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.
Over the last few weeks and months I’ve added secret messages in plain view on this blog. The easiest cipher (I thought) was on the Where Am I page. Over the last few months nobody said a word. When I finally added the easier cipher on the Where Am I page only one person contacted me shrieking, “Is it true? Is it true?” I’ll let you hunt for other clues. Hint: They are buried within posts.
To answer the question, “Is it true?” the answer is a firm “Maybe.”
For a year or longer I’ve been asked if a Camp Accountant was in the works. I generally shrugged my shoulders because I didn’t think enough people would be interested and I wasn’t sure I needed more commitments in my life.
As time went by it became more obvious people were hungry for material I offered. The guy on the street wanted more personalized service and my days can only service so many people before I exhaust. Tax and accounting professionals visit often looking for my latest method to game the tax system. (Yes, I am working on more posts leveraging the Tax Code. Those posts take more time and I can only publish so many if I want to maintain quality.)
A podcast I was on earlier this year led one of the podcasters to call later with an idea. His thought was to create a whole program for accountants to massively promote my work and experience. His idea was one I already had. The biggest problem was time.
But if there is a Camp Accountant it would be easy for me to give presentations he could record for a full-fledged program worthy of the time invested.
Problems with All the Camps
Four or five years ago a Camp Mustache was started in Seattle in honor of Mr. Money Mustache. It was a phenomenal success!
Success breeds copycats and Camp Mustache was no different. Last year a Camp Mustache was started in Gainesville, Florida and this year they seem to be sprouting like weeds.
Success also breeds jealousy. Earlier this year we needed a pow wow at Camp Mustache in Seattle to discuss how those terrible people in Florida might turn a profit from their camp. Egads!
If there is one thing I abhor it’s drama and this was pure drama. It was a waste of time whining about somebody else’s behavior which affected nobody adversely. It was thinly disguised jealousy. In my office I would fire an employee for such a wanton waste of time.
The same person who started the drama in Seattle pulled the same stunt at FinCon, paying me a late night visit with reinforcements to put me in my place as I stood to win a high honor for this blog. Nothing breeds jealousy better than success.
I was uninvited to the newly named Camp FI in Gainesville this January. Some people will be upset as several emailed over the last months saying they saved hard to afford Camp FI to meet with me and review their tax and financial issues. I was thanked when I supported Camp FI after the drama unfolded in Seattle and the Camp needed to rename to satisfy demands. Once the new drama unfolded I was out.
To be honest I was deeply hurt by the attack from the small number of people I respected. My initial response will not be my final response. Stress and lack of sleep make for poor decision making. Regardless, the deed is done and you, kind readers, are the winners.
It Starts with a Plan
I will endorse any Camp Accountant (as long as there is no drama) which holds true to my philosophy. There is room for plenty of other opinions. If somebody likes spending like a Wildman or prefers actively managed mutual funds over index funds; no worries. If someone doesn’t like a certain tax strategy; I’m okay with that. Preach or encourage bank fraud or tax evasion and we will not need a pow wow as I’ll lay down the law. This friendly accountant is very easy going, but do not confuse that with not having a backbone. I’ve survived a lot of challenges in a difficult industry. I survived for a reason.
What we need now is someone, or someones, to organize and facilitate the program. I will share my vision of what the first and branch Camp Accountant’s should look like. These are only suggestions. I don’t have a corner on good ideas so you must be willing to put something of “you” into the program. Each Camp should have its own flavor so people who attend more than one always get their money’s worth.
Many of the other Camps are on the U.S. coasts. There is heavy demand, gauging by me inbox, for gatherings in the center of the nation. I’ve been begged to do something in Wisconsin or northern Illinois. Many people are familiar with my hatred of travel. A Camp Accountant in Wisconsin is tolerable even for an old guy from the backwoods of nowhere to travel to.
Though not a demand, I have several suggestions on itinerary and venue.
Several years ago (2014) I attended a Novel in Progress BookCamp in West Bend, Wisconsin. There is an outside chance you may know this guy. Don’t worry about Renee, our transgender student, sitting next to me. I behaved myself. She is now a published author.
Dave Rank runs the BookCamp. It was his brainchild when he was president of the Wisconsin Writer’s Association. I was treasurer at the same time. I haven’t seen Dave in a while; it would sure be nice catching up. I left WWA several years ago with plans of moving to Colorado. Dave left his position as president of WWA a few years later. WWA didn’t want to be involved with the BookCamp so Dave set it us as a separate non-profit. (BTW, Dave can spin a helluva yarn.)
I attended as a student the first year the BookCamp opened. The second year I taught one day before racing to Seattle for Camp Mustache. (I do run a bit hot at times and it’s hard on this old man’s body.)
My recommendation for someone willing to facilitate a Camp Accountant is to plan the Camp either the week before or after the BookCamp. The Cedar Valley Retreat Center is a beautiful venue. The grounds are gorgeous and the meeting center and rooms are equivalent to the Camp Mustache facilities in Seattle.
An annual Camp Accountant in West Bend would be awesome. Other camps around the Midwest would also be nice. I am willing to attend one and only one Camp Accountant in Alaska and/or Hawaii. As much as I will love the setting it is a long trip and once I do it once; I’m done.
Other appropriate venues would include Ohio, Colorado, Texas, or anyplace central. The coastal cities already have plenty of camps and the center of the country is underserved. A camp on the coast is okay if someone wants to facilitate. The center of the country keeps the travel time shorter for many people, however.
Another consideration is distance. The further from my home, the less I will look forward to the travel.
I have zero interest in international travel. A few years ago Mrs. Accountant and I enjoyed out trip to Costa Rica. My parents invited us. (They almost had a coronary when I said yes. My opinion of travel is well-ingrained within my family and neighborhood.) I’ve been to Canada many times and don’t want to go back. Mrs. Accountant and I took our honeymoon in Jamaica. Once is enough. You get my drift.
My life is busy and I’m okay with it as long as it doesn’t turn hectic. I will attend a maximum of three Camp Accountants per year with a near certainty I would attend a Wisconsin Camp. FinCon, for now, is probably an annual event as long as this blog breathes new material. That leaves me with one floater for the year to keep my traveling to five times per year. World Domination Summit is a possibility. (That amount of travel will cause me to bleed from the eyes and break out with boils.) I make no guarantees how long I will keep such a massive (for me) travel schedule. I think people should take advantage of my offer before my sanity returns.
Setting up a Camp Accountant is work. The one area I will be involved in (if wanted) is the itinerary. Camp Accountant is NOT just about taxes. Like this blog, it is to get people to think like an accountant without actually being an accountant.
There should be one or two classes for advanced tax issues suitable for tax professionals and knowledgeable non-accountants.
There should be (as a suggestion only) one class about an hour and half long strictly for tax and accounting professionals looking to build their practice or add services similar to what I do in my practice. In essence, create a bunch of mini-mes. (The world doesn’t know what to do with one of me.) Other attendees are welcome to listen in.
Plenty of time should be kept free for socializing, sport and hiking the venue grounds. Exercise is healthy and good.
Regular classes should be short, preferably 30 minutes. Most topics are easily covered in that time if the presenter is prepared. A few classes —maybe two —could be 45 minutes or an hour. The goal is fast and to the point.
I am willing to present more than one class. The presentation to tax/accounting professionals is something I will do if in attendance. I would love the opportunity to flesh out one or two ideas besides. If I speak once per day that’s enough. Other people have important information to share, too. People enjoy listening to the guest of honor speak so I’m willing to prepare more material if needed.
I think it would be valuable for attendees to have one round table each full day of the conference (probably Saturday and Sunday if you use the Friday to Monday schedule). This is an opportunity to share ideas and ask questions.
About 30,000 unique visitors grace this blog monthly. For this to be viable other bloggers in the FIRE community will need to be asked to spread the word.
If you want to facilitate a Camp Accountant, contact me. I am willing to share ideas and endorse, but I never facilitated anything like this myself so I don’t have either the experience or the time. You also want to contact me before setting a date so it doesn’t interfere with other responsibilities. Tax season is out. A winter Camp Accountant is something the other guys aren’t doing and could be a lot of fun as long as it is before February 1st. (Many people enjoy winter sports, you know.)
I will not attend other camps for other bloggers in the future. At this stage of the game it doesn’t make sense for me to promote somebody else’s brand. For my vision to see the light of day requires events dedicated to the Wealthy Accountant’s brand. I have a broad vision on how you can take what I teach back to your community and make a difference. I’ll talk more about some of the things I do and plan on doing if you contact me for running a Camp Accountant.
I hope you are excited. I sure am. Other camps are fun and light. I joke around in my writing and real life. But I’m as serious as a heart attack, dear readers. I joke to entertain in a difficult subject. Money and taxes can be fun while remaining serious. The laughing stops when the file opens and it’s time to super charge your tax and financial life. We are talking real money here. Every person who attends a Camp Accountant should walk out wealthier than when they arrived. That’s how important I want the weekend at Camp Accountant to be.
You might have noticed the next Novel in Progress BookCamp is May 20 -26, 2018.
It would sure be nice to see Dave again.
Note: A reader left a comment asking if CPE for tax and accounting pros will be offered. I haven’t applied for that yet, but will do so once I have a program to submit to the respective organizations. I would like CPE of enrolled agents, CPAs and, fingers crossed, attorneys.
There is an insidious side to the FIRE (financial independence, retire early) community nobody wants to talk about. I was aware of this issue for some time as the owner of an accounting practice. What I found most disturbing is how blatantly bloggers and talking heads in the demographic keep giving advice that will lead to tears.
It is not if, it is when it will happen. If you follow the advice of this blog and others in the genre you will eventually suffer a million dollar loss day.
I have broken bread with these people and tipped a beer or three as this issue has been discussed and to date I never found anyone to give a damn.
The Bad Advice You Must Avoid
It is insane for bloggers to preach what they do. By encouraging people to save as much as half (sometimes even more) of their income and then drop it into a low cost index fund is guaranteed to cause massive financial problems. If you are one of those said bloggers: Shame on you!
Once you start down the slippery slope of frugality and living within your means the die is cast. The worst part is you will NEVER outperform the market! Index funds will MATCH the market, minus the extremely low fees.
It doesn’t take a genius to figure out what happens when you consistently drop money into a low cost investment geared to match market returns. A few years later you have a nice pile of money. What a headache!
By encouraging young people to take such steps is borderline illegal! There aughta be a law. A decade of this behavior is one thing, but before you know it these young people have a few decades behind them (like your favorite accountant) and then the manure really hits the fan.
Do you know what thirty years of investing half your income in index funds can do to you? That’s right! First you blow past a million and before you know it the seven figure account is in the rearview mirror. It sounds impossible, but this is only with “average” stock market returns! And the index fund isn’t taking hardly a thing in fees. You are double screwed, my friend. Double screwed.
You see, what goes up will eventually come down and come down hard. If you had a $100 invested and the investment went down to $90 in a market correction, you lost $10. Not too bad, I guess. God forbid, we get one of those gut wrenching days where the market declines 5% or even more. Imagine losing $20 of your hard earned money in a bear market!
(Well, actually, you didn’t lose any money. The market fluctuates a bit now and again so the ups and downs mean nothing unless you are in the market to sell. But I digress.)
Now think about the same scenario if you have a $1 million portfolio. Holy catfish, Batman! You just took a $100,000 groin shot. Time to get out of Dodge.
But it gets so much worse. Take it from your favorite accountant; I am living the following eventuality. You see, I started young and was scared witless so I saved everything and stuffed it into the market. Starting with a few thousand to my name at 18 I managed to amass a couple hundred thousand four years later. (Thank you early 80s bull market. You da man!) I quit life to read books all day until a certain young lady forced me to marry her (and she wasn’t even pregnant, I swear!). I fought like crazy, but could not get away. I still have scars. See!
Well, a respectable married man works a job, dang it. So the investment machinery went back into action. A short stint as a working man convinced me a job was not the course I wished to travel in life so I started a business where there was plenty of time to read.
That was the stupidest thing I ever did! Now my portfolio was growing from market gains and my new investments. In the last year my behavior pushed me into eight figure net worth territory. I’m still trying to figure out how a dumb schmuck from the backwoods of Wisconsin pulled this off without bumping off a bank or three. (I didn’t do it!)
Criminal activity aside, I cannot avoid the problem we started this post with. A simple (and normal) 10% market correction will cut a temporary $1 million hole in my hide, ahem, net worth. If the S&P has one of those stomach turning days where things head south by over 5% I’m dead meat!
My current net worth has me under 8%. That means if the market has an 8% down day I’m out a cool million.
And it keeps getting worse. Soon the portfolio will grow so large that when the President passes wind and coughs at the same time the 14 point decline in the Dow will crush my net worth by seven figures in an afternoon! Way to go, Mr. President!
Alternatives to the Awful Advice
There is help, my spend thrifty friends. As your favorite accountant I offer, two, not one, but two solutions to the issue above.
The last thing you want to do is end up like me with all that filthy money just dying to cut your heart out. I find it hard to get out of bed most days now.
Here are the two solutions from your friend who has lived this life of debauchery.
1.) Spend all your money before it gets a chance to grow. I know it means you will be forced to work a dead-end job you hate till your walker gets in the way, but think of the alternative. Do you really want to live a month of life where you tinkled a million bucks into the sewer? I didn’t think so. No go out there and buy those $300 sneakers you had your eye on. The blinking lights are fancy.
2.) If you are a sick puppy like me and hate shopping *whatever* and end up saving lots of money you still have an out. For God’s sake don’t drop the cash into an index fund, whatever you do. That is the first step to a $1 million bloodletting. Instead, open one of those fancy savings accounts at the bank that throw off a massive .01% interest annually.
If you follow my advice I can assure you the day your friends reading these crazy blogs take a $1 million haircut, you will be sitting pretty at your minimum wage job laughing your tail off.
Fun Time is Over; Time to Get Serious
We had some fun above with a serious issue few people think of. The larger your investment portfolio the more normal market declines become really big numbers even when it is a small percentage; numbers that have been known to cause a rash.
A simple and regular market correction will reduce your net worth/portfolio by $100,000 or more with a low seven figure account. Losing $100,000 is bit hard to take when less than a decade ago your net worth wasn’t even that big!
I told the truth above. Bloggers, me included, tell the truth about building massive wealth. What nobody talks about is what to do once you HAVE the wealth. Is it back to the investment advisors you were warned about all along?
Managing $10,000 or a million or ten million is nearly the same. The only difference is at the lower end where you need some liquid cash for an emergency. Most of your money will be in equities and equities like to go real high and then play rollercoaster periodically to shake out the weak hands.
It would be a dirty shame if you worked so hard to build wealth to the level of financial independence only to fall through the sieve when the market does what it always does.
Don’t listen to the crazy accountant writing above advising spending all your money or saving only in the bank at 0% interest. There is a better way.
The first step is to prepare. A market correction is defined as a 10% or greater decline from the market high or recent top. These guys show up every 3-5 years or so. It has been a bit since we saw one of these animals. Don’t be fooled. Corrections can be weird. Sometimes they trick us into a false sense of security by hiding for 7 or more years. They know they are more painful when they do it that way.
Bear markets are defined as a 20% or larger decline from a recent market top. These nasty devils educate the crowds usually at least once a decade. Yes, I know we are overdue.
Then we get the truly Armageddon style realignment of asset prices where the indexes are half the recent high. We had two of them in the first decade of this millennium, but that is unusual.
You must be mentally prepared for any of these declines in market value. We could go years before one of these declines arrive or it could start tomorrow morning. Nobody has ever proved they can predict market declines with accuracy so the only option is to stay invested at all times.
Protecting your money means preparing your mind. It’s all between the ears! Once you know it WILL happen you will not be scared into selling (AHHHHHH, the world is ending!!!) when we are enjoying a sale on investments. If you get good at this you will buy during these trying times and profit handsomely.
The best solution is to invest whenever money is available and always let it ride: up market or down.
Be different. When people scream, “The sky is falling!” you back up the truck and load up. Shirts are on sale half off, oh, I mean the companies selling the shirts are on sale half off.
Train yourself to not bury your head in the sand. I frequently tell clients not to look at their accounts when the market is in turmoil. Out of sight; out of mind. This is wrong. I say it so less astute investors, present company accepted, so they don’t destroy a lifetime of hard work building their nest egg to destroy it in an afternoon.
With some time and a bit of luck, you might one day be able to say, “I lost a million dollars today, and frankly, I don’t give a damn.”
When Mrs. Accountant and I got married we had a bucket list. Most items on the list are private and irrelevant to the story at hand. The one item on the list I will share is our desire to have foster kids early in our marriage.
The goal was to help foster kids at a higher level than the average foster home. We also wanted to have foster children early in our marriage out of concern for having foster children after we had our own children.
Mrs. Accountant and I realized our goal. Several foster kids were placed in our home over three years. Rather than collect a stipend (the county paid us $1,000 per child per month tax free!) and ram as many kids through as possible for some quick squid, we planned on helping these kids get the start they deserved in life.
After they settled into their temporary home I started a daily routine with them. Back then Tony Robbins had recently released his first version of his Personal Power program. This 30 day course took you from where you were at to accelerated growth in areas of personal development and even issues relating to money.
Monday through Friday I would sit with the foster child (we only took one child at a time) as we listened to another episode of Tony. The program strongly recommended keeping a success journal and completing each day’s tasks to move a step closer to your goals.
The kids were all reluctant at first, but the enthusiasm and promises Tony made on those tapes quickly drew them in. Some kept a journal, many only scribbled a few notes or had no journal at all. Most gave at least minimal effort to the assignments given at the end of each tape.
Foster care in an unforgiving environment even in a loving home. Too many of these young people (we took the hardest cases of junior high and high school kids) struggled and then it was time to leave for a group home or a new foster home. Some of these kids went back home to live with a parent. In at least one instance the parent got her child hooked on drugs shortly after leaving our home. It was heartbreaking.
Twenty years later one of our foster kids stopped by the office. It was such a long time I didn’t recognize him. He introduced me to his girlfriend and was so excited about his job. He grew up and was doing well. He told me about his many trials after he left our home. He mentioned our time together listening to Tony was the only thing that prevented him from taking his own life. He knew if he fought hard enough long enough things would work out.
Then he reminded me of one lesson Tony taught that shaped his life. And he came this close to getting into the NFL.
Turn Up the Heat
The concept our foster child clung to so tenaciously involved an internal thermometer which determines success and failure. According to Tony, when things go south your subconscious turns up this internal thermostat to get you back to where you used to be.
Your mind has powerful beliefs on where you should be in life based upon your values and experiences. If you view yourself as a married woman and find yourself widowed, the mental heater is turned on to remedy the situation. Once back in a relationship the heater is turned down as normalcy is returned, according to your subconscious.
The internal thermometer doesn’t always serve you well. The above example explains why everyone is familiar with the rebound relationship. This thermometer doesn’t guarantee you a nurturing and fulfilling relationship. The heater likes to force the issue to get back to the comfort zone as soon as possible. Sometimes faster isn’t better. (Usually faster is NOT better!) When you are below a perceived value in any area of your life the heater comes on. If you are seriously below the expected range the heater roars!
The opposite is true too. When things start going great your subconscious turns on the air conditioner to slow things down and even caused bad luck to knock you back into your subconscious normal zone.
This happens with money all the time. The plight of lottery winners is legend. Sports stars and successful entertainers also have a disproportionate number of bankruptcies. When things go too good too fast or for too long the air conditioner comes on. This internal AC has caused more fortunes to be lost than any other entity.
In my office an employee has been enjoying a good bit of luck. A difficult childhood followed by adulthood filled with more pain than anyone should endure has broken into vast opportunities. She is doing awesome at work and her income is rising fast. She is good and I let her know it. I want my talented team to also possess a positive attitude.
She recently said one sentence which brings the whole mental thermometer into clear focus. She said, “When thing go this good something happens that causes me to lose my job.” Oh, my God, woman! Things are going great for you and all you can think of is how you self sabotaged in the past? Tony might have been wrong! This isn’t always a subconscious thermometer going into action; it can also be front brain.
That kind of self talk will butcher anyone. I sat my employee down and explained to her why this time WILL be different. She had to change her thinking from ‘here we go again’ to ‘I deserve this’. The crux of the problem is just that. She did not believe she deserved things so good. A lifetime of pain and regrets all too often gives us the BS we need to continue the same destructive patterns.
Breaking the Thermometer
The heater and the AC exist in all of us. Both are equally destructive.
Breaking the thermometer is difficult, but necessary before you can move forward. Breaking up with someone you love isn’t fixed with a rebound relationship. Losing money in a market decline might encourage you to regain lost ground by taking unwarranted risks that destroy your remaining wealth.
The AC is worse than the heater. Over the years I have watched employees with massive talent self destruct after getting a raise or praise. I see it more often when a new employee comes from the poor side of town. Opportunity for them is lost because they can’t accept the gift of an improving life.
Regular readers know I come from a poor farming family. Life wasn’t easy and the AC was running full tilt more often than the heater. Since the family financial position was so low from a young age there was less need for the internal thermometer to trigger the heater to bring things back up to where they were expected to be.
I struggled those early years. I always thought I’d shovel manure for a living only to watch the family farm lost to bankruptcy less than six month after I graduated high school. My expectations were low and my brain was determined to keep me there.
Over the next four years I managed to add to my small stack I saved in high school. Excessive frugality and a kind stock market jacked my net worth into the six figures. This wasn’t enough to retire even in the mid 1980s, but it was enough to allow me a chance to slide for a while.
For a year I immersed myself in books, learning everything I could. Then the best thing ever happened to me; I met Mrs. Accountant. We talked a lot and built a dream we soon put into action.
I kept reading, but fewer novels were in the mix as I devoured anything that would help me grow internally. I didn’t know it back then, but I was resetting my internal thermometer. Good thing, too. All I was to become is a result of this massive indoctrination.
Before long I met a real estate agent who sold me on investment property ownership. He also introduced me to Tony Robbins and invited me to see Zig Ziglar live. (I have a picture on my office wall shaking hands with Zig.) I bought the books, I bought the tapes, and listened and read and listened and read.
I was a poor kid from the wrong side of the hill (the rural version of the wrong side of town). There was no chance I would be anything. Ever! I saw myself as poor and I was going out of my way to screw up what was a darn good start to my financial success.
Well, you know how it turned out. I bought a cassette player (remember those) with ear buds and listened to those tapes whenever I was working. If I wasn’t reading I was listening. I changed the thermometer; I changed the functioning of the heater and AC. No longer was I a slave to some subconscious voice keeping me in my place.
After all these years I still read voraciously. I listen to tapes less often. But now and again I give Tony or Zig my attention as I drive to the office or work around the house or barn. More often I read Warren Buffett or books recommended by Bill Gates today.
If you think about where you are at today financially, emotionally, in your faith, in your relationships, I think you will find the heater and the AC has been treating you with disrespect. Deep down you know where you belong and that is exactly where you will stay, adjusted for inflation.
You must reprogram yourself if you are to break free of this harsh taskmaster destroying your dreams. It’s possible, but you have to do it. No one can do it for you. You have to change the picture of how you see yourself before you can break the thermometer forever.
An old country boy from the backwoods of Wisconsin with no training happened to chance across a real estate agent who admired Zig and Tony. If not for that chance encounter I probably would not be here. My brain, my subconscious, needed reprogramming, programming for success.
And now you met me.
Ever since I disclosed my net worth broke eight figures strange emails have been coming in. Another milestone was passed without fanfare. Past experience had me used to the lack of excitement financial milestones caused.
A theme among many emails revolved around my rate of return. I never really thought of it that way. It was just a thing that happened because I saved a large percentage of my income and invested the bulk of my excess money in index funds. One commenter said he was impressed because my rate of return over the last 20 years was 11% while the S&P rose only 8.5% per year on average. I don’t know if it’s true; I never broke the numbers down that way. All I care is that it grew to a lot.
What the emails and comments forget when they calculate my rate of return is that I added funds over the last 20 years. If I reached my million dollar goal when I was 32 and never dropped another dime in the kitty my internal rate of return would be impressive. Instead, I added excess funds every year. If I analyzed my real return including the additional invested fund my internal rate of return would be less impressive.
There is something else strange about my net worth everyone forgets. I own a business and business ownership has a strange way of building net worth fast. The first million arrived a lot sooner for this broke farm boy than expected. Sure, liquid equity investments were a large part of the seven figure net worth 20 years ago. But I owned real estate and a business too.
Real estate had subpar returns for me. The money was okay, but not great, especially when you consider risks and the time and work involved. The mutual funds did well, as expected. The late 90s were great years for the market and I don’t need to remind you the market has been running higher for eight or so years now. The real surprise, the real sleeper, was the business. It wasn’t planned at first, but once I understood how powerful a business can be at increasing net worth I used all my accounting skills to make good use of the advantage.
Warren Buffett Enters the Room . . . Again
I have followed Mr. Buffett for a long time. One thing that always amused me was his knowledge of the tax code. His stellar growth at Berkshire Hathaway is only amazing because people don’t see how he did it. His stock picks have been solid, no doubt. But it doesn’t completely explain his massive outperformance.
Early in Buffett’s career there were many significantly undervalued stocks. That environment does not exist today. Try to find a listed stock with more cash and equivalents than the price of the common stock itself. Doesn’t exist today.
When the market rallied and kept rallying the awesome deals disappeared. Guys like Buffett don’t sit back and sip Mai Tais all day when the well runs dry; they look for more opportunities. Buffett’s massive knowledge of investing and accounting allowed him to do something few are capable of.
Here is Buffett’s secret. When a corporation, Berkshire Hathaway perhaps, buys enough shares (a large enough percentage) of another corporation, the buying corporation includes their percentage ownership of the profits into their own reported profits. The thought is if the buying corporation owns that much of an interest they will effectively gain their portion of the profits even if the profits are not distributed as dividends.
When Buffett buys a stock he buys a lot of it. Now you know why. He wants to hit a magical percentage of ownership so he can include those profits into his own even if there is no current distribution. Later he gets to claim the capital gain, too. The companies he wants to buy must be good deals. He must also consider the ramification on the book value of Berkshire Hathaway.
Increase Your Net Worth $2 for Every $1 You Earn
The little trick Warren Buffett uses to increase the book value of his company is educational. There is a magnifying effect in play. You get extra zing if you do it right. The small guy has it easier if he knows what he is doing.
Going back to my disclosed net worth, the real question or comment should not have been about growing my net worth from ~$1.2 million to ~$12.6 million in 20 years. The real questions should have involved issues of getting to the first $1.2 million. How did a broke farm boy from the backwater of nowhere tuck away a million dollar net worth in 14 years? Since nobody asked, I’ll answer the question.
To start, the family farm finalized the bankruptcy a few months after I graduated from high school. I didn’t go bankrupt. My life savings was meager, but there were a few dollars rolling around my bank account. Remember, in 1982 bank deposits paid double digit interest rates (and a free toaster if you opened an account with $100, or was it $1,000; I always forget).
Even so, I did not have a head start on my way to a seven figure net worth. I started working in my dad’s business for peanuts. Spending was as close to zero as you can get without being zero. (You in the back, sit down! I know that comes to one cent.)
Saving all my income and investing it in bank deposits paying 12% and dropping some in growth & income mutual funds for the rest started the nest egg growing. A side gig preparing taxes which paid more than my real job sparked the early growth stages of my stash.
Things still weren’t awesome. I took a few years off to read nonstop. Then I met Mrs. Accountant and my hyper frugal ways (did someone say dumpster diving? —we called them McDonald’s runs back then) would no longer work. I had a one-year stint as a custodian at a parochial school before my real big break. I didn’t know it at the time, but quitting my day job after a full career of somewhere around 14 months was the best thing that ever happened to me. And my net worth.
Skyrocketing Net Worth
Do you like games? I do. Let’s play.
Thought experiment: Assume you start your own business, a season tax preparation business, perhaps. You visit the local apartment association and speak a time or two to build your client list. Just for argument’s sake let’s say you bring in 200 clients (don’t want to work too hard) and each client on average pays you $500. (They have rentals so the returns are not the cheapest.) Your revenue for the year is $100,000.
Tax preparation firms have 40% – 50% net margins if they manage properly. Just to make our game easy enough to figure in our head we will say our business owner has a 50% net profit margin. As a result $50,000 ends up in his pocket as profit.
First question: What is the net worth of our hero if she has nothing else to her name? $50,000? Hold that thought.
Our business owner is frugal, but wants to supercharge her net worth so she adds another 200 clients at an average fee of $500. She now has $200,000 in revenue and because she manages her company so well 50% of revenues end up in her pocket. Her income increased $50,000.
Next question: How much is she worth now?
Most people would say if she spent absolutely nothing on herself she would have a $150,000 net worth—a $50,000 profit from year one and $100,000 profit from year two. If you said that you are wrong. Her net worth is $350,000 to $450,000!
The Numbers Game
Okay WA, you lost your mind now. She has a business for two years, earns a combined profit of $150,000, spent absolutely zero of the profit investing it all and has a net worth of $350,000 or more? That doesn’t make sense! What’s the punch line? Stock market tripled in a year? She played options? Won the lottery?
None of the above. She played the safest game in town.
I’ll give you a hint. The first year her net worth was already $150,000! Still blows your mind our business owner starts a business, does a hundred grand in sales and has a net worth more than her revenue!
[Stop teasing me! There are other blogs I can read you know.
Okay, okay. I’ll spill the beans.]
Every business is worth something on the open market. In this case we have a tax preparation firm. Tax firms generally sell for 1 – 1.5 times revenue. Therefore, our business owner generated $100,000 of new revenues in year one. The value of the new revenues is 1 – 1.5 if sold on the open market, plus the profit she got to keep from owning the company the first year.
In year two she doubled sales, hence the value of the firm. Of course I am assuming a conservative value by using the lower end of the range.
When I was 32 my small tax prep business did around $300,000 in revenues. Real estate added ~ another $200,000. Without the business and real estate investment values added to my net worth I would have had to wait a bit longer to hit the seven figure mark. Maybe I would have enjoyed it more if only the cash was counted. Doubtfully.
The Power of Knowledge
In my life business ideas revolve around my firm. Over the years I have sold off pieces of my company only to engage a new idea, expanding the business in a different direction. I never failed to attract at least 1.0 times the revenue of the piece sold.
Armed with this knowledge I am able to increase my net worth with a multiplier effect. I never consider a client worth only what they pay me or the profit on the account. If a new client comes in with $10,000 of work I know I will generate $4,000 to $5,000 of profit for my favorite human AND increase the value of my company by $10,000 or more. In my mind I have a massive annuity and a nice check at the end if I sell.
This why my net worth grew so fast and why I said real estate underperformed. This doesn’t happen with investment properties. If you raise rent $10 a month the value of the property may increase, but it will be negligible. Real estate is worth what the market says it is. Businesses are worth a multiple of revenues, profits, assets or a combination.
This is why it is not that hard to be wealthy. This is why it is not hard to build a million dollar net worth. Starting from zero today and knowing what I know I could reach seven figures in five years tops. That isn’t bragging either; it’s a simple fact.
And now that you know the facts you can do the same.
The year was 1996, I was 32 years old and the bank needed a personal financial statement for an investment property purchase. The real estate partnership I had with my dad and brother was in full swing, but I wanted to add a few additional properties to my personal portfolio.
The bank asked for a personal financial statement. It had been a while since I filled one out so I was interested in where I would end up.
Don’t get me wrong. I track my finances closely. Each individual investment gets reviewed annually or semi-annually. I don’t always add up all the numbers to see where my net worth is, however.
As I gathered each asset and wrote its value down I could see this was going to be higher than I originally anticipated. My liquid investments had advanced a lot over the years and the real estate in my portfolio was adding a serious number to my net worth.
Once I had the assets added I knew I had crosses the million dollar mark before tallying the liabilities. Debt was low, even with all those rental properties.
When the final number was entered, my net worth stood at slightly over $1.2 million.
Most people would be excited if they discovered they were a millionaire. I was numb. I didn’t know what to think.
I was also depressed. Deep down I expected there would be some kind of positive feeling when I crossed the magical barrier. But, nothing. I was still me. I did not feel rich and certainly didn’t want to sell my tax practice. I enjoyed what I was doing.
And this depressed me the most. When I was a child I always wanted to be a millionaire and now that the goal was reached it didn’t make me feel different. What was I going to do now?
Growing up poor gave me a distorted illusion of what “rich” was. A million dollars was rich in my mind without understanding you can be rich with or without money. And now that I had a million dollars it didn’t change me. Something was wrong.
I shared the good news with Mrs. Accountant. She smiled and said, “That’s nice” as she went back to tending our first daughter, one year old at the time. Even my wife didn’t think it was all that big of a deal.
It became clear quickly why I wasn’t feeling the glory. In my mind the million had to be liquid, as in stocks, bonds, mutual funds and bank deposits. Much of my net worth was in income producing assets: a business and investment properties.
I never quite got my arms around the concept that I had arrived. After a while I found a way to let it go and not worry about it. Money, lots of it, would never give me the tingly feeling I expected it to. And crossing a net worth boundary wasn’t going to be something you feel as you cross it.
Such are the illusions of a young man.
Twenty Years Later
It was time for the mid-year review of my portfolio. Normally I wait until later in the summer, but I had a feeling I crossed another big threshold in my net worth. In fact, I was certain of it.
In the late 1990s my business exploded to the upside. Profits were very high and I was young enough and hungry enough to want to push hard. We started selling real estate holdings in the family partnership. By 2000 my real estate portfolio consisted of my farmstead, office building, and some real estate paper paying some very nice rates of return. No more dealing with tenants for me.
I kept adding excess cash to my index funds. Spending was always low because there wasn’t much I really wanted. I had my family and was completely satisfied with this awesome gift. There was nothing else I needed.
Late last year I was a whisker away from $10 million. With the continuing bull market I knew I crossed the threshold without as much as a twinge. I’ve been down this road before and expected nothing in the way of emotions this time.
Adding the assets always takes some time now. My liabilities are easy; I have a small mortgage of just over $100,000. The end.
Assets are scattered all over the place. I own the obligatory index funds in traditional IRAs, Roth IRAs, the HSA and business retirement accounts. The non-qualified account also uses index funds.
Real estate was next. I still hold a minor amount of paper on property, plus the farmstead and the office building. I estimated the values conservatively. No room for ego when calculating my net worth.
The hard part is the trusts. As an accountant I understand the value of using trusts to carry out my wishes when I leave this green earth. This leads to a number of entities. Gathering all the trust values required the most time.
Once the assets were tallied I sat back in my chair and wondered how my life ever turned out so good.
Remember the old adage: the first million is the hardest? Well, I crossed plenty of those in the last six months. The final number came in at $12,600,200.
Yes, I rounded! Real estate and the business are estimated, as I have said.
My net worth increased over 25% in six months! This is an astounding number to me. I’m sure it is to you too. Part of my luck stems from a solid increase in the index funds. Where I smoked it is from investments I made in the 1980s. Phillip Morris is one of my first individual stock purchases. I never sold. It kept growing and keeps growing. In the early days it was in a dividend reinvestment account so the dividends kept buying more shares. Morris later changed its name to Altria when it spun off Phillip Morris International a few years back. The dividend grows times two now.
A while back I bought some Tesla, Netflix, Facebook and a few other stocks. The “other” stocks did okay, going up with the market. I don’t have to tell you what Tesla, Netflix and Facebook did, do I?
Twenty years ago I was depressed I missed the magical moment when I crossed from poor to millionaire. I expected something, I’m not sure what. But I expected it!
After the non-moment wore off I went back to doing what I always did. Nothing special. I ran my tax practice, read piles of books and satiated my curiosity whenever I could with a new project.
Since I invested nearly every dime I had in my paw, there were times money was tight. I subscribed to grandpa’s philosophy: Never take off the pile. I invested first and figured out how to pay the light bill later. What can I say? I always lived that way.
I always felt poor; still do. My goal was to return to the farm and twenty years ago we had just moved into the farmstead I still live in. My dreams were fulfilled. The office was out of the home. My business goals were simple: beat last year’s numbers. More clients, more electronically filed returns, more revenue. Always more. It was the only scorecard that mattered.
I drive bank repossessed cars and grow a significant portion of my own food. Mrs. Accountant loves canning and freezing our excess produce for winter consumption.
You want to hear the really sick part? Mrs. Accountant still refuses to buy any clothes unless it is marked waaaay down. And I mean way down! Like $3 pants and $3 shirts. It gets better. Underwear and socks are frequently purchased at Goodwill. You know, Goodwill sells undergarments with defects really cheap. My attitude is if they don’t have defects when purchased, they will about twelve minutes after I put them on. So I wear the cheap stuff.
Longtime readers of this blog know I muse periodically on why people like Warren Buffett and other very rich people still live frugal lifestyles. Buffett spends under $3 for breakfast he purchases at McDonalds on the way to work. Yes! On the way to work. At 86! He even uses coupons!!!
The exclamations points are for you, dear readers. I totally get why Elon Musk keeps starting new businesses and pushing forward even after snagging upwards of $300 million from his portion of the sale of PayPal. I get why Steve Jobs worked until his body failed. I know why Buffett says he skips to work every day at 86. I get why Jeff Bezos keeps building Amazon bigger when he is one of the richest people alive. I get it.
Those guys all have more money than me by a massive amount. But once you reach a level where money is no longer a deciding factor or important, it becomes something else. A scorecard.
Working my business is not about more money. It is about providing value; doing something important; making a difference; finding fulfilling activities to occupy my time.
I invest and expect the investment to go up. I work really hard to make good investment decisions. If they go down my lifestyle will not change one bit. In reality, it doesn’t matter what happens.
But it does to me. I want to win. It is all a big game. And I like winning when I play. If I can’t win, or am not allowed to win, then I don’t want to play anymore.
In the office I still track my performance. I track my performance a lot more than I track my net worth that is for sure. I want to always keep growing.
There are things I wanted to do even after I crossed the million dollar mark. I wanted to farm, so I did. For a while. (A twenty year while, actually.) I backed away from the steers, but still have the acreage. Maybe I’ll go back into raising more animals, maybe not. Right now I have another goal I need to satisfy.
Everyone has dreams as a child. My dream was to grow up and be a writer. (I wanted to be a stock broker, too. That dream has also been fulfilled and I moved on.) I wrote my first full length novel in high school.
Earning a living writing is no easy task. Some of my work sold, but it wasn’t steady work and by then I had different plans. Still, the dream never died. I wanted to be a writer. A real writer.
Over the years I published a lot. The internet offered more publishing opportunities than ever before in history. But I didn’t feel like a “real” writer.
Now I have this blog and it is my dream. I write. I love writing and will keep doing so. The goal is to build traffic and profits. I call it ego, but it isn’t. It is a little boy inside me screaming out his dream. The sound is deafening.
My goals are detailed. Without wasting your time on the details, let me just say I want this blog to be a standalone business with employees and not a sidebar of my accounting practice.
Like Buffett, Musk and Bezos, I don’t need more money to make me happy or to put food on the table. My lifestyle will not change a bit if this blog grows to gargantuan size or fails. I just want it. That sounds so selfish and self-centered. It’s not.
Money is the scorecard to keep track of progress. Nothing more. Traffic statistics help me see how many people I am reaching; money allows me to see the difference I am making. I want lots of both.
I’ll spare you the gruesome details on how I plan to accomplish my goal. Sharing valuable ideas is more important. What I want to share is an insight you must have.
If you have already reached financial independence you already understand what I am about to say. For the rest of you, I want to share this one nugget of advice I wish I understood at a younger age: Stop worrying about what your net worth is. Relax. Don’t worry about becoming a millionaire. Live right and it will happen all by itself without any necessary worrying.
I missed the magic second when I went from under a million to over a million. It was only a second and if for some reason it did cause some sort of feeling or euphoria, it would have been short lived anyway and a drug only offered once in life. When I wasn’t looking, there it was. I went from less than a million to $1.2 million. The same happened when I went to eight figures. It still blows my mind. Eight figures? And it makes not a bit of difference in the world.
My frugality is not forced. I am frugal with my money because it is who I am. Impressing the neighbors is something I never did. Let the neighbors laugh. It doesn’t bother me.
Saving half your income is easy once you allow yourself the gift. Investing is easy when you are not trying to shoot the moon. Debts and a low net worth encourages people to gamble with their investments. It’s not necessary. You do NOT have to shoot the moon! It will happen faster than you imagine when you let go. Buying a hot stock tip or a flyer is sure to end badly. Timing the market or your index funds investments usually ends in tears.
The rules are simple. Spend less than you earn and invest in a broad variety of established businesses (index funds). The rest will take care of itself.
One day you, too, will realize you crossed a magic threshold of net worth and missed the moment it happened.
It works that way. Hope you weren’t expecting more.
Wealth Building Resources
Personal Finance is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Finance is free?
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to skyrocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
Amazon good way to control costs and comparison shop. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.
“It’s not working.”
A long time client started reading this blog and subscribed wholeheartedly into the idea of saving half her income. She discovered the blog early so she had nearly a year of effort under her belt. Student loans were the worst part of her debt, but credit cards and a mortgage also weighed heavily on her financial plan.
Saving half your income is the floor, not the ceiling. In this case, my client and her husband earn nearly $100,000 a year. They wanted to cut their spending to my levels using my yardsticks for spending. They are down to the mid 40s, a very good sign. The lament, however, has me concerned.
The only way this works is to be consistent. Years of hard work can be destroyed by a short-term spending binge. A new expensive car, a cottage up north, a trip to the casino and a new set of furniture can all be spent in a single month. The penalty will take years to fix.
All Between the Ears
Financial success and early retirement are all mindsets. There is no special ingredient needed. Patience and persistence is all you need. Responsible spending cannot be a chore; it must be an ingrained part of who you are.
My client is nearly in tears as she tells me it is not working. But it is; she just isn’t seeing it.
I question her on why she thinks it is not working. She confesses they are still broke even though they reduced spending. I ask where she thinks the money is going. She says they are putting every spare dime they have into reducing debt.
Ah, the debt bomb!
Digging out of debt takes work. Fixing decades of bad financial habits takes a few years. One year is only the beginning.
The Difference Between Expenses and Cash Flow
There are several things that drive accountants crazy. One of those things is how people have no idea what the differences are between a profit and loss (P&L) statement and a balance sheet. This lack of understanding causes clients significant pain.
A new loan, for example, is a liability, not income. People get that. You don’t pay tax on loan proceeds. They correctly place the loan on the balance sheet as a liability. When payments are made they list the entire payment as an expense on the P&L. Wrong!
My client cut her spending and plowed the excess cash into debt reduction. In her mind she was still spending, putting all the excess cash flow on the P&L when the principal part of the payment belonged on the balance sheet.
Keith’s Rule: Interest on debt is new spending. The payment to reduce principal comes from current cash flow to pay for prior financial indiscretions.
My goal is to get you to think like an accountant. You need to understand where the money really goes on your personal financial statement so you can eliminate debt and build wealth. Let’s walk through the process.
Every transaction in accounting has two sides. We will not bog down on terminology or train you in handling complex accounting transactions. I just want you to understand there is always two sides to every transaction, whether in business or your personal finances.
We will start with taking out a loan. Let’s say you bought a home for $100,000 and took an $80,000 mortgage. How will the money look on our financial statements?
You now have a $100,000 asset on your balance sheet. The other side of the transaction is a reduction of $20,000 from the checkbook for the down payment and you also have an $80,000 liability. The entire transaction takes place on the balance sheet.
You can consider the home purchase spending. In a way it is. However, accountants don’t look at it this way. The home is still worth $100,000 and can be sold, converting it back into cash. Normally a property is depreciated. That is not the issue with a home purchase used for personal purposes. Therefore, I don’t include a home purchase as spending. The insurance, taxes, mortgage interest and maintenance are current expenses only.
When the first mortgage payment is made, what happens? Part of the payment is interest and the rest is principal. In our example the payment is $1,000 with $800 going to interest and $200 going to principal. The second mortgage payment will have less interest since part of the loan has been paid off by the prior payment and the principal portion therefore increases.
The mortgage payment looks like this on the financial statements:
Personal checking account: -$1000 (balance sheet: asset)
Interest: $800 (P&L)
Principal reduction: ($200) (balance sheet: liability)
Notice how the $1,000 coming out of the checkbook is matched exactly by the principal and interest parts of the transaction. We call that having the books balanced.
Why is all this important? Our simple illustration outlines how money moves. My client felt she was not getting traction from all her efforts when in fact she was. Each reduction in spending was used to retire debt. The less debt you have, the less interest accrues, meaning you are further reducing your spending with each principle payment.
Interest expenses are current spending! Reduce debt, and hence interest expenses, and you reduce current spending without any sacrifice!!!
Our example also reveals a bitter truth about money: spending and cash flow are two different animals. If you reduce annual spending to $30,000 a year, about what the Wealthy Accountant household spends annually, you will need MORE income to cover cash flow needs.
Accelerated debt reduction hits cash flow. All the money is still gone, but debt is reduced while you still retain the asset. Your net worth is unchanged! That is what hurts. You moved money from cash to reduce a liability. The bottom line is still the same.
Where you win is next month. The reduced debt means less interest accrued before the next payment is made. Less interest means less current spending. (And what did you get for that interest expense? Use of someone else’s money. That’s all.) The next payment pays off more principle because there is less interest to pay. Before long the debt is gone.
People planning on early retirement (or retirement at any age) need to understand they live in a cash flow world. The bank does not care what your expenses are. They want to know if you have cash flow to pay them back with interest. In our example, the person taking out an $80,000 mortgage will need $80,000 of excess cash flow over spending. Debt is painful and it should be. As painful as it is, people still are too excited about saddling themselves with loads of it.
Debt-Free Cash Flow Needs
Once you are debt free you can live on your income alone. If you have $30,000 in annual spending you only need $30,000 in income to cover those expenses. No excess cash flows is needed to cover liabilities.
Investments are nothing more than moving money from cash to the investment category, both of which are assets. You are just shuffling what you own.
How I think about my finances is slightly different than generally accepted accounting principles. For example: A car purchase is an asset paid for with cash. In my business I would list this on the balance sheet and depreciate it. Same with any furniture or equipment. In my personal (mental) books, a car is current spending—the hell with depreciation—listed in a footnote. I consider most spending core spending. Cars, a home remodel and other major expenses I list separately. In the back of my mind I consider a car a current expense. But I also know it makes it look like my spending is lumpy so I list the car as a footnote so I can track my core spending more accurately.
Great care must be taken when making large purchases. If it doesn’t show up in core spending it might be overlooked. Overlooked spending can get out of control. Remember, a large asset purchase shifts money from an income producing asset (investment) to a wasting asset in many cases. (Cars are wasting assets. They drop in value until the day they hit zero.)
I explained the cash flow issue to my client. She seemed to perk up as I showed her how her efforts were reducing spending (less interest) and how each month her income was now building her net worth a bit faster each month. The student loans really had her down. But she was making progress. In a few short years the debt will be gone and investments will be sizable as long as she stays the course.
Another way of thinking of cash flow is this. You need excess cash flow (income over spending) to fund investments. With rare exception, you are either spending more than you earn or investing excess cash flow, even if in a checking account. Expenses rarely match spending exactly. You need enough excess cash flow over time to fund investments before you can retire.
Understanding the difference between a balance sheet and a P&L will help you reach your financial goals faster with fewer crises. Knowing where each transaction goes on the financial statements allows you to build your net worth faster. Once your assets over liabilities (hopefully there are few, if any, liabilities) reach an appropriate level you can chose the life you live. We call that retirement around here.