Archive for the 'Finance' Category

Nov42008

Tuesday Top 5: 5 Options in Our Wild and Crazy Times

These are indeed some wild and crazy times we are living in - especially if you are in the real estate or financial fields. Utter chaos and turmoil rule the day.  Part of me wishes John Wayne would ride in on horseback, just for effect.

As I keep my ear to the ground, this is what I am hearing:

Should I buy stocks or go into cash?

Should we buy a house or keep renting?

Will I have my job next week/month/quarter?

Will I ever be able to retire?

Add to these a heavy dose of uncertainty and you have a perfect recipe for mass amounts of people looking for their next move.

In the spirit of fun and learning, I thought that I would offer up a few nuggets of what I think five clear cut options you have as an entrepreneur/investor are right now.

1. Run for the hills

You could hole up in a cave, mount some machine gun nests and wait for the rioting and looting to ensue.  Usually, if you want to make money this is not the best idea.

2. Yearn for the past

Most of the other people that aren’t running for this hills or participating in the ostrich look-alike contest are fondly reminiscing about the days of yore.  Things were good for a long time for people in many different industries.  Mortgage brokers used to be able to almost literally print money.  Blank checks were handed out to financial planners and stock brokers (in the forms of commissions and fees).   Auto companies used to be able to piston SUV’s and pickup trucks off of assembly lines and watch their wallets expand.

While this was all well and good, it is now part of the past.  Evolution and change are the rule of the day in business.  Well, they always were, it was just a matter of it being practiced.

3. Learn a lesson or two

There  are plenty of things we can learn from what has happened in the credit, stock and real estate markets in recent months and the events that are currently taking place.

“Those that cannot remember the past are condemned to repeat it.”  - George Santayana

For the entrepreneurs and investors still standing, this quote should burn into our mind that we should never get so far ahead of ourselves as to think that we are invincible.  I knew more than a few companies and individuals who thought the music was never going to stop (just like in 2000, when dot-coms became dot-bombs).

Life is a constant shakeup of learning and doing.

4. Tackle New Opportunities

Since the apocalypse is not yet upon us (despite Sports Illustrated magazine’s lobbying), there are no doubt new opportunities to make money in industries that are currently decimated.  Think: housing, auto’s, mortgage.  What shape this will take I don’t yet know.  Could new, niche focused portfolio lenders pop up to fill gaping holes in the mortgage market?  Will the upstart auto companies popping up like weeds in Silicon Valley usurp the global auto powers that be?  (I mean..come on, can GM hold out that much longer?  Glad I dumped my shares a few years ago).

When the tide finally retreats back to the sea, we will all look around and realize that not everyone has been swimming naked.

5. Vote

Since election day is upon us, it would be very patriotic of me to neglect to mention that the polls are open and you (well, those citizens of the U.S. who enjoy the privilege of voting) might be well served to pull the lever for the future you want to see.  I encourage you to get down and dirty and learn what I call the ‘micro-politics’ of your municipal and state governments.  Find out who your local judges, prosecutors, city council members and other elected officials are.  These people will impact your life more than the newly income president and vice president will.

Think about: keeping criminals off your neighborhood streets, approving new businesses into your city or town, changing the tax code to make it more/less favorable to businesses or homeowners.

—————-

Alright, now for a shameless self-plug.

My business partner, Dylan Tanaka and I will be resuming our real estate video blog at MiRealEstate.tv.

Keep your eyes open tomorrow for brand new episodes.

Published
by
Adam Davis
on November 4, 2008
in Finance and economics
. 0 Comments
Sep232008

Someday things will change…right?

For anyone paying attention to what has transpired in the financial markets in the last week, you know that we could discuss for eternity the short and long term implications of everything from government intervention to the value of the greenback.

I have no such interest.

There comes a point in time where you must admit the lack of control you have over many factors that intimately affect your life.  The latest events on Wall Street over the past week are an example of this.  This does not mean that we cannot adjust and improvise, and capitalize accordingly, it simply means that our boats, however large, will be tossed and pushed to an fro whether we like it or not.

One thing we can take away from this latest financial debacle is the old axiom: “the more things change the more they stay the same.”  Consider this:

  • in the 1990’s as the “new economy” was booming, it was “different this time” was the prevailing wisdom as the stock markets soared to dizzying heights, and people rushed in with investment dollars
  • in 1998, a hedge fund managed by Nobel Prize winners and math genius’ imploded and almost took the financial system down with it - they claimed they were different because they could mathematically eliminate risk from their portfolio
  • in 1929, flush with money from the roaring 20’s, investors were betting big with borrowed funds on the stock market - in spite of past market panics and margin calls, it was different for them
  • in 1971, President Nixon implemented wage and price controls, designed to tame 6% inflation and there were a great many who thought “temporary” wage and price controls could cure inflation - it will be different this time, they thought.  By 1974 the U.S. inflation rate had reached double digits

Apparently it was going to be different this last time as well, with subprime mortgages, credit default swaps and collateralized debt obligations.

Different indeed.

To take away something different from this most recent market meldown would be like saying that we have ignored history repeating itself over and over again.

Be ready for the next one.

Published
by
Adam Davis
on September 23, 2008
in Finance and economics
. 0 Comments
Aug72008

Nuclear Fallout - Mortgage Mess Continues to Pummel Average Joe

cloud1

Here’s a scenario for you:

A stranger comes up to you and asks to borrow some money. You have the ability to make the $5,000 loan being requested. The stranger can’t provide you with much information. They are vague about what their job is, how much money they make and how they will be able to repay the loan. They don’t have any assets to speak of. But they “promise” that they are going to repay the loan.

Does it sound like a good idea to make this loan?

If you said “yes,” then congratulations, you have what it takes to be a modern day finance company.

Now, you get to CLAIM YOUR PRIZE: Billions of dollars of losses!!!!

It used to be the job of banks and finance companies to ferret out the bad borrowers - you know, doing their best to solve the old adverse selection/moral hazard problem. From the huge mess we have in our financial markets right now, it seems as though all the computer algorithms that they had drawn up to make lending decisions did way worse than a monkey could have done in releasing funds to borrowers who were never going to make a payment.

_____________________________________

Finance giant and investment bank Morgan Stanley has just announced that they will “freeze” all of their clients’ home equity lines of credit (HELOCs). While the company isn’t releasing much information about this as of yet, one can speculate that the main reason for this is that the values of homes have dropped so much over the past 12 months that the equity being borrowed against is no longer there.

Hmmmm…

Knowing what we know about how many Average Joe’s and Jane’s use their homes like ATM machines, taking out equity to buy everything from new cars to vacations and plasma T.V.’s, it isn’t hard to see how further changes like this in the lending markets are going to make for a very lean Christmas this year in many homes.

punch1

This is likely troubling for consumer spending, since much of it relies on the “2 C’s:” confidence and credit. The mortgage and finance companies, who used to woo Average Joe with tantalizing offers of cheap and easy credit, are now gunning for him. It seems every dollar of red ink is stained with the blood of Average Joe’s and Jane’s across America.

If I could rub an old lamp and give orders to my genie, I would wish for ‘normal’ lending standards to return to the market - you know, like it used to be before things got absolutely nuts and ghosts started getting financing for leaving some residue on the wall.

genie1

Published
by
Adam Davis
on August 7, 2008
in Finance and economics
. 0 Comments
Jul112008

Too Big to Fail? What the Heck is Really Going On?

godzilla

Since just about every other blogger under the sun has weighed in on the pending financial meltdown that an insolvent Fannie Mae or Freddie Mac would create in the global credit markets - I feel compelled to throw my hat in the ring as well (what better thing to do when getting buzzed on caffeine at Caribou coffee on a Friday night?).

Many of you are probably familiar with the “too big to fail” tag that has been attached to some large financial institutions in times of trouble, most recently Bear Stearns. This tag has been thrown on the Government Sponsored Entities Fannie Mae and Freddie Mac in recent days as their stock values have plummeted and their financial woes have raised eyebrows across the world. “Too big to fail” means that the government should step in and prevent an institution from failing so as to preserve the greater good of the public.

I can tell you first hand, from an entrepreneur’s standpoint, that having the credit markets get worse right now would be bad news for me and a lot of my brethren. I know that the age-old argument of government interference in private enterprise is alive and well here, but I can’t help but take a look at what the implications would be if financing real estate transactions slowed down further or the capital markets failed to function in getting companies from small to large the money they need to work and grow.

Our economy has become so overly dependent upon credit and liquidity to even operatethat things will really come to a standstill if big shocks occur. The speed with which markets react to information is stunning and it wouldn’t take long for banks and credit card companies to put the screws on small business owners - squeezing profits and impeding growth.

Much of the commentary about this situation right now is focused on big companies and Wall Street banks. The entrepreneur is left out of the discussion but not out of the equation. I think that something should be done from a cooperation standpoint between the governments and other institutions that are close to Fannie and Freddie. We can’t afford to go ‘cold turkey’ in changing our credit dependency overnight - we need to enter rehab first and work it out of our system.

I am hoping and praying for sanity during this whole mess. Though I am confident that things will work themselves out over the long term, the short term will mean pain for somebody, portfolio companies, pension funds, investors, etc.

We can only look forward and learn from what is going on right now and eliminate the ‘irrational exhuberence’ that has once again penalized investors and, most likely taxpayers, again.

“I can calculate the movements of heavenly bodies but not the madness of men.”

Sir Isaac Newton

Published
by
Adam Davis
on July 11, 2008
in Finance and economics
. 0 Comments
May202008

Tuesday Top 5: 5 Reasons To Be An Investor vs. Speculator

buffet

gambler
Are you more Warren Buffet or riverboat gambler?

The reason I ask is that what you might think of as investing is really speculating and the consequences could be disastrous for your financial future.

I might be starting an argument of semantics, but I guess that’s the whole point, right?

Anybody familiar with the 1987 film Wall Street is likely familiar with the following quote made by Gordon Gekko, whom I believe summarizes the difference between investing and speculating:

“The public is out there throwing darts at a board, pal. I don’t throw darts at a board. I only bet on sure things.”

gekko

This quote is symbolic of what differentiates investors from speculators. Investors buy because they believe the asset they are purchasing is undervalued and/or is likely to increase substantially in value AND the performance of the asset, independent of others’ perceptions, will provide a significant enough return to justify the risk taken and opportunity cost to purchase.

Speculators, on the other hand, buy an asset because they believe they can likely sell it at a higher price (or sell it and buy at a lower price) to another person. The decision making is mostly determined by the appetite of others for the asset and does not largely depend on the characteristics of the asset itself.

Simply put, investors buy because they believe an asset holds value in and of itself and speculators buy because they believe they can offload it to somebody else for a profit.

You are going to notice that the undertone of this post is heavily influenced by the writings and teachings of Warren Buffett and Ben Graham (Buffett’s teacher at Columbia).

1. Good Investors Make Money Independent of What Others Think Of The Investment

A good investment will yield returns to an investor despite what the market thinks of the investment at a given point in time. Let’s look at investment real estate, for example.

A speculator might look at single family homes in Metro Detroit as a bad idea right now, because they could not (at least not very easily) just buy a house and sell it to someone else at a higher price with the ease that they could of 3-4 years ago.

An investor, on the other hand, might look at single family homes in Metro Detroit right now as a good investment. With a rock bottom purchase price and monthly cash flow, the investor would get a solid return over time no matter what happened with retail home prices

house

2. Investors Do The Work Up Front - So They Don’t Have to Worry About The Back End

Have you ever heard the phrase: “you make money when you buy, not when you sell?” I think this phrase better captures the mindset of the investor versus the speculator. A speculator is always buying because they believe that they can sell the asset to someone else. But, what happens when the buyers dry up? My first guess would be that they would be stuck with an overpriced asset.

Think about the condo developers and ’spec’ home builders across the country right now that are hemorrhaging red ink. Many of these builders continued to build in spite of the supply and demand of basic economics staring them in the eye. They just kept building and building, betting that someone from somewhere would come and buy the house or condo. Credit this as a large part of why housing and condo prices are plummeting across the board in what were formerly hot markets across the U.S.

3. Investors Know That The Market Will Always Fluctuate - So They Insulate Themselves From It

If you actively buy and sell stocks, stock options or futures, what would happen if the markets blew up suddenly? What I mean by ‘blew up’ is that there was some global geopolitical event that shook the foundations of the markets down to their very core. What if there was an oil embargo on the United States? What is there is a terrorist attack on U.S. soil (like Sep. 11, 2001)?

These wild market fluctuations are more likely to happen than not (causes could vary). Speculators constantly have to change their strategy to capitalize on market fluctuations, their very survival depends upon it. Investors don’t have to worry about this, they know that the asset they bought has a fundamental value, based on it’s intrinsic characteristics that will generate returns independent of the turmoil of the financial or real estate markets.

4. Investors Can Have More Control

Investors can have more control over their investments than speculators. How? Because the speculator is always worried about what the market will do that they have added another variable into the equation of investment performance. The only variable the investor has to worry about is whether or not the asset was a good buy at the price they are paying. The speculator has to always worry about what the next guy will pay.

There is another way that investors can have more control, too. Let’s turn to real estate again as an example. If I purchase a piece of commercial real estate, say a strip mall, I can make money from the rents on the stores alone. I can also do things to increase the cash flow, such as remove certain types of stores for more appealing ones, bring in larger tenants, increase parking, etc. All of these things are in my control to increase the performance of my building (and hence increase my ROI) and are not dependent on what other people think it is worth. I have more control to drive my investment performance.

A speculator, in this scenario, would only think about what he could sell it to the next person to and would likely not invest as much in driving the cash flow performance of the asset as an investor would. Time frames for holding make a large psychological difference.

5. Investors Enjoy Better Tax Treatment

The longer you hold and investment, the better the U.S. Government will treat you when it comes to taxes. Speculators (the ones that make money) incur short term profits each time they trade during the year. This results in ordinary income tax treatment of all the profits made.

Investors, on the other hand, usually hold their investments for longer periods of time (they are focused on the asset performance, not the markets pricing of the asset). Investments held for longer than 1 year are treated at lower tax rates in the U.S. (capital gains versus ordinary income). Dividend and passive income tax rules will often apply as well, throwing further tax benefits in the direction of the investor and not the speculator.

taxes

Now, I am not saying that there are no speculators that do well financially. Quite the contrary, I know several stock speculators that do well, year in and year out. It just may be in your blood to be a speculator. However, it has been my experience that investors make more money over the long term and build more substantial net worths because they pursue assets that will generate returns no matter what the market says the value of the asset is worth.

I realize that I could be throwing down the gauntlet in a lot of areas here: efficient market theory, value investing versus growth investing and many more. If so, I am quite glad. Let the debating begin.

Published
by
Adam Davis
on May 20, 2008
in Finance and Investing
. 1 Comment
May32008

Continuous Improvement - 8 Hours With An Expert On Raising Private Investment Capital

One of my mentors once told me: “life is one big self improvement project.”

Although I felt that I had always known this at some level, ever since I heard those words nearly 8 years ago I have relentlessly dedicated myself to making sure that I am always making forward progress. Making progress in the face of adversity and constraints is the hallmark of any business worth its salt.

Financing, raising capital especially, is a common constraint for virtually all businesses (small biz in particular). Fortunately, other entrepreneurs and business owners have traversed this path before and there is a lot you can learn from them. Real Estate Investing can present unique challenges of its own when it comes to raising money for growth.

Here a few just for starters:

  • Having liquid funds available to close deals quickly (especially bargain foreclosure properties)
  • Avoiding high cost capital sources (hard money loans in particular)
  • Balancing your immediate need for cash flow with long term wealth building

Last Saturday, my business partners and I hosted national private money expert Alan Cowgill for our Thursday night Real Estate Investors Association of Macomb meeting and all-day Saturday workshop.

Big 3 and Cowgill

(that’s me second from right)

What was great about this time with Alan was that he brought a lot of knowledge, insight and information from his experiences and he readily shared this with us. Many national real estate speakers will only give you enough information to keep you hooked and asking for more. Alan went beyond the call of duty and was as open with his mistakes as he was his victories.

Acknowledging and analyzing (but not dwelling) on our mistakes and taking corrective action is the only way we can truly improve. The way I remember learning to ride a bike is by falling down a few times. When I learned to shoot a basketball, I missed a few times. And so on the story goes. Too many business owners avoid mistakes at all costs, even the small ones that will create the foundations for personal growth.

Start committing to continuous improvement. Today!

What is a good way to start, you might ask? Try the following:

  1. Pick 3 areas of your personal or business life. Examples: level of fitness or endurance, business revenue, customer complaints, etc.. These areas must be measurable.
  2. Set specific and measurable goals in each area. Make incremental goals as stepping stones to larger goals. Example: 10 percent annual revenue growth is roughly .83% per month, running a 100 miles per month is 25 miles per week which is 5 miles per day 5 days per week, etc.
  3. Dedicate two to three hours per month to learning more about each these areas. Examples: attend a seminar or workshop on customer service, read the blogs of experts on each subject matter, etc.
  4. Make 1 bold move (something you have never done before, but something you have learned about and studied) every three months in each area. Examples: launch a radical new direct mail campaign, run 2 miles further then you ever have before, etc.)
  5. Analyze your progress, what you did right, where you could improve - base this upon your goals.

These steps might seem rudimentary or even basic. But, forcing yourself to take action is the surest route to continous improvement. As the genius Albert Einstein was quoted as saying: “nothing happens until something moves.”

So….get moving!

Published
by
Adam Davis
on May 3, 2008
in Business, Finance, Investing, Real Estate, Real Estate Investing and Uncategorized
. 0 Comments
Nov302007

Capital Constraints - Good and Bad

I was just at the REIA of Macomb last night, Michigan’s Premier Real Estate Investment Association, and heard national business credit expert, Tom Kish, speak about unsecured lines of business credit and how they can be used to fund your business.

I found Tom’s message to be compelling, and it got me thinking about the subject of financing for entrepreneurs. Money is always a big question mark for anybody that is looking at starting or expanding their business.

There are a lot of different theories on business financing out there. The fact of the matter remains that most entrepreneurs are continually operating under capital constraints; seeming to be forever in bootstrap mode. I know that for me, personally, bootstrap mode means continually evaluating the viability of projects. Questions like: “does this initiative deserve more money than another one?” are always circling around in my brain. I know the textbooks say that this is how you are supposed to operate, that you are supposed to have to make these ‘rationing’ choices all the time. This might be o.k. for large companies to swallow, but for entrepreneurs we are often talking about survival, or growth necessary to get to a more sustainable level.


As an entrepreneur, I think one of the hardest things to reconcile my self to is the fact that I can’t implement all of my ideas. You see, I just see problems that come up in my life and in the world that I want to solve. Solving problems effectively, for large numbers of people = money made. Not being able to address these problems is hard, but if I am honest with myself I understand that I can’t always do everything.

The bottom line is that only the best ideas and initiatives will get funded. Whether you are trying to get your business off of the ground with angel funding or working with your personal savings to get started, or you are raising institutional funding, only the best ideas get the money necessary to get off the ground. The same rule applies to your own internal business funding; only the most promising marketing initiatives will get funded.

All of this might seem like a hindrance to growth, but it is a necessary aspect of business development. Our job as entrepreneurs is to make sure that we are continually coming up with new ideas for improving and starting companies and continually pushing the growth envelope. As they old saying goes: “the cream always rises to the top.”

Published
by
Adam Davis
on November 30, 2007
in Finance and Investing
. 0 Comments