Sunday, October 26, 2008

Website Updates

I've added a new feature to the website at the bottom of the page called "Recent Videos." I come across many videos online, and I'll start to post some of the ones that are relevant to the market views expressed here.

I've also posted a recommended reading list. I try to read a book a week on business and investing, and about 2 or 3 a year set themselves apart from the rest. I'll let you know when I come across them.

I read countless articles online as well, and I've been posting some of the ones recently that I think are important on the "Additional Reading" in the emails.

I guess a good question at this point would be, why would a 26 year old spend so much time studying the markets, reading books, and taking courses. Unless I manage a trust fund or work as a financial analyst, isn't it just a waste of my time?

I don't think so, and I could give you a ton of reasons why, but here's a simple one:

Let's say I'm driving down the road and I see an apartment complex that looks nice. I decide to pull in and ask the property manager if they have the owner's contact information. She does, and I give him a call that afternoon. I let him know that I just drove by his building and felt that it is something I may like to buy. He is an older gentleman, approaching 70, and says that he has owned the building for 20 years and was thinking about selling it.

I then ask for the financial information to determine what the building is worth. I determine that the building is worth $5 million and tell him I'll give him full price if he will seller finance the building to me at a 7% interest rate. He says he is not comfortable doing that and would rather just sell the building and collect the money.

Here's where it becomes important to understand the markets.

If he sells his building, after paying a realtor, depreciation, and taxes, he will probably come away with about $2.5 million. So what is he going to do with the money then? I tell him that the stock market is crashing right now and explain to him why it is a dangerous place to put his money. How about bonds? Bonds are even worse because he is getting a negative real return after inflation and I explain to him how the bond market is in a bubble right now. So he can put it in a money market that may return 3% at the current rates.

What is 3% on $2.5 million? $75,000 per year or $6,250 per month
What is 7% on $5 million? $350,000 per year or $29,166 per month

What if I could not argue why 7% was a great investment for him? What if I could not sell him on the fact that he was getting a deal and I had to give him 9% per year. That is an additional $100,000 per year that I would have to pay him in interest, which means it is $100,000 per year that I would not be collecting in profit.

How about one more reason for fun.

Let's say that gentleman wanted $100,000 down as a deposit on the building. What if I did not have any money? I could go to a private investor and ask him for $100,000 and tell him I will pay him 15% on his investment. I would need to sell him on giving me the money as a better investment than anything else that is currently available to him.

No comments:

Post a Comment