Let’s talk about investing today, specifically how I put my money to work. There are a couple of big changes I’ve made over the years as my net worth has gotten bigger.
I’d rather talk about your hot mom.
Really, Italics Man? A mom joke? You’re better than that.
Whatever. You control me, you talentless hack.
Wow. My alter-ego is a pretty big dick.
When I was 18 years old, after a few years of after school jobs, I had a net worth of approximately $15,000. That cash was mostly tied up in short-to-medium term GICs, which paid approximately 5% annually at the time. Oh man. What a time to be alive.
(I also had a couple grand in a market-linked GIC. Which came due in 2002 or so. My timing was not great there.)
Anyhoo, an opportunity came my way, thanks to my dad. He was an avid real estate investor who owned a dozen or so properties. A local landlord was looking to sell one of his properties, a small two-bedroom house renting for the grand total of $285/month. My dad negotiated with the guy and they came to an agreed price of $16,000.
I jumped at the chance to buy the property, especially after I was told the market could easily demand $350 in rent. After deducting 25% of rent for expenses, I was offered to buy an asset with a 19-20% cap rate. How could I say no to that?
(Fun fact: as soon as a very nervous Nelson went to raise the rent the tenant immediately left. The property was soon re-rented, but there were a few nervous days in there)
This story has a happy ending, too. A full 17 years later I still own that place. I charge the tenant $400/month, which is a little low. Market rent is closer to $450-$500. But he’s been there for something like 12 years. I’ll gladly give long-term tenants a break in exchange for their undivided loyalty. BOW TO ME, PEASANT.
When I bought this property, a full 100% (plus more!) of my net worth was tied up in one asset. This wasn’t a fantastic asset, either. Sure, it had the potential to return 20% annually, but let’s face it. It was a crappy house located in a crummy real estate market. It’s probably gone up 150% over the last 17 years. Other real estate markets have seen a 300-500% increase in the same time period.
But I was comfortable making that move when I wasn’t worth that much. 18-year old Nelson knew $16,000 wasn’t that much money. I could recover if this one investment didn’t work out.
These days, I’m way more serious about diversification. It’s much more about preserving wealth rather than growing it. Now don’t get me wrong, I do want to get richer. I just don’t want to take giant risks to do so. I’m confident my portfolio of great businesses that pay dividends will return 8-10% annually. Sure, I’d like to make 12-15% annually, but to do so I’d have to concentrate my portfolio into 8-10 names I think will do the best. Such a strategy carries much more risk than wide diversification, so I don’t do it.
No more deep value trash
I used to proudly buy the trashiest businesses I could find. If it was cheap enough I’d gladly throw a few bucks at it, content in knowing the assets would eventually come back.
Sometimes, these investments did quite well. I nearly tripled my money investing in a coal mining stock back in 2015, for instance. But most of the time these investments would either do nothing or promptly tank. There are still a couple of zeros in my account, including Danier Leather.
Aside: that is an interesting bankruptcy. I’ll write about it.
These days I’m slowly punting those investments from my portfolio. I sold TransAlta, the troubled Alberta-based power producer for about 10% more than I paid for it. Yellow Pages got punted for a 25% gain. HMG Courtland Properties, a small Florida-based property developer, was sold at a nice gain, too. I even made some money on Dover Downs, a casino in Delaware.
These investments were satisfactory, but ultimately they were crappy businesses that deserved to trade at crazy cheap multiples. Plus it wasn’t really a tax efficient way to go about things. Constantly trading in and out of positions comes with a tax bill each time you sell, unless you do so in RRSPs or TFSAs.
Focus on dividends
One nice thing about owning great businesses is they have the ability to pay nice dividends. These dividends tend to grow over time, too.
Ultimately, however, the focus on dividend investing comes down to this. It allows me to build a tax efficient passive income stream that should grow at least at the rate of inflation for the rest of my life.
Note the two bolded words in that last paragraph. The power of tax efficient dividends are undeniable. As I’ve previously outlined, I can make $50,000 a year in dividends and pay no taxes. My wife can too. There’s nothing wrong with that.
Let’s wrap it up
Is that a condom joke or just a bad way to tell people the post is over? NO TIME TO DECIDE.
When I first started investing back in 2003 or so, I was obsessed with buying companies trading under book value. Like most obsessions, this one wasn’t healthy.
Book value, for those of you unaware, is one of the simplest financial ratios out there. If a company’s share price was under the net worth of that enterprise, it traded under book value. Buying $1 worth of assets for 75 cents seems like a pretty easy way to make money, especially if those assets historically traded for $2. All I needed to do was repeat this process a few dozen times and I’d be RICH, BABY.
Alas, it turns out investing is much harder than that. Who coulda thunk it?
These days, book value only enters the equation as a secondary ratio when I’m doing analysis. It turns out there are lots of reasons why it’s not the greatest. Asset values can go down, and companies are not excited to admit this. The logical conclusion to this is obvious; assets that really should be impaired remain fully valued on the balance sheet, giving investors the illusion they’re still worth the full amount.
(Note that book value is still useful when looking at some sectors, like REITs and financial stocks. It’s not a completely valueless ratio)
Intangible assets make up the majority of value when looking at a company’s balance sheet today. Pepsi is a great example. Much of that company’s value lies in its brands. People like Pepsi, Lays chips, Quaker oatmeal, Tropicana orange juice, and so on. Because they like those brands, they’re going to keep on buying them. Both those attributes have value, just like a piece of real estate. But unlike physical property, you can’t easily value them. Intangible assets will always be trickier to value.
How about your own balance sheet?
We’re taught that net worth has a very simple definition.
Assets – Liabilities = Net Worth
Both categories only include tangible items. Stocks. Real Estate. Debt. Note the absence of intangible items. Hell, the next net worth statement I see with intangible items on it will be the first.
But I’m becoming more and more convinced this is the wrong way to go about it. Let’s use getting a college education as an example. As much as I’m anti-college, I’m also the first to admit the statistics are right. People who go to college and graduate tend to enjoy much higher earning power. Let’s say the average university graduate earns $1 million more in their life versus the average high school grad. Sure, there are some duds who took gender studies in there, but they’re cancelled out by all the finance and engineering folk.
Now let’s imagine the net worth statement of a recent college grad. Assets likely are pretty close to zero. Liabilities are through the roof, thanks to all the debt taken on to fund the degree. We’re left with a negative net worth and a recent grad hopefully super motivated to get that ratio back to positive.
This isn’t entirely accurate, however. That debt wasn’t acquired for shits and giggles. It exists because becoming proficient in a topic is profitable. That knowledge is clearly worth something, yet it’s never put onto a net worth statement. Why is that?
There’s one very simple reason why not. Like the value of Pepsi’s brands, it’s tough to figure out. There are also a million variables that could impact the value of that intangible asset over time too. Is a degree really so valuable if you plan to drop out of the workforce in five years to start pushing out babies? Or because you want to work 15 years and then retire early? Degrees are still worth something to these folks, but perhaps not as much versus someone who plans to use their degree for 40 years.
One could argue the benefits of the college degree end up on your net worth statement anyway, thanks to the increased income it provides. Okay, fine. I’ll allow that. But what about other intangible assets? Unless you’re a weirdo hermit living in your mother’s basement (THAT’S ME, BABY!), you know people. Those relationships have value. They could lead to a lucrative new job or a business opportunity. It’s the same thing with your family. I know a kid whose family is worth anywhere from $20 to $50 million. His last name absolutely opens doors for him. Why shouldn’t he be allowed to put that value on his own balance sheet?
The bottom line
I admit this becomes a slippery slope very quickly. It also opens up all sorts of uncomfortable questions about privilege and whatnot. And to be completely honest, I think allowing people to put intangible assets on their net worth statements is a bad idea. The average person overvalues the hell out of everything they own. They’ll do the same with their university degree and contacts.
But at the same time, these intangible assets are hardly worthless. They’re definitely worth something, even if it’s hard to value. They shouldn’t be immediately valued at nothing. Keep this in mind while paying off your college loans and it’ll make that journey a little better. It might even cure someone of the “student loans must be paid off at all costs” mentality.
I know someone who recently lost the diamond in her engagement ring. After about eight hot seconds of looking — the phrase needle in a haystack seems apt here — she declared the stone lost forever and her life over. Her husband (the nicest guy in the world, btw) was going to beat her like Chris Brown after losing at an awards show. Topical!
This did not happen, of course. Instead he bought her a gigantic new engagement ring to symbolize their more secure financial status. The ring cost $2,500 on sale at some jewelry store. She loved it so buddy forked over the cash. Hopefully he got laid that night.
One of the major selling points for this ring was the jeweler’s appraisal that came with it. According to this IRON-CLAD CONTRACT, this ring had $6,100 worth of gold and diamonds on it. Confident they were getting a deal, our story’s heroes emerged from that jewelry store with the assumption they were somehow richer from the experience. What a fantastic marketing job by this store. I want to buy them all medals.
Anyway, here’s why that appraisal (and every other jewelry appraisal) is a giant scam.
The business of jewelry
Buying jewelry is kind of like buying underwear. Very few people are going to buy it used no matter what the deal is.
Which is a real shame, really. 50% of marriages end in divorce. Even some happily married couples are forced to hock the family jewels for pennies on the dollar to make rent money or buy diapers for their whiny offspring. Nobody can argue jewelry is a necessity, meaning it’s the first thing sold when the going gets tough. Put all of these factors together and the conclusion is obvious — there’s a lot of supply out there. Demand? Not so much.
Who exactly is going to pay appraised value for a diamond? Nobody. If you’re one of the few women who would ever wear second-hand jewelry, you want a reason to do so. It’s only logical. If you can’t save significant cash buying used, why even bother? It’s the entire reason anyone buys anything used.
Think back to the original story for a second. If that ring was really worth $6,100, why was it on sale for $2,500? Why wouldn’t the jeweler sell it for much closer to appraised value? Why wouldn’t they take the stones off and use them in other pieces?
FWIW, my guess is that piece was purchased, returned, and then the store blew it out. The ring looked brand new and the people buying it never thought to ask whether it was used or not. It’s probably better not to ask.
The true test of value
Let’s look at the bigger picture here for a second. What exactly determines the value of an object, house. investment, or your body? Don’t answer that last one. Financial Uproar is a 100% hooker free space and we’d like to keep it that way, thanks.
Come on, Italics Man. Even you can do better.
I don’t even exist, you moron.
What determines the value of anything is pretty simple, really. Something is worth what someone will pay and not a nickel more.
In theory, this is a fine hypothesis. Things get a little trickier in the real world though. Say you’re selling your house. Your Realtor comes by and says the place is worth $500,000. Congrats, baller. The market seems pretty efficient, so you accept this explanation.
But what if there was a non-zero percent chance you could convince somebody to pay $525,000? Or $550,000? Would it be worth it to price your house accordingly? These are the kinds of questions every home owner struggles with at some point. After all, it takes just one person to pay a wildly inflated price to make it worthwhile. And if one person would pay $550,000, what are the odds of that person finding your listing and slapping down the cash?
The opposite can happen, too. An impatient seller takes $450,000 because they want out now, dammit. Is the house worth $500 large still? Or has the value magically dropped to $450,000? I certainly don’t think so; this is why I increased the value of my house on my net worth statement a full 14 seconds after buying it. An efficient market often takes time, especially in big ticket items like houses.
The bottom line
Appraisals are just some guy’s opinion of value. Take them all with a grain of salt. Jewelry appraisals are especially suspect. No, you’re not selling your ring for more than what you paid for it.
(Blows off the layers upon layers of cobwebs)
(Starts to slowly clean up the rubble that used to be a prominent personal finance blog)
(It’s moving, but only barely)
(Oh my. What could it possibly be?)
You tried to kill me, but you couldn’t. I’ll never die.
OH GODDAMMIT IT ITALICS MAN.
So I guess I’m wading back into this whole PF blogging thingamajig. I know I said I’d go away forever and there was no place for my particular kind of finance commentary (92 dick jokes attempting to make a coherent point about something), but time (and quitting meth) has helped me come up with an interesting new business plan. I’m still hatching out the deets so I won’t say too much. Let’s just say it totally doesn’t involve me coming to all of y’all’s houses and stealing $20 from your wallet. At least not anymore.
It’s going to be lit. Do the kids still say lit? (Texts the only 18-year-old who will talk to me) He says if I don’t stop contacting him he’ll call the cops. Bummer.
Let’s talk a little about a personal finance mistake I may have made recently — paying off my house so damn aggressively.
Here’s the deal. It costs a surprising amount of money each month to live in a house you own. I still have to pay the stupid water bill and the electric to keep the A/C on 24/7. What? I refuse to take off one of my three sweaters. Then there’s the house insurance, the property taxes, the constant small improvements/fixes that keep popping up, and a billion other expenses. I own a ladder now. Why? Damned if I know. The only thing that scares me more than heights is the shower. YOU CAN’T MAKE ME GO IN THERE.
It costs about $700 a month to live in my paid off house, a figure that doesn’t factor in a nickel for house maintenance. That is more than I anticipated, to say the least. And I’ve got at least $1000 worth of upgrades planned in the next few months.
We figure if we’re patient we can get a decent place to live for $1000 all-in. A super-nice apartment at our former building is up for $1400, a figure that includes power, heat, water, and internet.
Let’s assume we throw up our hands and rent that place. On the surface, it would cost $600 more per month, or $7,200 per year. That’s bad.
But I can get access to $200,000 worth of capital by selling my house. If I invest that money and get just a 4% return, I’ll gain $8,000 per year. If I can do better than 4%, it makes all sorts of sense to free up that equity. That’s good.
At this point the only thing stopping me is laziness. $1400 per month is a little steep for my tastes, too. Note that if we settled and rented an $800/month apartment (there are probably a dozen of these available at any one time in town) we’d be miles ahead of the game. The problem is the $800/month apartments don’t have the kind of amenities we’re used to. Also, they’re cursed. Yep. Built on ancient Indian burial grounds. That’s bad.
That’s right. I’m one of those guys now. Someone who needs a dishwasher and stuff. Italics man would kick my ass if he actually, y’know, existed.
Hot damn is the Globe and Mail Financial Facelift series bad. I could almost do a recurring post every week making fun of it. It’s just the same thing every week. Can this couple who has clearly never read a personal finance or early retirement blog hang up their proverbial skates with juuuuuuust $1.4 million in the bank? You’ll never guess what our generic financial planner has to say!
Yeah, that’s right. I like gifs now. Just in time for them to fade into obscurity.
Also anyone who makes fun of Financial Facelifts is copying me.
Is it just me, or is every damn financial blog littered to death with ads? I understand my peers are happy RBC and BMO are taking them seriously, but enough with the 14 different reminders to sign up for the newest Johnny Come Lately roboadvisor.
The wife and I went to China in May. It was bananas. China might be the most interesting place I’ve ever been. I simultaneously loved and hated the place. It’s crowded as hell, noisy, dirty, and many of the citizens lack the basic respect given to each other that is so prevalent in the other parts of Asia I’ve visited. There’s also plenty of poverty. It’s everywhere.
At the same time, you’ve got to hand it to the government there. They truly are the next upcoming superpower. They’re hungry too. North Americans are too comfortable. The Chinese want desperately to be taken seriously. They’ll easily surpass us in 50 years. Hell, it might even be 20 years.
I kinda want to move there until I hear some of the horror stories. Certain hospitals won’t treat white people. Racism is rampant. Violence is much more common than other parts of Asia. And the government watches everyone. I couldn’t go to a soccer game without buying a ticket online and giving my passport info to some stadium employee. I’m surprised I wasn’t asked to piss in a cup too.
That’s about it. I gotta work in the morning.
As you read this, there are currently 529,839 entrepreneurs in Canada struggling to take their business to the next step. Y’know, give or take.
Every business has its own unique challenges, but most can be broken down into one main category. Some struggle to get sales. Others have costs slowly ballooning out of control. The lucky ones are swept off their feet, barely keeping everybody happy as orders keep pouring in. Naturally, the first and second groups hate the third. Uppity bastards.
This here blog, back when I was serious about making money at it, suffered from some of the same issues. Writing for other websites was much more profitable (in the near-term, anyway) than pecking away on the keyboard for Financial Uproar (the website which is like a tightly coiled sex robot in a jar). I spent so much time on content that I didn’t have time to establish relationships with real brands. And besides, why would any legit business partner with a website that made 13,920 different kinds of dick jokes?
That last paragraph was a little depressing, huh? Good thing I only do this for fun these days. Oh, you’re not enjoying yourself? I will make you have fun.
If I were to start over in the world of websites, I would make one major change. In fact, it’s something I would recommend many entrepreneurs do.
That change is…
I once poo-pooed partnerships, talking about the somewhat uneven relationship between two anonymous partners who started drifting apart once their business was running smoothly.
But some six years later, I now know there’s more to that story. The first partner was much more ambitious than the second, so he went ahead and worked on his own ventures. The second guy was content to run the business. So even though they drifted apart over time, the hard feelings quickly diminished.
Even though the two partners grew apart, they still accomplished more together than either one could have on their own. Their business has grown by leaps and bounds, and each of them have substantial investments outside of the partnership. Both spend money like drunken sailors too, so it’s obvious there’s some decent cash flow there.
Coming back to this blog, it’s obvious the advantages I’d have if there was another person helping out. I could focus on the writing while they worked the advertising side. Or we could both write, giving y’all differing opinions on stuff. This would leave time for both partners to network more effectively. The possibilities are endless with two people, while one quickly runs out of time. At the end of the day, it’s all about using different strengths to maximize benefit to the business.
One of the things I really enjoy about my grocery job is working out problems with my co-workers. It’s amazing how helpful it is sometimes to get a different perspective on things. If I’m stumped on a problem, a different set of eyes can easily find a solution. If you’re a solopreneur, you don’t get that benefit without reaching out to one of your peers.
Not every partnership will work, and that’s okay. I entered into a joint venture with an unnamed former PF blogger back in 2016. It only lasted a few weeks before fizzling out. I didn’t have the time to dedicate to the venture, while my partner had his own flaws. But we got as much traction in that first month as Financial Uproar got in its first year, including mentions on a couple of major blogs. Not bad for a couple guys working on something part-time.
Not every business would benefit from a partner. And there are certainly some entrepreneurs who would drive even the most optimistic co-owner batty. But on the whole, most businesses would benefit from having two (or even more) people with different strengths and weaknesses. I know if I were to ever go into business again, I’d do so with somebody else.