Wednesday, December 30, 2015


I think that lifestyle is probably one of the most important factors in building future wealth.  Think of yourself in the beginning of your career as a small start-up.  Is it smart for a start-up to buy brand new cars or expensive homes for its founders as soon as it starts earning a little bit of money or is it smarter to take that money and reinvest it in order to grow and become an even stronger business?  A lot of people get this part of building wealth backwards in that as soon as they begin monetizing their education or talent they feel they have now earned the right to start spending nearly one hundred percent of the profits or even more!  No business, no matter how dedicated or talented its founders may be can afford to have such a large draw down in capital and still expect to grow much less survive.  The media is partially to blame for this tendency to spend too early because it always focuses on the glamorous lives of people that are already successful and rarely focuses on people that are still in the process.

Getting to the point of profitability is only half of the battle...the other half is staying there and the best way to stay profitable is to reinvest every spare dollar that you can manage.  Saving money to invest is not easy especially with how much everything costs nowadays but it is absolutely necessary if you intend to ever increase your means.  So long as you've worked hard enough to obtain a basic education and a decent paying job you've got everything you need to be successful.  The next step is to find ways to live below your means so that you can invest your savings which will allow your means to rise over time.  If you are always living above your means it is basic math that one day you will eventually go broke.

Saving is so hard, I get it, but you can make it easier on yourself by changing the way you think about the definition of success.  Is success really about owning a luxury vehicle and expensive designer clothing or is that possibly what you may have been led to believe?  For instance, when I think about someone that is physically fit it is usually because they eat healthy and exercise regularly.  They are not constantly thinking about when they are going to be eating their next doesn't even cross their mind because they actually enjoy being healthy.  I think that it is the same way with being financially fit in that you cannot constantly be thinking about how to spend your next paycheck and expect to ever have very much money.  You actually have to enjoy saving and investing more than you do spending. 

Learning to ignore the typical luxury items and services that many people consider necessary purchases is probably the most powerful change that you can make to your lifestyle that has a direct impact on your chances of becoming wealthy. You'll free your mind to start thinking more about investing instead of just spending.  Ironically, deciding that you'll never purchase a Lexus in your lifetime may be the one decision that allows you to someday be able to afford to buy hundreds of them.  I know that there is something that you have in your mind right now that if you changed could help you save so much money.  What are you waiting for...stop saying I can't and start saying I CAN!

Thursday, December 10, 2015

Defending Leverage

I just learned today that the SEC will make an announcement tomorrow on 12/11/15 regarding derivatives and how ETF providers use them to create levered products.  What follows is my opinion on the topic.

I think that everyone understands by now how leverage can be used irresponsibly as there are dozens of books and articles that attempt to demonize the entire industry of leveraged products.  I think that it is important as a successful saver and investor to speak up about how I use these products responsibly to actually reduce my risk profile.

The biggest source of controversy with leveraged products seems to be the "decay" factor due to daily rebalancing which is no dark secret but rather a basic mathematical fact regarding the nature of percentages.  I rarely see it discussed, but this same "decay" factor that degrades performance in range bound markets can actually enhance performance in trending up a spreadsheet and try it out for's basic math!

Additionally, the responsible way to use leverage is to hedge investments rather than to amplify them.  For instance, if the market takes a sudden sharp downturn because of some random geopolitical issue and I have extra cash to invest because I am a prudent saver; I can use a leveraged product in this situation to actually reduce my risk. 

Instead of going out into the market and buying $10K worth of the S&P 500 index I can instead buy $5K worth of its equivalent 2X levered product and if we go into a sudden recession or depression I am only out the $5K instead of the full $10K.  Whatever "decay" I may end up paying for is just the cost of the protection that allows me to keep half of my money if everything ends up going to zero.  Do not delude this era of flash crashes a nice and safe vanilla index fund can just as easily go to zero for some bizarre reason as can these "highly dangerous" leveraged products.  Always remember, investments don't lose money...people lose money.

Is there a case for buying and holding leveraged ETFs?

No doubt that this statement will be offensive to many journalists and investors alike who are 100% convinced that leveraged ETFs are horrible investments due to their seemingly unpredictable nature.  I think it is more of a situation that they are just not very well understood and just like many things that people don't understand the immediate reaction is almost always negative.

Here is where the misunderstanding comes from.  Embedded within an investment in a leveraged fund is an investment in volatility or rather inverse volatility.  I  can assure you that among the option investing community buying or selling levels of volatility is just as normal and regular as buying shares of Apple or Facebook.  What you get with your leveraged investment is an exposure that will perform better in an environment where volatility is falling and perform worse in an environment where volatility is rising.  So when choosing these investments it is important to have a general opinion regarding future market volatility.

So why would anyone want to buy and hold these investments for the long term?  The reason is simple...the market tends to rise over long periods of time (decades) and volatility tends to fall over time due to the price discovery mechanism built into all free markets.  If you believe that this statement is true then a leveraged investment should outperform a similar unleveraged investment over longer periods of time.

If you are still confused then think of it this way.  If I transported myself back to the 1950's using Doc Brown's time machine and took with me $20 dollars to invest for the next sixty years in a leveraged investment or an unleveraged investment why would I not pick the leveraged investment?  In both scenarios I can only lose $20 but with leverage you have the potential for so much more return so long as the market rises over the next sixty years with less volatility.  How much more return can I expect?  Well I ran a simulation on the S&P 500 index and your $20 invested in a 3X leveraged fund back in the 1950's would be worth almost $200,000 dollars today while that same $20 invested in a plain unleveraged fund would be worth just over $1,900.  Huge difference, it much larger than you expected?  This is because you are not just getting leveraged returns but you are also getting leveraged compounding. 

So if you are now amazed and convinced let me pull you back in a little bit and caveat this investment strategy with several important warnings.  I would not be investing the majority of my wealth in a leveraged investment.  This investment has such huge upside potential that a very small investment would be more than enough to add diversity to your portfolio.  Also there is no 100% guarantee that the market will rise over the next sixty years or even the next one hundred years with lesser volatility.  The other issue is that currently, leveraged funds have significantly higher fees than similar unleveraged funds.  When accounting for higher fees your return is more than cut in half.  Finally, using the S&P 500 in this case worked because it has a long history of providing long term stable returns but running this simulation on more volatile markets like the Nasdaq 100 or the Russell 2000 provided for less convincing results.  Whatever you decide, use your own judgment, don't over do it, be long term and stay diversified.

Sunday, November 22, 2015

The BIG Idea

I would agree that most BIG ideas that are successful generate a ton of money...potentially billions, but I would also give that level of success the same odds as winning the lottery.  The biggest problem with having one idea that consumes all of your time and money is that it is not well diversified.  It is the prime example of putting all of your eggs into one basket.  Sure, if you are passionate about something then you probably have an increased chance at pulling it off but if you are just into some silly idea to make money then there are plenty of easier and safer ways to create wealth out there. 

Another big problem with BIG ideas is that we are all biased to think that there are a larger proportion of success stories out there than there really are.  This is because the media sensationalizes success stories and totally ignores failure stories.  For every billion dollar idea there are hundreds if not thousands of similar ideas that have made nothing at all...and why is that?  There is probably no better reason than that of being in the right place at the right time.  I'm sure newly minted billionaires would like to attribute their success to superior talent or relentless commitment, which in a lot of cases is true, but in most cases it probably boils down to a huge amount of luck. 

There is nothing wrong with pursuing great ideas but instead of spending all of your time and money on just one idea you should think about spreading yourself around dozens of different ideas.  The more ideas that you are involved with, the greater chance you'll be in the right place at the right time.  This is where the capital markets come into play.  If you do not have enough capital or time to be actively involved with dozens of ideas simultaneously then you could easily afford to invest in other people and companies that are pursuing similar ideas.  In fact, investing a small amount of money in a company can help to open your eyes to just how rough and unforgiving business can be.  You'll easily see your investment cut in half more suddenly than you'd expect and it is better to learn that lesson with a small amount of money rather than yours and all of your relatives' life savings. 

If you're really just trying to build wealth ask yourself this...would I rather have a 10% chance at getting there quickly or a 90% chance at getting there slowly?  Finally, consider spending beneath your means and putting the lion's share of those savings into a group of well diversified investments and you’ll be on your way to an early retirement in no time at all.

Saturday, October 10, 2015

Emerging Markets - Opportunity or Money Pit?

What is really going on with Emerging Markets?

For the past five years the S&P is up over 70% and Emerging Markets are down 20%!  As an enthusiastic buyer of everything beaten it's hard for me to resist from buying even more of this wretched sector even though I already own a sizable investment.  No doubt, there are many people out there that have a much more sophisticated understanding of what is going on but anyway here are my two cents.

There is no doubt in my mind that the Fed’s unprecedented interest rate policy has something to do with this but more importantly how so?  If you take a look at a comparison chart of the S&P versus the Energy sector you'll notice an equally wide divergence.  A quick glance at the US Dollar index reveals an escalating currency war that is beginning to challenge Fed policy.  This tells me that these emerging economies which are heavily dependent on their energy exports as a primary means of income are being squeezed on multiple fronts.  

New fracking technology creating oversupply, an unfavorable currency climate, and slower global growth are all combining to create the perfect storm for these countries.  The key indicator that I am monitoring is for this persistent deflationary malaise to abate.  This may not be happening anytime soon as there is currently no generation equipped to borrow the money that is required to create inflation.  The Millennial generation is already overloaded with student debt, the Boomer generation is running out of years to reward risks and the Sandwich generation finds themselves supporting their own kids as well as their broke parents.  Regardless of how low the Federal Reserve makes rates, if there is no demand for the borrowing of money these economies will continue to deflate.

Technology which is currently the shining star is not inherently a capital intensive industry due to its automated nature and lack of large pools of hands on labor.  Unless an industry emerges that needs capital and labor once again we may never break the threshold required to spark inflation.  What does that industry look like...where will it come from?  I have no idea.

Tuesday, October 6, 2015

Am I paying too much in taxes?

I could be totally wrong on this but I've never been too worried about how much I pay in taxes and in fact feel a little encouraged in seeing my tax bill rising year over year.  I use it as a rough indicator to know that I am successful in making more money.  I know that this sounds ridiculous and don't intend to ignore tax efficiency forever but to me growing wealth and paying less in taxes seem to work against one another.

For example, tax incentives are very similar to coupons in how they tend to get us to spend money that we normally wouldn't have spent.  If you are holding a 20% off coupon and you go to the store and buy something for $100...sure you'll save $20 but you'll also be spending $80 that you would have never spent in the first place.  If you are serious about trying to grow your wealth you should only be spending money that you absolutely need to spend and resist spending money in order to "save" it.  Take for instance a tax credit to buy energy efficient appliances or automobiles...if you aren't in need of a new one of these you might be convinced to save money that never needed to be saved in the first place.

Another problem is that a lot of people use tax incentives as an excuse for getting into a certain investment or investment strategy and I think that this is a big mistake.  Investments need to stand on their own merits separate from any tax benefit that you may receive because if the investment turns out to be a bad one the tax savings will seem like a drop in the bucket when compared with all of the losses.  For example you might be convinced to buy a home that you cannot afford due to an incentive that allows you to put less money down.  Sure you are saving money by owning your own home but the truth is that you are now involved in an investment that is over your head and likely to cause problems further down the road.  A good investment should be long term, easy to understand, have low entry and exit costs and be highly liquid...these are requirements that I would not sacrifice for the sake of an incentive.

On the other hand, programs such as 401Ks, IRAs and 529s provide great incentives to simultaneously save while being tax efficient.  There are not too many downsides to programs like these and the only minor issue that I would be aware of is the liquidity cost.  These programs can have stiff penalties for early withdrawals so to avoid this issue I keep a portion of my investments in a taxable account at a discount brokerage that has no withdrawal restrictions.  So long as I make sure that my taxable investments are long term oriented I won't be suffering too much from tax disadvantages and I'll enjoy the benefit of having immediate access to my investment gains.  Remember not every great investment opportunity that comes along is going to come with a tax friendly wrapper.

Being smart about taxes is a great way to save money and I would tend to leave it at that.  Paying more taxes is a natural step in becoming wealthier so I wouldn't be overly focused on fighting tax increases as you may find yourself unintentionally fighting wealth increases as well.  Finally, remember to only use incentives that help you to spend less or save more and you'll be giving yourself an increased chance at becoming wealthy at some point in the future.

Monday, September 21, 2015

Is superior talent required to create wealth?

I'll be honest...I've been rejected and have failed plenty of times.  In fact, it became so terrible at one point, I started to believe that I just wasn't cut out for business.  These early set backs however have not stopped me from working hard as a financial professional and being well on my way to surpassing all of my long term financial goals in my thirties!  So how does one overcome failure and manage to turn it into wealth?  This is a difficult question to answer if you believe that wealth only comes from having superior talent or skills.  Although having the right talent can lead to a higher income, income however, is only a part of the larger wealth equation.

I think of creating wealth as a physical activity rather than a mental one.  In other words, it is something that you do rather than something you are good at.  For example, if you want to be physically fit then you have to have a proper diet and exercise over a long period of time.  Likewise, if you want to be financially fit then you have to save, by living below your means, and invest over a long period of time.  Unless your talent is exceedingly rare and valuable, a marginally higher income will do nothing for your wealth if you are not continually saving and investing it.

To think of it another way - Warren Buffet does not receive a million dollar paycheck every week that he then deposits into his checking account.  The value of his wealth rises with the value of the assets that he owns.  Therein lies the must own things that tend to appreciate in order to build wealth.  If the majority of things that you buy tend to depreciate or lose value, there isn’t any amount of income that will be able to plug that hole.  Finding assets that naturally appreciate isn’t a secret or a mystery either.  These are things such as mutual funds, stocks, bonds and real estate.  Don’t over think this part of it, just spread your savings around these or similar types of assets and patiently watch your financial health grow stronger over time.

Can a stock genius make me wealthy?

I definitely think that there are plenty of skilled money managers out there that play a great role in protecting wealth but I'm not so sure that it makes a whole lot of economic sense to be able to pay someone to create wealth for you.  If wealth were something that you could just buy like child care or a clean house then why are there so many people that still do not have it.  Just as with any service, money management is subject to the laws of supply and demand with the best managers charging the highest fees which tend to cancel out any potential advantages.  I think at best with the right manager and the right fee structure you could play good defense if you are already wealthy and want to focus on other things but in regards to building your own wealth only you will care enough about it to actually make it happen.  Again, building wealth does not have to be about possessing some secret knowledge but rather living below your means and using time to your advantage.

Are you convinced yet?  If not, I'll leave you with this final example to think about.  Take John and Jane...Jane is stock market wizard that can double the market's returns year in and year out due to her special skills and love for investment research.  John on the other hand knows nothing about markets but knows enough that it is smart to be invested.  Since Jane is highly skilled she earns an average of 16% every year from her investments while John is only able to average 8%.  Jane is very pleased with her abilities and feels the need to reward herself more often so she is only able to devote $10,000 a year to her investing.  John on the other hand is less sure so he saves and invests as much as he can and thus is able to devote $20,000 a year to his investing.  Who do you think has more money after ten years?  You guessed it...John actually has 36% more wealth than the stock market genius.  In fact, it takes over fifteen years for Jane to just catch up to John.  Isn't that amazing?!  You can probably count on one hand the number of people in the world that are capable of doubling the market's return over a fifteen year period.  So if you want to be part of an elite group of investors you can actually get there by saving and investing more money without any need for super secret market knowledge.

Make saving and investing a part of your lifestyle and you’ll be giving yourself an excellent chance at becoming wealthy at some point in the future.

Saturday, September 12, 2015

Market Volatility – What I’m Watching

Normally I wouldn’t be endorsing tactical investing because I personally believe that investing small amounts of money at regular intervals over long periods of time is a superior investment strategy for the majority of people.  However, being informed about current market events does help with maintaining perspective and reduces the likelihood of succumbing to emotionally based investment decisions.  So what is going on with all of this volatility that we are seeing?

There are a few key fundamental factors on the table including a potential slow down in China, worries about the future of the Euro currency and a Fed that is beginning to turn bullish on interest rates.  The main problem with a China slowdown is that many economies around the world have geared themselves towards supplying China with raw materials in order to feed its growth.  If China is perceived as going into recession there could be big losses for these economies as they slowly shift gears towards something else.  The problem with the Euro is if you imagine that you have all of your life savings denominated in Euros and you see story after story about whether the Euro will even exist in ten years…are you going to wait around for that to happen or are you going to move your savings overseas into something safer?  Both of these issues contribute to a higher dollar which is working against the Fed’s increasing desire to raise rates.

Let's talk about some prices.  On the morning of 8/24/15 S&P futures hit a low of 1831 which is an amazing 7% drop from the prior day's close.  Ever since then the market has been creeping higher and higher but has been unable to surpass 2000 for what I'm assuming are psychological or emotional reasons.  In short, the market appears to be in a type of holding pattern waiting for some new news that will help to justify a significant move higher or lower.  The volatility VIX index also remains elevated at a level above 20 indicating that fears about a move lower still persist in the marketplace.

There really is no sure way to tell which direction the market will end up taking so the only real question is what you are going to do when the inevitable move happens.  I have always been a huge fan of keeping a stash of cash available for investment during market panics.  I use this cash to buy more of my favorite funds at discounted prices.  If I'm feeling adventurous I attempt to sell volatility and receive income from those who are panicking.  If you've heard that selling volatility is dangerous then you've heard right but in situations where there is panic selling this strategy is actually a very nice risk adjusted investment.  After all, due to the price discovery mechanism volatility over time is a naturally depreciating asset.  The key here as well as always is to not overdo it.  Smaller investments spread out over time usually perform way better than large one time investments.

Remember to always prepare for volatility before it strikes and you'll be one of those investors looking for bargains rather than one of those losing sleep every night.

Sunday, September 6, 2015

Is it necessary to take huge risks to create wealth?

Not only is it unnecessary to take huge risks to create wealth but it is actually counterproductive.  To me, creating wealth boils down to three basic ingredients: saving, investing, and time.  Often times, people will be lacking one or more of these causing a need to take greater risk in order to provide the same amount of return.  The big issue here is that it is not very likely that an increase in risk will lead to increased returns and actually more often than not leads to a higher likelihood of losses.  The easiest way that I’ve found to build wealth is to make sure that you are always taking maximum advantage of these three fundamental ingredients.

Saving is so important because it provides you with a base to invest from.  Lack of savings is akin to a farmer not having any seeds to grow the next years crops with.  A large portion of whatever you receive in income needs to be invested in order to allow for the growth of your money.  Saving can be hard especially if you live in an area with a high cost of living but it is absolutely necessary if you ever expect to grow wealth.  Think hard about what you need to get by with and then think harder about how to get by with even less.  Don’t worry, this frugality doesn’t last forever, in just ten years you’ll be thinking hard about what to do with all of the extra money you’ve got laying around.

Investment is equally important because this is where growth comes from.  Money under your mattress actually becomes less valuable over time due to the nature of inflation.  I think that a lot of people, including myself, tend to over complicate this aspect of wealth creation either by trying to time the market or by searching for rare and exotic investments that provide “increased” returns.  Again, these increased returns are not without increased risk and are therefore no better or worse than any other investment.  Take the easy approach and spread your money around into various types of investments in order to take advantage of diversification which is just a word for not putting all of your eggs in one basket.

Finally, time, I think is the most valuable of all three of these ingredients because it is essentially priceless.  In order to avoid having to take impossible risks later in life you need to make sure that you make the most out of every day that you have to invest.  Discount brokers offer commission free investing nowadays on a wide variety of products that allow one to take small amounts of savings and invest as often as weekly or even daily to take maximum advantage of time.  I buy when the market is up, I buy when the market is down and over time I essentially get a fair price.

Remember to always use these three key ingredients to your advantage and you'll be giving yourself a great chance at becoming wealthy at some point in the future.