My 1st Million At 33 – yes, you can do it too

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  • Archive for April, 2006

    Leverage: the secret of making big money

    Posted by Frugal on 30th April 2006

    Have you wondered how some people get so incredibly rich?  There is a saying: “you need money to make more money.”  If you hear that from a poor person, it may sound a little sour-graped.  But underlying it, there is probably some grain of salt, not well-understood by the person who says it, but a good observation nevertheless.

    What happens usually is that you need money or asset to borrow a lot more money, using which you can make even more money out of it.  It is a game of leverage.  The money-making potential is always proportional to the total amount of money involved.  Whether it’s borrowed or not, it doesn’t matter.  So when a business owner is successful in his or her venture, he or she will be handsomely rewarded.  But if he or she fails, the leverage works in the reverse gear and may lead to substantial loss or even bankruptcy, depending on the company structure and amount of risk and leverage that is undertaken.

    In fact, leverage comes in many forms, and in each case, you can see its multiplicative power.

    1. Leverage of employee’s time: As long as each employee can bring in more money than his or her wage, then the money left or the net profit goes into the employer’s pocket.  The employer or the business owner is leveraging on employee’s time to make money.  Multiplying by more employees is multiplying the profits.
    2. Leverage of the machinery: As an example, for an internet retail business, it leverages on computer equipments to take purchase orders.  Equipments have a fixed cost.  As long as the equipment brings in more money before its utility is fully depreciated, then it’s good business.  Multiplying by more equipments for machinery is multiplying the profits.
    3. Leverage of copies or copyright or franchise: This is leverage in the purest form of multiplication.  More copies of songs or CDs, more copies of software, more copies of books or DVDs, will all result in more profits for the owner of copyright or franchise.

    These are the reasons that in Robert Kiyosaki’s four quadrant of E/S/B/I, B (business owner) is a better money-making model than S (self-employed) because of the multiplicative power, while S relies solely on the available time of oneself, to be multiplied by a very high per hour rate to reach a good income level.  However, using leverage is not risk-free at all even when you control your own business.

    The other forms of leverage are financial leverages:

    1. Margin: Margin power in stock is usually 2X of your cash.  Margin in forex trading can go upto 400X.
    2. Asset-back loan: mortgage debt.
    3. Other loans that are not back by assets: Credit card debt falls into this category.
    4. Marketable options:  These are call & put contract in the stock or futures market.
    5. Employer’s granted stock options: It’s essentially a long term call option on the given stock.

    The only leverages that I recommend of pursuing are mortgage debt and stock options.  The other ones like #1 and #4 are better for professionals.  And the interest rate on #3 is usually too high to be worthwhile carrying, unless it’s for very short timeframe.  The advantage of carrying a mortgage is explained in my post: “Why is your home the best investment?“  #5, the stock options are very good if you are fortunate have them.  Under non-bubble conditions, value of stocks tend to go up along with inflation, and one should be rewarded with certain gain.

    P.S.  Be sure to check out comment #1 by Financial Reflections.  He filled in the point that I forgot to make about leveraging other people’s time for internet business.

    Posted in Career/Salary, Investing, Miscellany | 5 Comments »

    Silver ETF is here

    Posted by Frugal on 29th April 2006

    Finally SLV, the first silver ETF is here on April 28, 2006.  No more needs of paying premium over CEF which at one point was trading more than 10% premium over its underlying asset.  Despite its convenience and attractiveness as an easy way in investing in silver, it is after all a paper asset.  Not only that, like gold ETFs (IAU and GLD), they will be taxed at the very high federal tax bracket of 28%, falling into the category of collectibles.  I wonder where this collectible tax came from.  It must have come from an inflationary era when people held goods and collectibles instead of cash.  Our beloved government never forgets to extract taxes out of its own making of inflation, taxing collectibles at even higher rate.  As an investor myself, I think it’s so unfair to tax beyond inflation.  I have no problems with taxing real gain.  But when government inflates by printing more paper money, and then comes in and tells you that you have an absolute paper gain while you barely beats inflation, the government is simply stealing from you for her own sin of inflation.  The capital gain tax makes the job of being an investor doubly difficult.  Not only you need to beat inflation, but you need to beat inflation on an after-tax basis.

    Okay, enough about tax & inflation.  What are the other ways that you can invest in silver?  Here is my list:

    1. SLV, as just mentioned.  An annual percentage cost of 0.5% will cover all the storage costs and inconveniences.  However, as a matter of fact, I’m not too thrilled about another paper vehicle for the hard asset.
    2. Silver perth mint certificate in Australia.  Minimum investment is close to $10000 US.  Last time I checked, uncle Sam has got its tentacles into the books of most dealers, requiring tax reporting upon sale.
    3. American Silver Eagle coins or silver bars.  This is an easy way for small investor to get into physical silver market.  Storage cost is nil, at your own space.  But you pay for minting, dealer premium, and bigger bid/ask spread over the spot price of silver.
    4. CEF, Canadian Central Fund: A gold/silver holding company with small management cost.  It holds roughly 50% of gold and 50% of silver bullions.  It was trading at a 9.2% premium over it’s precious metal holdings on April 27 2006, the day before SLV is launched. 
    5. Silver stocks: PAAS, SSRI, and many other ones.  For disclosure purpose, I personally hold both stocks that I mentioned.
    6. Silver futures or call options: Commodity market is less regulated, and subjected to manipulation by various agency, especially close to delivery/expiration dates of futures/options.  This may not be a bad way, but I don’t have sufficient knowledge in this area.  Investment in volatile commodity market can reduce an overall volatility of the portfolio through its uncorrelation to majority of other investment choices.  More detailed information can be found in the theory of Efficient Frontier.

    Posted in Gold/Silver | 4 Comments »

    My gold buying experience

    Posted by Frugal on 28th April 2006

    Say what?! Buy gold?  Yes, and it was in year of 2002.

    Gold didn’t close below 252 $US, a level described by Martin Armstrong as a would-be century deal.  But after the double bottom chart formation on spot gold has been clear to me, forming at bottom of $253 in 1999, and $255 in 2001, I jumped right in at the first pull-back in the summer of 2002.  This was just after gold exceeded 300 $US.

    I couldn’t find any reliable place to buy pure physical gold in the US.  So I asked my father to help me buy it back in my home country from Asia.  My dad grumbled throughout the search, but finally found me a bank that has depository account in gold.  So I asked my dad to buy me $10000 US worth of gold, timing my entry at around $305 US.  My dad and my brother went into the bank for me for my purchase.  The bank clerk repeated more than three times, telling my dad, “there is no interest earned on the gold depository account, okay?  Are you sure?”  The clerks even giggled when my dad and brother walked out of the door.  The next day when I found out about that my dad walked out of bank with only $1000 US purchase instead of $10000 US because of the repeated good-willed urgings by the bank clerk.  I was totally speechless and dumbfounded.  I told my dad, that I have been watching gold market for more than two years, and finally found a terrific entry point.  My dad was not too happy at all, but agreed to go back for more.  In a couple of days, gold went up by more than 3% to $315, and I was afraid at this level now.  So I got myself just another $5000 US worth of gold.

    The rest is history.  That was truly a purchase close to the bottom of the market, a grumbled and ridiculed purchase that was made with great fear.

    Posted in Gold/Silver | Comments Off

    (Link to) My investment company brochure

    Posted by Frugal on 27th April 2006

    I regularly read the following websites, newsletters, and/or magazines for my doing investments:

    1. www.prudentbear.com
    2. www.financialsense.com
    3. www.marketwatch.com
    4. Outstanding Investments newsletter (paid subscription) by Justice Little and Kevin Kerr, recently ranked number 3 in all of the newsletters followed by Hulbert’s financial digest.
    5. Capital & Crisis newsletter (paid subscription) by Chris Meyer.
    6. Energy Speculator (paid subscription) by Doug Casey.
    7. The Gold Discovery Letter (paid subscription) by Eric Hommelberg.
    8. Market Perspective by Churchill Management Group
    9. Blue Chip Investor by Steven Check, Check Capital Management.
    10. In the Know by Puplava Securities

    The folowing two sites are very good too, but I’m limited by my waking hours to read them:

    1. www.silver-investor.com by Ted Butler & David Morgan
    2. Jim Jubak’s journal at MSN.  Thanks to Rag 2 Riches comment.

    Obviously, my investment selections are biased by the selection of the newsletters and websites that I read.  However, each of the above is the top-notch publication by itself.  The last three publications (#8 to #10) you may or may not find them anywhere.  I am receiving those because I am a potential client or a client for them.  All of management firms have more than 200 millions asset under management.  They are the best that I can find for active money management services.  All of them have excellent performance going through the bear market of year 2000 to 2002.

    Okay, without further babbling, I will place the link to my yet-to-be investment firm brochure (more like slides).  Like the best things in life, they are hidden mostly, and you have to seek them out.  I may follow up with more details on each topic mentioned in the brochure.  But in here, you will be able to see my investment philosophy in its entirety, and my reasoning in its natural order.

    If you have any comments, you will need to post them in this linking post.  But I probably won’t respond to your comments initially because I will follow up with other posts with more details.

    Posted in Miscellany, Stock Market | 3 Comments »

    Save $5 for the barber and $3 for myself

    Posted by Frugal on 26th April 2006

    This weekend I just had a haircut after several months.  I have been too busy with work and the new blogging activities such that my hair was simply too long.  My wife saved me a coupon for Great Clips, which was expiring really soon.  So I do what I always do, washing my hair before going to barbershop.  Yes, it’s a little bit of wasting water and shampoo indeed.  But since I don’t like touching dirty hair, I assume that barbers don’t like to do so either.  I have full respect of all professions and people who earn their own money and perform their duties on their jobs.

    The regular cost of a haircut at Great Clips is about $13, I believe.  Without this coupon for only $4.99 haircut, I wouldn’t have gone to Great Clips.  I usually go to another run-down barbershop for a $6 haircut.

    At the checkout, I paid $5 towards the franchise owner, tipped the barber $5, and still saved myself a good $3, paying the same $10 that I almost always pay at another barbershop, except with a different split of $6 bill/$4 tip.

    When I went out of the barbershop door, the mid-aged lady barber called me “Hon, thank you very much, please come back in a month or two”.  I hurried out of the door, thinking to myself: I’m not sure how to tell you this, but I don’t get haircuts that often so that I can save a little bit of money by going to barbers less often.

    Posted in Frugal Ways, Miscellany | 9 Comments »

    Invest to hedge for inflation

    Posted by Frugal on 25th April 2006

    According to the Efficient Market Hypothesis, the stocks are always fairly priced.  Whatever information and news will be reflected by the stock price almost immediately.  The current market capitalization of a given stock to the entire market is the best allocation percentage using all available news and information.  This is the philosophy of the passive index investing.

    Using the spirit of efficient market hypothesis, a person can invest to hedge inflation of his or her expenses by studying his or her expense budget.  Using my budget as an example, my total expenses including property tax, but excluding income taxes and charity contribution is $3805 per month.  I categorize expenses roughly into the followings (please refer to the table of my budget):

    1. Food: $360
    2. Car: $45 insurance + $40 maintanence = $85
    3. Housing: $1270 mortgage + $165 HOA + $225 property tax = $1660
    4. Communications: $16 local + $7 mobile + $20 long distance = $43
    5. Energy: $45 electricity+ $55 gas + $135 gasoline = $235
    6. Utilities: $25 water + $13 trash + $17 cable = $55
    7. Medicals: $127
    8. Travel: $220
    9. Consumer Staples/Clothing: $100 (baby) + $300 wife’s + $80 cash + $100 misc = $580
    10. Education: $440 preschool

    Here is the summary table:

    Expense

    Amount

    Percentage

    Food

    360

    9.5%

    Car

    85

    2.2%

    Housing

    1660

    43.6%

    Communication

    43

    1.1%

    Energy

    235

    6.2%

    Utilities

    55

    1.4%

    Medicals

    127

    3.3%

    Travels

    220

    5.8%

    Consumer Staples

    580

    15.2%

    Education

    440

    11.6%

    So if I want to hedge against the inflation of my expenses, I would invest in accordingly the related industries.  Of course, you may also want to consider the input factors into a particular industry along with that industry.  For example, to hedge against your costs of airline tickets, you definitely want to consider the cost of gasoline energy that goes into airplanes.  And for calculating your investment for housing costs, you should take out the mortgage, but do include the rent.  Mortgage itself is already your investment into your own housing.At last, you don’t need to over-hedge your expenses.  If you assume an operating margin of 10% (or stock return of 10%), you only need to invest $43 * 12 months / 10% = $5160 in the communication industry.  If the overall revenue of communication industry grows, most likely so will your expenses and your investment profits.

    Posted in Investing, Stock Market | 4 Comments »

    Saving on my car insurance

    Posted by Frugal on 24th April 2006

    I’m paying $529.60 a year for car insurance on my two cars.  It’s probably not easy to pay a lower amount than this.  I think there are four major reasons for this low rate:

    1. Both my wife and I have a clean driving record and zero claim history.
    2. Our cars are modest and not very new (year 2000 and year 1995 Toyotas).  Their values are less than $10K in Kelly’s blue book, and so it doesn’t cost a fortune to insure them.
    3. We only have liability insurance ($100K/$300K/$100K), and a high deductible of theft/comprehensive coverage.  Obviously, I won’t recommend anyone to have liability only, unless the cars are not very new, and also you can afford to lose the cars in an accident.  It means that you are financially capable of replacing a lost car, without causing hardship to your life.
    4. The fact that we don’t drive or commute a lot of miles helps lowering the rate.  If you get online quotes, one of the advantages is that you can play with your annual mileage and see what’s the range of mileage that will put you to the next bracket of insurance rate.  The lowest rate bracket at most insurance companies seem to be at 0 to 7500 miles.  But you don’t want to have your claims denied only because you put down some out-of-whack mileage numbers on the insurance policy.
    5. I shop for a good deal on my car insurance.  I got very competitve quotes from www.insurance.com, but I ended up using Costco’s.

    If your car insurance rate on a per car basis is cheaper than mine, please leave a short comment.  I would be thrilled to hear from you.

    Posted in Frugal Ways | 4 Comments »

    An investment platform for independent money managers

    Posted by Frugal on 23rd April 2006

    So, you have decided to become a financial advisor for an average earning of $122,500?  Wow, that’s actually higher than my salary, despite the fact that I think I know more or at least as much about investing than all of the advisors that I have met so far from various big banks and brokerage houses (read my experiences here).

    How about going even one step further and become an investment advisor to officially manage other people’s money for fee?  Well, look no further, I have got it all planned out, except I don’t have any potential clients.  Here is a direct route plan to become a small independent money manager in the fastest timeframe:

    1. Get your NASD series 65 license & register as an investment advisor in your state.  This will probably cost you one to two thousand dollars, and some annual renewal fees of several hundred dollars.
    2. Now you are qualified to open a master account at ScottradeAdvisor.  With this platform from Scottrade, you can essentially open up a money management firm of your own, with very little back-office support.  The master account allows you to have unlimited client accounts.  You can set up various rules for distribution of bought shares into your client accounts, and in a single master trade order, you can buy or sell from all of your client accounts.  Every client accounts are subjected to the same Scottrade commission and fee structure.  You can set up your management fee automatic deduction with Scottrade, with your client permission.  Your clients will own their accounts directly, while giving you the trading authorization and fee deduction authorization.  Since they are the direct Scottrade account holders, this will solve the biggest client trust problem when they give you money for management.  Their accounts will receive the full SIPC insurance coverage up to $500,000.  Plus that you and your clients will enjoy one of the lowest trading commission of $7 offered by Scottrade.  I have personally contacted Ameritrade, ETrade, and TDWaterhouse, and none of them has similiar platform like Scottrade’s.  I know that Charles Schwab has similar service to Scottrade’s, but the trade commission is higher, and they only seem to offer the platform to very big money management firms.
    3. Well, that’s it.  You just need to have some marketing plan, and find your clients now.  After that, it’s all about your money management performance, and you will have a very scalable business that can potentially bring you millions of income every year.

    Want to be my first clients?  My base fee is only 1%, and I don’t have a minimum opening amount (which is usually north of $100K).  I’m also doing very well, returning about 37% since April 1st of 2005, and returning about 16% since Jan 1st of 2006.  And I didn’t get this performance from a single stock portfolio, but rather diversified among some 60 stocks, most of which has a total return from 35% to 110%.  I will be posting the “brochure” on my website for my own investment firm pretty soon….

     

    Posted in Career/Salary, Investing | 19 Comments »

    My hunting trip for a money manager

    Posted by Frugal on 22nd April 2006

    A couple of years ago, with my idle cash piling up, and my time dwindling down for a newborn in my family, I decided that I wanted to give up the control of some of my money to someone else, and see how well it would turn out.  Since I did and still do most of my investment decisions on my own, I wanted to find someone or some firm that was hopefully at least as good as I was (or else, what is the point of getting an advisor).

    The first one I spoke to was from Bank of America.  She asked me about my current investment, and had me filled out a profile survey on my risk tolerance and investment goals.  Sensing that I was quite competent in doing my own investing, which at that time included selling covered call options and short-sellings, she actually didn’t call me back for further in-depth appointments.  Sounds a little rude, but I was glad that she didn’t waste her or my time.

    The second one I spoke to was from UBS Financial.  This advisor was relatively new in this business, probably less than 3 years, and was more willing to win my business.  Again, she asked my current investment, and walked me through some standard talks on those large cap/small cap, US/foreign, stock/bond, income/growth portfolio diversification.  And then, later she came back with some selection of funds and allocation for what she would recommend for me.  She worked hard, but I was not impressed.  I could have done exactly the same thing utilizing ETFs or mutual funds to achieve the same purpose, but without the 1% fee (which is usually the minimum money management fee in this industry).

    The third one I spoke to was from Smith Barney.  This advisor was knowledgeable, and was trying to sell various kinds of financial services such as 529 college saving account, and even mortgage financing.  Again, I went through this standard talk about age to stock/bond allocation, and diversification among large cap/small cap, income/growth, US/foreign sectors.  He even touted on one of his energy investment recommendation which had a return exceeding 50%.  However, I gave him an ETF holding of mine which practically tracked his recommendation in chart exactly, and yet I got in even earlier than his recommendation call.

    By this time, I was totally unimpressed with the standard asset allocation and diversification talk.  So when I met the fourth advisor from Ameriprise (formerly American Express), I decided to quiz this poor guy, before I wasted more of his and my time.  I devised a set of four simple binary choice questions, such that randomly guessing would only have 1/16 chance of getting all of them right:

    1. Shall I invest in a foreign utility or domestic utility company, if $US is going down, and all other factors remain the same?
    2. Shall I invest in a domestic producer or foreign producer of a certain commodity, if $US is going down, and all other factors remain the same?
    3. Shall I buy or sell more of the commodity producer stock, if interest rate is going up, and all other factors remain the same?
    4. Shall I buy domestic stocks or foreign stocks, if $US interest rate is going up?

    Despite my persistence on having him answer my quiz before the appointment, this guy from Ameriprise refused to answer my short quiz.  Instead, he told me that he couldn’t give out any investment advices when I was not his client, even though I protested that the quiz was only testing his general knowledge on economics.  I guessed he knew that he couldn’t answer all of my questions correctly, and chose to refuse my trial instead of embarassing himself.

    Want to try answer my questionaire yourself by posting to the comment?  I will post the answer in the comment after a week.  After these meetings with financial advisors from investment banks and brokerage houses, I have concluded that unless it’s an actively investing firm like a hedge fund, you are probably better off using ETF and low fee mutual funds to construct your own customized portfolio with regular rebalancing.  Of course, whether active investing is better than indexing is highly debatable.  But if I’m paying for 1% (or more) management fee, I would want my money manager to actively work for above average performance, rather than plain indexing for an average performance (minus his fees).

    Posted in Investing, Stock Market | 7 Comments »

    How I Bank

    Posted by Frugal on 21st April 2006

    I actually started online banking back in 1998/1999 when I first read an article on online banking in BusinessWeek.  The article was comparing two internet banks, and I chose to give NetBank a try.  NetBank was one of the highest yielding banks in the nation at that time according to www.bankrate.com, and has been so until recent last 2 to 3 years.  I made sure that NetBank was listed at FDIC http://www2.fdic.gov/idasp/main_bankfind.asp database, and then I started my online banking.

    In the beginning, I didn’t have a lot of trust.  So I started by depositing some small amount of money, and tried to withdraw money from my account by checks & ATMs.  After everything seemed to work fine without any problems, I started to move majority of my cash holdings to NetBank. 

    Because of the inconvenience of online banking, mainly due to very few free ATMs, I keep accounts at two local banks.  In one local bank, I only have saving account to reduce the amount of money that I need to keep for minimum balance to avoid fee, since checking account usually has a higher minimum balance.  In another local bank, I have both checking and saving accounts, so that I have at least a checking account locally.  And my rationale to have two local banks is to simply increase the total number of free ATMs that I could use in a short distance from wherever I was.  Of course, if you don’t have enough cash reserve, you probably want to limit the number of banks you have.

    This strategy of having an online bank and two local banks have served me well.  I can easily access my small cash need, while I can keep the majority of my cash in a higher yielding online account. Depending on your comfort level for accessible cash, you can put that amount in local banks, and put the rest in online accounts.  Since I conduct most of my purchases through credit cards, my need for cash is low.  I usually only keep about one thousand dollar in local banks, but it could vary from a few hundreds to just less than two thousands.  And to avoid all kinds of ATM & bank fees, I define my accessible cash as any amount over the minimum balance that is required to avoid monthly fee.  And I always use the ATMs of my banks.

    I also take full advantages of (free) online payment offered by NetBank.  Every month or quarterly, depending on the bill frequency, I pay my electricity, gas, water, trash, home owner association dues, and two of my credit cards automatically.  My phone bill and auto-insurance is paid automatically through credit card instead of NetBank, since I can get the 1% cash rebate on credit card charges.  Having all the bill paying arrangements, I spend probably less than 10 minutes for viewing or paying all of my bills, excluding credit card bills.  And I make sure that there is sufficient amount of money for payments by setting up an automatic transfer of an upper estimate of the total bill from my major high-yielding money market account to the checking account that allows unlimited withdrawals.

    In summary, I try to achieve the followings for my banking needs:

    1. Easily accessible cash by having two local banks.
    2. Higher yields for most cash in accounts at my online banks.
    3. Avoid any bank or ATM fees by using ATMs of my banks.
    4. Take full advantage for online bill payments to save time & stamps.

    By the way, I opened accounts at INGdirect a few years ago, and now I’m still debating whether it is worth my time and trouble to move my INGdirect accounts to EmigrantDirect for their exceptionally high yields currently at 4.50% 4.65%. 

    Posted in Banking | 6 Comments »