the too.</div><div><br />
</div><div>Buffett also clarified that he didn't fire Mr. Sokol on the spot because he wasn't sure of the involvement of Sokol at first, but that when Sokol resigned Buffett decided to accept the resignation which is cheaper than firing an executive and less prone to law suits.</div><div><br />
</div><div>I think deep inside Buffett didn't want to let Mr. Sokol go, but was forced to act this way to keep his image clean and Berkshire's reputation pristine.</div><div><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq8Z_85PbTC_w4CcpqFUl6VzBd9jakskU_T7aZjXJwN8YZ6Ksc4LnOloZC9gEXwPe4Nw28NX80HPHDm79SfvCDQvrS4O1Vdi6eEXbiw3WEdUy7m3ODLtayfc4Q1T57ys135bB6yTGxJxrN/s1600/omaha_buffett_2011.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="119" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq8Z_85PbTC_w4CcpqFUl6VzBd9jakskU_T7aZjXJwN8YZ6Ksc4LnOloZC9gEXwPe4Nw28NX80HPHDm79SfvCDQvrS4O1Vdi6eEXbiw3WEdUy7m3ODLtayfc4Q1T57ys135bB6yTGxJxrN/s320/omaha_buffett_2011.jpg" width="320" /></a></div><div><b>Investing in Gold</b></div><div><b><br />
</b></div><div>When asked about investing in gold, Buffett said gold "doesn't do anything". He said people can stare at gold, climb a ladder on top of a pile of gold and sit on it and claim to be the king of the hill. One can even fondle gold and rub it. But it doesn't generate any wealth. </div><div><br />
</div><div>He then proceeded to tell the same funny story he's told before: suppose Martians were watching the Earth. They would be quite confused by seeing people dig up gold from the ground in South Africa, transport it to New York and then bury it again in vaults.</div><div><br />
</div><div>Buffett simply prefers to invest in things that create economic value and tend to grow over time, such as well-managed companies with competitive advantages that require little re-investment of capital to maintain sales and grow, such as See's Candies.</div><div><br />
</div><div>I very much agree with this. In fact, I wrote about it very recently on my discourse on <a href="http://www.epicinvestor.com/2011/04/what-to-do-in-current-inflationary.html">how to fight inflation</a>.</div><div><br />
</div><div><b>Investment Vehicles</b></div><div><b><br />
</b></div><div>When answering a question about money, Buffett mentioned that there are three types of investment vehicles: currency-denominated investments, things that only have value because of prices people pay for them and businesses. </div><div><br />
</div><div>Currency-denominated investments are poor investments over the long run. All fiat currencies tend to go to zero over time. Even shorting currencies is not a great investment because one still needs to know which one will go to zero faster, but in the long run, they all go, because of inflation. So Buffett prefers to stay away from these, which include bonds, loans, IOUs and currencies. He did, however, short the dollar a few years ago for a handsome profit. But he doesn't believe he can consistently predict which currencies will lose value faster.</div><div><br />
</div><div>Things that depend on others to pay up later include gold, oil, and precious metals in general. Even though some metals have utility and oil is a finite resource, he doesn't have any edge on predicting what the demand is for these things. So he doesn't invest in them.</div><div><br />
</div><div>The third category is his favorite: well-managed companies that require little re-investment of capital to function. He cited an example of See's Candies which went from $30 million to $300 million in sales with just a $31 million investment (from $9 million in assets when he purchased it to $40 million now). So, a 10x gain was obtained with less than 10x investment, which is a property of great businesses.</div><div><br />
</div><div>Again, I agree completely with Buffett. I also <a href="http://www.epicinvestor.com/2011/04/what-to-do-in-current-inflationary.html">classified different types of investments</a> recently. Although not exactly like Buffett, my categories are similar.</div><div><br />
</div><div><b>Investing in Oil</b></div><div><b><br />
</b></div><div>When an investor asked if she should short oil or go long, Buffett answered that instead she should teach us how to do it, because he didn't have any insight. He simply said he has no edge on picking the direction of commodities and as such he doesn't get involved in doing it.</div><div><br />
</div><div><b>Too Big To Fail</b></div><div><b><br />
</b></div><div>An investor and small business owner asked whether there should exist a business that is "too big to fail", which was the case of many US banks in 2008 and 2009 and also AIG, Freddie and Fanny as well as General Motors.</div><div><br />
</div><div>Buffett said that these businesses do exist and in fact, there are now countries that are too big to fail. This is simply unavoidable, in his view. However, he doesn't believe in free bailouts either. He suggested a policy where shareholders should get wiped and the CEOs and their families should lose all their money, certainly all their money earned when at the helm of such big institutions. Such treatment would protect investors and the population by discouraging CEOs from taking huge risks.</div><div><br />
</div><div>In the case of GM, Buffett said he was on the fance on whether it should have been bailed out, but he said that in hindsight it was a good move by the government. I disagree. GM was not too big to fail and it sucked up resources and market share that could have gone to more efficient players. </div><div><br />
</div><div>In the case of banks, I'm sympathetic to Buffett's view, since a run on banks and massive unemployment could have destabilized the country and generated massive domino effects elsewhere. However, it's clear more responsibility is necessary on the part of executives. The trick is to achieve this without too much regulation and without stifling innovation and competitiveness -- if other countries can do it, then the US will lose out by not allowing their banks to do it too. Balance is the key.</div><div><br />
</div><div><b>Expanding the Circle of Competence</b></div><br />
<div>A shareholder asked: "if given another 50 years to live, which new circle of competence would you like to develop?" Buffett first answered with "I really like the preamble", and the crowd laughed. He then proceeded to say that he would learn about tech, because it's a very large field and there will certainly be a few big winners in it.</div><div><br />
</div><div>Charlie agreed and also said that energy would be a good area, because with enough energy all problems of civilization are resolved, such as clean water. Charlie mentioned having read "In the Plex", a book about Google, which he certainly enjoyed reading and learned a lot from it.</div><div><br />
<b>Best Businesses To Invest</b><br />
<br />
A shareholder asked Buffett whether an asset-heavy business would perform well during periods of inflation versus a business with fewer assets. His theory was that tangible assets such as factories, machinery, power plants, etc would work as a store of value.<br />
<br />
Buffett was unequivocal about this: no, the best business is the one that doesn't depend on too much capital invested in it and can generate profits with minimal capital reinvestment. He again cited the example of See's Candies and compared it with Lubrizol and utilities, which can be lucrative, but are not as good as businesses with moats and low capital requirements.<br />
<br />
</div><div><b>On Inflation</b></div><div><b><br />
</b></div><div>Buffett dislikes inflation like everyone else. He said that the dollar from when he was born is only worth six cents today. But despite that, he and Charlie did well over time. So inflation is bad, but not as bad as it sounds. </div><div><br />
</div><div>I suppose he was trying to say that controlled inflation is not a very big deal. But that somehow goes a little against his disdain for cash-denominated investments. I guess what he meant by this all is that inflation is only a problem if one is not invested in great businesses and instead holds cash or cash-denominated investments.</div><div><br />
</div><div><b>Jamie Dimon</b></div><div><b><br />
</b></div><div>Like <a href="http://www.epicinvestor.com/2009/05/berhkshire-hathaway-shareholders.html">two years ago,</a> this year again Buffett praised the CEO of JP Morgan, Jamie Dimon, and said it's worthwhile reading his shareholder's letter. Maybe again this year, <a href="http://www.epicinvestor.com/2009/05/jamie-dimons-shareholders-letter.html">like two years ago</a>, yours truly will read it and summarize it here. Stay tuned.</div><div><br />
</div><div><b>On BRK Dividends</b></div><div><br />
</div><div>This year again, as is common for several years now, people ask when Berkshire will pay dividends. Buffett thinks it's best not to, as long as a dollar retained produces more than one dollar of economic value for the stock. So far this requirement has been met. </div><div><br />
</div><div>The day Berkshire pays a dividend, says Buffett, is the day they admit defeat and can no longer invest money profitably. On this day, the stock price should go down, according to him.</div><div><br />
</div><div>Buffett joked that he wishes his friends live until BRK pays a dividend.</div><div><br />
</div><div><b>Misc</b></div><div><b><br />
</b></div><div>Many other topics were debated, including a charitable giving program that was discontinued several years ago; Charlie's love for Costco; Ajit Jain's workaholic habit of flying to London on Thanksgiving to continue on working; and the one diploma Buffett has on his wall: "Dale Carnegie's Course on how to communicate effectively".<br />
<br />
Buffett also commented that the government not raising the debt ceiling would be the biggest asinine thing it could do. That the debt capacity of the US is larger than it was when the ceiling was instated and that, in his opinion, there should be no limit.</div><div><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvm_-NU_bTPZOXLF4qhfOFnOGN1QxKXblDLoNYRZw5OMryOKJjHOrzBMX0MiaEKfBRFscUmKR9TulsPjKrRTPXX29NF0NXt44MkipODTIlJ-b6sQFqU9-GDNeM8sAl-IZJateowCAp2EyY/s1600/flight_to_omaha.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="154" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvm_-NU_bTPZOXLF4qhfOFnOGN1QxKXblDLoNYRZw5OMryOKJjHOrzBMX0MiaEKfBRFscUmKR9TulsPjKrRTPXX29NF0NXt44MkipODTIlJ-b6sQFqU9-GDNeM8sAl-IZJateowCAp2EyY/s200/flight_to_omaha.jpg" width="200" /></a></div><div>All told, it was worthwhile flying to Omaha to see the Sage. (Even better, on a private jet with a couple friends of mine). I expect to repeat this again in the years to come. Long live Buffett.</div><div><br />
</div><div><b>Disclosures</b>: I own BRK at the time of writing. I do not own an airplane.</div><div><br />
</div><div>You can follow me on Twitter <a href="http://twitter.com/#!/pinhe1ro">@pinhe1ro</a>.</div><div><br />
</div>edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-3983745207237319082011-04-23T17:44:00.000-07:002011-04-23T17:44:44.245-07:00What To Do In The Current Inflationary Climate?It's no secret that the dollar is turning into dust. It has been depreciating since it went off the gold standard over 40 years ago. And it is now depreciating faster given current government intervention. Just check out the news and expert commentaries:<br />
<ul><li><a href="http://goo.gl/o7BY7">Gold Hits New Highs</a></li>
<li><a href="http://goo.gl/xqlal">Inflation pressure, retail sales and gas prices are up</a></li>
<li><a href="http://goo.gl/N38ZM">Get Ready For The "Miracle" Of Compound Inflation</a></li>
</ul><div>Of course, there are those who believe the opposite is true, such as <a href="http://globaleconomicanalysis.blogspot.com/">Mish</a> and <a href="http://mises.org/daily/4974">Vijay Boyapati</a>. The argument pro deflation is that the government won't have the political will to allow rampant inflation and their means to trickle down newly-printed money within the economy is limited, barring political suicide.</div><div><br />
</div><div>The truth is that no one on the deflation camp believes the dollar is getting any stronger nor that inflation will not return in the future.</div><div><br />
</div><div>Inflation is the tried and true method that works to reduce government debt. It's what's been going on for decades ever since we've had fiat money. And it will continue in the future, in spite of short periods of deflation.</div><div><br />
</div><div><b>Becoming Inflation Agnostic</b></div><div><br />
</div><div>Regardless of what will happen in the next six months or a year, the fact is that investing is about the long term. And long term we will have inflation, like we've always had, plus more, given the increasing deficit this country is running.</div><div><br />
</div><div>So, what's the best way to protect hard-earned money? </div><div><br />
</div><div>There are many ways of doing this, and they all have pros and cons. Here are the ones I know of. I'll break them down into smaller categories, even though everything eventually rolls up as either "cash-flow positive assets", "limited supply entities" or "mixed".</div><div><ul><li>Business Interests (stocks, private businesses)</li>
<li>Precious Metals (gold, silver)</li>
<li>Commodities (gas, oil and agriculturals such as corn, wheat and cotton)</li>
<li>Collectibles ex-precious metals (art in general, rare objects)</li>
<li>Real Estate (land, houses)</li>
<li>Paper Instruments/Derivatives (TIPS, bonds, futures)</li>
<li>Other income-producing assets (patents, royalties)</li>
</ul><div>For simplicity, I will ignore the bottom two classes. I'll just say this about TIPS: while an interesting asset to have some exposure to, its inflation-protection comes from the people creating inflation (i.e. government), so in the long run TIPS are unlikely to offer much real purchasing-power protection.</div><div><br />
</div></div><div><b>Business Interests</b></div><div><b><br />
</b></div><div>I believe this is the best way to generate wealth. Having businesses generating income for me is the most scalable way to attract money. After all, I can't have ten day jobs to generate 10x my income. But by owning businesses (or their stock) not only is this realistically achieved, but even more is possible. </div><div><br />
</div><div>And having multiple sources of income is, in my mind, the best way to offset inflation. After all, profitable businesses want to stay profitable, so they increase prices with inflation when they can (unless they are airlines, in which case just don't invest in them, like I did and regret).</div><div><br />
</div><div>But stocks are unpredictable in the short-run and they can be at times grossly over-valued. </div><div><br />
</div><div>The other way is to create businesses from scratch or invest in them privately (private equity) or very early (angel investing). I've tried my hand at all of these. Results will vary and these are hard things to do well. So, if you're not in this camp yet, start to learn or move on to the next one.</div><div><br />
</div><div><b>Precious Metals</b></div><div><b><br />
</b></div><div>There is no way to value precious metals. And they don't pay a dividend either. </div><div><br />
</div><div>Nonetheless, precious metals have historically more or less retained purchasing power relative to fiat currencies. They can be especially useful in times of crisis when a race to the bottom in currency debasement is in effect, like it is right now.</div><div><br />
</div><div>I would advise people to have some small amount of physical gold or silver with them, such as 5% of their net worth. Timing the purchase of these metals is tricky. I wouldn't hurry to buy right now that they've gone up by record amounts. If you haven't exhausted other alternatives yet, hold off on buying metals until no one is talking about them again. However, if you buy as a contingency reserve and never sell otherwise, then almost any time is a good time to buy.</div><div><br />
<b>Commodities</b></div><div><br />
With commodities I see roughly two classes that mostly only exist in theory: <b>those that should go down in price</b> over time, such as agriculturals, and <b>those that should go up</b>, such as oil and gas.<br />
<br />
The reason why agriculturals should go down in price over time (all else equal) is because agriculture is becoming more efficient and mechanized -- we produce more food per acre than we've ever did in the past. Oil and gas, on the other hand, are being depleted and we'll eventually run out of them.<br />
<br />
However, theory and practice are very different. While oil is going up in price due to depletion (and also instability and speculation), reserves of natural gas are a lot bigger. Natural gas prices have been all over the place and can remain like that for a long time, depending only on supply and demand, both variables which I cannot predict.<br />
<br />
Meanwhile, agriculturals have gone <b>up </b>in price, mostly because oil has gone up and the dollar is losing value.<br />
<br />
So, what's an investor to do? I believe a diversified portfolio needs some exposure to commodities. However, the vehicles for that exposure are complex and time-consuming. Pure commodities ETFs and ETNs such as OIL, USO and DBA, are not ideal. In fact, they are harmful, because traders take advantage of them in ways I don't want to delve into right now.<br />
<br />
My recommendation: if you have the inclination, time and stomach to use futures, go for it. Setup a small account and keep rolling some exposure to grains.<br />
<br />
If you don't want to go into the futures market, then get some exposure to the agricultural commodities sector by buying stock in companies such as ADM. Or, for a more diversified (and more expensive) exposure to agribusinesses, try MOO or PAGG.<br />
<br />
The disadvantage of having stock in agribusiness companies is that it increases one's exposure to stock market and hence this may offset some of the benefit of being invested in commodities.<br />
<br />
As for oil and gas, I believe it's best to own exploration and pipeline companies instead of futures. The reason is that owning oil futures or oil in the ground is very similar: the stock price of companies like XOM should go up as oil goes up (with agriculturals, the wheat and corn are not there all the time, they must be grown, so owning the business is not a great proxy for owning the commodity). So for oil and gas, there's no need to forfeit getting the juicy dividends these companies pay just to offset the stock market risk. But again, if you have the inclination to do futures, that's a fine option too.<br />
<br />
<b>Collectibles</b><br />
<b><br />
</b><br />
Owning a Picasso painting or a Rodin sculpture is a great way to store wealth. It seems to be a trick the rich know and that the poor don't usually understand -- many people think buying art is squandering money, a vain waste of resources. But the value of these rare objects should go up over time. So it serves a dual purpose of decorating the home and storing wealth.<br />
<br />
However, the drawbacks are obvious: they are illiquid, non-fungible and extremely hard to deal with.<br />
<br />
During times of extreme distress (wars), good luck trading your Rembrandt for food at a decent exchange rate. You may have better luck with a <a href="http://www.google.com/search?q=patek+philippe+5102G">Patek Phillippe</a>, but you first need to find an original item and a qualified buyer.<br />
<br />
Finally, this leads us into another category.<br />
<br />
<b>Real Estate</b><br />
<br />
Real estate was the darling of the easy-money policy era. Until 2007.<br />
<br />
And then it became taboo to even talk about a "recovery" in real estate prices.<br />
<br />
Real estate cooled in America and became hot in other parts of the world such as China, Australia and Brazil. In fact, the last two seem to be nearing bubbly conditions, though the make up of these conditions are very different than those in the go-go years of free-houses-to-everyone-with-a-pulse in America.<br />
<br />
That's exactly why real estate is now the right place to invest -- because no one is talking about it other than saying how bad it is and how slow it will be for a long time.<br />
<br />
What most are missing though is that price appreciation is only part of the equation. Income is the other. Even though prices can continue to tumble into the near future, they must eventually find a floor on rents. Especially in desirable and growing areas.<br />
<br />
It is now possible to own real estate essentially for free in many desirable zip codes across America. <b>Right now</b>. For example, in Silicon Valley, companies are hiring, builders have slowed down and yet there are houses on the market that after a down payment can generate enough rent to cover mortgage, closing costs, insurance, taxes and even HOA fees (in case of condos).<br />
<br />
Now, depending on the terms, it might even be possible to generate a 6% annual return on investment. Plus any future price appreciation. And that with almost full immunity to inflation, since rents will keep pace with inflation. Add to this equation a fixed-rate mortgage and I see not better inflation protection right now than a cash-flow positive rental property.<br />
<br />
Of course, there are drawbacks: the market is not very liquid, tenants are not all the same and managing rentals can be a time-consuming and headache-prone activity. If you're not up for it, the alternative is to go the ETF route, such as RWR or IYR.<br />
<br />
<b>Final Thoughts</b><br />
<b><br />
</b><br />
When fighting inflation there is no silver bullet. It's important to be broadly diversified. And that doesn't mean having many mutual funds. One needs to think in terms of assets that tend to retain value. My favorites are those in the category of income-generating assets, especially business ownership and real estate rentals.<br />
<br />
I think now is a good time to buy real estate in America, particularly in areas with positive job growth. Prices may continue to slide, but timing purchases perfectly is tricky. Plan on buying properties that can generate enough income to at least pay for the mortgage. In 2-3 years they will likely turn cash-flow positive and in 5-10 years you'll get price appreciation on top of that.<br />
<br />
In the end, you get inflation protection, income and price appreciation. It doesn't get any better than this.<br />
<br />
<b>Disclosures</b>: I own RWR at the time of writing.</div>edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com1tag:blogger.com,1999:blog-3104840428657680638.post-10935119175366319632011-02-09T11:08:00.000-08:002011-02-09T11:08:01.671-08:00Never Fall In LoveFalling in love with a company, its services or its products is well-known to cause its stockholders more financial harm than good. Avoiding this trap is a common advice. And it's a good one.<br />
<br />
<b>A Concrete Example</b><br />
<br />
As a real past example, let me tell you about when I invested in Jamba Juice (JMBA), the smoothie shop that is so ubiquitous and keeps expanding. I thought the concept was great. After all, being from Brazil, I know how popular freshly-squeezed fruit juice and smoothies are over there. The fact that Jamba was aggressively expanding outside of its home state of California was a big plus. <br />
<br />
This was back in 2005, and I had just discovered Jamba Juice. I immediately fell in love with the idea and wanted to invest in it. But Jamba was a private company back then and all they gave me was a discount coupon when I offered to invest some money into the company. Silly me. <br />
<br />
So I waited for its IPO and then waited some more for the post-IPO hype to die down. In 2007, I finally decided to buy, based on its expansion plans, and a lot of excitement about its products and business model. After all, who wouldn't want to buy a Jamba Juice smoothie?<br />
<br />
Result?<br />
<br />
Price paid: $6.49 per share in 2007.<br />
Current price: $2.37.<br />
Maximum price in the last two years: $3.83.<br />
Dividends paid: $0.<br />
<br />
Now you do the math.<br />
<br />
What went wrong? First, I didn't stop to analyze the market. I assumed everyone must love smoothies. But it turns out that outside of California, Hawaii and Florida people don't care as much about smoothies. Moreover, only during the summer months do people care enough to look for Jamba's colorful stores. Also, Jamba's expansion plans were so aggressive and it expanded so quickly that it had to close some poorly-performing stores, hurting the bottom line.<br />
<br />
And how could this business model be so popular in Brazil? Despite the weather differences, juice and smoothie shops in Brazil typically freshly squeeze their fruits in front of customers, while Jamba mainly freshly blends fruit concentrate with a sugary "dairy base", according to their own in-store information.<br />
<br />
I took my losses on JMBA today, after keeping a shred of hope for the last 3+ years.<br />
<br />
Conclusion: it pays to look beyond products and services before investing. Look at the market, <a href="http://www.epicinvestor.com/2009/06/judging-management-quality.html">management quality</a>, financial situation and company expansion plans.<br />
<br />
<b>Avoiding a Current Trap</b><br />
<br />
With the lesson learned from Jamba Juice, I recently avoided a similar trap. <br />
<br />
I'm a big fan of Vitacost, my supplier of vitamins, herbs, protein, etc. Their products have the lowest price, they ship super fast and their customer service is great. In fact, over the many years I've been using them, I've only had two minor problems with shipping, which they resolved so quickly and satisfactorily that I even wonder if they caused the problem on purpose so that I would fall in love with their speedy customer service.<br />
<br />
Sounds like an ad for them, right? But I'm in no way affiliated with them. And that's for the betterment of my pocket.<br />
<br />
You see, I wanted to invest in Vitacost for a while and like with Jamba Juice, it was still private when I first thought about investing in them. Today, I discovered that they've been public since 2009, ticker VITC. So I started looking into a possible investment.<br />
<br />
Even before turning to their financials I find a <a href="http://www.reuters.com/finance/stocks/keyDevelopments?rpc=66&symbol=VITC.O×tamp=20100816120000">slew of terrible news about the company</a>. First, it failed to file for the required paperwork with NASDAQ and it is at risk of being delisted. The CEO has left recently, and it is postponing its shareholder meeting. Worse, it's being sued by not one, but three law firms for security irregularities. Something about its executive team having allegedly lied about its products, services and financial strength to mislead investors into a higher valuation.<br />
<br />
Of course, all the bad news could mean that the stock price is depressed and when things are resolved this could be a terrific opportunity to buy. However, for a company with such short track record and with so many problems accumulating right out of the gate, I can't even start considering an investment in it.<br />
<br />
I will continue to enjoy Vitacost's good product selection and quality service. But I'm not buying any piece of the company any time soon.<br />
<br />
<b>Conclusion</b><br />
<br />
The advice "don't fall in love with your stock" is a good one. Treat all your investments as anonymous machines working for you. If they fail to work for your best interests, it's time to replace them. There's a large pool of good ones out there. All you have to do is do your due diligence, look at the fundamentals and choose carefully.<br />
<br />
<b>Disclosures</b>: No position in any of the above mentioned securities as of the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com2tag:blogger.com,1999:blog-3104840428657680638.post-65875614633484353772011-01-31T11:03:00.000-08:002011-01-31T11:03:12.611-08:00Why Abbott Looks CheapThe pharmaceutical juggernaut Abbott Laboratories looks reasonably cheap these days. Its shares have been going down for the past few weeks and it's a good buying opportunity in my opinion. Here's why.<br />
<br />
<b>Consistent Dividend Growth</b><br />
<br />
Abbott has grown dividends consistently for over 25 years. It's part of the Dividend Aristocrats index maintained by S&P. Not only that, but ABT has grown dividends an annualized 9.33% over the last 11 years. On average, the year-over-year dividend growth has also been around the same ballpark, 9.45% (the average and the annualized 11-year return can differ in case most of the growth was in one or just a few years as opposed to consistent over time. When they match, it's a sign the growth has been sustained over time).<br />
<br />
<b>Consistent Earnings Growth</b><br />
<br />
A consistent dividend growth needs to be accompanied by a consistent earnings growth too or the dividend is not sustainable. Over the same last 11 years, ABT has had an annualized earnings growth of 9.31%, which comes in very close to its annualized dividend growth. This means that dividend growth is supported by earnings growth directly, which is a good sign. It means the company is passing through all of its extra earnings back to shareholders via dividend increases.<br />
<br />
Some people prefer to see earnings growth slightly surpass dividend growth to be on the safe side. But by doing so, it means the company is increasing its cash reserves and I would want to understand why. It could mean an acquisition is coming up or the company is expecting to have higher expenses going forward (patent disputes, lawsuits, etc). So, higher earnings growth per se is neither good or bad, but must be understood. In the case of Abbott, for the past 11 years earnings and dividend growth have matched, which can only mean the company is growing smoothly and not becoming lopsided in anyway, neither increasing cash reserves nor depleting it, hence a very good sign in my opinion.<br />
<br />
<b>Consistent Sales Growth</b><br />
<br />
Just because earnings growth have been consistent during this time does not necessarily mean the company is actually generating more cash since earnings can be so easily manipulated. However, 11 years is a long time, especially when the earnings can be seen in form of dividends during this time (it's a lot harder to fake real cash in your pocket than it is on an income statement). Nonetheless, let's see how Abbott fares in sales growth, which is a more direct way of assessing where growth is coming from.<br />
<br />
For the past 10 years, sales have grown an annualized 8%. This is only slightly less than the 9% earnings growth, which indicates that for the most part sales have kept pace with earnings. It also indicates that the company has been aggressive at cutting costs at a rate of 1% per year. In the long run I'd expect earnings and dividend growth to slow down to catch up to sales growth. Still, 8% is a good growth rate to have.<br />
<br />
<b>Dividend Yield is Moderately High</b><br />
<br />
At a price of approximately $45.50 and with an annual dividend of $1.76, ABT sports a dividend yield of 3.8%, which is pretty decent in today's market. When factoring in a 8-9% growth, it means investors can expect a return of 11-13% on their investment going forward, minus inflation and plus any share price appreciation.<br />
<br />
<b>Implied Price using Dividend Discount Model</b><br />
<br />
Treating a share of ABT as a bond and investing in it just for the dividend using the Dividend Discount Model, I came up with a price range for ABT of between $59 and $44. This means that ABT is undervalued at the time of writing. My assumptions were a 10-11% discount and 7% dividend growth, which, given the track record of sales growth of 8% is still a little conservative.<br />
<br />
<b>Other Considerations</b><br />
<br />
Other things to consider before investing: why is ABT going down in the past several weeks? No single news piece accounts for this decline, but a more thorough investigation is warranted.<br />
<br />
One a price-to-earnings basis, ABT looks fairly valued with a tailing P/E of about 15. However, its forward P/E is only 10, since ABT expects to earn between $4.54 and $4.64 per share in 2011.<br />
<br />
<b>Conclusion</b><br />
<br />
All things considered, ABT looks cheap to me. I'm buying shares of Abbott (ABT) at the time of writing. Please do your own analysis before buying.<br />
<br />
<b>Disclosures</b>: I own shares of ABT at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-20246017808319107042011-01-23T21:30:00.000-08:002011-01-23T21:30:16.049-08:00Are Muni Bonds Cheap Again?Back in 2009 Munis got a lot of attention because several states were in trouble, meaning they couldn't service their debt loads. The situation is not much different now and still most muni issues are still being serviced.<br />
<br />
<b>So, what has changed?</b><br />
<br />
For one, their credit ratings. Specifically, two California issues I own (one of which I <a href="http://www.epicinvestor.com/2009/12/two-sides-of-muni-bonds-part-ii.html">discussed back in 2009</a>) are now back in investment-grade camp. Both <b>13062TPU2</b> and <b>13062TSB1</b> started 2009 as A+ issues and were downgraded to BAA1 (or BBB as Fitch calls it). Both are now back to A-, as of late 2010. And yet, their prices have fallen recently, probably in anticipation of more ugliness ahead.<br />
<br />
However, these two issues are still paying their coupons and both are fully backed by the state's taxing authority. No disclosures of other material events have been filed with the <a href="http://emma.msrb.org/SecurityView/SecurityDetailsARD.aspx?cusip=13062TSB1">MSRB</a>.<br />
<br />
In this case, should a California-based investor buy more?<br />
<br />
I can't see why not, at least in the short term. Even if inflation picks up, it's unlikely to pick up so fast as to obsolete these papers, whose coupons are 4.5%, but are yielding now about 6.2%, tax free, at approximately $78 per issue.<br />
<br />
Therefore, I'm officially adding to my position. The only trick is that the market is so illiquid now that these bonds are not being offered on a daily basis. Investors must request offers, which are hard to come by. Patience shall be rewarded.<br />
<br />
<b>Disclosures:</b> I own both bond issues mentioned above. Consult your financial advisor before making any investment.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-32857361074868771802011-01-18T23:24:00.000-08:002011-01-18T23:27:10.404-08:00S&P 500 Fair Value: What to Expect in 2011About two years ago I posted my mathematical assessment of the <a href="http://www.epicinvestor.com/2009/04/s-500-fair-value.html">market's fair value</a>. It's still a widely-referenced article. Given your interest and my own curiosity as I prepare my investment route for 2011, I thought I'd repeat that study using more recent data.<br />
<br />
But this time, I'll use both a dividend discount model and an earnings growth model.<br />
<br />
<b>S&P 500 Fair Value from a Dividend Perspective</b><br />
<br />
Using the Dividend Discount Model here's a quick summary of the market today and what is in store for 2011, if history helps.<br />
<br />
If we treat a stock as a bond and nothing else, we're expecting to get in the future our model for dividends that we got in the past, plus some growth. This is one of the most conservative ways I know to value a stock and hence why I'm using it here to value the index.<br />
<br />
Here are the numbers:<br />
<ol><li><b>All-Time Dividend Growth. </b>Since 1960, the S&P 500 has grown dividends an average of <b>5.04%</b> per year (note: variance is large, meaning some years this number is much higher, others much lower).</li>
<li><b>10-Year Dividend Growth. </b>The last 10 years have seen a lower dividend growth, just <b>3.58%</b> annually.</li>
<li><b>Today's Fair Value. </b>Assuming a 5% growth <i>ad infinitum</i> a 7.5% discount rate based on an estimated dividend for 2011 of $24.28, today's fair value is <b>971</b>, meaning the market is <b>overvalued</b> by 33%.</li>
</ol><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4HwFPS7i56jo1xgXST6QlZDIJoLxkuu6-zrj2yFCi89SF1Fz5g7nQJfupJFKUH2PudTaur3YqHsmiJq91tx7rSU5HRn59jHm0wFC5nZAkMZ1cLc8yXuNWIY5dsjzY1Ig9VY-Tr9xVtp2R/s1600/sp500.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4HwFPS7i56jo1xgXST6QlZDIJoLxkuu6-zrj2yFCi89SF1Fz5g7nQJfupJFKUH2PudTaur3YqHsmiJq91tx7rSU5HRn59jHm0wFC5nZAkMZ1cLc8yXuNWIY5dsjzY1Ig9VY-Tr9xVtp2R/s400/sp500.png" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;">Modeled value vs. real value for S&P 500 using DDM.</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div><div><b>S&P 500 Fair Value from an Earnings Perspective</b></div></div><div><br />
</div><div>Earnings provide another way to assess the fair value of an index. By looking at historical growth and current earning yield, we can put a fair price on the index. However, earnings are a secondary measure of what one can get out of an index, since not all earnings flow to the investor as dividends. </div><div><br />
</div><div>While earnings can give us a good feel for how the market is doing, it can't tell us what the companies will do with their earnings nor how they will return them to us investors. Dividends can be cut, but earnings are flakier, given that they're not usually thought as belonging to shareholders, which is a shame, but quite true of most companies.</div><br />
Here are the numbers:<br />
<ol><li><b>All-Time Earnings Growth. </b>Since 1960, S&P 500 earnings have grown an annualized <b>6.81%</b>.</li>
<li><b>10-Year Earnings Growth. </b>For the trailing 10 years, earnings have grown <b>4.07%</b>.</li>
<li><b>Today's Fair Value. </b>Assuming 2011 earnings of 87.84 and applying a P/E multiple of 15, the S&P would be valued at <b>1318</b> today, meaning the market is <b>undervalued</b> by 1.7%.</li>
</ol><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL_bqph4-AIGE0brqu6JLAWxRXzn6sZrwBbfreGab2ubAHNX0aFdJqRAKueSKlmIQg9pUc8ejUh9uWeUc3JqBp3xHi_oMPBal55nVX3t-j6cLJ_iql5GbGhPx-TJbOr-vCuWUTvmNcxcsk/s1600/sp500_earnings.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiL_bqph4-AIGE0brqu6JLAWxRXzn6sZrwBbfreGab2ubAHNX0aFdJqRAKueSKlmIQg9pUc8ejUh9uWeUc3JqBp3xHi_oMPBal55nVX3t-j6cLJ_iql5GbGhPx-TJbOr-vCuWUTvmNcxcsk/s400/sp500_earnings.png" width="400" /></a></div><div style="text-align: center;">Modeled value vs real value for S&P 500 using earnings.</div><div><br />
</div><div><br />
</div><div><b>Conclusion</b></div><div><b><br />
</b></div><div>Whether you choose to believe the DDM is more accurate or the earnings approach is more accurate, both currently indicate that the S&P is anywhere from fairly-valued all to the way to grossly overvalued.</div><div><br />
</div><div>However, this numerical assessment assumes a smooth continuation of history without taking into account all that is going on with the economy, international affairs and expectations of inflation/deflation. Use this to help you make informed decisions, but do not rely entirely on it.</div><div><br />
</div><div>The source of raw data is still <a href="http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm">here</a> (no affiliation with the authors or their institutions).</div><br />
<div><b>Disclosures</b>: I own SPY and many other whole market-tracking indices at the time of writing.</div><div><br />
</div>edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-30471987178512536882011-01-08T05:09:00.000-08:002011-01-08T05:09:00.571-08:00Portfolio Returns for 20102010 is now history and it's time to update my portfolio returns to check on my progress so far.<br />
<br />
In 2010, my US portfolio, which excludes real estate and foreign accounts, returned (including dividends) approximately 11.3%. Comparing with the S&P 500, which returned (including dividends) approximately 15.1%, my returns are not great.<br />
<br />
But my results don't bother me at all, because my portfolio has less risk than the S&P and does better than the S&P in down years. Let's see why. But first, let me define risk.<br />
<br />
<b>Risk</b><br />
<br />
I don't consider risk to be equal to beta or the Sharpe ratio. That's because I don't mind price swings (which increase beta) as long as I believe that <b>in the long run, my buying power will be maintained or increased versus inflation</b>.<br />
<br />
In other words, I consider risk to be the <b>degree with which I may lose principal, either via loss of capital </b>(due to bankruptcy, long-term loses in the underlying companies, etc)<b> or inflation</b>.<br />
<br />
With that, let's dissect my portfolio a bit to understand where I trailed the market and why I should not worry about it.<br />
<br />
<b>Portfolio Drag</b><br />
<br />
Looking at my holdings and the weights they play on my overall allocation, I found out that the main reason for underperformance in 2010 was due to my bias towards large value companies. These are mainly blue chips that pay steadily-growing dividends such as HD, WMT and JNJ.<br />
<br />
Let's look at a couple of those:<br />
<br />
<b>Johnson & Johnson (JNJ)</b>. The BandAid maker opened the year at $64.41 and closed it at $61.55, hence returning -4% in share price appreciation. When adding the 3.2% dividend, JNJ's total return was a negative 0.8%.<br />
<br />
<b>Walmart (WMT).</b> The world's largest retailer opened the year at $53.45 and closed it at merely $54.09, thus returning 1.19% in share price. When adding its dividend of 2.2%, WMT's total return was 3.39%.<br />
<br />
<b>Home Depot (HD).</b> The home-improvement retailer opened the year at $28.93 and closed at $30.21, thus returning 4.4% in share price. Adding its 3.3% dividend, HD's total return was 7.7%.<br />
<br />
Therefore, my over-reliance on these big names caused my portfolio to lag behind the larger market.<br />
<br />
However, as I've mentioned before, I believe my capital will be preserved better if I stay with these stocks for the long-run, as opposed to rotating in and out growth or "story" stocks throughout the year.<br />
<br />
<b>Goals, Restated</b><br />
<br />
For the largest part of my portfolio, my goal is on <i>dividend growth</i> and <i>capital preservation</i>. As such, I believe these companies will continue doing the job. All three have been increasing dividends over the years (HD did pause for a while though, but I believe they will resume soon) and as long as my capital is safe with them, I will reap the benefits of the increasing dividends over time.<br />
<br />
To recap my investing approach: When I invest, I look for companies with a history of sustainable dividend growth. Then I factor in this growth and current share price to determine a price I should pay now that will yield at least 11-12% dividend return over many years, with a margin of safety of between 10 and 15% (depending on various fundamental and historical factors).<br />
<br />
For this reason, I'm quite happy with my returns so far. I will lag the S&P in good years, but I will do better in the down years (like I did in 2008).<br />
<br />
<b>Disclosures: </b>I own every stock mentioned above at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-27506568309450481132011-01-01T09:50:00.000-08:002011-01-01T09:50:17.128-08:00Two High-Yield Funds To Consider In 2011In my quest for high returns, high yield is an obvious candidate. It's also a tricky one for the same reason: if it's so obvious, it probably won't last long or is very risky.<br />
<br />
Nonetheless, a little bit of research can help mitigate these things a bit. Research won't guarantee anything -- nothing is ever guaranteed in investing. But I digress. <br />
<br />
Here are the two funds that may help boost a small part of your portfolio the same way they're boosting a small part of mine (emphasis on small).<br />
<br />
<b>CEF Income Composite (PCEF)</b><br />
<br />
The PowerShares* Closed-End Fund Income Composite (ticker: PCEF) is a fund of closed-end funds seeking high current income. It tries to achieve this by rotating in and out of closed-end funds when they offer a discount to NAV (net asset value) and good risk-reward prospects based on PowerShares proprietary trading technology. It currently yields about 8% and pays out monthly dividends. It has a very steep fee: 1.81% (0.50% for the ETF and the rest as per the underlying funds).<br />
<br />
What I like about this fund is in part derived from what I like about CEFs (Closed-End Funds): they often trade at a discount to NAV and attract less attention than other funds. CEFs are often leveraged and they use long and short strategies to boost performance (and thus increase risk). The subject of closed-end funds is very interesting, but long. I'll reserve the details for another post.<br />
<br />
With PCEF in particular, the yield and the monthly payouts are very nice. I looked at the top 5 funds that compose this ETF and they are reasonable funds with the typical risk profile of CEFs: some leverage (20-30%), a good diversifications of securities and most are not managed payout funds, which in my opinion are horrible funds (managed payout funds are those that make a distribution whether or not they have gains, which means that in lean times they will return capital to shareholders, which is a waste of time). Sadly, out of the top five funds, two are returning capital to shareholders.<br />
<br />
Here is the breakdown of investment of PCEF, according to PowerShares:<br />
<div class="separator" style="clear: both; text-align: center;"></div><br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnHHM-3Zms8NFwHRCb8-Z52oUVGeN5A6zyRxpiEO4OjAeUWPpEFDijBCFScvRc6hqNmerjm5ZmI84dX3y6towOvR6V9NfS8JZk6Rx5javfJJtOnmruoTnZ3htEcYMRiSb7VDTFtZx0MgQY/s1600/pcef.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnHHM-3Zms8NFwHRCb8-Z52oUVGeN5A6zyRxpiEO4OjAeUWPpEFDijBCFScvRc6hqNmerjm5ZmI84dX3y6towOvR6V9NfS8JZk6Rx5javfJJtOnmruoTnZ3htEcYMRiSb7VDTFtZx0MgQY/s320/pcef.jpg" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;">(source: <a href="http://www.invescopowershares.com/products/overview.aspx?ticker=PCEF">PowerShares.com</a>)</div><br />
<b>High Yield Bond Fund (DHY)</b><br />
<br />
The Credit Suisse** High Yield Bond Fund (ticker: DHY) is a simple CEF, not a fund of funds. It invests primarily on US corporate "junk" bonds. These are bonds rated "below investment grade" by the credit agencies. What this means is that these securities are less likely to re-pay their debts than the theoretically safest bond out there: US treasury bonds. In reality, no company wants to default on their bonds, which would imply having to file for bankruptcy protection and possibly liquidate the company. But in practice, this does happen, so the credit rating is important. Just keep in mind that low doesn't mean investors won't get paid. It means investors should demand higher yields.<br />
<br />
DHY offers a monthly "dividend" (treated as regular income at tax time) that yields about 11% annualized. The underlying portfolio has a medium duration -- 4.75 years -- which means that the portfolio is not super sensitive to interest rate changes like, say, a 30-year bond. But it is not immune either.<br />
<br />
The fund is leveraged, about 29% and has an expense rate that is very steep: 2.65%. Typically, I don't invest in funds with high fees, but in the case of CEFs I allow a few exceptions when I can get the funds at a discount.<br />
<br />
This fund in particular is offering about 1-2% discount to NAV right now (it was 1.1% when I bought it). But it recently traded at a large premium (see graph below), which means that an attentive investor may capture outsized returns.<br />
<br />
<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRF4ImfBdn8r7Z-kOSuD6cOgc7fJ33-__SYr4HaG1_DsrPIHDV7ML1C9byBEEwzrQ2MH4oYPGreCqHx1iRKFU5b2qSXIkqNwl4tl7pJxlOSPf9Khd07t69Iu4R4PuLceajXABHQIeoiJk-/s1600/premium_discount_dhy.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRF4ImfBdn8r7Z-kOSuD6cOgc7fJ33-__SYr4HaG1_DsrPIHDV7ML1C9byBEEwzrQ2MH4oYPGreCqHx1iRKFU5b2qSXIkqNwl4tl7pJxlOSPf9Khd07t69Iu4R4PuLceajXABHQIeoiJk-/s640/premium_discount_dhy.jpg" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;">(source: <a href="http://www.cefconnect.com/Details/Summary.aspx?ticker=DHY">CEFConnect.com</a>)</div><div class="separator" style="clear: both; text-align: center;"><br />
</div>It has, however, traded at significant discounts to NAV in the previous 3 years, which means this is a short-term play only.<br />
<br />
<b>Conclusion</b><br />
<br />
I consider both of these investments to deviate from my value strategy. First, they are expensive and leveraged and second, at least DHY is a short-term investment only given its long history of premium/discount. So, consider yourself warned. However, the yields are decent and given that inflation is pretty much staying under wraps for a short while (at least until the Fed hits again with QE3), these two funds can offer a nice current yield.<br />
<br />
Have a profitable 2011 everyone.<br />
<br />
<b>Disclosures:</b> I own both of these funds at the time of writing.<br />
<br />
* I'm not affiliated with PowerShares in anyway. Moreover, I usually don't endorse their dynamic way of portfolio construction and higher fees. This is one of the exceptions.<br />
<br />
** I'm also not affiliated with Credit Suisse either.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-9860972494143587532010-11-04T17:10:00.000-07:002010-11-04T17:29:29.413-07:00The Problem With Investing in High-TechAs a high-tech engineer and a value investor, I'm often caught in the middle of what might be seen as a conflict between the two: should value investors shun high-tech?<br />
<br />
Hardcore value investors often quote Warren Buffett's reasons for not investing in technology companies: Buffett admits he does not understand the world of high technology well enough to be sure of which companies will still dominate their core area in 10, 20, or even 30 years from now. Despite being friends with and admirer of Bill Gates, Buffett has never invested in Microsoft nor any other high-tech company. The closest he got to high-tech was investing in Chinese fuel-cell maker BYD.<br />
<br />
<b>The Case in Favor of High-Tech</b><br />
<br />
Predicting dominant position in 20 or 30 years is not really what value investing is all about. There's plenty of money to be made by companies that don't fully dominate their markets. After all, not every company can be a dominant player in its market, and there are way more profitable companies than markets out there.<br />
<br />
Moreover, being the dominant company in the next 10 to 30 years is probably asking too much of tech, where many of its fields did not even exist 5 or 10 years ago. Fortunes can be made in a short span of time in technology, since consumer preferences change quickly, specially for online services (think social networking, search, micro-blogging platforms, etc).<br />
<br />
Also, high-tech is where a lot of attention is. And following attention, many times is reward. And attention should be there in case of tech. With simple changes millions of lives can be changed (typically for the better, but not always). <br />
<br />
Think of how people found addresses until recently: physical maps. Then printed maps online, GPS devices and now phones and watches can guide you from Timbuktu to Kathmandu. <br />
<br />
Or how many expecting mothers couldn't see if their babies had any problems before they were born because ultrasound imaging technology didn't exist.<br />
<br />
<b>The Case Against High-Tech</b><br />
<br />
That said, there are real criticisms for investing in tech that are <b>not</b> related to the difficulty in predicting dominant positions in the future.<br />
<br />
The problems are many.<br />
<br />
<b>Need for constant innovation.</b> How can one ever be sure that the next product to come out of Apple will be a blockbuster? Motorola all but disappeared from the market after its success with the Razor phone. One day the Apple's iPhone is all the rage, the next day, Google's Android is outselling it. High-tech companies need to invest a lot of effort into innovative new products to keep people buying new ones. And that entails spending money on research and development and also retaining talented employees. Compare Apple or Nokia with Coca-cola and WD-40. Which ones haven't changed their product in 20 years?<br />
<br />
<b>High-tech companies are typically young and without a solid track record.</b> That's just the nature of their businesses. While this is not true for some more mature companies such as Microsoft and Intel, others are still not exactly on Value Line's 10-year index either.<br />
<br />
<b>Most tech companies don't pay dividends.</b> And the few that do typically don't pay meaningful dividends. They keep the cash around for making deals, acquiring smaller upcoming companies and defending their positions, which can typically be attacked very quickly by faster, more nimble smaller competitors.<br />
<br />
<b>Repeat business.</b> While not all tech companies are single-sale business, some are. How many times can someone buy a new video game, laptop, cellphone, etc? Having repeat customers can often yield superb results. Think Starbucks coffees and Gillette razors. Warren Buffett once said about his investment in Gillette that he takes comfort in knowing that 2.5 billion males will be shaving in the morning.<br />
<br />
<b>Too much attention.</b> As discussed before tech draws a lot of attention and it's harder to find inefficiencies and mispriced securities when everyone is dissecting these companies. Value investing has a lot to do with discovering hidden gems in balance sheets.<br />
<br />
<b>Conclusion</b><br />
<br />
All told, I love innovation and the occasional high-tech gadget. And I do reserve a small pool of money to invest in promising new technologies and solid high-tech companies when they fit my investing criteria.<br />
<br />
But when it comes to investing the bulk of my money, it goes into companies that are simple, have been established for long, draw less attention, don't require a lot of innovation to maintain and, of course, pay out lots of dividends.<br />
<br />
Disclosures: I own shares of PG, KO, GOOG at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-30896523114786260042010-10-17T22:00:00.000-07:002010-10-17T22:47:02.924-07:00Starting Your Own BusinessI want to apologize. It's been quite a while since I last wrote here. You'll know why in a moment. But first, I want to recap what I consider to be "the" formula for getting financially independent.<br />
<br />
<b>The Get Rich Constantly Formula </b><br />
<br />
Long time readers of this blog will know what I consider to be the formula to get rich. It boils down to constantly building <i>cash flow</i> that gets reinvested into more cash-flow-generating investments.<br />
<br />
To get there, the formula goes like this:<br />
<ol><li>First, <a href="http://www.epicinvestor.com/2009/08/best-investment-in-yourself.html">invest in yourself</a> with whatever means you have.</li>
<li>Get a job where you can <a href="http://www.epicinvestor.com/2010/05/return-on-salary.html">get raises</a> often.</li>
<li>Save money and invest. Focus investments on...</li>
<li><a href="http://www.epicinvestor.com/search/label/dividends">Dividend-paying</a> stocks.</li>
<li><a href="http://www.epicinvestor.com/search/label/search/label/real%20estate">Real estate</a>, for the <a href="http://www.epicinvestor.com/2009/08/basics-of-investment-in-real-estate.html">rent</a> and proceeds from sales by <a href="http://www.epicinvestor.com/2010/03/final-update-on-real-estate-investment.html">building it yourself</a>.</li>
<li>A small part should be invested in a mix of bonds (<a href="http://www.epicinvestor.com/2009/11/two-sides-of-muni-bonds-part-i.html">municipals</a> or <a href="http://www.epicinvestor.com/2009/04/why-corporate-bonds-are-still-expensive_30.html">corporate</a> preferred), <a href="http://www.epicinvestor.com/2010/02/bracing-for-inflation.html">commodities</a> (<a href="http://www.epicinvestor.com/2009/11/place-for-shiny-metal-in-value.html">gold</a>, oil, agricultural), <a href="http://www.epicinvestor.com/2010/01/notes-on-foreign-exchange.html">foreign currencies</a>, and to a lesser extend speculative capital gains opportunities.</li>
<li><a href="http://www.epicinvestor.com/2010/02/beat-warren-buffett.html">Private equity</a> (angel investing, small startups).</li>
<li><a href="http://www.epicinvestor.com/2009/05/reaching-castle-island.html">Building a business</a>.</li>
</ol><div>The last one, Building a Business, I have alluded to a few times, but haven't discussed in detail. So, today I'd like to focus on it.</div><div><br />
</div><div><b>Starting a Business</b></div><div><b><br />
</b></div><div>Starting your own business is a big decision. One that needs to be fully thought-out before embarking on the entrepreneurial ship.<br />
<br />
</div><div>On the other hand, a business, if built right, can help one grow cash flow. The idea is to leverage resources -- money, hard assets, other people's time and effort -- to solve a problem that people are willing to pay money for. With the proceeds from sales (of service or goods) one reinvests in the business to make it grow to its full potential. As an entity, a business lives forever and if profitable, that theoretically infinite stream of income can generate salary for many as well as dividend to shareholders (you, the business owner).<br />
<br />
</div><div><b>Fallacies of Starting a Business</b></div><div><br />
Note that I suggest starting a business as yet another source of cash flow, similar to buying dividend-paying stocks. The idea is to leverage "the system", which is the sum of assets (patents, machinery), employees, and a plan (the business plan), to generate this cash flow.<br />
<br />
</div><div>But many people confuse working <i>on</i><b style="font-style: italic;"> </b>your business with working <i>in</i> your business. One's goal should <b>not </b>be to create a new job for oneself. That you already did on step 2.<br />
</div><br />
Instead, one should focus on working <i>on</i> the business. This means building a rock-solid plan that is so simple anyone could execute. Why? Warren Buffett once explained why: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will".<br />
<br />
Hence, your goal should be to come up with a simple system that can be applied repeatedly to generate money as a business structure. Of course, this is not to say that there is no work involved <i>in</i> the business at first. If it were that easy, anyone would do it. The goal though, is to make it simple to operate and free yourself to work <i>on</i> it -- that is, generating improvements, new ideas, closing deals -- instead of doing all the jobs that can be outsourced like accounting, paper filing, greeting customers (if that's not what you're good at) or talking to suppliers (unless you're a good negotiator and enjoy doing that).<br />
<br />
Take, for example, a restaurant. Many people can cook. Many people can cook well. But cooking well doesn't mean being able to have a restaurant. In fact, cooking well can easily <i>get in the way</i> of building a great restaurant. Why? Because as a restaurant, one needs to be able to provide fresh and tasty food in a short amount of time to many people. Even if you have a small restaurant that only serves four to five tables at a time, you still need to cook their meals within 15 to 25 minutes. No one will wait an hour until you roast that pork and no one will want yesterday's pork either.<br />
<br />
In this case, cooking like your grandma used to may be a detriment to the business. The trick, so I'm told by a friend who owns a great restaurant, is to develop recipes that are fresh, delicious and can be prepared relatively quickly in a consistent and repeatable manner. Pre-cooking that pork will not work unless you know how to keep it fresh and moist and ready to serve while your customers wait.<br />
<br />
<b>My New Business</b><br />
<br />
Okay, so you got the message. You may still be wondering why it took me so long to post something new here.<br />
<br />
The reason is that I've been busy working on one of my passions outside of investing: nutrition and fitness. And as an investor and entrepreneur I decided to follow my own formula and turn this passion from a hobby into a business.<br />
<br />
Today, I'm proud to present my new venture: <a href="http://entropydrink.com/">Entropy Energy Replenishment Drink</a>. Entropy is an anti-aging drink that helps the body's own mechanisms turn fat into mental focus (these statements have not been evaluated by the FDA. Entropy is not intended to treat, cure, prevent or diagnose any disease). Entropy was developed after many years of experimentation and studies. You should <a href="https://entropydrink.com/products/entropyoriginal">try it out</a>. To boot, you get a 10% discount by using coupon code EPINV2010X.<br />
<br />
Besides creating it out of passion, I partially did this to learn the steps and later be able to tell others about it. With this new business, I've now executed on all steps of my Get Rich Constantly formula above.<br />
<br />
So now you know why the long absence. Next time, I will discuss how I put the company together and how I plan on working <i>on </i>it instead of <i>in</i> it.<br />
<br />
My goal is to slow cook that meal once and then find ways to make it repeatable in under 20 minutes. In the beverage world, it takes a long time to come up with a good formula and flavor, but once that's done, you as a consumer get to drink it right away. And that's how it should be.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-25084173473920964682010-08-04T22:03:00.000-07:002010-08-04T22:03:25.996-07:00Investing in Real Estate in Emerging MarketsWhile the economy in the US and Europe continue to melt, savvy investors are turning their eyes to "alternative" investments, such as gold, venture capital, and foreign real estate. Today, I want to talk about one of these alternative investments, which readers of this blog are now familiar with: foreign real estate.<br />
<br />
Every emerging country is different and the one I'm following more closely is Brazil. Just watching the stock prices of Brazilian home builders -- many of whom IPOed or raised more money in the last couple of years such as <a href="http://www.google.com/finance?q=NYSE:GFA">Gafisa</a>, <a href="http://www.bloomberg.com/apps/quote?ticker=MILS3:BS">Mills</a> and <a href="http://www.google.com/finance?q=PINK:RSRZY">Rossi</a> -- and their underlying fundamentals, it becomes apparent that they're making money, and a lot of it.<br />
<br />
But there is no need to watch the stock market for this if one is attuned to what's happening with the real estate market. Brazil has a strong economy where the lower class is getting richer, thanks to a solid economic policy in the last couple of years and a myriad of government subsidies and protectionist laws (the latter two of which, by the way, have their many downsides in the long run, but that's another story).<br />
<br />
Good deals don't last long, but they're happening everywhere. I'm aware of new high-end beach houses in gated communities in the south, commercial buildings in the financial town of Sao Paulo all the way to low-end popular apartments in Rio de Janeiro, right where the World Cup 2014 and the summer Olympic games 2016 will take place. <br />
<br />
Out of these, the popular apartments in Rio caught my eye. One particular set of buildings is planned for 2012. The builder is offering very low financing, according to government rules to incentivise the low middle-class to buy their first home, and financing is eligible for such government credits. It's as sweet a deal as the cash for clunkers was in the US. These are modest two-bedroom, one bath small units about 10 minutes from the beach, right where the bulk of the Olympic games are supposed to take place.<br />
<br />
The risks:<br />
1. Too many investors and speculators driving up the price to the point they can only resell to other investors and not to their target audience. That's the basis to form a bubble.<br />
2. Overbuilding. This shouldn't be a problem for at least the next two years or more, since Brazil has a shortage of homes and pent-up demand. But the market is local and each area has a given capacity for building and demand that are unique. Those with first-hand knowledge of their region will have the upper hand.<br />
<br />
The benefits:<br />
1. The upside is tremendous. Some investments are returning anywhere from 20 to 60% a year.<br />
2. In the worst case, investors can rent their units. Demand exists.<br />
3. Qualifying for credit in Brazil is tough, but when buyers are approved, they really are creditworthy and chances of investors getting the short end of the stick are low.<br />
<br />
Unfortunately, none of the opportunities I mentioned above are available anymore. Good deals don't last long. But others will come up. Readers interested in finding out about upcoming deals and similar opportunities should get in contact through the comment section below.<br />
<br />
Disclaimers: No shares in companies mentioned. I own real estate in Brazil.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-38878083017009972532010-07-24T04:52:00.000-07:002010-07-24T04:52:33.143-07:00Sources of Personal Income<i>This article originally appeared on <a href="http://www.thediv-net.com/2010/07/sources-of-personal-income.html">The Div-Net</a> on 2010-07-13.</i><br />
<br />
Last time we talked about <a href="http://www.epicinvestor.com/2009/08/source-of-income-where-your-companys.html">sources of income</a> it was in the context of where companies get their income from. We discussed one specific company and how healthy and durable that source was.<br />
<br />
Today, I want to talk about your personal source of income. Like companies, you too probably want to make sure you have a diversified stream of income from reliable and durable sources. For most people, that source of income consists of salary, savings accounts, stocks and bonds and perhaps even a rental property. If you have any two of these you are already better than most people on this planet in terms of income.<br />
<br />
But chances are you're a reader of this blog because you would like to have more income. And we do cover a lot of ground regarding stocks, dividends and even real estate. But the investment world is not limited to those and perhaps you should consider adding other income streams flowing directly into your pocket.<br />
<br />
Let's take a look at some of the possibilities.<br />
<br />
<b>Salary</b><br />
<br />
Adding more salary to your income stream is probably something you're already doing now. Getting a raise or a bonus is what you work so hard for. We even discussed the topic of <a href="http://www.epicinvestor.com/2010/05/return-on-salary.html">return on salary</a> previously. But once you get it, chances are that to get another one you have to work even harder or longer. And at some point this plan doesn't scale anymore -- it can't continue to grow and grow.<br />
<br />
So, what should you do? Get another job? Well, that's always a possibility. One can work part-time or on weekends or after-hours or double shift. But again, this only goes so far.<br />
<br />
Is all lost then? Not at all. Keep working on (and in) your job but start to look at other possibilities too. Have you considered...<br />
<br />
<b>Angel investing</b><br />
<br />
We discussed that by looking to invest on small or startup companies that other investors cannot invest on (because they lack the personal connections), one can even <a href="http://www.epicinvestor.com/2010/02/beat-warren-buffett.html">beat Warren Buffett at his own game</a> as well as big-shot venture capitalists who are looking for the next Google and will probably miss the next corner store, butcher shop or flower stand. <br />
<br />
If you keep your eyes peeled and your ears tuned, perhaps you could even invest in the next Walmart before the big shots. But if not that, investing in your next neighborhood bar or local gas station might be a start and a solid plan, depending on your capital and expected return.<br />
<br />
<b>Investment clubs</b><br />
<br />
Investment clubs are nothing new. But they can be overlooked by many investors because investing often feels like it should be a solitary activity. Nonsense! Investment clubs can actually scale better than solo investing because by pooling together people with similar goals, it's easier to benefit from each other's knowledge and time to analyze companies and find new opportunities. <br />
<br />
Often times, investment clubs that are flexible enough may even want to pool their resources together to invest in private companies, do some angel investing or move into real estate.<br />
<br />
The benefit is clear: leverage each other's time, money and all get to share the benefit of new ideas from others who may think alike but do so independently.<br />
<br />
<b>Start your own business</b><br />
<br />
This is also a topic I've alluded to before but have yet to discuss further. Opening up your own business -- whether part-time or home-based -- can be easier and safer than one imagines. <br />
<br />
First, there are many businesses that don't require huge upfront investments nor huge effort or high cost to operate. And while one may think these are easy to replicate and thus should return close to zero to their owners, think again. The trick is to do something you love or have a strong interest in or something you'd love to have but somehow is not available yet or is not easy to get in your area. Or you just need to do it better than the competition. In many cases, you don't need to do all of these, so long as you have the passion or interest.<br />
<br />
Let's just consider a few examples that are close to me. I'm sure you can think of a hundred other example of small businesses that you could create easily and that are meaningful to you.<br />
<br />
<b>Growing escargot.</b> Yeah, the slimy snails that some people love to eat (especially the french). Turns out my dad used to create escargot in our backyard when I was little. He had plans to sell them, but he never developed the business around it and chose to eat them all instead. Growing escargot is easy -- they reproduce faster than rabbits -- and extremely cheap -- they eat lettuce and other greens. If you have even a medium-sized backyard, you can build a little shed and grow escargot in simple to build boxes. Just make sure you have all the necessary sanitary and business permits and you could sell them fresh or frozen to your local specialty store, restaurants or even grocery shop chains.<br />
<br />
<b>Pizza dough.</b> Growing up, I remember us buying pre-made pizza dough from a friend's neighbor. They made the dough at home and packaged them in four or fives and sold them to order. If I were to do this today I'd probably offer multiple options such as whole wheat, yeast-free, gluten-free, special multi-grains, vegan. All organic and natural and 100% preservative-free.<br />
<br />
<b>The pill.</b> Yes, believe it or not I have a friend whose grandparents used to make women's anticonceptional pills at home. They had all the permits and licenses and sold them under their own brand name. They never felt much competition from the big brands because they had their local niche market. I would probably be more careful on this one given the risks, but with proper knowledge and insurance this just comes to show that one can get as entrepreneurial as one wants. The sky is the limit.<br />
<br />
<b>Homemade jewelry.</b> I actually know two people (not related to each other in anyway) who used to make earrings, rings, pendants and other jewelry at home or at small local shops from cheap metals or semi-precious ones, with semi-precious stones or other good-looking materials. In one case, the person would sell everything she could make to big-name retailers who would sell under their exotic or one-of-a-kind departments.<br />
<br />
There. Four small but very real ventures created and run by people like you and me, most of which had a job and a family to attend to.<br />
<br />
Know how to cook? Love dogs? Can build children's toys out of stuff in your backyard? Can teach piano lessons over the internet? What are you waiting for?<br />
<br />
<i>This article was written by <a href="http://epicinvestor.com">EPIC INVESTOR</a>.</i>edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0tag:blogger.com,1999:blog-3104840428657680638.post-70704239872149589562010-07-10T16:12:00.000-07:002010-07-10T19:45:19.367-07:00Building a Strong Dividend Growth PortfolioWhen it comes to indexing I usually have two views: it's a great tool if one doesn't have the time or inclination to analyze stocks, but it's also a wide catch-all net that brings in the tuna along with the catfish.<br />
<br />
So, what should a time-constrained investor do if one doesn't want to invest in the entire market or a sector at once and get the chaff along with the wheat? Answer: Buy the strongest dividend payers from selected industries. And to find out who these dividend payers are one can do their own detailed analysis or read this blog.<br />
<br />
<b>Selected pharmaceutical index</b><br />
<br />
The list below is a <b>non-diversified</b> list of strong pharmaceutical companies that have a history of paying dividends. Not all are cheap, but the point of indexing a sector is to get the benefit of the industry as a whole without having to guess or investigate which company has the best pipeline, the best strategy or the best cash position to go after acquisitions. <br />
<br />
If one believes, like I do, in the future of the pharmaceutical industry -- which is home to great companies, many international, and robust dividend payers -- then buying the strongest companies is a wise strategy.<br />
<br />
<b>Dividend yield-based weighting</b><br />
<br />
Should one buy an equal-weighted index of these companies? Well, first, if by equal-weight one means same number of <i>shares</i>, the answer is no. Share price is too dependent on number of shares, which is arbitrary and as such this index would be arbitrary as well. If one buys an equal number of <i>dollars</i> per company, that's a more suitable strategy but it would still assume that all companies are equivalent, which is not a good assumption.<br />
<br />
A better way to index is to use a dividend yield-based indexing: buy more dollars worth of companies with higher dividend yields. This approach has two benefits: 1) one buys more of the higher-dividend companies which in turn boosts the yield of the portfolio and 2) higher yielding companies in the same industry are typically considered cheaper than peers since the yield is higher because the price is lower, so one ends up buying more of the cheaper companies.<br />
<br />
However, this pure yield-based approach also has drawbacks: 1) high yielding companies can be cheaper for a reason, and a thorough investigation of these reasons defeats the purpose of this lazy indexing approach; and 2) high current yields could mean the companies have little growth ahead of them and as such the dividend may not keep up with inflation or growth elsewhere.<br />
<br />
So, what's the alternative?<br />
<br />
<b>Dividend growth-based index</b><br />
<br />
Factoring in current dividend yield as well as dividend growth should provide a much better index because current yield plus dividend growth equals total dividend returns. So, this indexing method is equivalent to saying "buy more of the companies that will return more money to you in form of dividends". <br />
<br />
Of course, dividend growth involves making predictions about future dividends. However, armed with fundamental analysis and a long history of dividend growth one can make informed assumptions about future growth and thus minimize the risk of making a bad call.<br />
<br />
With this, here's my <b>dividend growth-based index of pharmaceutical companies</b> based on 10-year historical growth rates and current yield and their respective weights.<br />
<br />
<table FRAME=VOID CELLSPACING=0 COLS=6 RULES="all" BORDER=0 CELLPADDING=3><colgroup><col WIDTH=51><col WIDTH=119><col WIDTH=75><col WIDTH=78><col WIDTH=49><col WIDTH=48></COLGROUP> <tbody>
<tr> <td WIDTH=51 HEIGHT=18 ALIGN=CENTER>Ticker</TD> <td WIDTH=119 ALIGN=CENTER>10-yr div. growth</TD> <td WIDTH=75 ALIGN=CENTER>Curr yield</TD> <td WIDTH=78 ALIGN=CENTER>Curr Price</TD> <td WIDTH=49 ALIGN=CENTER>P/E</TD> <td WIDTH=48 ALIGN=CENTER>Weight</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>NVS</TD> <td ALIGN=RIGHT SDVAL="0.1374" SDNUM="1033;0;0.00%">13.74%</TD> <td ALIGN=RIGHT SDVAL="0.0393" SDNUM="1033;0;0.00%">3.93%</TD> <td ALIGN=RIGHT SDVAL="49.55" SDNUM="1033;">49.55</TD> <td ALIGN=RIGHT SDVAL="12.07" SDNUM="1033;">12.07</TD> <td ALIGN=RIGHT SDVAL="2.36" SDNUM="1033;">2.36</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>JNJ</TD> <td ALIGN=RIGHT SDVAL="0.1284" SDNUM="1033;0;0.00%">12.84%</TD> <td ALIGN=RIGHT SDVAL="0.0357" SDNUM="1033;0;0.00%">3.57%</TD> <td ALIGN=RIGHT SDVAL="60.54" SDNUM="1033;">60.54</TD> <td ALIGN=RIGHT SDVAL="12.72" SDNUM="1033;">12.72</TD> <td ALIGN=RIGHT SDVAL="2.19" SDNUM="1033;">2.19</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>LLY</TD> <td ALIGN=RIGHT SDVAL="0.0786" SDNUM="1033;0;0.00%">7.86%</TD> <td ALIGN=RIGHT SDVAL="0.0557" SDNUM="1033;0;0.00%">5.57%</TD> <td ALIGN=RIGHT SDVAL="35.17" SDNUM="1033;">35.17</TD> <td ALIGN=RIGHT SDVAL="9.07" SDNUM="1033;">9.07</TD> <td ALIGN=RIGHT SDVAL="1.8" SDNUM="1033;">1.8</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>ABT</TD> <td ALIGN=RIGHT SDVAL="0.0926" SDNUM="1033;0;0.00%">9.26%</TD> <td ALIGN=RIGHT SDVAL="0.0366" SDNUM="1033;0;0.00%">3.66%</TD> <td ALIGN=RIGHT SDVAL="48.03" SDNUM="1033;">48.03</TD> <td ALIGN=RIGHT SDVAL="14.08" SDNUM="1033;">14.08</TD> <td ALIGN=RIGHT SDVAL="1.73" SDNUM="1033;">1.73</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>PFE</TD> <td ALIGN=RIGHT SDVAL="0.0787" SDNUM="1033;0;0.00%">7.87%</TD> <td ALIGN=RIGHT SDVAL="0.0487" SDNUM="1033;0;0.00%">4.87%</TD> <td ALIGN=RIGHT SDVAL="14.77" SDNUM="1033;">14.77</TD> <td ALIGN=RIGHT SDVAL="11.89" SDNUM="1033;">11.89</TD> <td ALIGN=RIGHT SDVAL="1.7" SDNUM="1033;">1.7</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>GSK</TD> <td ALIGN=RIGHT SDVAL="0.0553" SDNUM="1033;0;0.00%">5.53%</TD> <td ALIGN=RIGHT SDVAL="0.0528" SDNUM="1033;0;0.00%">5.28%</TD> <td ALIGN=RIGHT SDVAL="34.84" SDNUM="1033;">34.84</TD> <td ALIGN=RIGHT SDVAL="10.2" SDNUM="1033;">10.2</TD> <td ALIGN=RIGHT SDVAL="1.45" SDNUM="1033;">1.45</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>BMY</TD> <td ALIGN=RIGHT SDVAL="0.0373" SDNUM="1033;0;0.00%">3.73%</TD> <td ALIGN=RIGHT SDVAL="0.05" SDNUM="1033;0;0.00%">5.00%</TD> <td ALIGN=RIGHT SDVAL="25.6" SDNUM="1033;">25.6</TD> <td ALIGN=RIGHT SDVAL="14.71" SDNUM="1033;">14.71</TD> <td ALIGN=RIGHT SDVAL="1.17" SDNUM="1033;">1.17</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>MRK</TD> <td ALIGN=RIGHT SDVAL="0.0329" SDNUM="1033;0;0.00%">3.29%</TD> <td ALIGN=RIGHT SDVAL="0.0419" SDNUM="1033;0;0.00%">4.19%</TD> <td ALIGN=RIGHT SDVAL="36.3" SDNUM="1033;">36.3</TD> <td ALIGN=RIGHT SDVAL="7.57" SDNUM="1033;">7.57</TD> <td ALIGN=RIGHT SDVAL="1" SDNUM="1033;">1</TD> </TR>
</TBODY> </TABLE><b>Putting it all together</b><br />
<br />
The "weight" column in the table above indicates a dollar multiplier for each ticker. That means one should buy 2.36 times more Novartis (NVS) than Merck (MRK). <br />
<br />
If one has a budget of $10,000 to allocate to this index, and rounding the number of shares to their nearest whole number, one should buy $1783.8 (36 shares) worth of NVS and only $762.3 (21 shares) of MRK.<br />
<br />
The final portfolio worth approximately $10,000 in today's prices would look like this:<br />
<br />
<table FRAME=VOID CELLSPACING=0 COLS=3 RULES="all" BORDER=0><colgroup><col WIDTH=94><col WIDTH=94><col WIDTH=94></COLGROUP> <tbody>
<tr> <td WIDTH=94 HEIGHT=18 ALIGN=LEFT><br />
</TD> <td WIDTH=94 ALIGN=center>Shares</TD> <td WIDTH=94 ALIGN=center>Cost $</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>NVS</TD> <td ALIGN=RIGHT SDVAL="36" SDNUM="1033;">36</TD> <td ALIGN=RIGHT SDVAL="1783" SDNUM="1033;">1783</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>JNJ</TD> <td ALIGN=RIGHT SDVAL="27" SDNUM="1033;">27</TD> <td ALIGN=RIGHT SDVAL="1634" SDNUM="1033;">1634</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>LLY</TD> <td ALIGN=RIGHT SDVAL="38" SDNUM="1033;">38</TD> <td ALIGN=RIGHT SDVAL="1336" SDNUM="1033;">1336</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>ABT</TD> <td ALIGN=RIGHT SDVAL="27" SDNUM="1033;">27</TD> <td ALIGN=RIGHT SDVAL="1296" SDNUM="1033;">1296</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>PFE</TD> <td ALIGN=RIGHT SDVAL="86" SDNUM="1033;">86</TD> <td ALIGN=RIGHT SDVAL="1270" SDNUM="1033;">1270</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>GSK</TD> <td ALIGN=RIGHT SDVAL="31" SDNUM="1033;">31</TD> <td ALIGN=RIGHT SDVAL="1080" SDNUM="1033;">1080</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>BMY</TD> <td ALIGN=RIGHT SDVAL="34" SDNUM="1033;">34</TD> <td ALIGN=RIGHT SDVAL="870" SDNUM="1033;">870</TD> </TR>
<tr> <td HEIGHT=18 ALIGN=LEFT>MRK</TD> <td ALIGN=RIGHT SDVAL="21" SDNUM="1033;">21</TD> <td ALIGN=RIGHT SDVAL="762" SDNUM="1033;">762</TD> </TR>
<tr><td></td> <td alight="right">Total</td><td align="right">$10,031</td></tr>
</TBODY> </TABLE>Of course, one should only follow this approach if one doesn't have time to do a thorough due-diligence fundamental analysis and after consulting with their financial advisor.<br />
<br />
Disclosures: Long JNJ at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com2tag:blogger.com,1999:blog-3104840428657680638.post-6363089453449004452010-07-04T09:03:00.000-07:002010-07-04T09:03:00.017-07:00Preparing a Shopping List for Bad Times AheadSeveral pundits <a href="http://www.hussmanfunds.com/wmc/wmc100628.htm">online</a> and on <a href="http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7862380/Warning-signals-of-a-double-dip-recession-flash-brightly-across-the-world.html">mainstream media</a> are calling for another "leg down" or plain <a href="http://www.nytimes.com/2010/06/28/opinion/28krugman.html?_r=1&ref=paulkrugman">depression</a> in the markets soon. <br />
<br />
I don't react to predictions, forecasts, star readers or fortune tellers. I will see when it happens. However, it's always good to be prepared for anything -- up markets, down markets, neutral markets -- at all times. As such, I have my shopping list ready in case the forecasters turn out to be right.<br />
<br />
Because it's a long shopping list and it's mostly still far from my entry prices, I will just pick those that have been approaching my entry price recently. Many of these are names I already own and am looking to buy more of. Some are new.<br />
<br />
<b>Shopping list for the next "leg down"</b><br />
<br />
PAYX (Paychex) - Buy range: $25-21, Current: $25.47<br />
COP (ConocoPhillips) - $47-38, Current: $48.82<br />
PFE (Pfizer) - $13-11, Current: $14.14<br />
RDS.A (Shell) - $48-42, Current: $50.01<br />
CINF (Cincinnati Financial) - $23-21, Current: $25.53 <br />
ETR (Entergy) - $75-60, Current: $70.70<br />
<br />
Note 1: These are all dividend payers that have been around for a while and paying dividends for a while. <br />
<br />
Note 2: Entry prices were based on my model of <a href="http://www.epicinvestor.com/2009/11/dividend-discount-model-in-action-lly.html">discounted dividend analysis</a> and a qualitative assessment of earning power. The entry prices typically entail a total return from dividend plus dividend appreciation to 11 to 12%. Any share price growth is extra icing on the cake (and was not factored in the price).<br />
<br />
Note 3: There are two oil companies on the list. This is a good thing, because when governments in developed countries start to print money seriously, oil, gas and tanker and pipeline companies will benefit. It's best to own the companies behind these commodities than own the commodities outright for various reasons that are beyond this article's point right now.<br />
<br />
Note 4: I started buying Shell a little ahead of my entry price and am looking into buying more significantly when it does enter the buy range.<br />
<br />
Note 5: I haven't bought Entergy yet because I haven't had time to investigate their price drop and read their latest 10Qs. As soon as I find out they're still in as good a shape as when I first priced my buy range, I will pull the trigger.<br />
<br />
Disclosures: I own shares of PAYX and RDS.A at the time of writing.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com3tag:blogger.com,1999:blog-3104840428657680638.post-75872169966386371842010-05-07T22:42:00.000-07:002010-05-07T22:42:29.647-07:00Return on salaryIn this blog, we've been talking about investing and getting a return on your investment. However, as most readers tell me, besides being investors, they are also salaried workers. Do the same principles of investment apply to salaried workers? But of course.<br />
<br />
One should look objectively at compensation, with an investor's eye to it. The concept of return on salary should be routinely checked to make sure one is not working in vain.<br />
<br />
Return on salary is simply the annualized rate of change in total compensation. For example, if one gets a pay raise on year 2 of 10% and then again on year 3, and no more raises until year 5, then over five years, this person has had a return on salary of about 3.8% (assuming salary of X at year 1, this person ends up with a salary of 1.21X on year 5 because a 10% raise applied twice is 1.1 x 1.1 = 1.21 and that annualized over five years is equivalent to 1.21^(1/5) = 3.8%).<br />
<br />
So, this fellow would be in practice a little ahead of inflation, assuming inflation is 3% per year -- but not much more than that.<br />
<br />
On the other hand, someone who gets a 20% raise twice would fare much better than inflation at the end of the same five-year period: 7.5% per year.<br />
<br />
Of course, we are not advocating that people focus on a salaried job to get rich. Very few people manage to do that. But if that's your biggest source of income, then watching your return on salary every so often is important to make sure you're not losing to inflation or effectively staying behind on pay given your added responsibilities as you progress in the job.<br />
<br />
If you're only getting raises that match inflation or you're only getting promoted every so many years, you may effectively be making no progress on the financial aspect of the job.edpinhttp://www.blogger.com/profile/17074080596544230028noreply@blogger.com0