Step3 Prophet

Buying Opportunity

With the DJIA  down almost 10% in the past few days, I'm taking this opportunity to buy some more stocks and mutual funds/ETF's. I'm currently favoring Sony (SNE) and Citigroup (C) in the individual stocks category, along with Rydex Equal Shares Index ETF (RSP) for broader exposure and Vanguard's High Dividend Yield mutual fund (VHDYX) in my Roth IRA. My total transaction value today is only about 2.5% of my investment portfolio, and that will leave about 1.5% cash remaining for future investments, unless I move more cash from non-investment accounts.

  Citigroup is an interesting pick at the moment. They are down about 30% in the past month because of the economy in general and because they have high exposure to European debt which is in jeopardy of default. My feeling is that these are short term setbacks and C's long term prospects (3-5 years) are still good. I've been buying C in small lots almost since the recession began, thinking once this recession is well and truly gone C's share price will pop back up again, but so far time is making a fool of me. C is about 1.5% of my investment portfolio.

  Sony is a more recent favorite. After the earthquake troubles and lawsuit troubles earlier in the year, I've been buying SNE while it's been slowly declining. The are down about 40% year-to-date, compared with only 10% for the S&P 500 index. Again, there is no reason the l can see that the long term outlook is that bad. Sony has a diverse product line up and profit losses should only be temporary as they get things going again after the earthquake.

Investing in Real Estate and Starting a Business

I'm a huge fan of the investing philosophy of "Buy low, sell high" (as are most investors), and I've come to a point in my life when I actually have some cash to do just that. Since real estate has been on the decline for a while now, I figure it's a good time to jump in to the real estate market. To that effect, a partner and I are buying an investment property with the intentions of renting it out for a profit. 

So far we are still in the early stages of negotiations. The property is a short-sale, which means we should get it for a very good price, but the bank that owns the mortgage has to be willing to take a loss on difference between what the seller owes and the sales price. The seller has accepted our offer this week, but we still have several months for the banks to make up it's mind about the disposition of the house.

Actually,the first step in the process was  establishing a Limited Liability Company(LLC). It is our LLC that will be buying the property, not my partner and I. Since we are the only two members of the company though, it is close to the same thing. The importance of the LLC is mitigate some of the risks of owning and operating the property. If a person were to be injured on the property and sue the owners of the house, the owners could end of losing everything they own to pay off any judgments against them. That includes the rental house, their personal houses, other savings an investments. In today's litigious society, this is a remote but very real risk. By making the LLC the owner of the house, we limit our risk so that only the house and property might be lost, not everything we own.

  Setting up the LLC was easy to do. Our state has a website where you can fill out the "paperwork" and submit the application in about 30 minutes. The fees were fairly reasonable at $200, and we didn't even need a lawyer. A few days later we got a letter from the Secretary of State confirming our LLC was created and a nice certificate to hang on the file (or file into oblivion). Once our LLC was confirmed we gave the name to our broker for the short-sale and the purchase-sales agreement was written so that the LLC will buy the house.

  When starting a business it's important to keep business and personal finances separate. The LLC will have to file it's own tax paperwork, which can get pretty complicated depending on what type of tax structure your company has. The easiest thing to do would be to have the LLC disregarded for tax purposes, but you can only do that if the LLC is owned and operated by a single person (or married couple filing jointly). If the LLC was disregarded, it would be taxed like a sole proprietor business on the owners own tax return.

Since our LLC is owned by two individuals, we have chosen to be taxed like a partnership. This means the LLC doesn't pay any taxes directly, but passes all the tax burden onto the members of the LLC. You still have to file many additional forms with the IRS and State on behalf of the LLC, but the Federal tax reckoning will be done at the member's level instead of by the LLC. There are state tax implications that I have not fully explored yet, so more to come on that.

Also, we have applied for a federal Employer Identification Number(EIN). This will let the IRS track our companies activities by the EIN, and let  us establish bank accounts and other financial services in the LLC's name. The EIN is used on all tax forms the IRS gets related to our LLC. The process was free and took about 10 minutes online at the IRS's web site (www.irs.gov). You just answer a series of questions about your business and give your contact information for your LLC, and you instantly get a EIN. We'll be on the look out for free business checking accounts in the next week to firmly establish separate finances.

 

Forgotton Rewards

  I was updating my monthly finances when I realized that I have a lot of rewards points on my Chase credit card. I use rewards cards to earn cash back on purchases, and since it takes a while to accumulate enough points for something meaningful I don't usually think about them, but the balance caught my eye and I was taken aback.

  I prefer cash back, as opposed to miles or gift cards or some other reward,  because cash is useful for every transaction and it's usually clear what you're getting for your points. My Chase card is a 100 points to 1 dollar conversion, so it's very simple. My USAA card is a bit trickier because if you convert a small point balance, you don't get as much. For small balances it's a 100:0.83 ratio. You need 20000pts for it to be a 100:1 conversion. I'm not quite to 20000pts at USAA yet, which is another reason I've been ignoring the point balance for so long. When I went to convert my Chase points to cash I checked out the other deals on their rewards site as well, but all the rewards were the same point to dollar value, so I'm taking the cash.

If you're not using a rewards type credit card I highly recommend it. It's like finding several hundred dollar bills in your pocket you didn't know you had.

Thoughts on Rich Dad's Conspiracy of the Rich - Part 2

Kiyosaki starts the book by delving into some of the relationships between business, government, and the Federal Reserve, as well as looking at a time line for the financial crisis of 2007/2008. Delving is maybe too strong a word, since he really don't go any deeper than stating or implying there is relationship, and since you (the reader) are not rich, you are excluded.  Chapter 1 is rhetorically titled "Can Obama Save the world?" and the obvious answer is no. I respect Kiyosaki for giving the message that you have to save yourself. He states that "Personally, I don't expect government or big business to save me. I simply watch what the powers that be actually do, and respond accordingly."  According to Kiyosaki the key to saving ourselves lies in financial education, specifically on the topics of Taxes, Debt, Inflation, and Retirement. 

  Chapter two talks about the conspiracy in education. Kiyosaki spends a lot of time on the difference between two schools he attended in Hawaii growing up, one predominately rich and one predominately poor, then he goes on to say (in a round about way) that neither teaches a true financial education. He's spends a lot of time promoting an "us vs them" mentatliy in just the first two chapters, so I was kind of caught off gaurd by that.

 Kiyosaki introduces his first "new" rule of money in chapter two as well, namely that "Money is knowledge." He uses a stock trade as an example of how knowledge can be turned into money rather easily. I hope the fact that you can leverage your knowledge of things to make a profit is not news to people, and has been around for as long as there have been trade and merchants. The kind of knowledge you need is much deeper than a firm speculation about the direction of stock. I realize that these first five chapters are more setup than actual information, but I hope to see some better example of how "money being made of out nothing - nothing but knowledge. " The statement itself is a little simplistic, usually you need some sort of cash or credit or property to make a transaction happen, even if you are using leverage.

 There are a lot of unesssary diagrams and lists in the book. So far none of them have been useful. The text digram showing the relationship between the old school he attended and the new school was particularlly un-enlightening since neither made a difference in his money education.

Thoughts on Rich Dad's Conspiracy of the Rich - Part 1

  A friend of mine lent me the book Rich Dad's Conspiracy of the Rich by Robert Kiyosaki. Kiyosaki is a very polarizing figure in the world of personal finance and wealth building, and I've read one of his other books before, so I thought this would be an interesting read. As a side note, I think Kiyosaki is crazy like a fox. His advice is very good, but at the same time carries a lot of risk that he doesn't adequately account for in the book that I first read.

 He starts the book by lamenting about the poor state of financial education in public schools and lists a bunch of basic finance terms that people may not fully understand, so I thought I would go over them for starters. These questions and terms are taken from page 6.

 The difference between a stock and a bond: Stocks represent an ownership stake in a company. Bonds represent debt obligations of a company or city. A bond is promise to pay back money that has been borrowed by the company/city, whereas a stock promises nothing unless you acquire enough stock to get control of the company.

 Why are preferred stocks labeled preferred? Preferred stock(or shares) are like a cross between a stock and bond. Preferred stock typically pays a set dividend, generating income like a bond, but also can trade like a regular stock share.

Why are mutual funds labelled mutual? They are mutual because a group of people pools their money to buy more stocks at lower cost than an individual could on their own. To get a diverse mix of stocks requires a lot of money and substantial costs, which mutual funds spread among all investors to lessen the impact on the individual.

The difference between a mutual fund, a hedge fund, and exchange traded fund (ETF) and a fund of funds. A mutual fund is explained above. A hedge fund is similar to a mutual fund, but it is a private investment and can therefore take more risks(and thereby get greater returns). Because it is riskier, hedgefunds typically require investors to be very wealthy already so a significant loss will not be as bad for the investors. An exchange traded fund is a mutual fund that trades during the day like a regular stock. ETF's are usually cheaper to own than a similar mutual fund, but have more transaction cost.  A fund of funds is made up of many mutual funds to give the investor one place to meet all their diversification needs. The most common examples are "lifetime" funds or "Target retirement" funds that change their assets overtime as people get to a specific retirement date.

How debt can be both "good" and "bad". Bad debt is debt that brings no return on your investment. All your unpaid credit card balances typically fall into this category, as well as car loans and personal loans. When you go to sell or trade in your car, it will be worth far less than what you paid for it if you bought it new. Good debt helps you increase you finacial returns. Houses are the most common example, or buying stock on margin (a loan from your broker). You could also borrow to start a business. By borrowing money you can afford something you wouldn't have been able to buy on your own, and which could be sold for a profit( or produce income). In my experiance Kiyosaki tends to downplay the risks involved with "good" debt.

The difference between capital gains and cashflow. Capital gains are the differnce in price between what you paid for something and what you sell it for. For example, a stock day trader hopes to make money by buying a stock a low price and selling at a higher price. Loosely speaking, cashflow is money that you earn from your investments or business. For example, if the stocks you own pay a dividends, you get a steady stream of income as long as you own them.