BEWARE THE RECEDING TIDE

Just a Note to Inform You That I will be in Denver for two weeks starting tomorrow. I look forward to meeting with several of my clients. Writing on this blog has been somewhat sparse lately. I have had numerous visits from friends and family. My writing has been secondary to enjoying those visits. Those who wish to meet during the next two weeks can call Susan to arrange a time. The number is 720 449-0200. One other thing I would like to call your attention to is that I will be filling in on Real Money, a radio show with my old friend and colleague, Ray Benton. The time is 12 noon this coming Saturday at 1600 on your radio dial. Listen if you can and feel free to call with questions if you have any.

The Tide Has Been Rising. Remember the old adage that "A rising tide lifts all boats." This has been true of our stock market lately. It has been hard not to make money in this market. Even if you did a poor job of stock selection, chances are the rising market made you look good. I must say the same thing goes for our money management clients. I would like to claim it is our brilliance that produced this result but I call your attention to another adage: "It is only when the tide goes out that we find out who has been swimming naked." In other words, we may not be as brilliant as we think we are when the inevitable correction takes place. Its time to ask ourselves whether our gains are real or illusionary. The answer is we don't really know. When we buy a stock, we buy into a business. If the price doubles the next day, has the value of that business really doubled? I say that it hasn't. It is the investors' perception of the value that has doubled. That perception could change tomorrow and all those gains could disappear. In other words, you don't reap the benefits of the market's perception of the value increase unless you sell. Before you run out and liquidate all your investments, remember that the market perception of value could, and often does, continue to increase. This is why we usually recommend that our clients construct investment portfolios that emphasize cash flow. It is only that cash that we find in our hands which we can use for funding our lifestyle. I almost never recommend selling a company just because the price has gone up or down. It is only when my perception of the company's prospects has changed that I recommend selling and I fully admit that my perception could be incorrect. The best recommendation I can offer at this time is to look at stocks in your portfolio and ask yourself if your opinion of the company's prospects have changed. If so it may be time to take some or all of your money from that investment.

The Tide Has Gone Out In The Real Estate Market. Some folks have been caught swimming naked and face foreclosure or even bankruptcy. This Saturday, I will be talking about the Denver real estate market on the radio show. I am analyzing some of the market statistics in order to decide whether or not this is a good time to re-inter that market. My next post will contain some of these observations and our conclusions.

THINGS I'VE LEARNED

About Borrowing Money. There are a lot of misconceptions where borrowing money is concerned. Common sense wisdom may not apply in all cases. Here are some of the things I've learned in almost 50 years of borrowing money and 25 years of helping others acquire financing.

1. There Is No Such Thing As A Bad Loan. I can imagine the majority of my readers will disagree with this statement but it is never the loan that is bad, its the way its used. Bet you still disagree. Think about it. How can a 36% interest rate ever be a good loan? The answer is when you have to have the money and there is no other loan available. I recall getting such a loan many years ago to buy two new tires. One of the old tires was totally ruined and the other not far behind. I drove 20 miles to work each day and had to have those tires. No one else wanted to loan me the money so I got it from a consumer finance company at 36%. Best deal I ever made. If you are considering that same loan to buy a new couch, you are probably better off getting a used one from goodwill and waiting until you can save enough money to pay cash for a new one.

2. Borrowing Will Not Provide More Discretionary Income. If you have five thousand in discretionary income per year, borrowing another five thousand will give you additional income for the year you borrow the funds but it will cut your income for subsequent years when you are paying it back. If you have to pay interest on the money, the reduction in discretionary funds will be permanent by the amount of interest paid.

3. The Interest Rate Isn't Always Of Paramount Importance. Too often people shop hard to find the lowest interest rate when other loan terms may be more important. For example, if you are borrowing to buy a $100,000 property that offers a 20% return, you are better off passing up a $50,000 loan at 4% interest in favor of a $75,000 loan at 8% interest if you can buy two of these properties with your $50,000 in equity. This assumes that the rest of the terms are similar. It also assumes that you have adequate tools to manage the risk of the higher leverage.

4, All Borrowing Adds Risk to Your Life. In case you didn't quite understand the meaning of that last statement, I would emphasize that even though buying two investments with a 15% return with 8% money will give you a higher return than buying one 15% return with 4% money, the risk is higher with the larger loan. This is because you have to make those loan payments whether or not the investment performs as anticipated. If one of those properties becomes worthless (possible but not probable), you will owe $150,000 and only own one property worth $100,000. If the result is foreclosure, your dream of success using OPM (other people's money) turns into a nightmare.

5. There is No Free Lunch. Some people advertise zero closing cost loans. Other's advertise rock bottom interest rates. In the absence of outright fraud, there is no way they can offer both in the same loan. When you do business with a mortgage company they have to make a profit. In order to do so, they can charge you fees or a higher interest rate that can be sold for a premium in the market place. In most cases, they get their profits with a combination of the two. In my opinion, the most ethical companies explain the trade offs and allow the borrower to choose the financing that fits his or her needs the best.

6. Be Careful What You Ask For. I recently counseled a real estate investor who was about to lose a property to foreclosure. She told her loan officer that she wanted the lowest payment available. The loan officer got her a loan with an interest rate of 1.5%.........for the first month. At the end of this time the rate escalated but her payment stayed the same. How did that occur? They simply added the unpaid interest to the loan amount. Over the time that she owned the property, her entire equity was consumed. While this loan may be a good one for some circumstances, it was not a good one for her, mainly because she didn't understand how to use it. In this case, I doubt the loan officer did either or he would have explained it more thoroughly.

It Is Not Only Dishonest Men Who Are The Most Dangerous. It can be the honest man who doesn't know what he is doing. Unfortunately, there are a lot of those in the mortgage business. If you need advice on a mortgage loan call Susan at Westmont (720-449-0200). She can arrange a telephone or personal appointment with me. Again, I want to remind everyone that I will be available for appointments in Colorado from May 16-31.