Cryptocurrencies are all the rage with bitcoin (BTC) leading the pack. As I write, BTC blew past a 1,000% return year to date and posted its first trade above $10,000. Experts claim BTC could increase another 400% between now and the end of next year to $40,000 or more! If that doesn’t make your eyes water, remember BTC traded at a $1 in early 2011. I don’t know about you, but this is nosebleed territory.
Bitcoin will continue growing until 21,000,000 BTC exist. Actually, the programming to mine BTC stops 3 bitcents shy of the 21 million mark, which at the current growth rate could be worth a few million dollars. It will take until 2140 to complete the BTC mining process. On June 1st, 2017 there were 16,366,275 BTC in existence, if that is the right word to use. (It isn’t.) More BTC has been mined since June 1st.
This means the total value of BTC is approaching $200 billion in value. If BTC climbs 400% in the next year, as some suggest, the total value of BTC will approach $800 billion and the market cap of Apple!* When all 21 million BTC are mined, if the price is $40,000 to 1 BTC the total value of all BTC will reach $840 billion. Then it gets absurd.
The Insane Logic
If you bought BTC seven years ago (early 2011) for $1 per BTC I salute you; you are a genius. Unfortunately, schmucks buying today will never see those kinds on return in seven years or a thousand! The starry-eyed fools jumping in today looking for similar returns will need BTC to climb another 10,000 times. Okay. Let’s add all the zeros. BTC is at 10,000. Add four more zeros and you get $100,000,000 per BTC!
Well, it could happen!
Of course when you multiple $100 million by 21 million BTC you get, well, more money than currently exists by a very large margin! ($2.1 quadrillion if I calculated it right. You have to forgive any errors. Other than my own investment account, I’m not used to playing with such large numbers.)
I can hear you already. It doesn’t have to climb another 10,000 times to turn a tidy profit. I agree. However, name anything that rose so far so fast without ending in tears?
I’ve seen this stunt several times in my short lifetime. As a child I watched the Nifty Fifty crash and burn in the 1970s. The dotcom bloodbath at the turn of the millennium should have provided lessons for today’s investors. The housing and banking collapse of 2008-9 should be fresh in everyone’s mind as it happened less than a decade ago. But memories are short when stupidity runs rampant, I guess.
This Time is Different
As with every bubble, this time is different. The tulip bulb mania of the early 17th Century (1636-7) was different. In all honesty, tulip bulbs always had value and best I can tell are still around. I can pick up a large bag at my local garden center for a few dollars. Tulip bulb prices ended up where they started. There was always value, just not the insane valuations. This is our first lesson. There is a grain (or bulb) of truth in every bubble.
The U.S stock market of the late 1920s is another example of value turning into a buying frenzy at any price.
Tears. Remember it ended in tears.
The stock market is a favorite vehicle for bubble creation. The Nifty Fifty of the late 1960s and early 1970s were stocks people felt could be bought at any price and held forever without worry. By 1974 there was worry. The only stock I can image did well was Kimberly-Clark, the maker of Kleenex tissues.
The stock market pump was over-primed in the mid-1980s ending in the biggest percentage loss for one day in market history on a fateful October day in 1987.
But this time is different.
Once again as the millennium raced toward the finish line stocks went insane. Dotcom stocks traded for hundreds of times revenue (not profits!) if they had any revenue at all. But many stocks (companies) did have real value so this time is different.
Then came housing in 2008. Fed Chair, Ben Bernanke, said housing prices would continue climbing only at a slower pace. Good call, Ben. And he was an expert.
For some reason people never learn. They go from one hot stock to another. People get killed in a bubble collapse, take a decade to rebuild reserves and go at it again with their battle cry, “THIS TIME IS DIFFERENT!” No it’s not.
Where is the Value?
In most bubbles of the past there was underlying value. Tulip bulbs were worth something. Not much, but something. Stocks (publicly traded “businesses”) certainly have value.
Today we have several expanding bubbles due to the massive money creation of central banks around the globe. Bonds are arguably overpriced. How else can you explain bond yields less than inflation?
We can go into other possible bubbles, but BTC is turning out to be a doozy by historical standards. Boys and girls, you might live through a bubble spike bigger than any other in recorded human history on an item worth absolutely nothing!
Stocks, bonds, real estate and even tulip bulbs have some intrinsic value. But what about BTC? Does BTC really have any value? Let’s examine.
What is a bitcoin? Some call it a pyramid scheme, but it really doesn’t resemble one. Is it a currency? Economists say a currency has three characteristics: a medium of exchange, a store of value and a unit of account. BTC doesn’t exhibit any of these features to any large extent. Yes, BTC is used in a small percentage of transactions, mostly involving nefarious transfers. The massive price fluctuations make BTC more a speculative investment than a store of value or unit of account.
Think about it this way. Why would anyone buy something with BTC? To do so when BTC prices are climbing triple digits or more each year is industrial strength stupid. Only a fool would do that! Using dollars to buy stuff and pay for services because your BTC will be worth more tomorrow seems the smart move when BTC is such an awesome investment. Just read the news, they’ll tell you.
Compare BTC to dollars. Yes, dollars are fiat money, backed by nothing more than faith in the government and the economy to give you value. No physical commodity supports fiat currencies. The U.S. government can tax more to pay back its debts if necessary. And currency IS debt. It says so right on paper currency: Federal Reserve Note. A note is a loan! (Ie. you have a mortgage note.)
BTC has no government or economy supporting it. BTC is fiat money**! No physical commodity backs its value. Scarcity doesn’t imply value as many buying BTC today contend. There might be a limited supply (intentionally) of plaid shirts. That doesn’t mean plaid shirts are worth more and more every day due to this limited supply!
BTC is supported by nothing and is fiat money. When BTC collapses who will want to accept BTC as payment for goods and services? When the price rises who in their right mind would use BTC to buy something; that’s a de facto sale.
There is no government or economy supporting BTC. BTC has value because people say it has value. Just like gold has value because people say it has value. (And because it’s pretty, useful in art and industry.)
When someone decides there is nothing but air underneath BTC the rush for the door will not be pretty. Most will not get out as the building burns. If you think the rush to buy is tremendous, just wait until fear sets in.
This is BTC’s Achilles heel.
Signs of a Bubble
I don’t want to dissuade anyone from investing in BTC if that is their heart’s desire. All I urge is caution.
Here are a few indications the party may be nearing its end. Over the preceding long Thanksgiving weekend here in the States over 300,000 new accounts were opened to buy BTC. BTC jumped over 10% during the long weekend. People are buying BTC with credit cards they are so desperate to get in.
Hedge funds are starting to invest in BTC, not use it as a currency. ETFs and futures contracts are ready to debut in the BTC arena. On December 10th when futures begin trading on BTC it could actually hurt BTC pricing! With a futures market you can play BTC without actually buying BTC. With such an easy vehicle to trade BTC without owning it could be a catalyst for problems. I’m not making a prediction, only offering insight. Like program trading in the 1980s, it might take a few years before BTC has its October 19, 1987. Or it could happen much, much sooner.
Taxes on BTC
This part of the discussion is for U.S. readers and those subject to U.S. taxes.
The IRS has clarified the tax treatment of bitcoin and other cryptocurrencies in Notice 2014-21.
Under tax law, BTC is NOT considered a currency! It is considered property. If you pay employees with BTC you still include the amount of U.S. dollar equivalent on their W-2. If a merchant accepts BTC as payment, the amount received at fair market value on the date of receipt is income. A miner of BTC includes BTC received as income and may be subject to self-employment tax.
Here is where it can get ugly. Most people are buying BTC to hold as an investment. If you buy something with BTC you may have a gain or loss on the transaction, technically a sale of BTC to buy said product or service. If you sell BTC at a gain you get either long- or short-term capital gain consideration.
If you sell BTC at a loss you can only claim the loss against other capital gains, plus $3,000 per year against other income. People buying into the hype could face serious losses and those losses may not be deductible for a very long time, if ever. You can carry unused losses forward. However, when you die, the capital loss carry forwards die with you. Ouch!
I’ve been in this business for a very long time. (The first one to leave a comment on my age gets one in the puss.) I remember the mess caused by stock options when the dotcom bubble burst. The Alternative Minimum Tax (AMT) issues were incredible. It took special action by Congress to offer relief to some of the victims. They suffered years before help arrived.
The good news is that this accountant sees no AMT issues (other than normal AMT issues) with BTC. The real issue with BTC is that losses could be strung out on tax returns for decades or longer. People who borrowed money will need to earn money, pay tax on the earned money and use the remainder to pay off debt lost trading BTC.
I am unqualified to call the future price of BTC. I could be wrong and this time could be different. Amazon was caught in the dotcom mess and did pretty darn well if I don’t say so myself. However, BTC is not Amazon. It’s not even a currency technically.
BTC has no real value. BTCs entire value is built on faith and faith has a habit of letting people down when they need help the most. At best BTC is fiat money; at worst it’s a fool’s game.
For BTC to continue climbing in price, more buyers willing to pay a higher price, need to step forward. The day will come when nobody wants to pay a higher price. That is the day we find out if BTC is for real or another chapter in the history book of insane bubbles. With no intrinsic value I have a bad feeling where this is going to end.
* Remember, more BTC are created every day so the supply keeps going up. If BTC continues to rocket higher, the total value of all BTC will climb faster as more BTC are available at the higher price.
** This isn’t really true. Fiat money is technically “from decree”. In this instance I use fiat as meaning a currency without the backing of any commodity or government taxing authority.
Thirty plus years in the tax field has exposed me to the good, bad and downright vulgar. In the early 1990s I was a top producer at a broker/dealer for several years before refocusing on the accounting end of my practice. Before I left the industry changes were underway. Fee-based asset management was gaining adherents.
The old model of commissions was experiencing the first crack in its armor. Leaving the industry didn’t leave a void in my knowledge as clients consulted with me when considering investments and reviewing their investment advisor.
Fee-based is all the rage today. Many of the original selling points from the 90s are still used today with the exception most reporting is now done digitally online. In a nutshell, people are doing all the fee-based work while still paying a fee.
Rather than call out firms selling fee-based products, I want to focus on how wealthy clients work with their fee-based advisor or firm if they handle investments themselves.
Less wealthy clients seek my advice, too. This allows me an inside look on how wealthy and pre-wealthy (is that politically correct enough?) deal with their investments and the people advising them.
There are remarkable differences. Readers will probably see some of these actions in their own behavior. The wealthy already know this stuff; they have people who have helped them accumulate wealth. The less than wealthy will see where they can change to improve their odds of achieving significant wealth.
Before we start we need to review what I mean by wealthy and non-wealthy. For this study I consider wealthy someone with $10 million or more in liquid net worth. The non-wealthy have a net worth of $500,000 or less in liquid assets.
The examples I use are from my office. I have many more examples of people working with advisors from the lower end of the spectrum. Still, with decades at my post I’ve noticed the speed at which people increase their net worth. Those who act like the wealthy tend to get there faster; those who don’t usually never get there or barely break into the seven figures.
One caveat: The market has been on a tear for nearly a decade now without as much as a meaningful pause. Everybody is smart right now! It’s easy to be smart when you’re winning. Mistakes are easily glossed over in a rabid bull market. Too many people will fail when they are challenged for the first time. Good habits and appropriate demands on your financial professionals will be your anchor in the storm.
5.) No churning! This goes without saying, except it needs to be said. Investment advisors are not immune to the pipe dream of trading your way out of a problem or to success.
You would be surprised how many investment professionals churn an account legally. Churning can be illegal, but my definition of churning is far broader and includes legal activities.
What I’m talking about here is not the typical churning of mutual funds or stocks to generate additional commissions. I’m talking about all the new fangled computer algorithms trading to generate tax-loss harvesting or asset allocation models.
Clients bring me these beautiful folders of color graphs and charts they received from their advisor. It’s junk! Yes, the folder has great information, but swaddled in plenty of BS. I think it’s done that way intentionally to cover for the times results are subpar. You can see the same thing online.
Wealthy people are less impressed with color charts and tax-loss harvesting. Tax-loss harvesting is a zero sum game most of the time with the only value deferred taxes. If you don’t have a large capital gains to offset you are limited to a $3,000 deduction against other income. The rest gets carried over. Tax-loss harvesting has its place, but is overused with several (we will leave unnamed) companies hawking these services.
What impresses the wealthy is intelligent asset allocation. Intelligent asset allocation needs rebalancing once per year. That’s it! No more playing with the money! Leave your fingers off it.
Instead of churning the wealthy avoid investment gains all together with the host of retirement and quasi-retirement options available. Another neat trick to not pay capital gains tax is to not sell a stock with a gain or, in some cases, gifting it to charity and getting massive tax breaks while avoiding capital gains taxes to boot.
Rebalancing your portfolio quarterly only gives the illusion the investment advisor is doing something to earn his keep. With rare exception, rebalancing the account is needed once per year max!
The wealthy know you can’t beat the market with a simple computer program. Moving money around causes tax issues, trading costs and potential missteps in handling the portfolio, leading to loss.
4.) Matching the market is not a bad outcome. When the stock market was crushing it back in the mid and late 1990s I had a client who was considering moving his portfolio to me. I interviewed him (Yes, I interviewed him! Every warm body walking through the door is not client material.) to find his objectives and to see if we had a similar philosophy. Early in the conversation he said he expected me to do better than 20% per year since anybody could produce those types of returns. I showed him the door.
Good times (like today) give people a false understanding of long-term gains in the broader market. If a potential client has an unrealistic expectation it didn’t pay to begin a relationship; he would be unhappy in a short period of time anyway.
I’ve never had a wealthy client ever spew such garbage. Wealthy people think matching the market is a good baseline to start from. If you drop everything into index funds you should expect to have index results minus fees.
Non-wealthy people always want to take a flyer with the next greatest thing, currently bitcoin. Wealthy people also realize some hot investments today could really be a long-term quality investment. Amazon and Apple are two examples proving their worth and Tesla and Netflix are felt by many to have promise.
Hot stocks are not intrinsically bad! Wealthy people know this. Less wealthy people over-weight the risk of their portfolio. For a few it means immense wealth and encourages other less wealthy people to try to emulate the lucky.
The wealthy allocate a small percentage of their funds to non-traditional investments or high flyers. A typical wealthy client will have the bulk, say 80%, in investments expected to match the underlying market*. The remaining 20% in invested in increasingly risky investments.
A typical example is the wealthy client with most of her money in broad-based market index funds with the remainder in quality individual stocks and a few speculative issues.
Non-wealthy investors complain to their investment advisor of market matching performance. Over the long run this is an enviable track record and the wealthy know it and hence, don’t complain about their good fortune. Even a small outperformance over long periods of time is a cause to celebrate. The difficulty in beating the market before fees is long.
3.) Consider taxes when presenting investment ideas. Taxes can take an awesome investment down to mediocre in three seconds flat! Non-wealthy investors are impressed by before tax results. Wealthy investors want to know what they keep after taxes.
Many times a great performing asset can find a home in a retirement fund to preserve before tax gains. Of course, the investment needs to be made from inside the retirement account.
Buying an investment with a long time horizon is better than short-term results! Non-wealthy people love the quick score, but lose when the tax man begs his share. Wealthy people know a long-term investment with years of upside means taxes will not be due for a decade or longer, allowing for more growth without taxes slicing out a major portion of the gain.
Taxes are not #1 on this list, but are the most talked about issue wealthy clients have once a new investment is introduced. I can count on one hand with fingers left over how many non-wealthy clients asked me about their expected returns after taxes. The non-wealthy who do ask are not non-wealthy for long.
2.) Research. Pretty booklets and brochures don’t cut it with the wealthy! The wealthy don’t like short cuts. They want detailed research with solid numbers and ratios. When is the last time a non-wealthy client asked me about an investment’s cash flow? I can’t remember it ever happening. The wealthy ask EVERY time. Cash flow is how investors are paid and how a company generates capital to invest. The wealthy are nervous when capital requirements are met with borrowed funds. It’s also why Warren Buffett likes Apple now, but didn’t bite twenty years ago.
Research comes in many forms. The most obvious is the lack of research. Investment professionals working with the wealthy know better than to bring an idea to the client without adequately vetting the investment. Wealthy clients ask a lot of questions before investing!
Less wealthy clients are more likely to say, “Cool!” at pretty baubles and trinkets. An S&P index funds doesn’t need a lot of research. Individual stocks and bonds do. Less broad asset classes also need extra research to verify it meets investment objectives. Alternative investments need continual research, even after the investment is made.
1.) Straight talk. If anything drives wealthy people crazy it is double talk. Wealthy people are wealthy for a reason! Most are self-made and don’t appreciate a condescending attitude. Technical jargon will nix a deal faster with the wealthy than anything else. Less wealthy are frequently impressed by such 47 letter words. The wealthy are not!
I’ve noticed wealthy people can sniff out BS from a mile away. That’s why they are wealthy! Investment advisors looking to pocket a quick commission of generate some easy fees are advised to seek out the less wealthy. The relationship between advisor and wealthy client will wither fast when the technical jargon and BS flies.
Honest answers, even bad news, are expected by the wealthy. They don’t have time dancing around an uncomfortable situation. They want straight answers now.
The less wealthy cling to every ounce of hope the losing investment will turn around. It never does. The wealthy lick their wounds and move one; the non-wealthy cling to hope when all hope is gone.
The wealthy are wealthy because they know when to move on. Honesty up front is the only way the wealthy want it.
The wealthy are a big mystery to non-wealthy people. It shouldn’t be that way. There is no big secret the wealthy possess! In a nutshell, the wealthy hate games: talk straight, do your research before contacting them and consuming their time, consider taxes when researching an investment, matching the market is not a crime and most of all, don’t churn their money for a quick fee or to hopefully score big.
When handling your own money expect the same! It’s what the wealthy do.
And that is why you read to the end of this post.
* Each investment has an underlying market. Some wealthy investors keep a lot of their net worth in bonds. Some like equities. The goal of the wealthy is for their investment objectives to match broad market returns they’re invested in. Example: a wealthy client with a risk tolerance for bonds only might have 80% of her funds in Treasuries or high rated corporate and municipal bonds, with the remainder in lower rated bonds and a few percent in junk bonds or junk bond mutual funds/ETFs.
For thousands of years in the Western world the best way to be noticed was to have your book banned by the church. Intelligent modern authors would welcome such attention as it guarantees their work will be lifted from obscurity into the light.
Every year books are banned. Sadly, your favorite accountant has never made the list.
If I can help it.
Censorship doesn’t work well with me. If you tell me I can’t read something I’ll not only read it, I’ll buy it and keep it on my shelf. When a warning is issued to avoid knowledge my suspicion is raised as to the warning. The government and self righteous people are motivated by a personal agenda to hide the truth and it is a sure way to get people to look, including me.
Book banning isn’t something limited to the Dark Ages. Books are banned every year by various organizations for a variety of reasons. Personal bias may cause me to agree with the ban. For example, Twilight was banned back in 2010 by some groups. I think we can all agree the book was bad (play with me on this one) and should have been relegated to the dust heap of history. Instead, Stephenie Meyer enjoyed a bestseller as the hate erupted and grew.
Another book I should have saved my money on was The Satanic Verses. Salman Rushdie’s book was destined for the remainder bin until the Ayatollah, in his infinite wisdom, made sure the entire planet knew of the book with his banning and fatwa. The Satanic Verses went on to become a bestseller and Rushdie’s work is relevant because of name recognition. Rushdie’s work was likely headed into the abyss, known by only by the most dedicated of scholars until his work was banned. Rushdie now is a guest panelist on a variety of television programs such as Real Time with Bill Maher. Why couldn’t the Ayatollah keep his flap shut? Rushdie’s net worth is estimated at $15 million. I guess banning Rushdie’s book really showed him.
Oodles of years ago I was reading a news magazine when a small article listed a book used by man to murder was forcing the publisher to pull the book off the market. The book is called Hit Man by Rex Feral. The author used a pseudonym for obvious reasons. It was later learned the author is female.
I immediately purchased a copy of Hit Man before it was pulled. The book is a how-to guide on how to start a side gig killing people, aka, a hit man. Always keeping my mind open to all possibilities (one never knows when such information might be needed) I read the book. It’s not the worst thing I’ve read, but it is toward the bottom. The information is suspect but might provide a good resource when writing fiction.
I still have my copy of Hit Man. A few used copies still float around for anyone curious what all the ruckus was about. Used copies fetch $75. I’m still not selling mine.
Cory Doctorow is a science fiction writer who insists his work be available online for free. He makes it clear an author’s greatest risk to their work is not theft; it’s obscurity!
In the crowded field of fiction standing out from the crowd is near impossible and without sticking out from the crowd you are guaranteed a front row seat in the loser’s column of the obscure.
I would never have heard of Cory and his work if it weren’t for his digital policy with his work. As he expected, it lead to a certain someone, perhaps a certain accountant, who ended up separated from some of his cash for a hardcopy of the material.
What Doctorow did was tame compared to what one of my favorite authors did. Ryan Holiday is a bestselling author now, but he had to start somewhere.
Early on Holiday was an assistant to Robert Greene as he was writing The 48 Laws of Power. Holiday was indoctrinated in the Machiavellian methods employed by people serious about success. While not in agreement with every piece of advice offered by Greene, his points are solid and backed up with examples from history. You don’t have to like it as long as you are aware it does work!
Even this is child’s play compared to the work Holiday did for Tucker Max. Max’s work is vulgar, even by my standards. I have an extremely open mind when it comes to publishing. Attempts at censoring my work will not go well. That said Max really grosses me out. His work encourages (in my opinion) abusive behavior towards women. It’s one of the few things I couldn’t finish reading. I could only take a few pages before I backed down as I fought back the wretching.
Max’s first book was I Hope they Serve Beer in Hell. He later made the book into a movie. Max enlisted the services of Holiday. Holiday knew he had to pull out all the stops. Holiday orchestrated a reverse psychology campaign where he organized pickets against the movie and vandalized movie posters himself and then reported it to the media. What Holiday was trying to do was get the movie banned so everyone would have to see it to know what all the commosition was about.
The movie bombed at the box office, but don’t feel too bad for Tucker Max. The book sold over a million copies.
I was only banned (censored) once in my life. In the past I wrote flash fiction in the transgender genre. My youngest daughter’s medical issues introduced me to a demographic I never knew existed. Always wanting to conquer flash fiction, I rolled up my sleeves and started pounding the keyboard.
Flash fiction is stories of only a few hundred words. It’s harder than it sounds. Writing a story, a real story, in two hundred or so words is brutal. And each story had to have a transgender theme! Determined not to succumb to vulgar writing I made it a point to keep the stories uplifting. Many TG blogs sparked traffic with nudity. This wasn’t going to work for me. I had Google ads and Amazon on the two TG blogs I wrote so it had to be clean.
I was also motivated by something else. I laugh and joke about my TG flash fiction days and how every story had to end. But this was serious business to me. The cold hard facts are transgender people commit suicide in alarming numbers! Estimates range as high as 60% of transgender people attempt suicide and it’s the highest demographic of people who succeed in ending their own life.
This is not a world I wanted my daughter to grow up and live in! My stories were my way of making it normal for people to be different. My baby, my child, my girl was born intersex. She will be grouped in with the TG community because she MUST undergo the same medical procedures a transgender person does transitioning. The only difference is my daughter has no choice. She can’t “just live with it”. She either undergoes the medical procedures or she dies. What would you do?
Keeping material fresh when my average story was two hundred and some words grew more difficult each day. I wrote two TG blogs (double the blog, double the income) every day for about four years. That’s over 2,500 flash fiction TG stories! Even I find it hard to believe I produced so much material.
I covered every topic imaginable as I wrote the flash fiction. I, of course, wrote many stories to appeal to the erotic portion of the demographic. I also researched the genre looking for fresh material. And I found a whopper.
I discovered the sex change capital of the world is Iran! Yes, Iran! It seems homosexuality is a sin against Allah and sure to get you killed. But, if you get a sex change you are technically a woman and no longer an abomination to god. So Iran leads the world in sex change operations. Mostly due to the fact it’s chop it off or die. We can laugh, but for homosexual and transgender men reading this it’s no laughing matter.
Well, I used this information to write a very mild TG story based in Iran, Yes, I pushed 250 words together and caused a ruckus. TG flash fiction is generally captioned, meaning a picture is captioned with the flash fiction. I used a picture of a Muslim woman wearing a niqab. All you could see was her eyes and her feet.
I was immediately banned by Google! The offense? You could see the woman’s ankle and it would offend some countries around the world. I was not impressed. I removed Google ads and republished. Like I said, censorship doesn’t work well with me.
Ban This Blog!
I looked. There is no list I could find of banned blogs! That’s too bad. I really would have enjoyed making the list.
My marketing sickness has caused me to write some modestly controversial topics on this blog. Maybe I need to turn it up a notch. I once claimed I died and I begged readers to steal my stuff. It gave me great pleasure to write my obituary. (Maybe I am sick!)
As a masterful stroke of marketing genius I propose we use Holiday’s tactics to Tucker Max this blog. No misogyny or encouraging the abuse of women. I support anyone’s right to publish what they want; I reserve the right to not read or promote it. We don’t need to encourage the harm of others to get noticed.
If you haven’t found anything to feel righteous indignation about in who I am and what I write here you haven’t been paying close attention. No one is exempt. Everyone has something you can be offended with. Don’t waste a good opportunity. If you meet someone of impeccable character, make something up. The media and the government do all the time.
Traffic here has been growing nice the past year. But to get the numbers into the stratosphere we need people to start talking. And nothing spreads like juicy gossip! The more solicitous the better. To get banned by anyone or any group requires offending certain groups of people who will teach me a lesson by encouraging the media to call for my banning. These outraged folks will contact other bloggers to spread the rumors. They need to want to hurt me and I love it!
How can you start the rumor mill? How can you get the media to put this blog (and me) into crosshairs? How can you get the gossip flowing with a life of its own?
Well, I read naughty banned books listed above. I even own a how-to book on how to kill people for a side gig. Not good enough?
Tell them I’m a questionable person of questionable character! Ah heck, not good enough either. We elect people like that every year.
I know! Hit’em where it hurts. When with your Republican friends, tell them I think Sean Hannity is a weasel and Fox News is fake news. Tell your conservative friends I think Hillary Clinton would have made the best President in U.S. history. Heck, I even called Trump an idiot!
Still not enough? I agree! We still have close to half the population we need to offend. Gather your Democratic friends and tell them I think President Trump is the most productive President ever. Tell them I said Bernie Sanders is a light weight.
Now I understand some people have stepped off the political train long ago to retain their sanity. Well we can take care of them!
If you have an atheist friend, tell them I said atheism is a religion. Around your Christian friends say, I know this blogger who thinks you’re nuts.
Don’t worry none of it’s true. This is marketing! People will stick around if they like your stuff, but they come back more often if they hate you with a passion. They want to watch you fail. They want to slam your head (actually, my head) against a wall with every word I utter.
Nothing generates traffic like a zealot! And traffic means money. And since this blog is a business enterprise we like traffic for obvious reasons.
In honor of Buy Nothing Day (the day this post is published in 2017) you can spread the wild rumors. Contact other blogger and tell them to ban me. Get people talking behind my back and protesting I cease and desist! I demand it! It costs you NOTHING!
What? Wait, kind readers. I have a phone call coming in.
Uh-huh. A fatwa you say. Lynch mob? Really? Is it helping traffic? I see. Then I’ll be a martyr for a good cause. No?
Okay, I’m back. I’ve decided to take the day off and not publish since it’s the day after Thanksgiving (Black Friday).
But for the record, I did say that thing about the President.
This post idea was rolling around in the queue for a while. I started a few months back with the first two paragraphs. Later I fleshed the idea out a bit more and finally had enough material for a humorous post with serious implications. I double spaced between entries of this outline as I expanded it.
Readers may find my writing process entertaining. Bloggers and other writers may find it instructive. When my notes seem to add to the story I publish them below the corpus. Enjoy.
Bloggers hide a truth they may be wrong. It’s an occupational hazard.My tax advice includes limited situations. Facts and circumstances can change the outcome so additional thinking/research might be required.
And the post title is perfect for marketing. Tell someone not to read something and they will do it anyway.
Ryan Holiday marketing ploy of starting a boycott of his client to get attention. Cory Doctorow demanding his publishers allow him to post his stuff online for free (theft is not the issue, obscurity is), Hitman book when someone used it and it made the news (how I heard about it and bought it).
In honor of Buy Nothing Day I ask readers to find something around here to feel indignation about and spread the word. Demand a boycott. Don’t read this blog!!! Tell the news. Use Ryan Holiday tactics.
Then internalize the hatred, coming back often looking for any chance to jump down my throat.
Consider it your early Christmas present to me.
And it didn’t require you to spend a penny to give it!
Funny stuff: Talk about politics and religion a lot. People like that. When with Republicans tell them you heard I think Fox News sucks, Sean Hannity is a weasel and Hillary Clinton would have made the best President in U.S History. With Democrats tell them I think Hillary buys used pant suits, we are finally getting stuff done with Trump as President and liberal policies died with LBJ.
On religion, when with atheists, tell them I think anybody who doesn’t see the truth of God’s existence deserves to spend eternity in hell. Tell your atheist friends I think atheism is a religion. With your friends of faith expound my astounding logic on the lack of evidence for a god, any god. Tell’em I fish Sunday morning instead of going to church.
Don’t worry none of it’s true! This is marketing. People will stick around for a while if they like your stuff or hear good things about you. Get them to hate you and they’ll live on this blog waiting for any chance to jump down my throat. They’ll also glean every word I write looking for indications of misfortune in my life. Indignant people love to gloat. You get’em here and I’ll give’em a reason to stay. I’ll intersperse moments where I need to hammer the Jack as the biting liquid spills from my glass as I fall into a drunken stupor.
It’s easy to forget to feel grateful for all the awesomeness in our lives. We get lulled into a false sense of superiority in our abilities when the blessings flow unfettered. Only when the boom is lowered do we begin to look around and notice how lucky we have been.
It’s the Thanksgiving holiday here in the States on Thursday. Families from around our nation will gather at the dinner table for good food and stories. Anticipation of the mouth-watering food means we quickly recite a prayer and quickly dig in to the abundance displayed on our table.
As soon as we stuff our face we waddle to the couch for football and a nap. A guy has to work hard to make room for the pies and ice cream later.
I’m not immune to whining. When I think I’ve been treated unfair or my life has experienced a minor inconvenience I quickly bitch about the inequalities of life. I forget too easily how good I have it.
The question really is: How bad is my life? Has it ever been really bad? Am I really so unlucky or inconvenienced? Let’s examine.
When I was thirteen years old my dad took us hunting often in the early autumn. I wasn’t a big sportsman, but walking the outdoors in autumn is always a welcome pleasure.
Back in those days we were religious. My parents still are. It was pheasant hunting season and we belonged to the Eastshore Sportsman’s Club. The club rented land from various farmers and planted pheasants. Our hunting party consisted of my uncle, brother, dad, our church’s minister and his son.
Our party walked a fence line of farmland northeast of Chilton rented by the club and planted with pheasants. Our dog worked the fence line like a pro. As several fields came together the fence branched off in the shape of a T. Our group took the fence line to the right.
Another lone hunter came from the other direction and walked the opposite side of the fence line we were on slightly ahead of us.
Our dog flushed a pheasant in front of my dad. My dad let the bird get in the clear, raised his gun and fired. Score!
My dad was a good shot. As the pheasant died it flopped a bit as it fell so that it would land between the sole hunter on the opposite side of the fence line and us. The sole hunter turned, saw the pheasant falling and raised his gun. He followed the bird as it came down and when his gun hit head level he pulled the trigger.
Can You Hear Me Now
Our minister, his son and I went down. The sole hunter had a double barrel 12 gauge shotgun. If he’d have pulled that second trigger you would never have known I existed.
BBs from a shotgun are unlike a rifle wound. We went down, but didn’t stay down. We were peppered with BBs but relatively unharmed.
We were rushed to the hospital. The doctor took forever being we were at Chilton’s Band-Aid Stand as our local hospital is sometimes called. The doctor and hospital really did do a good job. No speed is fast enough when suffering a gunshot wound.
God was watching out for us that day. He allowed stupid to happen, but protected our rag-tag band from permanent harm. He also left several warning calls to remind us how fortunate we were.
Our pastor wore thick glasses. A BB broke one of the lenses. If his sight were true he would have likely died that way. There is a blessing in needing glasses sometimes.
Our pastor’s son was a friend of mine until we graduated high school and he moved out of the area. His name is Aaron. Aaron was the luckiest of the injured having the fewest BBs.
All the BBs in me we superficial injuries save one. A BB hit my Adam’s apple dead center. If you feel your neck you will notice a groove in your Adam’s apple. The BB hit that spot on me perfectly in that groove and stopped less than ¼ inch (one centimeter) from my larynx. Just a bit more and the talkative me would not exist.
Thank God I was Shot!
The doctor removed the BBs without any problems. My vital signs were taken. The doctor heard a strange heart murmur. Another odd thing, my blood pressure was high in my upper body and low in my legs.
The doctor suspected heart issues and ordered a cardiac catheterization to see what the heck was wrong with me. Time was of the essence because of the suspected high risk to my life.
Cardiac catheterization isn’t that big a deal. It makes you sick when they push in the dye, but otherwise it wasn’t bad. The surgeon cut a vein on the underside of my elbow and inserted a tube with a camera at the end.
I had what is called a coarctation of the aorta. In laymen’s terms this is a narrowing of my body’s main blood supply. The fix was simple in theory, but major surgery in 1978. All the doctor had to do was cut me open, stop my heart, clamp the aorta tight on each side of the coarctation, cut the narrowed portion out, pull it together and sew it up. Simple! Oh, and restart my heart before closing the door.
And hope there are no leaks.
The narrowing was serious and would become a greater problem as I aged. It was decided I could finish the school year before going under the knife. I was shot in the fall of 1977 and had surgery the first days of June 1978.
Back them they separated my ribs to get in there and change the oil. If you ever see me shirtless (unlikely since I don’t like running around half dressed) you will see a scar starting under my left armpit and ending above the shoulder blade. The scar is J shaped.
I spent my fourteenth birthday in recovery.
Gifts Never Stop Coming
Back in 1978 there was a disease going around doctors had no what it was. The CDC worked frantically to figure out how the disease spread. Today we call this disease AIDS or HIV.
Blood wasn’t screened back then and even if it was the medical profession had no idea what to look for. All doctors knew was an autoimmune disease was striking down homosexual men and drug users.
My surgeon died a few years later of HIV complications. All it would have taken is one nick of the glove.
Pass a Tissue Please
When I start to count my blessings the minor annoyances of life begin to pale. My life growing up on a farm in the middle of nowhere was a generous gift it took me decades after the fact to realize. Now that I appreciate the blessing I would like to go back and do it again. Right this time.
But it doesn’t work that way.
I was always lucky in business. I’ve had plenty of failures and times of acute anxiety. Business can do that to you! In the end it always worked out. I work the job I love as the boss and make an above average income.
Before the FIRE community was cool I learned to save and invest with intensity. Grandma and Grandpa Accountant lived through the Great Depression so saving was ingrained in us kids from little on. Those were hard times! Another tissue please.
Today I had the brainy idea of checking how much the stock market has climbed during my adult life. I turned 18 in the summer of 1982. The DJIA was around 800 back then and is approaching 24,000 today! Gawd, my life is hard. The market “only” increased 30 times in my adult life. A measly 3000%. What do I have to be thankful for? Really?
I worry people may talk behind my back spreading rumors, true and false. I complain of too much work in my business due to the unexpected success of this blog and the kindness of other bloggers sharing my story. Like really sucks!
Less than two years into this blog and its won an award for Best New Blog of the Year. Just hand me the box of tissues. I can’t take it anymore.
Humility and Gratitude
Life has been good to me and always has been. I bet its been darn good to you too.
I came this close to losing my life to AIDS without even knowing the name of the disease that would have killed me. My business took hard work, but always kept the family fed.
If I were not shot my heart condition would have gone undiagnosed. The doctors estimated it would have caused a heart attack by around my 30th birthday. Good thing I took lead.
Simple mutual fund investments have been straight to the moon for 30 years! Sure, I made dumb decisions and lost money and paid the price. I wouldn’t change any of it for all the money in the world.
You, kind readers, are a special gift. I never expected you’d be stopping by. It was only a fluke that forced me to write this thing for two years. It’s hard to believe I published 600,000 words here already. Your support has been overwhelming. I am humbled and filled with gratitude.
I am human. I make mistakes; I have feelings and emotions. Perfect I am not. Through it all my heart was in the right place even when I swung and only caught air.
All the things I mention above I am thankful for; the glorious successes and the educational failures. But more than all those things I am most blessed with the most wonderful woman to ever walk the earth and the two best kids any dad could want. Some of you might want to disagree. Protest all you want. I know how good I have it and always did. (Give a shout out to the greatest mate and children in the world in the comments section, guys.)
My life has been a litany of things to be grateful for. I can barely grasp the scope of my blessed life. It takes my breath away.
You also have as many things to bow your head in humility for. You’ve had challenges and problems. Nelson Mandela could have given up hope in prison. Instead he kept hope close and eventually brought democracy and a voice to his people. Stephen Hawking could cry and people would understand. Yet he continues to excel without complaint. He is grateful and thankful for his blessings of family, friends, modern technology and his mind.
You are as lucky as I am no matter where you are.
You are alive reading this right now. Excluding the level of my writing skills that is a gift! You are on a piece of technology only a mere two decades old. I am reaching out over space and time to touch your mind and leave a message of hope. We are all very blessed.
I give thanks for my family, health and mind. I give thanks for awesome clients and forgiving readers.
Now please pass the gravy.
The easiest way to invest in equities is with a mutual fund. The surest way to match market performance is to use index funds. Then there are times we get the urge to do things the hard way.
Of all investment classes the broad market has performed best. The stock market, for all its fits and starts, has outperformed over long periods of time without the need or risks of leverage to accomplish the goal.
A simple strategy of consistent investing in index funds has plenty of adherents in the FIRE* demographic. The reason for this is simple: it works! Depending on where in the market cycle you start, a decade to decade and a half if all that’s needed to fund your retirement. Start saving half you gross income at age twenty and by 35 you are ready to either retire or carve your own path in life.
The plethora of blogs in this demographic are a testament to the successful strategy of wealth building with index funds. What is often forgotten is that you are investing in real businesses even when using an index fund. And it’s business, not stocks, which create the real wealth.
If it takes a decade or so to create an adequate net worth to retire, business can get you there in a few years.
Buying an index fund is a sure way to enjoy average growth. Average is good in this case because the economy grows, always has grown and will continue growing into the foreseeable future. As productivity and other advances and new technology come online you are in for the ride because your index fund owns just about every winner in the crowd. You also own old school companies still growing and/or throwing off massive dividends. There are also a few stinkers in the crowd as some former success stories are headed for the exit.
With this in mind, intelligent people sometimes want to strike out on their own with a small percentage of their portfolio. If you possess the mind of an accountant and the discipline of a saint you can ferret out opportunities with the potential of outperforming the market.
And armed with this knowledge it becomes clear the pickings are slim when the market has been straight up for eight years. There are plenty of great companies, but most sell for a dear price, unworthy of additional investment unless available at some future date at a better price.
A Clear View of the Future
Exotic securities have been devised over the years to hedge various investments. These very same tools are easily used to gamble, ah, speculate.
Farmers have had futures contracts available to them since before the beginning of time. It makes sense for a farmer to use futures to protect their investment in an uncertain world. Agricultural products have thin margins and farmers know it. A small shift in commodity prices between planting and harvest can destroy a farm financially.
To limit the risk of prices changing, a farmer can sell his future corn crop in advance. It works like this: A farmer probably knows his input costs of fuel, seeds and fertilizer. He also knows if it makes sense to drill the seeds into the ground in the first place. If the input costs are more than he can expect at harvest he either needs to allow fields to lay fallow, plant a different crop or hope to Mother Mary prices turn around.
Even if the farmer sees current corn prices are higher than his input costs there are no guarantees prices will stay favorable. A drought can devastate his crop and prices tend to decline into harvest as more of the commodity becomes available.
To limit risk the farmer can sell his expected corn crop coming off the field in autumn before he even plants in spring! If prices go up the farmer loses on his hedge, but wins on the actual crop. In prices decline he loses on the actual crop, but profits from the futures hedge.
Futures contracts are a necessary part of farm living. Without the ability to hedge farmers are one, or at best two, bad years away from bankruptcy.
The same tools can be applied to almost any asset.
You Have Two Options
Before we start this part of the discussion I want to give a warning. This is more a case of do what I say, not what I do. I use some very advanced methods when protecting my investments and when buying them. This discussion is on options. I do NOT recommend options except to the most knowledgeable and astute investor! Consider the remainder of this post informational only.
If you are unfamiliar with options and how they work, here is an article on Investopedia and another from NotWallStreet. Do NOT let anyone, me, a broker, a TV talking head or internet article, talk you into options unless you know what you are doing. You don’t.
There are two options in the world: calls and puts. Like futures for a farmer, an investor can hedge her investments against the price on some future date. The market has been rallying hard for years. If you are worried about the market declining, you can sell your stocks or index funds and pay taxes on the realized gains or write covered calls or buy puts. Each action has its own associated risk.
Selling causes tax issues, but at least the damage is known. Covered calls only provide limited protection and if the market keeps climbing you are likely to lose out on future gains. A covered call might provide a few points in premium only. If the market decline is larger you will suffer paper loses. Buying a protective put is a cheap hedge and frequently the preferable route. If the market declines you gain on the put option; if the market rises or stagnates your only risk (loss) is the put premium.
But that is not what I use options for. I’d buy a LEAP call option on the S&P 500 if I got the same deal Warren Buffett did nearly a decade ago. (Buffett paid a small premium for an at-the-money S&P 500 index call with a 10-year time frame with the market off nearly 50%. I wanted the same deal but they showed me the door.)
I rarely use covered calls to generate premiums as the market likes to steal your stock when you do. I don’t speculate or gamble with options either.
The one time I love to use options is in a market like we’ve had the last several years. The market has been doing well for a long time and when I’m looking to buy an individual stock I sometimes use options. (You can use the same strategy with index funds, but I never do. I still invest excess capital into the index fund and wait like a good boy.)
The problem with today’s market is good companies are selling at too high a price. Now if I could pick up some Facebook (FB) at 100 or Apple (AAPL) at 140 I’d be excited. (FB last closed at 179 and AAPL at 170.15.)
Most stocks don’t have much of a premium for short-dated options way out-of-the-money. Some stocks do. The best way to show you how I spike my returns using options is to list what I have in my current portfolio.
First, when I sell naked puts I consider them long-term buy orders in companies I want to own more of when the price is too high. If the price comes down enough the options will execute and I’ll get my extra shares. If the stock doesn’t drop enough or advances I keep the premiums. I never use this strategy in a down market as I can just buy the stock without waiting.
Here are my current naked put holdings:
Company Sold Date # Sold Option Date Strike Sold $ Current $
AAPL 11/15/17 -2 Jun 15, 18 140 3.04 2.87
FB 6/9/17 -4 Dec15, 17 120 2.05 .01
FB 6/29/17 -2 Jun 15, 18 100 2.00 .30
MO 7/31/17 -2 Jan 18, 19 65 8.03 5.90
NFLX 5/25/17 -2 Dec 15, 17 130 4.05 .05
PM 10/30/17 -2 Jan 18, 19 90 4.33 5.25
TSLA 5/25/17 -1 Dec 15, 17 220 6.68 .26
If every stock declined to the strike price or lower I would be on the hook to buy $175,000 of stock! As you can see most transactions will expire worthless before the end of the year and I keep the premiums.
MO is the outlier. Option premiums are low for MO so I sold a LEAP out in January of 2019. I also bought more MO in the low 60s recently.
I am willing to buy each one of these stocks at the strike price should the market decline to those levels and probably will even without the naked puts.
There are two risks to consider. The first requires self control. You only sell naked puts in the amount you have current funds available to buy.
The second risk you can’t control. If the story changes and the stock crashes, you will end up buying back the put at a loss or owning shares in a company where the story is no longer compelling.
Simply put (pun intended), there is no risk free investment. Just wanted you to understand the two risks in this scenario.
The Cash Hoard and the Friends I Keep
Whenever I mention I use this strategy people ask why I don’t stay 100% invested all the time. My answer is, for the same reason Warren Buffett’s Berkshire Hathaway has around $100 billion in cash currently.
The truth is I like to keep my powder dry. I never have 100% of my money invested. There are a few nickels in my pocket when I walk around town to avoid vagrancy charges. As a business owner I need liquid working capital so I always have something tucked between the mattresses. I also like keeping some money available in case an unbelievable opportunity arises.
You do the same thing on a smaller scale. You might have an emergency fund. If so, it’s probably earning a whopping 1% while it waits for work to arrive.
Another brutal truth to why I keep a larger amount of cash laying around is because I am different than you. The higher your net worth the more liquid cash you will tend to accumulate during certain times of the year and during market overvaluations. I consider the current market overvalued.
Does my opinion of the market conditions change my core investing style? No! I max out all my retirement accounts (Mrs. Accountant’s too) and put it all in index funds. Those suckers keep getting filled.
When it comes to individual stocks I need to build a reserve to buy companies when they are on sale.
I’m not alone in using this strategy to generate income. Back in the 90s Intel (INTC) sold massive quantities of put options with the intention of using a down market to buy back shares. (I’m not sure if INTC still does this or not.)
Over the years INTC had such a large income stream from the naked puts they listed the income separately in their earnings reports and annual report. INTC’s intention was to structure the naked puts to force execution so they could buy back the stock and keep the premium. There was serious money in this for INTC.
I owned INTC for a few years back then. It wasn’t my favorite investment, but it had potential until my research discovered a terrible truth. I went back and reviewed over a decade of financials for INTC and discovered they bought back more stock than their entire earning over the previous decade and still had MORE shares outstanding. Such is the world (and risk to shareholders) of employee incentive stock option.
We’ll leave that discussion for another day.
A Steaming Pile of Schmoo
This was harder than I thought. Novices will be left bewildered and experts already understand the program. How do you present a complex idea like options in under 2,000 words? You don’t! I feel like I left a mish-mash of information. The information is accurate! The issue is communication. Did I get my message across?
There is so much more to this discussion than I could pack into one post. Naked puts are a viable investment strategy if used in a limited fashion, even if INTC used it to the nth degree.
Options in and of themselves are not bad. They do have the potential to cause great harm however and they are easy to abuse. Consider options the opioids of your investment portfolio. They reduce pain at first, but can do lasting damage when abused.
So why do I do it? Because if the market doesn’t decline I keep over $6,200 in premiums. The extra cash, added to an already growing stash, will come in handy when the market does decline and some companies become a steal.
Or I might be an addict beyond help. You decide.
* Financial independence, retire early.
Good fortune has struck the Accountant household again. Cash has piled up while the retirement accounts are maxed out. Significant funds were added to the non-qualified index funds and there is still cash waiting for investment.
I’m generally uncomfortable with too much uninvested cash. Never one to time the market (not that I haven’t tried, but my results were as expected) I like to get my army, called capital, into battle as quickly as possible.
In the last few weeks I added selectively to my portfolio, even adding a new name to the mix. Since I preach index fund investing so heavily it requires some explaining why I did what I did.
First let me introduce you to my new soldiers. I added to the ranks of Altria (MO) and Philip Morris International (PM). The name of the new platoon — wait for it — is Apple. Yeah, I know. Back in September I warned of the risks of owning index funds and individual stocks. My argument was simple. Buying certain big name stocks (companies actually; remember you are buying a fractional share of ownership in an ongoing enterprise) can overweight your portfolio. Since Apple comprises a whopping 3%+ of the S&P 500 weighting, buying more Apple stock on the side starts to make the ship feel a bit top-heavy.
Sometimes it’s best if you do as I say and not as I do. I have the luxury of a larger net worth so I can have a larger mad money account to play with. The only thing is these new purchases are in what I call a serious money account. The purchases are planned as very long-term holdings.
I have some explaining to do, kind readers. I’ll outline why I like Apple enough to buy even after a massive run-up this year and a market looking frothy. My reasoning for adding to my large amount of MO and PM follows the Apple discussion with my thoughts on two stocks I own but have concerns with: Netflix and Tesla.
The Case for Apple
Some people recommend diversification as a way to mitigate risk. I recommend diversification (index funds) because most people don’t know how to value a potential investment or don’t have time to do the evaluation.
My investing history has included a small number of companies with most of my money in mutual funds (index funds the last decade or so). Instead of diversifying to mitigate risk I research to mitigate risk. As long as I’m going to research I may as well do an in-depth analysis. If I do a good job and the investment is solid with an adequate margin of safety it makes sense to buy a lot of that investment.
Apple is a company I’ve watched for a long time. I made excuses as to why I shouldn’t buy it, but the story is too compelling to pass anymore.
Apple is a massive company. Normally companies so dominant tend to stagnate as competitors eventually pass them buy. The biggest market capitalization stock changes each decade. Today’s big names eventually wither and die. Anyone remember Eastman Kodak or Xerox? They’re both still around and publically traded. They were also darlings of another age. In 1973-4 they were part of the Nifty Fifty. Time has not been kind.
So why Apple? It’s a huge company; the biggest on the planet by many measures. Only a few enterprises have ever been bigger when adjusting for inflation. The Dutch East India Company was worth north of $7 trillion in today’s dollars so Apple has a ways to go to reach the milestone. The real reasons to consider Apple are margin of safety (they have a lot of cash), growing profits and a cult-like following.
A cult following is not a reason to own a company, but if the fundamentals are there with an adequate margin of safety a cult following becomes icing on the cake. As long as the veneer shines you can enjoy profits.
The main reason I bough Apple is the margin of safety. Take a glance at the chart of Apple’s cash position. The cash position is over $250 billion. After total debt is subtracted you still have over $150 billion as of September 30, 2017. This, by the way is the wrong way to look at Apple’s cash situation. When other liquid and short-term assets are included, Apple could retire 100% of its debt.
Therefore, a better way to view Apple’s cash position is to subtract the short-term investments to cover long-term debt and other liabilities. Inventory and receivables are enough to retire all liabilities, including long-term debt.
This leaves us with long-term investments and cash in the checkbook, revealing the true cash holdings of Apple: $201.3 billion. That is a massive pile of money!
The next step in valuing Apple is to check the price of the stock (what I can buy it for) against reported earnings per share of $9.21, the so-called P/E ratio. Apple’s P/E ratio as I write is 18.58. This means if earnings remained unchanged it would take a bit longer than 18 ½ years for Apple to earn enough profit to buy 100% of its outstanding stock as long as the stock price didn’t change.
An 18 P/E ratio for such a dominant and growing company is rather reasonable. Apple spends a pile of money buying back its own stock and in dividends to shareholders. But the pile keeps growing. These are good times in the world of Apple.
The dividend yield is 1.47%. This is slightly lower than the S&P 500 as a whole where the dividend yield is currently 1.86%. The earnings yield is 5.4% as I write. This means if Apple distributed all its profits as a dividend the yield to shareholders at the current stock price would be 5.4%. Also a good indicator.
So far we have an interesting scenario, but not enough to buy the stock! Before I open my checkbook I want a margin of safety. And that is where the cash hoard comes in.
The market cap of Apple is $878.5 billion with 5.1 billion outstanding shares.
The $201.3 billion in cash represents $39.47 of cash per share! At today’s closing price on November 16, 2017 of $171.10, cash represents 23% of the stock price!
Look at it another way. Suppose you buy a wallet or purse for $171.10 and when you get home you find $39.47 tucked inside the wallet. If the original price was good, it just got better!
Two hundred billion is a lot of safety margin and makes an Apple investment worth considering. However, I’m digging deeper. If 23% of the stock price represents cash in the bank, then the P/E ratio is less than indicated. If the cash portion of the stock price is removed from the listed price (remember you buy the stock and find a bonus $39.47 per share in cash) the stock price is really $39.47 lower. (If you think Apple is worth $171.10 per share as an ongoing enterprise and get $39.47 in cash along with the stock purchase, you really only paid $131.63 per share for Apple the company.)
This drives the P/E ratio lower by 23% to 14.29. Now the P/E is below the market average for a company with tremendous market power, growing earnings, a dominant market position and a cult following. With the safety of margin firmly in place I am ready to buy. So I did.
Of course my valuation research went much deeper than what I outlined here. To keep this post sane I abridged the content.
The Case for Altria and Philip Morris International
Tobacco seems a bad investment idea as more people quit smoking each year. However, investors forget the real fact the percentage of people who smoke is declining, but the increasing population keeps sales declines more muted.
MO and PM are dominant in their markets. PM was spun off from MO many years ago. MO has the U.S cigarette market and PM has the non U.S. markets.
I will skip the heavy analysis of these two companies. It takes a lot to get me to buy a new investment, but I’ll add to existing stock holdings when opportunity is ripe and as long as the story still resonates.
The margin of safety is smaller for MO and PM than Apple. However, virtually every company has a smaller margin of safety compared to Apple!
Let me sum up my reasoning for owning these two companies in the words of Warren Buffett. Buffett once said about MO, the product costs a penny to make and is addicting, what’s not to like? I think the reason Buffett doesn’t own MO is because he wants to protect his reputation. Your favorite accountant has no reputation to protect so I loaded the boat with MO and later PM.
Tobacco use as a percentage of the population has been declining since around 1964! MO and PM know how to navigate in this environment and have done so successfully for 50 years. Profits keep growing and the board of directors keeps paying out the majority of profits in dividends. Life is good for the owners of these two companies; not so much for the users of their products.
My buying trigger for adding to my large pile of MO and PM is the dividend yield on periodic market scares about the world ending for tobacco companies. When the dividend yield is over 4% I review the company prospects. If nothing has changes I add more shares. (In reality all I’m doing is reinvesting a portion of the accumulated dividends.)
There is also another interesting development at MO and PM. PM developed a smokeless tobacco product called iQOS. PM developed the product and recently licensed it to MO for sale in the U.S. Demand has been so high there are shortages of the product. And the profits are a lot higher than traditional cigarettes!
Revenues and profits look ready to accelerate over the next years and decade. Decades of stock accumulation in these two companies has been good for my wealth. And when their stocks go on sale I have a tendency to buy more.
The Problems with Netflix
As a disclaimer, I own Netflix and have made a lot of money on the stock. However, I am uncomfortable with my position.
I love the company and their product. Who doesn’t like commercial-free programming?
Netflix has a leadership position in their space, but lacks a margin of safety. When I bought Netflix years ago it was under the assumption they would turn a profit on their business model. I am beginning to doubt that is possible. And don’t believe their reported earning!
This year Netflix added a large number of new subscribers as in past years. However, their increased spending on new programming will increase so much as to consume the entire revenue from over a half million new subscribers! Yikes!
The increasing programming costs never seem to end and competition keeps popping up. Disney is pulling their titles from Netflix in 2019 to start their own streaming service at a “significantly lower price” than Netflix.
The worst problem for me is their accounting! Netflix amortizes their content programming costs over four years. This is insane! This one simple accounting gimmick allows Netflix to report a profit while cash-flow negative. Like I said, insane!
Here is how egregious their accounting method is. Take House of Cards as an example. They amortize the production costs from the first season over four years. Does this make sense? Not a chance! Most of the value from Season One of House of Cards ends shortly after the season went live. Considering the problems surrounding the main actor, Kevin Spacey, the value of those titles is impaired even further and faster.
A damning statistic reveals amortization of content expense is increasing faster than revenues. Past sins are catching up and it’s only going to get worse.
I’m not selling yet, but Netflix is on the watch list. I watch Netflix close for signs subscriber growth is slowing. If they can’t reach a cash flow positive situation before subscriber growth slows Netflix is in big trouble.
The Story of Tesla
Tesla is different from Netflix. Netflix is a one-horse show while Tesla makes cars, batteries, solar panels and solar storage. The finances for Tesla are stretched, as with Netflix, but with many more options for success.
I own Tesla and if the wheels don’t fall off — pun intended — the company will be wildly profitable. There are a lot of ifs right now. The Model 3 has production issues and the main man, Elon Musk, spreads himself thin at times running so many disparate companies.
I consider Tesla a mad money holding right now. Tesla is burning through cash and looks to do so for several more years. Musk doesn’t have much in the way of accounting gimmicks I disagree with, but he does use plenty of financing gimmicks to fund the company’s burn rate.
My Tesla investment is small. If the stock came down in price $100 or more I might add to my position. Might.
A lot of issues need resolution before I jump into Tesla deeper. Tesla is one of those companies which will either crash and burn leaving investors licking their wounds or they’ll end up bigger than Amazon. Musk is the right man with the right dream coupled with the right work ethic to get the job done.
Tesla is not for the faint of heart or to be purchased with the rent money. Just warning you.
One More Thing
Most people buy stock by placing a purchase order. So do I, most of the time.
However, there is a trick you can use to buy listed stock at a price less than the price quoted. But that is a story for our next post.
I had to do something to get you to come back. Besides, I talked enough for one post.
Once I reached the age of majority I discovered something I learned to really hate. Money was tight in those days. I didn’t have a reservoir to draw from for basic expenses. Buying my first home required the purchase of my first furniture. There were always extra expenses to waste money on.
It also seemed like society was intentionally trying to keep me poor like the farmer I grew up as. Farming was part of my history shortly after my 18th birthday, but income was thin and I refused to dip into reserves.
Then came holidays, birthdays and other events. It seemed like every time I turned around there was another event I was supposed to spend money on. Every month had at least one birthday or holiday where the media pressed hard on the weak minded to squander money they didn’t have on stuff people would soon neglect.
A financial crisis was a wedding or milestone anniversary. The budget was stretched to the breaking point when a wedding arrived requiring yet another monetary outlay.
Christmas was the worst! Here was a time of the year to celebrate love and hope and instead every free moment was squandered thinking about what gift to buy whom and then running around purchasing said gift. There was no time to reflect on love, hope or family. We were too busy assuring the profits margins of retailers.
The hardest part for me was age. The starry-eyed feel of the holidays made way for the reality of exploitation by large corporations brainwashing the masses into believing Christmas was really about spending money. They never advertised the greatest gift you can give is you. No money in that. To suggest something so insane was un-American. (So my non-American readers don’t feel left out, just replace your country’s name in the last sentence where you see American. It’s not an exclusively American sickness. It exists where you live, too.)
The bright lights and decorations of the autumn and winter holidays (spring and summer for my Southern Hemisphere readers) were overwhelming as a child. Christmas Eve and Christmas Day always had a special feel to them. And marketers wasted no time raping the consumer of their money.
Buy Nothing Day
Buy Nothing Day is traditionally held on the day after Thanksgiving in the States: Friday, November 24th this year. It is recognized as the busiest shopping day of the year. It amazes me we can spend a day giving thanks and the next pushing our neighbor to the floor screaming, “Get the f*ck out of the way! It’s mine!” Love and thanks evaporate into mindless demand for self in less than 24 hours. The good news is retailers open early now on Thanksgiving Day to get an early start on the selfishness.
And it all costs money! An electronic gizmo marked down 20% will cause normally sane people to spend what they don’t have. Thank God banks invented credit cards so you can deal with the fallout later. Of course, the marked down gizmo will be passé in a year or less, selling for nickels on the dollar in the remainder bin.
Last year I wrote about Buy Nothing Day on the actual day. This year I want to get a jump on the more important holiday of spending nothing before people are out the door and trampling old women and children early Friday after the day of thanks.
Now I know you are better than what I’m describing. All readers of this blog are. I attract the best readers in the blogosphere! Instead of trampling wild women with credit cards in outstretched hands, you casually shop Amazon or some other online source. If Friday doesn’t tickle your fancy, you can rob your employer by shopping at work the next Monday. (If business is going to benefit from crazy spending they encouraged, you should have the right to screw them back. Right? All in the holiday spirit, of course.)
And if you are serious about financial independence you either have stepped off this madness long ago or need to right now.
The Reasonable Way to Gift Give
I get it. Some of you think I’m acting like the Grinch who stole Christmas. All I have to say to you is, “Bah! Humbug!”
I didn’t steal Christmas, I promise. What I did do is develop some responsible gift giving policies in my household. Shortly you will see how my children demanded they give Mrs. Accountant and me a Christmas gift. Giving is very important.
I have nothing against gift giving. I don’t have anything against buying stuff for yourself, either. As long as your spending is responsible for your personal financial situation I am okay with it. My concern is overspending and over gift giving until the meaning of the holiday is lost. Holidays, birthday and other important life events are times to reflect, not digress into spending madness. Keep the occasion special is all I’m saying.
In my household gifts aren’t exchanged or given for any birthday or holiday, except Christmas (with exceptions). Weddings and anniversaries are one-time events (or should be) so a monetary gift is usually given.
We buy a small amount of candy for Easter (a very small amount). We decorate the home (and yard sometimes) for major holidays. We don’t go crazy on decorations either.
Kids are different than adults. We bought our girls Christmas and birthday gifts when they were younger. They received their gift on Christmas. We don’t do that now that the girls are older.
When our girls need something during the year we may buy it for them and indicate it is for their birthday and/or Christmas. This year my oldest daughter had her college tuition paid and my youngest has a cell phone courtesy of mom and dad. No large boxes of regretful spending will grace the space below out Christmas tree.
My girls were aghast when Mrs. Accountant and I pleaded they don’t buy us gifts this year. Their response, “You mean we can’t make you something?” Oh, my God, girls. No! Of course you can make us something. The cost of making us a gift is really small compared to a retail purchase. And more important, giving mom and dad a piece of you is more important than any gift available in stores. Yes, you can make us something. My girls are artistic and I value every piece they give us. A gift filled with thought is the only gift that counts.
Mom and dad also have a different form of gift giving. I can gift my girls money. ($14,000 this year; $15,000 next.) If they have earned income and spend every penny, I can still gift them money to fill a Roth IRA up to their earned income limit. Also, remember, tuition paid for children doesn’t count toward the gift limit.
I think a gift that keeps giving a steady and increasing stream of dividends is better than the latest over-priced gizmo.
My parents are the only holdout. Holiday gift giving has decreased to zero. Mrs. Accountant and I stopped exchanging gifts decades ago. The gift giving thing died almost before it began between us. Our relationship is built on something more solid than trinkets.
My parents still give my brother and me gifts at Christmas. It is an awkward moment as we want for nothing. We have all we want and hunger only for intimate family time during the holidays. We have the family time, but my parents still believe in the traditional Christmas where gifts are given. I apologize to my non-Christian friends, but God gave his Son out of love. That is the real meaning of Christmas. That is the only gift that counts. The gift of hope.
Gifts will still exchange at my parent’s home Christmas Eve. This year we have an electronic gizmo I’ll use as this year’s gift. I don’t know what else to give. I received the gizmo as a gift and will re-gift. (I have no problem with re-gifting.) I’ll never use the gizmo. Contrary to popular wisdom, I’m not much into technology. I’m always a little late, if ever, adopting new products. The gift value is around $50. I see no reason to spend more on gifts for people who have everything they could want. My real gift this year? The ladies in my house will accompany me for some quality time with family sharing stories and a warm cider.
Please don’t read this and try to follow my advice to the letter. It takes time to get people to adjust to less gift-giving. Maybe you enjoy giving gifts and have plenty of money to do so. Then gift give!
What I will ask of you is this. Keep it simple and personal. A gift should be a part of you. You can create your gifts. They mean more. If you lack talent (as I do) you can buy a gift or re-gift. But it should have meaning. Fewer gifts with thought are worth more than a room piled to the ceiling with gifts given out of obligation.
My gift to you is this blog. My words come from the heart. I pray every day you find value and meaning in my work. Your satisfaction is the greatest gift I can receive from you.
You can give me another gift. Leave your words in the comments section below. I know it’s become so passé to say that in YouTube videos and blogs. I don’t ask often, but this one time, humor me, even if it is only to say “Merry Christmas”, Happy Hanukah”, Happy Holidays” or “May peace be with you, my friend.”
If you still want to buy loved ones a physical gift, go ahead. It’s not wrong as long as you are not trying to buy love.
If crowded stores of crazed people pushing each other to save a few bucks doesn’t appeal to you, you can shop online. If you buy from Amazon you can use the link here. It doesn’t cost you a penny more and it supports my work. (Humor me. This blog is a business and a profit does thrill me. All I ask for is responsible spending. I don’t need the money and this blog will survive regardless.)
I’ve neglected to tell you what I get Mrs. Accountant for Christmas. I’m sorry, but that’s none of your business. But like I said, the best gift is to give a part of yourself.
Happy Thanksgiving, Happy Holidays and Merry Christmas to every one of you, kind readers. May you find the perfect gift.
The biggest risk most people have when it come to building wealth is putting all their eggs in one basket. Having one full-time job supplying you with 100% of your income means you are either doing well or in a crisis.
Wealthy people and large corporations have multiple streams of income and continually work to develop more. Sometime the failures are huge. New Coke might be an example. In my practice I’ve had ideas cost serious money go down the toilet. I’ve also had spectacular successes.
Multiple streams of income are the only way to protect your wealth creation program. The same applies when you reach financial independence and decide to retire. All your eggs in one basket is a bad idea. Imagine busting your tail for a decade and having all your money in Enron.
Another problem revolves around active and passive income. Active income comes from work you do yourself. A job or small business is an example. There are only so many hours in a day to sell for income. You can work hard to increase your productivity earning more per hour, but you remain a slave to working for every nickel you earn.
Business owners have an advantage. Once the business begins operations employees become part of the mix. Part of what employees do end up in the owner’s pocket. If it didn’t, why would the own bother with the headache of hiring/having employees. Even though the IRS considers business income ordinary income, there is still a passive nature to the income stream.
Danger, Will Robinson! Danger!
The problem with working for every dollar is risk. If you become ill the income stops. Insurance can provide a backstop, but that is a limited solution you have only minor control over. A business owner can suffer catastrophic loss due to weather or other events. When the business suffers, profits evaporate. The worst case for a business owner is they are forced to choose between closing the business or feeding it to keep it alive.
The solution to these wealth building and preserving risks is diversification. More accurately, diversification into passive forms of income. Whereas, you have only so many hours in a day to trade for income, you have an unlimited ability to create and increase passive income. The best part about passive income is that most sources of such income reproduce automatically.
Mutual fund dividends and capital gains are easily reinvested. Rent can either be used to reduce leverage (mortgage debt) or to buy more properties. Interest breeds more interest.
Without a business your options are limited. Your main source of income is extremely top heavy with wage income. Even a business owner has risks. A handful of clients can make up a large portion of the profits. A large book of clients is a buffer between normalcy and disaster wage earners don’t have the luxury of. However, if you are in the retail music business things might be as bad as or worse than that of a wage earner. CDs and vinyl records don’t have the market they once had prior to digital music on the internet.
Passive Income Sources
There are a thousand sources of passive income. We will only focus on the big four today with an honorable mention to profits in a small business with employees running the place.
Dividends and capital gains are treated favorably by the Tax Code. Rent is considered derived from a passive activity and treated as ordinary income, but income property enjoys depreciation and other tax benefits. Interest is treated as ordinary income, but as we will soon see, a lot of interest is also treated favorably by the Tax Code.
According to Zillow, renters paid $535 billion in rent in 2015 in the United States. And the number is rising. There are about 125 million U.S. households and 43 million households rent. The U.S. also has about 250 million adults (adults, not the entire population).
Some simple math reveals an astounding amount of rent paid by renters/received by landlords. If the $535 billion in rent paid were paid evenly among all U.S. adults it would amount to $2,140! That’s right. Every U.S. adult would receive $2,140 of rent if it were divided evenly. If rent were evenly divided between all households it amounts to $4,280 each for 2015! Since renters probably don’t own income properties we can divide the gross rent paid by the approximately 82 million non-renting households and we get $6,524.
Most people don’t own income property, so the ones that do generate a very large amount of passive income. Of course, rent is not all profit. The mortgage requires servicing, maintenance is ongoing, and property managers need to be paid. Still, this is a staggering amount of passive income many people neglect. (Never mind my reality check on income property versus index funds.)
In the arena of passive income that takes effort is business income which we discussed above. Business income is “earned” for tax purposes. There are instances where it may be considered “unearned” and goes beyond the scope of this post. As mentioned above, a business can distribute massive amounts of money to owners. A manger running the day-to-day operations makes the income passive in reality, if not for tax purposes.
Work-Free Passive Income
When most people think of passive income they usually think of things you do once and then receive a long-term stream of income. Real estate can do just that if you have a good property manager. Real estate lacks diversification unless you invest in a security holding real estate. With a large amount of money you can invest in multiple properties around the nation to avoid regional economic risks. Or you can take on partners to spread risk, but partnerships have risks of their own.
True forms of passive income include dividends and interest. Before you roll your eyes, I want to share the incredible amount of dividends and interest paid out each year.
Before we continue, the statistics I’m using comes from the IRS, one of the most respected institutions of the United States. (Pardon me a moment while choke down that hairball.) There are other sources of information, but all are estimated using different methods of information gathering. The IRS data, while more accurate, is gathered based on reported income. Not all income is reported. However, reporting requirements (Forms 1099-DIV and 1099-INT) make the data reasonably reliable. Some dividends are so small they go unreported and older taxpayers may not have enough income to file. Interest is another animal. Form 1099-INT may be issued to most recipients of interest from banks and other large organizations, but land contracts and other similar devices may go unreported.
With the caveats in place, the IRS lists $254.7 billion in dividends for 2014. That works out to $2037.60 per household. It doesn’t sound like much, but two massive issues are missed here. One, most people have zero dividends, so those who do have a lot, and two, most dividends are paid to retirement funds or other corporations and aren’t included in these numbers.
Let me share a secret from the tax office. Most people have zero dividends to report. A few have a couple dollars to report and even fewer have up to $100 of reportable dividends. Then we get the people who receive real dividends. These folks report $87, 904 in dividends received from their non-qualified accounts alone. This number become more astounding when you realize the total market throws off about a 2% dividend yield. That means the value of their account is worth 50 times as much as the reported dividend!
These are normal people who invested and kept their fingers off it for a very, very long time! There is no big secret. Most never owned a business or inherited a substantial amount of money. They consistently invested with each paycheck and let it ride. Time did the rest.
It sounds like a lot, but a million dollars invested in a broad index fund should generate ~ $20,000 of dividends growing 5 – 7% per year. Starting is the hard part. Even harder is leaving your fingers off it. But for people just smart enough to invest consistently and refuse the temptation to play with their money, thinking they can outsmart the market, will do extremely well.
Interest in retirement accounts face the same issue dividends do. Much interest will not show up in IRS data. We’ll go with it anyway to see how much we can get ourselves.
The IRS reports taxpayers listed $93.9 billion of taxable interest and $62.5 billion of tax-exempt interest. This works out to $751.20 of interest income per household without consideration to interest earned inside retirement accounts and $500 of tax-exempt interest. Considering the low rates of interest today, this means the account values are at least 100 times larger, probably much larger!
Remember, this isn’t all the interest and dividends paid in a year. Corporations, banks and insurance companies earn tremendous amounts of income from these sources and are not included in the amounts. The numbers above are from individual returns only! The real total of passive dividends and interest paid is staggering.
Another difficult number to track is capital gains. The IRS says just over $705 billion in capital gains were reported in 2014. But how large is the amount of unrealized capital gains? It has to easily stretch into the trillion dollar arena!
Not only are you at greater risk when all your eggs are in the wage earning basket, but you get taxed hard. Wages suffer income tax at ordinary rates, but FICA taxes as well. Rent, dividends, interest and capital gains receive varying degrees of preferential tax treatment when calculating your income tax, but they all avoid the FICA tax.
Remember the $535 billion in rent paid from above? Well, the IRS records show only $75.2 billion was taxed or a bit more than 14%. (Here’s my handkerchief. I know how much it hurts.)
Now I’ll add up the averages in non-qualified (non-retirement) accounts alone. Take the $4,280 of rent you should receive on average (only $1198 of which is taxed) and add $2037.60 in dividends and $751.20 of interest and $500 of tax exempt interest and the $5,640 of realized capital gains and we get $13,208.80.
Again, this seems like a small amount to the average reader of this blog. But these numbers don’t include earnings from retirement accounts. It also doesn’t include we can invest more and take a larger share from corporations, banks and insurance companies.
The real secret is in the value of the underlying accounts which reveals the staggering level of unrealized capital gains. In today’s low interest, low dividend environment, the average household holds north of half a million dollars! That means a lot of people are doing really well considering how many are doing so poorly.
And I never said a word about how much is stored in trust accounts!
Wealth is not a complex process. Consistency is the most important factor. Long-term investments in index funds have enjoyed superior performance historically. The amount of passive income to be had is large enough for everyone to do very well with only an average slice of the pie.
The question now is: Where are you on the scale? Average? Below average? 🙁 Above? 🙂
If you don’t like your level of passive income it might be time to do something about it now that you know where the money is.