Diverse Interests Create Diverse Income Streams

cash-moneyThe more interests you have, the happier you will be. Imagine if one of your hobbies is analyzing clouds, or cumulonimbuses for the scientifically savvy. You could step outside any time during the day and entertain yourself for hours.  There are so many things around us that our minds tend to filter things out so we can focus on more important tasks.  If we stopped to admire everything, we’d probably never get anything done!

Income diversification is important during weak economic times since you never know when one stream might dry up.  However, the funny thing is that I’ve never purposely thought about creating new income streams for the purpose of diversification until this year.  Instead, my diverse interests have lead me to have a diverse amount of income!  It never occurred to me to count up my non-job income and figure out what percent it is of total income. But, as I started adding things up, I was amazed to realize some months would regularly achieve 25% and up to 50% of my gross base salary!


Where To Invest In A Rising Interest Rate Environment?

Rising Interest RatesAt long last stock market volatility returns due to rising interest rates. We’ve now seen a more than 60% increase in the risk free rate since its 2012 bottom and things are starting to get hairy. I’ve been wrongly waiting for a pull back since the beginning of May so it’s good to finally get some sanity back in the markets again.

Nobody knows whether rates will continue to move higher from current levels. However, it’s good to layout a what if scenario so we can be better positioned.

Rising interest rates do the following:

* Makes mortgages more expensive. The window to refinance at all time lows has passed.

* Makes car loans more expensive. One shouldn’t be borrowing money to buy a depreciating asset anyway, so all is good.

* Increases credit card interest rates to even more egregious levels. Nobody better have revolving credit card debt unless they are a financial masochist.

* Increases student loan interest rates, depending on what type of government subsidies you receive.

* Makes the stock market less attractive given the opportunity cost to own securities has increased. One of the main reasons why I aggressively invested in equities in 2012 was because the S&P 500 dividend yield was greater than the 10-year yield.

* Cools off the housing market as homebuyers are now hit with an increase in prices from a year ago and rising mortgage payments.

* Slows down consumption growth, which is the main driver for GDP growth in the Y = G + I + C + NI equation.

* Theoretically increases your savings rates and CD rates, but banks will move like molasses to adjust so don’t bet on anything great for a while.

* Leveraged buyouts will decrease at the margin due to more expensive debt financing.

* Makes bonds look more attractive given higher yields.

* Strengthens the US Dollar vs a basket of major foreign currencies.

* Makes you reflect on what’s next.

It’s important to realize that a rising interest rate environment often reflects underlying strength in the economy as the demand for money increases. Money demand increases due to better employment levels, higher wages, positive growth expectations and a host of other factors. It’s the short term adjustment, which which can be tricky to maneuver.


How A Structured Note Can Save Value Investors From A Bad Trade

Apple Structured Note Investment

Back in December 2012 I started geting interested in Apple (AAPL). The stock had fallen from $705 down to the low $500s as investors began to sour on its margins, the CEO, and the competitive landscape with Samsung launching a 5″ smartphone called the Galaxy S4.

One simple investing screen I use to find ideas is to see what stocks have fallen at least 20% in a six month period. From there I identify names to research for potential catalysts that will hopefully prove the market wrong. My thoughts on Apple were simply that they couldn’t ignore the market’s appetite for a large screen iPhone. I also thought they’d begin returning more money to shareholders given their $150 billion war chest. At then 12X earnings with double digit earnings growth and an S&P 500 at over 14X earnings, I thought Apple provided a good risk reward in the low $500s.

After dumping a good chunk of change into the markets in June of 2012, I regrettably let a remaining $40,000 sit in a low yielding money market account waiting for opportunity as the markets kept on rising. I figured keeping some money liquid would be prudent because one never knows what opportunities may arise. Apple looked enticing, but I wasn’t willing to “catch a falling knife.” There had to be an option where I could invest in Apple with lower risk, but with a decent return. Enter the Apple ELKs structured note (the link goes into more detail of how a structured note works).


Why It’s Better To Invest In Growth Stocks Over Dividend Stocks For Younger Investors

Growth stocksDividend stock investing is a great source of passive income. The problem is, with dividend yields relatively low at 2-3% you need a lot of capital to generate any sort of meaningful income. Even if you have a $500,000 dividend stock portfolio yielding 3% that’s only $15,000 a year. Remember, the safest withdrawal rate in retirement does not touch principal. Furthermore you must ask yourself whether such yields are worth the investment risk.

If you’re relatively young, say under 40 years old, investing the majority of your equity exposure in dividend yielding stocks is a suboptimal investment strategy in my humble opinion. You’ll be hoping for filet mignon for decades while you eat Hamburger Helper in the meantime. When you reach your desired age for retirement, you might just be asking yourself, “Where the hell is the feast?

Out of the few multi-bagger return stocks I’ve had over the past 16 years, none of them have been dividend stocks. I’m sure dividend stocks will provide over 100% returns if you give them a long enough amount of time. But if you are like me, you’d rather build your fortune sooner rather than later. If I’m going to bother taking risk in the stock markets, I’m not playing for crumbs. When things turn south, everything turns south so there had better be more than a 3% dividend yield and some underperforming appreciation to compensate.

The following article will attempt to argue why younger investors should focus on growth stocks over dividend stocks in a bull market with potentially rising interest rates. In a bear market, everything gets crushed but dividend stocks should theoretically outperform.


Don’t Stop Fortune Hunting – Money Making Opportunities Are Everywhere

So close yet so far. Giraffe reaching for leaves.

When I was 23 I got lucky, very lucky. No, a Ford agency supermodel didn’t decide to stalk me around Manhattan and show me off to her beautiful friends in case we didn’t work out. Instead, a $3,000 investment turned into $155,000 in two months. The stock was VCSY a Chinese internet company with a homepage consisting of a simple dial pad. I had no idea what the company did except for the fact that Internet + China in December 1999 sounded like a fantastic idea during one of the greatest bubbles of our times.

VCSY went from around $3 to $6, did an inexplicable 20-for-1 stock split and then went up to around $9. In other words, it went from $3 to $180 pre-split and I had 1,000 shares. The stock’s move was one of the most ridiculous things I’ve ever seen as everybody I knew on the Street started piling into the name. I eventually got out of the stock at around $155 a share, netting a cool $153,000.

I proceeded to do what every foolish 23 year old would do and blow it on things! I bought a 600cc racing bike along with a second hand Volvo 850 GLT. At least I didn’t go out and buy a pound of coke. The safety of the Volvo was a way to balance out the risk of death during wheely popping attempts on FDR drive at 100mph. With both vehicles came insurance payments and a $300 a month parking bill. Yes, even back in 2000 parking was that expensive in lower Manhattan.

My biggest regret wasn’t actually spending $25,000 on goodies after the financial windfall. My biggest regret was not investing MORE into VCSY! I could have put in up to $20,000 worth in the name because I just received my first stub bonus after starting work in the summer of 1999. Meanwhile, the ritual of saving more of my after tax paycheck had begun because getting into work before 5:30am and regularly leaving after 7:30pm didn’t seem sustainable long term. Unfortunately, I was too chicken shit to dump everything into VCSY. If I did, the $20,000 could have turned into a cool million! Sob. So close, yet so far from being able to make it rain!

Ever since the spring of 2000, I’ve regretted not taking more risk. I swore to swing for the fences more often with the new found capital. Instead of fulfilling my oath, I decided to cower in the corner like a scared child in the night because the internet bubble began to burst in March 2000. After a couple $10,000+ down days thanks to reinvestments in B2B stocks like Ariba Technologies I bid the stock market casino sayonara! The one year time period of confusing brains with a bull market was over.


Financial Benchmarks Investors Should Consider To Gauge Performance

Pimped Out ride

There’s one simple observation I’ve noticed in my journey towards financial freedom. Rich people make things more expensive for the rest of us. Given the supply of desirable necessities such as homes, schools, food, and even water is finite, the rich bid up prices far beyond what the middle class can afford.

I remember back in 1995 thinking $20,000 to go to a private university was ridiculous. Now such a private university costs $50,000 in tuition. Ridiculous again, especially with the internet providing so much free education now. Did the median salary increase by 125% in the past 18 years? No. The median wage actually fell 8.9% from its peak in 1999 to around $50,000 per household. That is a double ass kicking!

I remember wanting to buy a sweet two bedroom, two bathroom, double balcony condo in Manhattan with a view of the Chrysler Building and Madison Square Park for $720,000 in 2000. The problem was I only had one year of post college savings and stock gains under my belt and had to borrow about $50,000 to achieve a 20% downpayment. The cost of the 1,350 square foot condo is now roughly $1.7+ million dollars sadly enough. Just take a look at the price per square foot values of ultra high end property and you’ll see an increasing spread compared to the value of median priced property. Someone with enough money bought the place and is now that much richer as a result.

As my portfolio grew over time, I became much more risk averse with my investments. With the Asian financial crisis in 1997, the Russian Ruble collapse in 1998, the stock market implosion in 2000, and the mortgage market meltdown in 2008, it’s hard not to come away with a more conservative investment style.

Now that I’ve built up a livable passive income stream, I’ve gravitated more towards absolute return once again. So long as I don’t blow up the principal portion of my passive income stream, it’s risk-on. We should strive to outperform the competition, especially if we have the buffer to do so. In this article I’d like to discuss the various benchmarks you should consider using to measure your performance based on your wealth and risk tolerance.