MERRY CHRISTMAS

Sitting at the Kitchen Table. It's 11:10 on Christmas morning. The packages have been opened and trash bags are full of wrapping paper. Everyone is pooped, yet there is a huge amount of activity as preparation for Christmas dinner is under way. My philosophy is that the real benefit is in getting the family together. I could get by on a hamburger and chips. Perhaps I just feel guilty because of all the work going on while I sit pounding on this laptop and looking out the window.

How is Your Resiliency Muscle? It's a muscle in your heart. It allows you to bounce back after a set back. I saw a program on television in which a four foot tall man with dwarfism was talking to a classroom of 10 year olds. He talked about the trials and tribulations of being a "little person in a big world". His own situation was complicated by the fact that his legs didn't work normally and he had to use crutches everyhere he went. Despite these many handicaps, he was a successful person by almost any measure you could use. He attributed his success to his "resiliency muscle." How many of us could use a little development of this resiliency muscle? I certainly could as I face the aches and pains of the aging process. Far too many of us sell ourselves short and accept defeat too easily because we don't exercise our "resiliency muscle."

Investors Need a Resiliency Muscle. Nowhere is the resiliency muscle more important than in investment. One of the things I work hard to do is develop a vision of the future to use in making investment decisions. As valuable as this vision can be, it is probably less important than the ability to bounce back after I make the inevitable bad decision. So many things can occur to cause an investment to perform poorly, that I know I can never predict the future well enough to do everything right. But I can't afford to stop trying. There are some very challenging economic changes ahead. No one will be immune to the consequences of these changes but those who resolve not to give up will undoubtedly do better than those who fail to persist.

A Visit From the Eagle. I have always been inspired by the pictures of eagles but, before yesterday, I had never seen this majestic bird close up enough to identify it. Yesterday, as I was sitting in my glassed in living room, looking at the lake a huge bird swooped down within 20 feet of me. There could have been no doubt that it was an eagle. Brilliant white head, with wings spread wide, and white tail feathers. Betty saw it too and we both had goosebumps at the sight. What a gift that visit was! While I won't go so far as to ascribe any particular meaning to it, I am thankful I was sitting by the window at that moment for the vision of a lifetime.

CHRISTMAS WEEK END

Beautiful Day at the Lake. It's another beautiful day here at the lake. I got out of Denver just in time to miss the big snow storm. Lucky me. Tomorrow we're headed to town to spend Christmas with the family. Back to living out of a suitcase for a couple of days.

It's Been A Good Year In the Market. I can't complain about how the markets treated us this year. The S&P index increased almost 11% and most of our portfolios did better than that. Predictions are for another good year next year. Who knows. We will continue our philosophy of emphasizing cash flow rather than appreciation for our return on investment. This concept is well understood by my real estate investment colleagues but it sometimes called to question by financial planners. Perhaps now is a good time to discuss the whole concept of total return.

Total Return is a Simple Concept with Huge Implications. Total return is best described by the following simple equation: Total Return = Cash Flow + Appreciation. If you purchase a stock for $10 which pays an annual dividend of $.40 per year and that stock increases in value to $10.50, you have a total return of $.90 ($.40 cash flow plus $.50 appreciation) or 9% for the year. Sounds simple but there are a number of factors to consider. For one thing, you have to pay tax on the 40 cents per share but the 50 cent appreciation is not taxable unless you sell the stock If your objective is to build wealth and you have sufficient income from other sources, you can build more wealth by buying investments with less cash flow and large appreciation potential. If you need income to buy groceries, you buy investments with high current income and less appreciation potential. Can you have both high income and appreciation potential? Maybe, but it requires considerable skill or, better yet, luck to locate those investments. This still sounds relatively simple. Choose high cash flow investments for clients who need income and high appreciation potential investments for clients who want to build long-term wealth. In reality, what we do is construct a portfolio with a mix of cash flow and appreciation investments and tailor that mix to fit the needs of the client.

There are Other Factors to Consider. We can't neglect risk in our investment decisions. In the previous example, the 40 cent dividend is yours to spend or re-invest as you wish but the 50 cents appreciation can disappear. Enron is a notable example of evaporating wealth. Investors who intended to sell a bit of their stock periodically to fund their retirement found that they had no value to sell. Aside from a tax deduction, the only benefits they received from their investment were the quarterly dividends during the holding period. This leads to the conclusion that, as a rule, investments with high cash flow are lower risk than those that depend on appreciation for return on investment. Of course, there are many exceptions to this rule and high cash flow investments can carry considerable risk as well. In constructing your portfolio, you have to pay attention to all these factors. Today's good deal might be tomorrow's trash heap.

PLAY THE GAME HARD....BUT NOT TOO HARD.

Glad To Be Back At The Lake. Its a week from Christmas day and I am finally back at the lake. Since November 30, I have driven for 2,600 miles and flown another 1,700. I have spent a total of four days here. While that might not sound too difficult to some of you travelers, I found it somewhat draining. I am glad to finally be back at my place of refuge. The weather is warm and the water is beautiful..........Now if I could just find an efficient way to deal with all the leaves that keep falling.

I Have Had a Lot of Time to Think Lately. Sitting in a vehicle at 75 miles per hour going down Interstate 10 or waiting at an airport gives you a lot of time to think and reflect. One of the needs that seems to be prevalent among older adults is that of reflecting on the past and trying to make sense out of what it all has meant. Having spent the past 30 years in entrepreneural pursuits, I often wonder about how I could have been more successful. I know, it doesn't reallly matter at this point but maybe I could develop a bit of insight to pass on to my clients who are still in the game. One thing I feel sure about at this point is that we need to be careful who we envy and choose to emulate. One notable example is a local financal planner who had a very high profile. He lived in a high end neighborhood, had his own airplane, and once told me that his clients were all winners, and as such, wanted their advisor to be a winner also. While I found him arrogant and not very likeable, I envied his succes and assumed that he must be doing very well for his clients as well as himself to be so successful. As of this writing he is serving a 100 year sentence for bilking over 10 million dollars from those clients who placed their trust in him. His recent appeal of that severe sentence has been rejected. Lucky I didn't emulate him.

There Have Been Others. When I first started a mortgage company in 1985, I met an ex banker who had been a multimillionaire and chairman of a large bank holding company. A crisis in the banking business caused him to lose millions for himself and his banking clients and he even spent a few months in prison as a result. Still, he was one of the most driven business people I ever met. He started his own mortgage company which always seemed to do better than mine. A few years ago, he sold the company for a reported 18 million. You can imagine how much I envied him, although I will admit I found him arrogant and not very likeable. He didn't quit when he sold his business. He stayed in the game and continued to chase bigger and bigger deals. This week end when I was in Denver, I learned that he took his own life a month ago. We never know what demons chase those successful people we envy. Lucky I didn't emulate him.

We Need To Be Careful. Based on these examples, it would be a mistake to conclude that we didn't attain our success goals because we chose not to be arrogant and unlikeable. Still, it is a strange coincidence that two of the people who's business success I envied the most ultimately turned out to be failures at life. As I look out the window at the tall, glossy-green magnolia trees and the bright red holly berries, I am reminded of all the things I have to be thankful for. Perhaps I could have been more successful at business but I might not have been able to spend as much time with the grandkids or sitting outside in these beautiful woods.

BACK AT THE COMPUTER

It's been a crazy time since my last post. I just drove a 2650 mile round trip to spend two days in Phoenix with my Dad. It was a nice visit but perhaps a bit too much driving, even for an old man who loves road trips. The worst part about this trip was the fact that I received news that my uncle fell and broke his elbow and hip. Since I am the person in charge of making virtually all the financial and personal decisions regarding his care, I sometimes felt like I should be in Colorado dealing with the situation instead of heading down the interstate at almost 80 miles per hour. Anyway, I am flying to Colorado this coming Tuesday to check on him.

Caring for an aging relative can be very stressful in the best of situations, but it is seriously compounded when there is no money. I feel really fortunate that there are funds available for my uncle's care and I can make decisions based on his best interests without worrying about money. While I helped my aunt and uncle with investment and other financial decisions for 20 years prior to my aunt's death and my uncle's alzheimers, they deserve a lot of credit for setting up the proper vehicles to allow me to continue to do so when they were no longer competent. Many of us think that old age and incompetence is something that happens to others but it can happen to anyone. My uncle was a highly decorated WWII veteran and a very competent individual. He was the last person you would expect to become totally incapable of managing his life. Now he can't even remember his last name. As painful as it is to think that we may be like him someday, we have to consider that possibility in our planning. Hardly anyone does. One of my own personal goals for January of next year is to take a hard look at my own situation and make sure that plans for the future are based totally on reality and not wishful thinking. Thinking about the fun things we want to do after we no longer have to spend 40+ hours a week earning a living is the enjoyable part of late life planning but we have to devote at least some energy to thinking about what can go wrong and developing some contingency plans for dealing with those possibilities. The same thing holds true for me in writing about these issues. I would attract more readers by writing about the "fun stuff" but life isn't always about the "fun stuff." Hopefully, I can encourage you to protect your family members by considering these other issues as well.

Dealing with adversity is part of life and we always have to remain as positive as we can in these situations. Remember. When life hands you lemons, buy a bottle of tequila and some salt and give me a call.

GREETINGS FROM APRIL 1989

Every once in awhile I run across an old newsletter that I used to communicate with clients when my practice was at an early stage. The April 1989 issue was directed to Baby Boomers who were between the ages of 25 and 43 at the time. Next year, that same generation will be between 43 and 61. Here are some quotes from almost 18 years ago.

"....The movement of your generation through our economic system has been compared to that of a snake swallowing a rabbit. For example, when you became school age, the educational system was forced to expand rapidly to meet the demand. The result was shortages of teachers, textbooks, and classroom space. ..........The same thing happened as you entered the labor force and competed for a finite number of entry level jobs. Now that you have moved into postitions of increased responsibility, there is a serious shortage of entry level workers and a surplus of managerial and supervisory talent. When you needed housing, the increased demand caused an increase in home prices and interest rates."

".........In some 17 odd years, many of you will be eager to stop working and enjoy the benefit of many years of labor. In the beginning this may not be too dificult; however, as you grow older, the number of workers paying into the retirement system will decrease, making it less likely that you will be able to recoup the funds which you have so faithfully paid into the system."

"......... If baby boomers don't drastically increase their savings habits, they won't have funds available for retirement. If they do, they may drive rates of return down resulting in insufficient retirement assets. What can you do to avoid this competition for high investment returns? The best answer lies in becoming serious about saving and investing before of others of your generation discover the need to do so.........we might also look at the current high interrest rate environment to lock in rates at the current levels. I am about ready to start moving into instruments such as zero coupon treasuries with a 10- year maturity or long-term fixed annuities with a 10-year rate guarantee. ........I believe that there is a 10-20% probability that interest rates in the 90's will return to the low levels of the 60's and I intend to invest accordingly."

These quotations from almost 20 years ago are some examples of what we can do to develop a vision of the future and plan our investment strategies accordingly. Very few people would have beleived that the yield on a 10 year treasury would drop from 9% in 1989 to 4.5% today. During that same time increased investor demand drove the Dow from 2418 to 12,121. It is also an example of statistical information that is "set in stone." We absolutely knew that a large segment of the population would go from the 25-43 range in 1989 to the 43-61 range in 2007. It was only a small step to extrapolate what behavior changes might occur as that change became reality. Following that investment strategy enabled me to enjoy the comfortable lifestyle that I now have..............Now if I could just figure out what to do for the next 18 years. Come to think of it, it is the need to do just that that has prompted me to start this blog in the first place. Give me a call or drop me a quick e-mail if you want to discuss some of these issues and develop a strategy for your own financial independence.

JUST WHAT IS A CASH FLOW GARDEN?

Some of my readers have asked me why I named this blog "Cash Flow Garden." A short answer is because I believe that the central issue in developing financial independence is not assets, it's cash flow. Its about replacing the cash flow derived from work (trading time for dollars) with cash flow from more enjoyable pursuits, like investing.

Over 20 years ago when I enrolled in a program to earn my commercial real estate designation (CCIM), one of the first things the instructor emphasized was that any investment could be evaluated based on a series of cash flows. That message stuck with me as I helped clients plan for their retirement. When I used the financial planning methodology for calculating the funds needed for retirement, I had to make a number of assumptions such as life expectancy, average return on investments, inflation, etc. The final result was dependent on my making those assumptions of which were little more than educated guesses. As an example, consider the fact that a recent article I read calculated that a couple earning $50,000 a year would need $1.75 million for a "comfortable" retirement. Now ask yourself, what couple earning $50,000 a year has a prayer of accumulating $1.75 million? Stated another way, what couple with $1.75 million worth of investment assets will be satisfied with $50,000 a year?

When I read Robert Allen's book on "Multiple Streams of Income", I reached the conclusion that cash flow from a wide variety of sources was the actual key to financial independence. I envisioned that the process was something like planting a garden from which cash flow could be derived. Like a garden, some crops were dependable (almost anyone can grow zucchini but sometimes you can't even give it away). Other crops are more valuable (every one likes home grown tomatos but the yields often vary due to weather, pests, and soil conditions). Still the garden needs a variety of crops to produce a reliable food supply.

I would like to wish all of you a happy Thanksgiving. Of the many things I am thankfol for, I appreciate my clients, past present, and future which are a part of my cash flow garden. As a side benefit, I have been blessed with some very valuable friendships from this group. Think about your financial independence and call or e-mail me if I can help you construct your own cashflow garden.

HAVE YOU EVER HEARD OF A CANROY?

Canroy is short for Canadian Royalty Trust. These are investment vehicles out of Canada which have been very popular with American retirees. An abbreviated definition is that these trusts own interests in natural resources mainly oil and natural gas. In recent years trusts have been formed for iron ore, coal, and synthetic oil. Their popularity with income oriented investors is because they tend to distribute 75% of their income on a monthly basis. Yields have reached as high as 16% on invested capital. One of the reasons for the high yield is that they haven't been subject to Canadian corporate taxes....No longer true. Canada's relatively new minister of finance has announced that in the future, they will be taxed as corporations. This to the dismay of retired investors, many of which sold off their investments for as much as 25-40% lower than pre-announcement prices. One of my colleagues, a very seasoned investor announced that "Canada will never get another dollar from me. Not even a Moosehead."

Most of our clients didn't lose money in this disaster, mainly because we preferred to keep our royalty investments in the US, where we think we are more familiar with the investing environment. Now that prices have dropped, are canroys now attractive? There are a number of reasons to think this may be true. 1. While corporate taxes will definitely mean that there is less to distribute to investors, the new taxation will not be implemented for existing trusts until 2011. The rules may change by then. 2. Plans are under way to reduce Canadian corporate tax brackets which will reduce the effects of the new rule. 3. Depletion allowances are such that much of the income is considered to be a return of capital and not taxed. If 12-14% distributions sound good to you, it might be a good idea to diversify your income stream by adding small amounts of these vehicles to your portfolio. While we probably won't add these to accounts other than those large enough to absorb some risk, I may add some to family accounts.

Getting back to real estate, I was interviewed by a reporter for an article that appeared in the November 20 of Time magazine and quoted as saying something to the effect that "As soon as you have a bunch of empty bedrooms, you should consider downsizing to a smaller house because owning more house than you need is a poor allocation of capital." I qualified that statement that stated that this was from a strictly financial perspective. I don't know if that was clear in the article but I am well aware that it is never a strictly financial issue. Living under the bridge along Cherry Creek gives you the benefit of a good neighborhood at very affordable prices from a "strictly financial perspective." Still, did we really need to go from an average new home size of less than 1000 square feet in the 1950's to almost 2400 today? One of my main concerns is that the economy of the future may not allow us to continue to allocate so much capital for the simple purpose of putting a roof over our head. We should discuss this more in future posts. Send me an e-mail if you have any ideas on this subject.

UNPLEASANT BUT IMPORTANT

Would it be possible for someone to take over your finances this afternoon? Could they locate the required documents? Could your spouse guide them in the right direction? I ask these questions because I am often called on to do just that and find it amazing that it is such a difficult task. Sometimes its an unexpected death; however, in others it is in a situation where dementia has gradually lessened someone's ability to decide what's important and worth keeping. In those cases, there is often so much unorganized, trivial information that it is impossible to sort through it all to locate what's really needed.

If you expect insurance companies to be a big help in this area, you can be sadly mistaken. Mortgage cancellation policies are particularly difficult. I have spent hours on the phone talking to mortgage companies before locating someone who has a clue as to the benefits available under these policies. In one instance, the surviving spouse was told that the policy was an accidental death and dismemberment policy with no benefits available for natural death. Since the premium appeared to be way to high for an AD&D policy I was determined to get more information. After speaking with five or six representatives over the phone, I finally found someone who could give me an insurance company and policy number. The spouse got a $40,000 benefit but it was stress she didn't need at the time.

Living trusts are another example. These are supposed to be devices to avoid probate and simplify distribution of an estate but they are worthless if you don't put any assets in them. Sometimes successor trustees have been appointed and never given a copy of the trust documents. In some cases, they weren't even told that they would have this responsibility. The same is true for durable and medical powers of attorney.

Perhaps the worst instances are those in which one spouse has handled all the finances and the surviving spouse has no idea what to do when left alone. Even if a detailed record of all the assets is available, the surviving spouse may not be able to determine how to derive income from those assets. I have seen cases in which the surviving spouse had to cope with considerable anxiety along with grief until we were able to determine that she would be able to support herself without the deceased pension and private annuity income. The moral of that story is that income planning can be the central issue in estate planning as well as retirement planning.

I could devote several posts to this unpleasant topic but I hope this one gives you the motivation to contemplate what those who depend on you would do without your presence in in handling your affairs. It certainly has me. Stay tuned for my next post on the topic of canroys. If you don't know what those are you are probably in the majority. I've had to do a bit of research myself to become more familiar with this topic.

ANOTHER FANTASTIC MORTGAGE DEAL.

Here it is again folks. A fantastic deal just waiting for you call. I saw this advertisement when I pulled up my e-mail. At the bottom of the screen were several silhouettes showing people dancing around some text that said "$510,000 mortgage for less than $1,698 per month." Being a curious sort of fellow, I got my trusty HP 12C calculator out, put in the numbers and came up with in interest rate of 1.25%. Reminds me of the TV commercial that offers a mortgage that's the "Biggest no-brainer in the history of Earth." I never knew there were lenders out there who would loan home buyers money at a rate less than the US government pays. Some lenders even advertise those as "30-year fixed." How can they do that? The secret is that the payment is fixed for five years...........Well, not exactly fixed but it escalates at a fixed rate of 7.5% per year. Still sound like a good deal? Look at your loan balance. It goes up every month, not down.

Another "fantastic deal" is the 50 year loan. With a half million dollar principal, it saves a borrower $365 per month over a 30 year loan (assuming the same interest rate). The worst thing about those advertisements is that they claim the payments on this loan are even lower than interest only loans. Think about it. How could a loan with any principal payments whatsoever have lower payments than an interest only loan? (Again, assuming the same interest rate). Another mathmatical mystery. Maybe some of my clients with an MBA in finance can send me an e-mail answering this question.

We continue to watch the real estate markets. It appears that most commercial real estate is overpriced relative to the income it produces. We have yet to see much weakness in this area. The housing market is another story. If you look hard enough it is possible to buy houses at lower prices than a year ago. The high foreclosure rate, along with overbuilding, is putting downward pressure on home prices. All this at a time when the rental market is growing stronger. We may be approaching a point in which rental housing is becoming more attractive relative to other investments. We are not quite ready to recommend jumping into the market at this time. When the current excess inventory begins to diminish, we will be ready to scour the markets for buying opportunities.

WE HAVE MET THE ENEMY......

..........AND HE IS US. That old expression came from the comic strip known as Pogo which was a popular satire piece over 30 years ago. Never has it been more appropriate than in our current energy and political environment. Part of the reason for the Middle East crisis is our addiction to foreign oil. In importing so much high cost oil from the middle east, we are providing the funds for our enemies to continue to attack us. Not only do we have to bear the cost of our own military action, we are paying for that of the terrorists as well. What else could we do? We could certainly exploit our own sources of petroleum by drilling in locations presently forbidden. While this will have some environmental consequences, these could be managed. We do things every day that have environmental consequences and total elimination of these is impossible. All of those unsightly windmills supposed to be a clean source of electricity take a huge toll on the bird population. We view the use of nuclear generated electricity with disdain because of the environmental consequences but some European countries derive as much as 40% of their electricity from nuclear power. One of the biggest culprits in the whole picture are speculators who drive up futures prices, increasing the cost of raw material to refiners who pass those costs to the consumer. The bottom line is that we have plenty of options for generating energy that are less ambitious than converting our entire fleet of automobiles to ethanol. If you are upset about the ups and downs of gasoline prices, don't blame those "evil oil companies" or the president. Its much more complex than that and you might just take a look in the bathroom mirror. There are a number of things we can do as consumers and investors to keep energy prices from getting out of hand. By looking to blame others for our plight, we ignore the possibilities that are within our own control.

Its been a busy week for us since our return to Texas for the winter. My "fishin' buddy" from across the lake died, the rain sank my boat and overwhelmed our septic system, and I am inundated with leaves which are just now starting to fall. The one bit of good news is that the defendant in the jury trial I served on received 508 years for molesting 20 boys. That is one less person able to run free and harm our children.

GREETINGS FROM NEW MEXICO

Here we are in Raton New Mexico. I am at the Holiday Inn express, using my laptop on their high speed internet to check the markets, e-mail and make a quick post. I am on my way to Texas but I still am able to manage my money and that of clients. Some people complain that the current generation will be the first to not have a standard of living equal to their parents. I guess I'm part of the parent generation that they don't think they will have a standard of living equal to. When I was 30 something, you couldn't have a computer equal to this one without several rooms of climate control space, a card punching machine, and hundreds of thousands of dollars to purchase the computer and peripheral equipment. You couldn't buy a cell phone because they weren't invented yet. Likewise microwave ovens and GPS devices. Of course, it was easier to figure out how to use a Royal typewriter than this damn thing. At least I knew how to get it to make a new paragraph. I will be in Texas off and on throughout the winter and I will be able to manage our money and communicate with you. Even if I can't figure out how to make a paragraph on this blog.

PET PEEVES

High on my list of pet peeves are mortgage advertisements. Have you noticed the large number of ads telling you its time to refinance your ARM mortgage to a fixed rate? Weren't these the same guys who advised you to get the ARM mortgage in the first place? Granted, we have seen a number of borrowers who probably should refinance their adjustable rate loan but many of them can't afford the higher payments of a fixed rate or the closing costs necessary to obtain the new loan. The fact is, the only way they could get into the home the wanted was with the aid of a higher risk adjustable mortgage. While we did encourage some borrowers to incur adjustable mortgages, we spent a lot of time making sure they were familiar with the risks and had an exit strategy in place in case rates escalated. We never used ARMs to help borrowers purchase homes they couldn't afford. Speaking of closing costs, do you see those ads that offer no closing cost loans and tell borrowers how they are getting ripped off by unethical lenders who charge enormous closing costs. They promote their no-cost loans as "The biggest no-brainer in the history of Earth." Could that statement be a huge exaggeration? What they fail to mention is that their no-cost loans bear interest at 1-2% higher than closing cost loans. Virtually any lender can offer these no cost loans. The key is that borrowers need to be informed of the trade-off between rates and closing costs. This allows them to choose the combination that fits their situation. There is no "one size fits all" mortgage. The bottom line is that the most important factor in the mortgage lending process is choosing the loan that fits your needs. The lowest rate in town could be the wrong deal for you if it is not the right product. Call our office if you have a question in this area.

SNOWBIRD READY TO FLY.

It's turned cold in Colorado. The low temperature overnight was 35. I'm ready to go back to our Texas lake house as soon as I can take care of some real estate details here. We bought our lake house almost 11 years ago and the main question now is how long we should continue our "back and forth" lifestyle. Seems like when you are looking for something it is always at the other house. Betty had to fly back there at the beginning of summer to get our income tax files so we could file our taxes here in Colorado. One thing I can tell anyone not yet retired looking to buy a "vacation home" now before prices increase, is that there is no hurry. In some years we only spent two weeks at the lake house. We could have had two weeks in Maui for what that cost. There is no hurry. Although I thought we got a great deal, my perception of a what a great deal was changed after I became more familiar with the market in that area. Another thing is not to count too much on rental income. After you put your furniture and personal possessions in the property, you lose your appetite for letting strangers come in. We have yet to receive the first dollar in rental income from that house. Obviously, the benefits of owning that second home are not financial. My main benefit is my wife's enjoyment of the woods and waters that surround the property. I couldn't sell it if I wanted to. Will Rogers said, "There are two theories on how to argue with a woman........Neither works!

BUY WHEN THERE IS BLOOD IN THE STREETS

That is a horrible title but a common saying in the investment arena, particularly in real estate. In Colorado, there is a high foreclosure rate and a number of homeowners have become reluctant investors because they can't sell their houses. The supply definitely exceeds the damand. I have become a reluctant investor recently because I had to take over a property, I loaned money on a few months ago. When I inspected my new acquisition I was discouraged. The interior was a mess; however, that is something I can fix. The biggest problem is the exterior and, since it is a condominium, that can only be done by the property owners association which is something I have little control over. The homeowner dues are high, the association insolvent and many, if not most, property owners are delinquent in their dues. There are a whole host of foreclosures in the community. if this isn't blood in the streets, I can't imagine what is. You can buy these units for $50-70 per square foot and it may get worse before it gets better. Its a great location, near shopping and light rail and I am tempted to put together a group to buy more units. The key to success is being able to buy enough units to get control of the homeowner association so you can put money into the exterior. The luxury apartments across the street are renting for $1.50 per square foot per month. These units would provide a good return on investment at much lower rents. The question is: Am I ambitious enough to attack such a major undertaking? I doubt it but I will do some more research before reaching a decision. I'll keep you informed.

REAL ESTATE AND NEGOTIATING SKILLS.

Do you want to be a real estate investor? If you do you had better learn to negotiate. The more complex the transaction, the more your negotiating skills come into play. As an example, consider the recent offer I received on a property I badly need to sell. The offer was for full price and I accepted the deal with few changes. No need to negotiate there, right? I wish. Obtaining a meeting of minds from buyer and seller is only the beginning. There are several major hurdles in a transaction even after the contract is signed. Perhaps the most critical of these is the inspection. Since it can be expensive to obtain a professional inspection, few buyers will bear this expense without first making sure they can agree with the seller on price and terms. In the example I cited, the buyer spent several hundred dollars for a professional inspection which took about five hours to complete. The result was that the inspector thought the building needed a new roof and the buyer wanted a substantial price reduction in order to replace the roof. I was able to produce a document that showed the roof had been replaced within two years. So much for the competency of the "certified inspector". Deal over, I won. Right? I wish it were that simple. I question the competency of the inspector and the buyer questions the competency of the roofing contractor who did the job. What was the outcome? Negotiations still in process. In a complex real estate transaction, you don't know the deal is done until you sign the final papers and cash the checks. Even then, there is the possibility of lawsuits for such things as misrepresentation and withholding material facts. The main point of this post is to let you know that some of what you read and see on TV about the huge profits in real estate investing don't tell the whole story. If you enter into this investing arena, you will need negotiating skills beyond those required for other types of investments. You also need to make sure you are willing and able to handle the stress involved. I could make several posts with examples of some of the negotiating problems I've encountered over the past 30 years. If you would like to see others, send me an e-mail or give me a call.

ENERGY PRICES DOWN

In one of my recent posts entitled, "If you can't beat 'em, join 'em" I recommended investing in energy companies as a hedge against rising utility and transportation prices. Shortly thereafter, one of the companies, Devon Energy rose almost 20% due to their partial ownership of a huge new discovery in the gulf which is estimated to increase our country's reserves almost 50%. This sounds almost too good to be true and may well be; however, it does serve to calm the markets in view of some of the predictions that we will be running out of oil. All of the stocks I spoke of in that post, including Devon Energy have since gone down substantially. but I make no apology. That's what a hedge does. Since I don't know the direction of energy prices, I buy these stocks to protect me if they continue to increase. If this happens, I pay more for my gasoline and utilities but benefit from increases in the prices of these stocks. If energy prices drop, I benefit by paying less for energy but the prices of the companies I buy will probably drop. I frown when I look at the value of the stocks I purchased but I smile when I fill up my truck. If I had known energy prices were in for a drop, I would not have bought these stocks but I didn't know. My position is that you can make bets on the direction of a given stock but there is no way you can know. Your only hope is that you will be right more than you are wrong.

CASH OUT MUST EQUAL CASH IN.

When I told my brother, a banker for the past 30+ years that this was an important part of financial planning, his response was "Duh!" Since when is a common sense statement like that worth mentioning? If this is just so much common sense, why are so many Americans trying to fool themselves into thinking that they can circumvent this rule. Perhaps one reason is that you can circumvent it for a short time and, on occasion, you can even circumvent it for a long time, but eventually, you have to face the music. The longer you continue to spend more than you earn, the more painful the eventual correction will be. Suppose you have $5,000 a year to spend on discretionary items and you want to spend 10,000 this year. The result is you have $5,000 less to spend next year which means you have no discretionary income or you can drag it out for five years and have $1,000 lest to spend for the next five years. This is the case even if you have no interest. If you pay 15% interest, a rate not uncommon for consumer credit, you will have $1,000 less to spend for 10 years. I am not one of those guys who hates all debt but you have to ask yourself, Is it worth it? Over the 20+ years I have spent in financial planning I have encountered many who feel that they are entitled to a certain standard of living, even if their income doesn't support it. It may sound obvious if we say that there is no way you can do this forever but that is the simple, unvarnished truth.

Retirement Insurance.

Given the fact that there are so many unknown factors facing today's retirees, it is mandatory that we remain diligent to guard against an interruption in retirement income. We don't know how long we will live, how well our investments will perform, how much we will need to spend for our health care, or even if social security will be able to continue without cutting benefits for current retirees. There a number of things we can do to make our retirement more secure; however, the two that work best are the two least popular among the people I work with. The first is to maintain your ability to earn income. I know that sounds like retirement isn't really retirement and perhaps that's true, but we need to re-think this issue since changing times require changing strategies. In the event of a disaster, you most important asset could well be your ability to earn income to fund your living expenses. The second means of enhancing your security is to simplify your lifestyle. I have many clients who left the work force in their late 40's or early 50's. Most will tell you that they have been able to do this because they have maintained a simple, low cost lifestyle. Think about it. It may not be as hard as it sounds.

A DAY TO REFLECT

The first thing that came into my mind when I woke up this morning was the tragedy of five years ago and the way that it changed life as we knew it. An estimate of the cost to our government is in the neighborhood of a trillion dollars. It was a trillion dollars we had to borrow. We have still not realized the effect of all these expenditures which are continuing. Another thing I thought about was the determination of our enemy, as illustrated by the docu-drama on television last night and scheduled for tonight. We almost certainly underestimated the severity of our situation in the past and we may be continuing to underestimate it. It is becoming evident that we have to broaden our views as to who our enemies really are. A case in point is the recent evidence that Iran and Syria are funding massive infusion of weaponry to the Hezbollah terrorists. Last, but not least, is the division among our own people. We need a comprehensive policy to fight this war and we need to be united in implementation of this policy. This should include everything from cultivation of relationships with our true allies in this battle to strengthening homeland security and seeking energy independence. While this may not sound like a post about your personal finances, it definitely is. The pursuit of this war will have a profound effect on your future quality of life and your path to financial independence.

SIGNS OF MARKET TOPS.

Do you ignore radio or TV commercials? If you do, I can't say I blame you but there are things you can learn by paying attention to what is being touted in the financial markets. For example, a few years ago there was a commercial by a well-known talk radio host telling you it was time to get started in rental real estate. A developer was offering you a chance to own a brand new $330,000 duplex with a $16,500 down payment. The commercial promised a positive cash flow from the beginning and stated that if you had made a similar investment 10 years ago, you would have a return of 90+% per year. Although these facts were mostly true, the developer was recently indicted on a number of counts, not the least of which was securities fraud. The developer took earnest money from over 1000 borrowers and ended up delivering only 40 finished units. This was a bad deal from the beginning but that is not my point. The more ads like this one air, the more likely it is that we are nearing a market top in that investment sector. In a normal market, no one would believe these "too good to be true" promises. Another example is the plethora of ads touting gold as an investment vehicle. The ads state that if you had invested in gold three years ago, you would have made a 20% return. Again this is true but it fails to mention that if you had bought gold 25 years ago, your return would be negative. I believe gold has a place in some portfolios but these ads lead me to believe that the easy money has already been made for this cycle and we are very near a market top. There are other signs of market tops which we will discuss in future posts. In the meantime, if you would like to develop a clearer picture of your financial situation send me an e-mail.

SLOW PROGRESS.

I guess some progress is better than no progress. Finally got my picture up. The old coot with the guitar in the upper left hand corner is me. Although I have spent the past 25 years in the financial services business, my main passion is playing the guitar. Fortunately, I am better at finance than I am as a guitar picker. Another change is that the address of this site is stormysvision.blogspot.com. Seems that reflects the philosophy of this blog better than the old address. Hope to learn more about how to do this as time progresses. Reader comments are welcome. Send me an e-mail with your questions.

REAL ESTATE OPPORTUNITIES.

The most successful investors I know buy when the most investors are selling and sell when the majority are looking to buy. This is called "contrarian investing" and it works more often than any other strategy I know. It doesn't matter whether you are talking about the stock market, the real estate market, or precious metals. It is virtually always preferable to go against the prevailing trend. This sounds simple but it is not nearly as simple as it sounds. The problem is you could rush out and buy when a downtrend has a long way yet to run. During the real estate crash of the late 80's some buyers bought too early and were unable to hang on until the market turned around. Many of those became foreclosure statistics along with those who bought at the top of the market. So how do you know when the downtrend is over? The short answer is you don't. The long answer is to watch the market carefully for certain signs. In the real estate market, one of the most important statistics is the demand for rental space. Sometimes real estate investors forget that it is tenants who drive the market. Buying when tenant demand is low means that you may not receive adequate income to fund property operating expenses and mortgage costs. The result is you may have to sell into a weak market to stop the negative cash flow that you will have unless tenant demand increases. How do we measure tenant demand? One of the easiest ways is to look at the vacancy rate in the market you are considering. A falling vacancy rate is a sign of a market that will improve. Another sign is the amount and cost of new construction. If there is little in the way of new inventory being produced and the cost of construction is higher than the cost you are paying for the property you are considering, this is positive since there is no way a developer can build a new property without having to charge more rents than the market will pay. These are but two overly simple strategies. There are many others. Stay tuned.

FALL IS IN THE AIR.

It's been a chilly rainy weekend. I can even see a few leaves starting to turn yellow here and there. From a strictly seasonal standpoint, this is not a time to get too aggressive in the stock market. Historically, October has been one of the poorest months to own stocks. That said, October could be a good month to buy if you can catch a good stock that is dropping just because the rest of the market is going down. Of course, stocks don't always drop in October but statistically, that's what usually happens. As I said in my last post, energy stocks are a good hedge against future increases in energy prices. Many companies are selling at low multiples to earnings and still appear to be a good buy. While many investors are thinking oil and natural gas prices are ready for a fall, it should be remembered that a lot of these companies have earnings that still can increase if raw material prices drop. That's because some have long-term contracts that were based on price levels before the recent run up. Even if we do get a drop in oil prices, these companies can benefit from expiration of old contracts and replacement with prices below current levels.

IF YOU CAN'T BEAT 'EM, JOIN "EM

No need to sit around and complain about gasoline and utility prices. Accuse these companies of gouging all you want but the market place sets these prices and attempts to jawbone the price down are doomed to failure. What can you do about high energy prices? You can conserve by driving less, buying more fuel efficiency, keeping thermostats lower, or a number of other measures. We probably should all do more of that anyway but in the final analysis, we can't conserve our way out of this one. One way I've been dealing with this is to invest in companies that produce energy. Here are but a few suggestions of companies you might want to research if you decide to take this route. Be aware that these are not specific recommendations. Devon Energy (DVN) is a company that produces natural gas from their own reserves. The price has been pretty well stagnant for the past year, mainly because natural gas inventories have been building and prices stagnating. I think it is a bargain at less than 9 times earnings. If you are looking for an income stream (and who isn't) you could buy a royalty trust that distributes income earned from royalties. One natural gas play is San Juan Basin Trust (SJT), a trust that pays royalty distributions monthly. The yield varies with gas prices and inventory levels but is virtually assured to go up if gas prices continue to increase. You could also invest in refinery companies. For example, Frontier Oil (FTO) is a refining company with the capabilities of refining less expensive, high sulfur, crude oil. Their refineries are located away from the gulf coast and less subject to hurricane damage. By way of disclosure, I either own, or have recently owned all these stocks. I seldom mention specific companies in my posts and these are just a few of the many companies that you could invest in that will profit from increasing energy prices. The purpose of this post is to let you know that it is possible to derive some benefits from high energy prices. These benefits can go a long way towards helping you deal with higher transportation and utility prices.

MONDAY MORNING, BRIGHT AND SUNNY

It's a beautiful day. Time for another 4-mile walk before it gets too hot. Speaking of too hot, our real estate market got too hot. This is why its cooling off now. Our strategy was to stay inside while it was too hot. The question is, when will it be time to venture out into the market again? My guess is that it may be approaching that level soon. One indicator is that the rental market is getting better. Another is that construction costs are getting out of hand. This means that you can buy a property now for much less than it would cost to reproduce at today's labor and material costs. Furthermore, in contrast to two years ago, it is easier to find tenants. It never ceases to amaze me when investors are eager to buy properties when tenants are scarce. In the long run, unless you are a "quick turn artist", the ultimate success of your real estate investment will be governed by your ability to locate tenants to cover your costs of capital and operating expense. Stay tuned for new information as it becomes available. Call me at 720-449-0200 if you want to talk about some of the topics you see here.

SATURDAY MORNING

It's a cloudy Saturday morning in Colorado. I guess it really doesn't matter what day it is. I do what I want most days anyway. Gonna try to get a four mile walk in if it doesn't rain. One of the most proactive things us old folks can do is take care of our health. Not only does it keep our health care costs lower, which ultimately improves our cash flow, it keeps us in a position to supplement our retirement income via part time work. Whatever your retirement plans, it is in your best interest to maintain your health.

A SLOW START

You may notice that the first publication on this blog was almost two years ago. The whole concept has been incubating in my aging mind for all that time. I finally got going again a few days ago. One of the main things on my mind lately is the real estate markets. Major building companies like Toll Brothers and Lennar have seen their stock prices drop drastically over the past few years and it certainly appears that the bloom is off the rose. Still many keep building and many markets are oversupplied with new and resale inventory. This creates problem for those of us who want to sell our existing properties and move on. The problem is further complicated by the fact that many have mortgages that will re-price in the next two or three years. When I say re-price I mean that your rate will increase. The worst thing you can do in these circumstances is stick your head in the sand and wait to find out what your rate will be. The most logical approach is to get busy and project what is likely to occur over the next few adjustment periods and make a plan to deal with the worst case scenario. I'll post more on the methodology of this later. If you can't wait you can always call our office at 720-449-0200. Ask for Phil and I'll get back to you if I'm not there.

TIME TO GET STARTED.