Aug 222016
 

Falling Victim

The pharaohs of ancient Egypt created¬†the first pyramid schemes. ūüėܬ†But since then these schemes have evolved to become¬†more elaborate. The most recent example has taken shape in the form of a Gifting Circle, which specifically targets affluent women. According to the Better Business Bureau, a consumer watchdog, the scam works by inviting women to join wine parties and luring them in with the promise of a $40,000 payout if they invest just $5,000 themselves and recruit their friends. Organizers at the party claim to create “abundance and spiritual healing” for anyone who signs up.¬†ūüėá

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Personally I thought spirituality was about self development and discovering meaning from within. I didn’t realize it could be bought with money, lol. But I am certainly no expert on the¬†subject.¬†ūüėĆ

Evan Kelly, an advisor for BBB Mainland B.C., says that since $5,000 is somewhat prohibitive, this scheme tends to go after wealthy women and their circle of friends. “After all, a friend asked you to join. It couldn’t possibly be a scam, right?” Kelly says. But eventually the pyramid collapses under its own weight and members on the bottom lose thousands.

So if you ever get invited to a¬†party that might be held under false pretense then enjoy yourself and drink responsibly. ūüôā But please DO NOT sign up for any programs they want you to join, especially if it involves recruiting more of your friends.

Here are some tips from the Better Business Bureau for avoiding potential scams such as this.

  • Do your own independent research and be skeptical.
  • If there’s no actual product or service being offered, question how it makes money?
  • Be careful of investments that promise low risk and high returns.

So the lesson here is simple: Money can’t always buy brains. However, brains will almost certainly make¬†us more money. ūüėÄ To improve our financial literacy, we can take this¬†online quiz I recently stumbled across. It¬†contains 6 short questions related to personal finance and should help us¬†make better¬†money decisions. Feel free to take the quiz here and see if you can ace it¬†on your first try. ūüėȬ†To put things into perspective, the national average score in the U.S. is 3.16. Hmm.¬†That seems kind of low to me.

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Random Useless Fact:

A¬†polar bear’s fur is not white. Each hair is a clear hollow tube. The bear looks white because of the way its hairs reflect the sunlight.

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Aug 182016
 

Early Retirement 

For professional skiers the best time to retire is when they start to go downhill. ūüėÜ But what about the rest of us? Well for most people the question isn’t at what age we should retire, it’s at what income. ūüėČ In¬†all the stories I’ve read about people who have retired early, they all seem to¬†have a clear and consistent focus to grow¬†their wealth so that it can provide them with enough passive income to sustain their lifestyles forever. This¬†can be¬†done through a number of ways simultaneously such as reducing living expenses, increasing income, and making high investment returns. ūüôā

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I recently read a CNBC article that featured a couple, Carl and Mindy, who retired in their early 40s with a million dollars. And they did it pretty much the same way as most other early retirees.

In 2012 the husband-wife duo with 2¬†kids already had $570,000 saved up. But they were inspired to retire early so they set a clear goal to build a portfolio of $1 million and no debt. And earlier this year in 2016, they have accomplished their dream. ūüôā

The CNBC article suggests that “anyone can do the same ‚ÄĒ and you don’t have to be an investment banker raking in millions. All it takes is smart decisions along with intelligent saving and investing.

Here are some steps the couple took to reach their financial goals.

  • Track spending –¬†“My wife and I wrote all of our expenses in a book,” says the husband.
  • Live in an affordable location –¬†¬†The couple resides¬†in a low-cost area in Colorado, and lives on $2,000 a month for the whole family.¬†They mention this would not be possible in San Francisco or Manhattan.
  • Cut bills –¬†“I learned that you don’t need a lot of money,” said the wife. “My quality of life has not changed since we became laser-focused on cutting out our expenses. I don’t need the cable TV. I don’t need a super-expensive phone plan.¬†I don’t miss all this stuff because it didn’t really add to my life,” she said.
  • Invest in appreciating assets – The couple bought a¬†$176,000 fixer upper home that they estimate is now worth over $400,000. They also¬†I bought 2,000 shares at Facebook at $30 a share which is now worth around¬†$120 a share!
  • Consistent savings – They’ve continuously put away $2,000 per month into their investment portfolio.

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Aug 152016
 

Asset Allocation for the Wealthy

I don’t always recognize¬†good¬†investment opportunities when I see them. But I do know that we¬†should never invest in funerals… because it’s a dying industry. ūüėܬ†But when I run out of investment ideas I usually turn to the wealthy.

I think it’s extremely important to follow what rich people do. It gives us insight¬†about financial opportunities that we should be aware of. People with extremely high net worths tend to have either a natural knack for managing money, or are at least smart enough to hire the best advisors to invest on their behalf. Of course wealthy people don’t make the best investment decisions all the time, but their historical performance is consistently higher than the average Joe, which is how the rich continues to stay rich. ūüôā

One way to track¬†the “smart money” is to follow the quarterly member surveys from Tiger 21, an exclusive network of high net worth investors. To get into this private club all you need is to have a minimum net worth of $10 million. Easy right? ūüėõ This confidential and anonymous survey asks members about where they have their net worths allocated.

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Almost all participants are either self made investors or entrepreneurs with a good eye for business trends. With hundreds of¬†members spread across North America, the results of the survey should represent a fairly accurate cross section of investment opinions from some of the most sophisticated millionaires and billionaires in the world. So what have the wealthy been doing during the last year? For the most part they have decreased their exposure to real estate and increased investments in private businesses. ūüôā

Below we can compare the Tiger 21 survey results from the first quarter of last year with the same quarter this year.

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Aug 112016
 

Sherritt Restructures its Debt

Earlier this year Sherritt International, a Canadian mining company, announced plans to extend its debt maturity by 3 years in order to weather the current commodity downturn. Out of the $720,000,000 debt that will get the extension, $5,000 of it is owned by me. ūüėÄ A couple of years ago I purchased some Sherritt bonds for $5K with the expectation that I would be paid 8% interest rate every year until maturity in 2018, at which point my principal will be returned to me.

But last week I received the following online message from my discount broker.

16-08-sherritt-bond-pushed-back-to-2021 Sherritt Restructures

I always knew this was a potential possibility. Making 8% investment return a year comes with a fair chunk of risk.¬†I can understand the plight of the mining company. I first realized Sherritt was in trouble when the value of my bond dropped 38% last year,¬†and prepared myself or the worst.¬†Sherritt’s profits are tied to the underlying commodity that it’s¬†trying to sell. The price of nickel has dropped to just under $5/pound today, compared to $12/pound 5 years ago.

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Aug 082016
 

Introduction to the World of Private Equity

When there are fewer bargains to be found in the stock market, investors will seek alternative ways to make money. So what else is out there besides stocks?

One viable option may lie in¬†the enthralling world of private equity! ūüôā

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Investing in the stock market is like working in a knife factory; after a while things can get dull. But private companies can be much more exciting! For decades private equity has produced higher returns than the stock market! It does this by¬†sacrificing liquidity. Unlike publicly traded stocks, private equity shares¬†cannot be sold easily as there is no secondary market. Investors normally have to wait years for a return.¬†ūüė®

Private companies can also use more leverage to increase¬†their¬†profits. To illustrate, the average debt-to-equity ratio of the S&P 500 is about 33%. But a¬†leveraged buyout (LBO) deal will typically set a private company’s¬†debt-to-equity ratio at 75%, or sometimes even as high as 90%.¬†This intrigues to me on a philosophical level. As most of you already know, I also have a tendency to pile on the debt when acquiring new assets, hehe.¬†ūüėĀ

In the past only institutional investors and privileged asset managers had access to private equity. But not anymore.¬†ūüĎ欆U.S. officials recently passed¬†Title III of the JOBS¬†Act. This essentially creates¬†a regulatory framework for which retail investors can finally access private equity deals. This was not possible even a year ago. Wow, what a time to be alive!¬†ūüėČ

In today’s post we’ll explore this¬†fascinating asset class for retail investors, and how I might be taking¬†my investments in this amazing new direction! ūüėÄ

So what is private equity? Generally speaking, it’s¬†an asset class consisting of equity securities in¬†companies that are not publicly traded on a stock exchange. Small but growing companies are very capital intensive and¬†often have to spend a lot of¬†money in the beginning to market itself and boost market share. But money doesn’t grow on sprees. ūüėܬ†So businesses rely on private¬†capital¬†as a way to fund their operations. Investors gain by having part ownership, or even executive¬†influence sometimes, in these companies.

Some private equity deals are huge and often make it into the mainstream news. The CPPIB, which is the largest pension fund in Canada manages over $275 billion in net assets. It had the foresight to¬†invest $300 million¬†into a¬†private company called Skype in 2009, which gave the pension fund a minority stake. Just 2 years later, Microsoft made the largest acquisition in its corporate history and purchased Skype for $8.5 billion. The initial $300 million investment turned into nearly a billion dollars for the sovereign wealth fund. Yay! Canadians who receive¬†government pension benefits should celebrate.ūüĎī¬†LEGO is another prime example. It’s more profitable than Mattel and Hasbro combined. Businesses like these always attract the attention of private equity investors¬†for obvious reasons.

But not all deals are measured in billions of dollars. One segment of private equity revolves around venture capital and smaller companies.

 

ūüíĶ¬†What is¬†Venture Capital?¬†ūüíĶ

Venture capital describes¬†early stage financing that investors provide to startup companies or small businesses that are believed to have strong growth potential. Venture capital is an essential source of money¬†for startups because with¬†limited operating histories they often don’t have access to traditional capital markets such as stocks or bonds to raise money. For investors the upside potentially can be very high, but so is the risk. Investing in a startup company is one of the riskiest decisions one can make, which is why due diligence and a thorough understanding of the market are crucial to consistent profitability.

Last year CNN Money reported that there are 141 privately held startups worth more than $1 billion in the world. The term “unicorns” is often¬†given to these¬†impossibly rare phenomenons. Private companies are valued based on how successful it raises money. If you’ve ever seen an episode of Dragon’s Den or Shark Tank you will probably see it in action. For example, if an investor agrees to pay $5 million for a 25% equity ownership in a startup then the company is said to be worth $20 million because 5¬†√∑ 0.25 = 20.

The popular¬†ride-sharing company Uber launched its¬†mobile app in 2010, and it’s latest round of funding already values it at over $50 Billion, making it the world’s most valuable startup! To put that into perspective, both GM and Ford are also worth roughly $50 Billion each. But GM and Ford are publicly traded companies and¬†unlike Uber, they actually produce and sell real cars, lol.¬†ūüöó

Venture capitalists invest¬†about¬†$30 to¬†$60 billion a year in the U.S. Although most venture capital (VC) funds¬†aim to beat the conventional stock market most of them do not. However, top-performing VC funds have consistently outperformed the S&P 500 and Russell 2000, including across multiple vintages. This means finding competent managers is super important as the lion’s share of profits go to the top quintile¬†of VC investments. So now that we know what VC is, let’s explore some options.

 

How Equity Crowdfunding Works

Crowdfunding sites are very popular. We’ve all heard of platforms like Kickstarter or Indiegogo. Most crowdfunding sites like these offer the backers rewards, goodwill, or swag, but not¬†money. But other crowdfunding sites are created specifically¬†for raising investments¬†and act¬†as financial brokers between investors and entrepreneurs. There are two main ways to¬†crowdsource for investment capital; Equity Crowdfunding, and Debt Crowdfunding. For the purpose of this post we’ll just be looking at the former.

Equity crowdfunding is the online offering of private company securities to a group of people for investment purposes.

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The way it works is that investors would give money to a startup that they want to back. Their money is pooled together with other venture capitalist and private equity firms. In return they receive partial ownership (AKA equity) in the business. The value of this equity will go up if the company succeeds, or go down if the company fails. Once the business grows large enough it would either be acquired by a larger firm, or file for IPO and become listed on the stock market. During this exiting process ownership of the company changes hands and the initial investors get their money back, hopefully with a decent profit. ūüôā An equity crowdfunding website would facilitate all of these transactions. It would be similar to¬†Kickstarter, except¬†backers¬†receive equity in a business instead of a lame pre-order.¬†ūüėĀ

There are a lot of equity crowdfunding sites to choose from. You can see a full list on Wikipedia. But below¬†are some names that I’ve looked into so far and shorted listed for my own personal use.

  • AngelList¬† Only accredited investors can invest at this time. $104 million total invested sum.
  • CrowdFunder¬†For funding small and medium size companies. 12,000 investors. $100¬†million total invested sum.
  • SeedInvest¬†¬†Mostly deals with tech startups. 100,000 investors. $50 million total invested sum.
  • Wefunder¬†Crowdfunding company in San Francisco.¬†70,000¬†investors. $22 million total invested sum.

Minimum investment is usually $1K or $2K but it depends on which website and even which specific company you want to fund. The following SEC regulations apply to all equity crowdfunding platforms in the U.S.

  • If either your net worth or income are below $100k, you may legally invest up to 5% of the lesser number.
  • If both your net worth or income are above $100k, you may legally invest up to¬†10% of the lesser number.
  • No one may invest more than $100,000 per year, even for accredited investors.

Although there are lots of ways to invest in private companies not everyone should do it. As we’ll see in the following section, with high potential returns comes high risk and volatility. If you don’t like financial roller coaster rides then hold onto your stomach.¬†ūüėį

 

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