There was an error in this gadget

Sunday, November 14, 2010

Streams of Income

It’s bad enough to initially depend on just one source of income, but it’s even worse to not invest it or diversify it such that you protect it over time. In other words, there is more than one way to diversify your income.

(1) You can diversify your sources of income so that you have, say, two or three jobs
(2) You can diversify the ways in which you earn income

It’s better to go with the second option, even though, strictly speaking, it can be considered a version of the first.

You can work three jobs if you want. That will definitely give you three different sources of income. If you get laid off at one place, you’ll still have the other two jobs. It’s great to keep your options open, after all. Maybe you’re moving up at one place and you want to give it some time.

But working three jobs is really no different than just working more hours at the same job. You’re still a rat running on the wheel – just a bigger wheel, and you’re running faster, or for a longer period of time, and you get a bigger piece of cheese to take home.

What you really need to do is slowly outsource your own income stream.

Progressively safer streams of income

1. Invest in high yielding dividend stocks that grow their dividends yearly.
2. Reinvest a portion of the dividends into more high-yield stocks.
3. Use the other portion to pay current bills (and debt servicing if you have it)
4. Repeat by reinvesting proceeds into a different asset class: real estate with cashflow.
5. Repeat by reinvesting remainder of RE cashflow into another class: a business of your own, for example.

You may want to change the exact order and the benchmarks at which you would buy an investment property, for example, but the idea is generally the same. Protect your investment income by diverting it into different asset classes with (ideally) less risk.

Your day job is the most risky form of income. Not only do you have just one, but you have to pay with your time and energy just to get a return. You need to take that most highest level of risky income and lock it in to less risky streams, like dividends. I think these are actually less risky than starting a business on the side, because that’s just going to take up more of your precious energy in the beginning. Some can do it – for various reasons. I think starting a business is an excellent idea, but I think you can get more leverage in the beginning with juicy dividend growers.

On this model, the more that your day job kills you, the more you should try to save as much of that money as possible and convert it into another, less taxing, source of income. Do the same with your high-yield stocks. Precisely because they are high-yield (especially if the payout ratio is high, or they’re high yielding because of a recent price drop), you’ll want to redirect those dividends into forms of money with less velocity, like the money market or a bond fund. Then I’d get out of the corporate sphere altogether and create my own source of cashflow by buying an investment property and renting it out.

If you have enough income right now, perhaps you can skip these steps and just purchase your rental property right away. But the idea is the same. Recycle that money into a system that can be set on automatic, but wherein your money cycles through progressively lower levels of risk (you can do the work to determine the order of risk for each opportunity). Once that’s done you can focus on how to increase it the velocity of these cycles of money

Friday, November 5, 2010

the bottom line on money printing

So, here’s the bottom line on money printing, or QE if you prefer. If nothing happens, the whole thing was a waste of time. If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process. Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off. Do not ask about the exit strategy from QE; there is no exit.

Sunday, September 19, 2010

Do you need to build a portfolio that will generate cash?

Are you more concerned with paying your bills and having enough income than growing richer?

If so, you need to focus on something called income investing.

This long-lost practice used to be popular before the great twenty-year bull market taught everyone to believe that the only good investment was one that you bought for ten dollars and sold for twenty.

Although income investing went out of style with the general public, the discipline is still quietly practiced throughout the mahogany paneled offices of the most respected wealth management firms in the world.

Saturday, September 18, 2010

The Root of All Evil

Is the love of money the root of all evil? Or, is it the ignorance of money?

What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money?

Is the lack of financial education in our schools simply an oversight by our educational leaders?

Or is it part of a larger conspiracy?

Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money.

Like it or not, money has a tremendous impact on our lives in today's world.

At we believe that all can live a properous life if we just save and invest in income producing assets.

Monday, September 13, 2010

Fundamentals are Not the Fundamentals

If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).

Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).
"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).

Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)

Excerpt From Ludwig Von Mises Institute

Sunday, September 12, 2010

Who Should Manage Your Money? Only You!

The typical stockbroker went from selling shoes or cars to hustling stocks after passing the exam.

Your financial future is not his or her concern; generating sales commissions is. Of course there is plenty of free advice out there, from Jim Cramer to Suze Orman. But, you will likely get what you pay for.

Finding good investments is very hard work. Buying them at the right price is even harder work. Having the patience to buy at the right time and sell at the right time is nearly impossible.

Your best bet is to invest in companies that pay monthly distributions. At least this way you get paid to ride things out or to recover your capital if your investment was poorly timed.

Saturday, September 11, 2010

Forced Investing

As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.

"An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."

The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution.

In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.