Rich Dad (tm) Observations

5 Differences Between a Legitimate MLM and a Pseudo-MLM Scam

2011-04-16T00:45:00.000-07:00

Difference #3

Legitimate MLM Rewards Leaders with profit sharing

Legitimate MLM, in order to have a minimal sales department with the sales teams and supervisors and trainers, have tasked their associates to find better sales people, train them, and supervise them. In return for doing all that, the company rewards the associates with a bit of the profit from the new sales people that were recruited. Thus, the existing associates are encouraged to help the new recruits to be better salespeople, in order to maximize the profit being shared.

The end goal is more products being sold, not necessarily more recruits.

Fake MLM Rewards Top Recruiters

A fake MLM would have minimal sales, and all emphasis are on recruiting even more people for their membership dues. This is often formalized in some sort of a "matrix" scheme, where you will reap some rewards when you 'cycle out' (i.e. filled the pyramid with recruits). However, there can be additional "profit sharing" or "incentives" for the top recruiters.

Any sort of profit sharing are for the people who bring in the most recruits. The end result is more recruits, not necessarily more sales.

http://hubpages.com/hub/How-to-distinguish-a-Legitimate-MLM-from-a-Fake-MLM

Happy New Year to you, Death to scammers like TVI Express

2010-12-31T14:26:00.001-08:00

Wish the liars stop lying... but that may be impossible. Until the day when TVI Express is dead and buried...

Breakdown Insurance

2010-07-18T15:53:00.001-07:00

A mechanical breakdown insurance, also known as auto extended warranty, is supposed to be insurance that covers your repair bills in case your car needs BIG repairs. Two of the biggest names (i.e. advertise a lot on TV) are Mogi, and StopRepairBills. Your automaker would also offer them as well, as would the dealer. They are very profitable... for the seller, not the buyer. Thus, they are usually a bad deal for you.
Please note that I am NOT against either company. They offer a service that some people want. However, you may not understand all the pros and cons of what they offer.

Here's a few things you need to know before you call their number and pay up.

1) Neither companies un-named above are the actual policy issuers. Both are sales agents who will "match" you with the appropriate policy issuers / administrators (who remains unnamed in their ads). In other words, they are actually more like 1-800-DENTIST who match you with the right vendors, even though in the ads they sound like they actually sell the policies.

2) Deductibles are barely mentioned in their ads. All they claim is you don't have to pay for repair bills. There's a small disclaimer somewhere that basically says your deductible depends on the specific policy you buy. And it could be several hundred dollars. Obviously, the higher the deductible, the cheaper the policy.

3) The policies are far more expensive than you think. Quotes go beyond two thousand PER YEAR. And you are often pushed into buying multi-year policies for "discounts".

4) You are required to pay for regular maintanence, and actually provide PROOF of such maintanence, else your policy is VOID! (It's in the policy, really.) The policy issuers are known to have denied claims UNTIL such evidence is submitted, and you better have all the i's dotted and t's crossed! (And don't miss even ONE!). Thus, paying for one of these policies may actually INCREASE your maintanence bill, NOT decrease it as you hoped, esp. when you throw in the deductible!

5) You are automatically pushed toward the highest coverage (read: the most expensive), because it's the only way you can cover almost everything. Murphy's law pretty much predicts that the stuff you don't cover is the stuff that WILL break. However, did you actually analyze what may break, how likely it is like to break, and how much are the repair bills? And thus, what are the expected cost PER YEAR? Of course not. That's the insurance company's business. It's called actuarial science (or probabilities, close enough). They did the numbers already, so they came up with a rate that will make THEM a lot of money, not you. They are relying on your ignorance.

6) How can a company insure something they haven't even seen? They do it by making the "worst case assumption", not the average case. They have built-in a large enough profit margin that even if your car is a virtual junker that needs lots of parts, they probably won't lose much money. For an average car, the policy would be VERY very profitable... for them, that is.

7) Newer cars already have longer and longer warranties. Most new cars come with 3/36 bumper to bumper and 10/100 powertrain warranty, and very rarely would you see major repairs in the first 3-5 years of the vehicle any way, if you do the proper maintanence to start with.
If you are considering such policies, there are many things you should look into:
1) What are excluded? i.e. what is NOT covered? Even so-called bumper-to-bumper warranties have exclusions, like "not for commercial vehicles", "not for racing, rally, competition, etc." The more expensive the policy, the more it will cover. Aftermarket parts are never covered.
2) Claim limit: do you need to use specific repair shops such as AAA approved or CSE approved? Or would just any licensed facility would do? Or just those in a certain "network"? Do you have those in locations convenient for you? How about when you travel?
3) Does the policy come with any perks, such as road rescue services (tow truck, battery service, emergency gasoline delivery, key lock-out), rental car, trip interruption insurance, etc? The less perks, the less expensive the policy.
4) What is the cost-benefit ratio for the policy, vs. just putting the money in the bank for those repairs when they *do* come up?
5) Is your car actually covered? Generally the newer the car, the less it is to insure for breakdown. Most insurers won't touch vehicles over 100000 miles.
6) Did you shop around? Dealer usually tack on about 200% markup on those policies, so it can be VERY profitable. ANYTHING in a dealership can be negotiated. While it is hard comparing apples to oranges your car insurer may offer such a policy as well for comparison.
Consider all the factors before committing.

Micro-Franchising

2010-07-18T15:49:00.001-07:00

Micro-franchising is a new trend among charity entrepreneurs, but first we have to define the terms.
A charity entrepreneur is one that offers opportunities, often to very poor third-world countries, and often with help of some NGOs (non-government organizations, such as Red Cross, or Doctors without Borders).
Micro-franchising is basically make the franchise very affordable. A typical full franchise in the US is 20000 dollars and probably a lot more. Microfranchises can often be had for well under $1000, by using a lot of charity work and simplify the training. By combining the two, third world countries economies and lives are improved.
One such example given in Entrepreneur magazine was for reading glasses, which is increasingly important due to the aging population all over the world. Those simple "reading glasses" with fixed prescriptions that you can buy in a US pharmacy or market for $10 may just be something curious for you, as you have access to an optician and an optometrist that will give you full eye care. For someone in the third world, who has no opticians, no doctors, and no health insurance, a travelling salesperson with a simple backpack of glasses for sale, some simple eye charts, and a little training, is a godsend. The reading glasses micro-franchise is a win for all sides. The franchisor gets to do good and make a little money by selling things with opportunity to sell more, if any. Most are probably written off as charity. The franchisee gets to learn a business and make a livelihood, by selling the glasses at an affordable price, usually 10% of the monthly wages in the area. The clients are happy because they are getting something they did not have before at a price that is not prohibitively expensive. The NGO's are happy to help the franchisor train the new franchisees because it improves the overall quality of life in the area. They often also offer low to no-interest financing to the franchisees, which are typically paid back within 1 year.
The reading glasses microfranchise, as reported in Entrepreneur magazine, is packaged as "franchise in a box". The franchisee gets one full kit, which contains glasses, eye charts for rough determination of of lens strength, and some sample reading material. The NGO will conduct 3 days of training and work out the pricing and financing detials.
A while back there was another article about another NGO providing cell phones / satellite phones to rural village woman, one per village, in remote areas. The women are trained on how to use and troubleshoot the devices. It provided a lifeline for local villagers, who can receive advice for everything from farming to medicine, and contact relatives who had moved to the cities and such. The phones are "franchised" by the NGOs to the women, who them charge villagers a modest fee per use. All parties benefit.
Of course, there is no need for this idea to be third-world charity world only.
When you think about it, those hot dog carts and mobile food vendors are basically mini-franchises. Most of their food is pre-prepared in a central kitchen every morning, and the carts basically heat, pack, and serve. There really is little reason for a food franchise to be fixed to a location except "tradition", given the capabilities of a modern food vending truck.
What services or products are widely needed, small enough to carry in quantity, AND can be sold for reasonable profit yet be affordable, in your area?
If your business already provides goods or services for sale, can it be micro-franchised?

Password Protection with Password Card

2010-04-22T09:46:00.000-07:00

This is a bit of a stretch of topic for this blog, but identity and password protection is important in the modern age, when one must be vigilant in protecting one's assets. Weak passwords (basically, anything less than 8 characters) are not that hard to guess, and most people fall into simple patterns like birthdays and such. However, people cannot remember the really tough passwords. Here's a little help, called Password Card.

http://passwordcard.org/

Password Card is a card filled with gobbledygook that makes no sense to anybody, but it is really a password reference. Go to the website and it will randomly create a card for you. The chance of someone else getting the same card is infinitesimal. You will need to guard the specific "key" (which is the number above the card) in case you need to recreate the card.

How you use it? For each account you need to make a password for, pick a specific combination of symbol and color. Yes, you will need a color printer. Then pick at least 8 characters from the starting point, going any direction you choose, left/right/up/down/diagonal. That is your password. As long as you remember the combination, like smiley/pink or diamond/blue, and you used a consistent direction that you recall, you know your password, that is nearly impossible to guess. EVEN if you lost the card, as long as you did not leave any hints on the card itself (finger smudges, pen marks...) it is useless to anybody except you.

You can use this for multiple accounts, and it should vastly increase your password strength.

Tenant paying your mortgage? Is it possible again?

2010-04-21T14:39:00.000-07:00

Image via Wikipedia

AP just did a week-long study of major real-estate markets, and they are pinpointed a lot of markets where it is cheaper to OWN a home instead of renting one. While this is usually good news to the renters (who want to become owners), it is also a golden opportunity for those who have the down payment available to pay down house, and get a tenant to pay the mortgage for you.

This is that Robert "Rich Dad" Kiyosaki promotes in his books and his Cashflow game: find a property with "net positive cashflow", and according to the AP study, some markets have rent HIGHER than that of mortgage (esp. in foreclosure-ravaged areas), and that is without counting any special benefits like tax credits and such that only owners can benefit from.

If you currently rent, it is a great time to buy, esp. in those markets. Even if you already own your home, you may want to look into what credits and loans you can get for investment property (non-owner-occupied) and if you can generate any positive cashflow from it. When the home prices go back up in a few years, you will be raking in money... maybe.

China's Real Estate Bubble is a sign of MAJOR economic problem

2010-04-20T11:00:00.000-07:00

A quick comparison between China's real estate bubble and the American real estate bubble of 1998-2005 shows that China's bubble is growing at TWICE the rate of the American bubble. During the bubble, the average price index of the American home grow by about 80 percent in 7 years. China managed to do 60% real estate price increase in just THREE years, and it is STILL going up.

You can see the details at http://randomrantsbykc.blogspot.com/2010/04/rant-chinas-real-estate-prices-worse.html

And the Chinese government is FINALLY taking notice. They are cracking down on special promotions and such prohibiting "advance sales" on properties not even finished yet. This is causing a huge CRASH as all the various real-estate holders dumping their inventory on the market. And who will lose most of the money? Those who already own their houses and cannot sell, but have taken out loans on them for other uses.

Not all "experts" are convinced. Some claim that China has already clamped down on bank lending, thus the money supply is tighter. What those American analysts are NOT realizing is most Chinese do NOT borrow from banks, but instead from friends and relatives. So the actual number cannot be measured through bank lending.

And people are noticing all around the world, even CNN Money. And when the real estate bubble actually crash (more than twice as hard?) it will destroy the the mirage of "leader in economic recovery" that China is sprouting, and hold back the "real" global economic recovery that everybody is eager to enjoy.

What goes in a business contract?

2010-04-04T20:38:00.000-07:00

A contract is something everybody needs, especially business. But there are legal aspects of a contract you must be aware of to make the whole thing enforceable. Keep in mind that individual jurisdictions may have additional legal requirements that supersedes some of the following aspects of the contract. Also, as I am not a lawyer, I can only write in very generic terms. You should consult a legal self-help book, such as those published by Nolo Press, for the exact verbiage, or check an existing contract used by your competitor(s).

A contract is composed of these major components:

* Names Clause
* Signature Clause
* Standard Clauses
* Dispute Resolution Clauses
* Attachments (if any)
* Amendments (if any)

Names Clause

Identifying the entities involved in the contract can be tricky. As individuals, just full name would be enough. However, a business entity cannot sign for itself. Only its officers can sign, thus, the entity and its representative must identified properly. If the business entity is accredited by the state (Corp, LLC, or LP), then you also need to identify the state it was organized in. Finally, if the business has a fictitious business name (i.e. "dba" -- doing business as) you would need to identify that as well.

Example: XYZ Inc., a California Corporation, doing business as AlphaBeta (seller) and Jane Smith (buyer) enters into the following contract...

Signature Clause

A contract is only valid if signed by people who actually have the authority to "bind" the contract (i.e. the person has the LEGAL authority to enter into such contract). The signature block should usually consist of six parts:

Full name or DBA (entity name entering into contract)
Type of Business, even if it's just sole proprietorship
Signature line
Full name of the person signing contract
Title/Position of the person signing contract
Full address

Example:

XYZ Inc. (dba as AlphaBeta)
A California Corporation
___________________
John Johnson
Vice President
123 Main Street, New York, NY 12345

Personal and other guarantee clauses, plus witness and notary clauses, may also be part of this section.

If you are signing a generic contract, and you are signing for a business, make sure you sign, then next to it put ", ". If you don't, the contract can be construed as between the seller and you as an individual, not your company!

Standard Clauses

Contracts can contain a variety of clauses depending upon the circumstances. Some of which you may want to include:

* Actual Agreement (in entirety)
* Successors and Assignees (how will the contract survive management / ownership changes?)
* Notices (how you keep each other informed? Include address, fax, and so on)
* Governing Laws (which state or jurisdiction has authority over this contract?)
* Counterpart (all pages are treated as original, if contract is signed in different locations / times)
* Modification (contract can only be "amended" by stuff in writing, signed by both parties)
* Waiver (if you don't do something doesn't necessarily you can't do it in the future i.e. waive the rights)
* Severability (if ONE portion of the contract is not enforceable, it doesn't void the whole contract)

Dispute Resolution Clauses

We all do not like disputes when it comes to contracts, which is why you should have a contract written up in plain language and understandable to all parties. However, if there are still problems, you should explore alternative dispute resolution methods, such as negotiation, mediation, and arbitration, before you go to actual litigation, in terms of increasing costs. Thus, it makes sense to specify in the contract that should disputes arise, one must first attempt negotiation. If that didn't work, you have two choices: mediation then litigation, or mediation then arbitration. In general, both sides split the costs of the mediator, and the person can be picked ahead of time or as "mutually accepted choice". Arbitration results can be entered into court's jurisdiction and has the same legal weight.

Attachments

Attachments are additions to the contract that doesn't quite fit in the contract, but are needed. If there are more than one, it should be numbered, and all must be presented to both parties BEFORE anything are signed. If they appear AFTER things are signed, they become AMENDMENTS.

If you are purchasing real estate, for example, a full description of the property would be an attachment, as the actual description doesn't really fit in the contract.

Attachment should have the same names as appeared in the main contract, in the same order. It should also have refer to the main contract by name, date, and short description. You then include the content you wish to "attach".

Attachment should be signed and dated, just like the main contract, by all parties.

Amendments

Once contract has been signed, it can still be changed, but all parties must sign a written amendment, if you included the "amendment clause" as mentioned above.

If the changes are minor and small, such as changing an amount or two, or a date, you can simply cross out some words with a pen and write in some more, and then all parties must initial the change to confirm they have looked at it and accepted it, either next to the word(s) or in the margin. No separate document is needed for something that trivial.

If there are extensive changes, it is probably better to rewrite the contract altogether, as it can be VERY confusing to refer to an amendment that changes the contract in a dozen different places.

An amendment would contain the names, the contract title, date, and short description, and finally, the actual content. If you are deleting a paragraph or provision in the original contract, specify the page number and paragraph number. If you are amending some figures, specify both the before and after, and the page number and paragraph number.

You will also want to throw in the following legalese: "In all other respects, the terms of the original contract and any earlier amendments will remain in effect. If
there is conflict between this amendment and the original contract or any earlier amendment, the terms of this amendment will prevail." This basically says should anything else in the contract conflict with the amendment, the amendment is the one that counts, else the contract

Then you make room for all parties to sign and date the amendment.

Contracts are a necessary part of business life, and writing the wrong contract can hurt you. Thus, it is better to do it right from the start. Not only will your contract look more professional, it will protect you in the long run.

The CANSLIM investment strategy

2010-04-04T12:21:00.000-07:00

CANSLIM is a stock trading/investing strategy created by William O'Neal, who also created Investors Business Daily. CANSLIM is an acronym, which really stands for

Current quarterly earnings per share

Annual earnings growth

New products, New Management, New Highs

Shares outstanding

Leading industry

Institutional sponsorship

Market direction

CANSLIM is a combination of fundamental and technical concepts, and is covered in detail in O'Neil's books "How to Make Money in Stocks" and "The Successful Investor". Here's a short summary:

C: Current Quarterly Earnings per Share

EPS should be 20% or more over the same quarter of previous year. In other words, the company is growing, and growing at a good rate.

A: Annual Earnings Growth

EPS for last five years should be growing at least 15% per year, averaged out, and preferably, positive growth each of the five years. However, one bad year out of five is fine. Relatively steady growth is good.

N: New Products, New Management, New Highs

Anything new, such as new product, new management, and even new stock high, can drive the stock prices higher. Each of those events will decrease the resistance (i.e. sellers), leading to breakouts.

S: Shares Outstanding

Most stock market winners have less than 25 million shares outstanding, according to O'Neil's research. With few shares outstanding, even a little bit of purchase can cause scarcity and drive up prices.

L: Leader

An industry leader is is far more likely to stay ahead of its competitors as well, and thus remain profitable. It is assumed that they have done SOMETHING right, in taking advantage of changing markets.

I: Institutional Sponsorship

Most large purchases comes from institional buyers (i.e. mutual funds, banks, insurance companies, pension funds, etc.), who can be assumed to have done their analysis, as they can afford it. However, if the stocks are more than 70-80% owned by institutions, this can be a problem, as often bad news leads to excessive selling by those owners, and thus, sharp drops in prices. Thus, if a stock is only owned by 3-10 instutional owners, the stock is good for you to buy.

Please note that this is contradictory to Peter Lynch's advice, that you want to get in BEFORE the institutional guys get in. However, it's not too far off the mark. The idea is, if the instutional investors got SOME in, to confirm your choices. It's assumed that the institutional investors know what they're doing, so following in their footsteps is not a bad idea.

M: Market Direction

In O'Neil's research, 75% of the stocks move WITH the market, rather than against it. Thus, you can pick all of the other criteria correctly, and STILL lose money, because you bought at the wrong time, going against the market. Thus, be sure about the trends.

CANSLIM claims to have good track record. And it is relatively simple to implement, and generally follows "common wisdom". Give it a try.

Pros and Cons of Diversification

2010-04-04T12:12:00.000-07:00

New York Stock Exchange, Image via Wikipedia

Diversification is a risk management technique, that mixes a wide variety of investments within a portfolio. The idea is summarized by the adage: don't put all your eggs in one basket.

The problem is, most people are doing it wrong. Either they are NOT diversified when they think they are, or they think diversification will minimize their risk, when it does not, because they don't really understand what they are giving up when they diversify.

Let me give you an example: Say you have a dozen eggs. You decided to put each in one basket on the table. Now you have a dozen baskets, each with one egg. You are diversified, yes, as one basket tipping over will not ruin all of your eggs. Right?

Right, until someone tip over the whole table.

When the economy went into a recession, all baskets on the table are affected. No amount of diversification will save you, if you leave everything on the table.

Most people, when they hear the word diversification, they think investing in stocks of different sectors... If you remember the 6 stock archetypes from earlier, they'll put some in fast grower, and some in stalwarts, with some risky stuff in cyclical, turnaround, and maybe asset play. The really safe ones may put some in bonds and mutual funds. The problem is... These are all PAPER ASSETS. What's worse, mutual funds are just "diversified" stock investments: the fund manager invests in a bunch of different stocks. So investing in diversified stocks and investing in a mutual fund is the same thing. Also, while the bond market usually moves opposite that of the stock market, it does NOT always do so. Thus, relying on it always do so is rather foolish. Therefore, investing in all paper assets is NOT diversification.

True diversification involves non-paper assets, such as real estate, commodities and precious metals and such. Why? Let me illustrate:

Imagine the same dozen eggs, except you put some of the baskets on the ground, away from the table. Now, even if you tip over the table, unless the table falls right on top of the baskets on the ground, you should still have some eggs left. Now that is true diversification. The idea is to put your money in a completely SEPARATE market, something that is NOT based purely upon the economy, for TRUE diversification.

While the real estate prices have dropped due to foreclosures and such, rental properties are far less affected because their prices are far more reliant upon cashflow than other factors, such as market pressure. Think of it this way: when in a buyer's market, a normal family house's price will drop, until someone thinks the price is worth buying, right? But that's a liability, takes money OUT of buyer's pocket every month due to a mortgage. A RENTAL property, on the other hand, produces monthly cashflow, and that is worth a lot MORE than a regular house with a mortgage. A rental property, even if it's just a family house, but with a tenant paying the rent, is worth more than the same house withOUT a tenant, to an investor. On the other hand, you must realize that investment properties usually do NOT qualify for a loan modification, as many are no doubt finding out now. If you do not want to take that kind of risk, you can invest in real estate trusts instead of directly buying real estate. But you may not enjoy as high a return.

When economy goes bad, people flock to precious metals. In times of war or disaster, people buy gold or silver. When WW2 begin (which for China, start with the Japanese invasion of Lu-Go Bridge, years before Hitler invaded Poland), refugees bought up gold and silver and carried them instead of possessions. Jews fleeing Europe from Nazi persecution brought gold and silver. Precious metals are portable, and valuable almost everywhere. Those have intrinsic value to almost everybody on Earth, thus is far less affected by the economy. They are not paper assets, but real assets. And you don't need to actually have them shipped to you. Instead, you can just trade in gold and silver certificates, and pay a small annual fee to insure and store them elsewhere. On the other hand, people pushing gold or silver as the hedge against economical downturn like the one we have now are not exactly being completely honest. However, that is story for another observation.

Now, what exactly do you give up when you diversify? You give up a lot of profitability, and just SOME of the risk.

Let's say you have a very diversified portfolio... You own each of the 500 stocks in the S&P 500. Do you see what will happen? You have the S&P 500 index fund. Your portfolio will perform exactly like the S&P 500... you can't go above it or below it. You perform exactly as the market. (assuming for a moment that S&P 500 is your market, I know there's NYSE, NASDAQ, etc.)

Owning MORE stocks than the index would expose you to additional risk. Thus, to outperform the market, you MUST own LESS stocks. You MUST PICK AND CHOOSE.

Warren Buffet has said it before: diversification is for the ignorant. In other words, diversification is the shotgun approach. You can't aim, so you use a shotgun and hope to score some SMALL hits, and probably STILL misses all the time. Real investors invest in stocks they analyzed and know they are buying it cheap. In other words, they study the target, learn to lead the target, and score bullseyes more often than they miss.

You also give up the gains by having other stocks to weight it down.

Let's say you have 10000 and you invest in 4 stocks, A, B, C, and D equally, 2500 each. let's say C went up 100%, is now worth double. So your portfolio now is worth 12500, correct? Let's assume the other three had went sideways (no change). That is a slightly diversified portfolio.

What if you have the same 10000, but you decided to pick C because you have studied it and you are quite cetain it will double? You will now have 20000 (100% return). That is certainly NOT a diversified portfolio.

A difference of 7500, out of 10000 invested. 75% difference in return. That's the price you pay for "security", because you didn't trust yourself to commit 100% to stock C, but instead decided to hedge your bets on A, B, and D as well.

So what exactly do you gain with diversification? The idea is you lose less. To use the same scenario, but instead of C goin up 100%, say C went down 50%.

If you have a "diversified" portfolio, you'd end up with 7500+1250= 8750. Your portfolio is down 12.5%.

If you have just C, you'd end up with 5000 (half of 10000). Your total value is down 50%

In other words, diversification is supposed to smooth out your investment... both upward spikes, AND downward spikes. In other words, in order to limit the potential losses, you've also limited your potential gains.

Frankly, if you have NO IDEA which of these four are undervalued, and thus worth buying, then perhaps you should not have bought any of them. There should have been some sign that company C is fundamentally sound and undervalued, thus is worthy of your investment.

Have you considered WHY Wall Street recommends diversification? Simple... They want your money

* the more complicated the process is, the less likely you'll understand it, thus hoping that you will leave it to them
* the brokers make money on EVERY transaction you make. Thus the more transactions you make, the more they make
* and frankly, they are all taught by the same schools, so no wonder they give the same advice

Mutual funds are even worse. You give up ALL control over the money, hoping that the fund manager knows what he's doing. Some, of course, really do know what they are doing, but you have to keep in mind: a fund manager is an EMPLOYEE. He makes his salary no matter what (obviously if he does pretty badly, he may not keep his position as a fund manager too long, but YOU are the one suffering the losses, not him). Not to mention there's all sorts of fees and such in a mutual fund that they can charge to lower your real gains. What's worse, mutual funds are REQUIRED by the SEC to diversify. They cannot dedicate more than 5% of their fund to own a single company's stocks. (in other words, they HAVE TO invest in at least 20 different stocks), and they cannot own more than 10% of a company's outstanding shares. In other words, they are required by SEC to invest in a LOT of different companies, so the small investors, i.e. those of us with less than a million dollar to invest, can't lose too much.

Diversification is a risk management technique for investing. However, as we have examined previously, you give up a LOT for that safety cushion. It has its uses, but you should NOT rely on it solely to manage your risk. There are ways to manage your risk besides diversification that have far less disadvantages. The problem basically is you have to do more research and work on your part, where as in diversification, you simply spread the money around and that's it. It requires no brainpower. Unfortunately, that's how average people invest, and if you want to be rich, you have to unlearn those habits.

Last Chance to Make a First Impression

2010-03-31T12:13:00.000-07:00

It is said that your initial impression is almost everlasting. Indeed, it takes a lot to undo an initial impression. In fact, you usually have about 90 seconds to make a good first impression. Beyond that, unless you are a brilliant conversationalist, people tend to tune you out. Thus, it is important to use that first 90 seconds, and there are various techniques you can use to maximize your effectiveness.

0) Have a purpose in mind

All communications have a purpose. It could be to make friends, to flirt, to persuade, to network, and so on.

Remember, it never hurts to have a bigger network, and as Harvey Mackey said, "Dig the well before your are thirsty: network now so you can use the network later!"

Or to paraphrase the Cheshire Cat in Alice in Wonderland... if you don't know where you're going, then it doesn't matter which way you go. Same with communication. Just what impression do you wish to convey? "Good impression" is such a generic term, wouldn't you agree?

1) Go in prepared

You should always have a business card and an "elevator speech" ready.

Business cards are simple and to the point. It may seem old fashioned (people seem to like the iPhone "bump", or the vCard...) But remember: a business card is physical. You can hold it in your hand, and it requires no electricity. Even if you are unemployed, you can still afford to print some business cards on your computer printer, or go to VistaPrint and order a few hundred cards for a minimum price (I think the first 100 is free). In fact, consider printing up some personal cards, just your name and a catchy line, great for speed dating... See someone you like? Just write down your phone number THEN give the prospect the card.

(and present it with BOTH hands)

As for an elevator speech... That's for when you bump someone into an elevator and need to introduce yourself in 10-15 seconds. Practice in front of a mirror: name, what you do, nice to meet you... and so on. Rehearse it many times and get it memorized so you can recite it automatically. Throw in the business card, and you got it made: personal sales pitch.

2) Know thy enemy... if you can

If you know who you are going to meet, or at least have an idea, it is best to do some research beforehand. If they are friends of relatives, or relatives of friends, whatever, pump the relative or friend for information. Look on the Internet if possible. Favorite drink? Coffee type and prep? (Black? One or two sugar? Etc.) favorite color? any fashion sense? Favorite book and author? Favorite topic? Taboo subjects? Any children? Wife/girlfriend or Husband/boyfriend? Their likes? If you need to bring a gift, what may be inexpensive, but still tasteful, and useful? That sort of thing. You're trying to be memorable, not notorious, remember, and to quote G.I. Joe, "knowing is half the battle".

3) Right Mood, Right Attitude

Having the right mood will help you meet the right people. Your body language naturally reflects your mood. If you are morose or occupied, your body screams "stay away", and people will avoid you. Folded arms, wooden face or a scowl, and slouched back are all signs that says "don't bother me". Get into the right mood with happy thoughts about favorite places, and feel your mood shift, which will open up new possibilities.

Just because you are facing what you consider "drones", like airline counter employees, waiters / waitresses, and so on, does NOT mean you should turn off the charm. In fact, those are the people you NEED to charm, esp. if you go back all the time.

Keeping a positive attitude and mood throughout the day will actually improve your overall mood and attitude.

4) Have the right body language

Often, you will say one thing, but your body is indicating something else. It's called "mixed message", and you may not even be aware of it. This is where some friendly critique or even coaching may be required.

The "open body language" means palm open, arms uncrossed, and when conversing, occasionally lean forward as if you need to get a better look, facing the other person directly, steady eye contact... this shows willingness to trust, and rapport between you and the speaker. Occasional nods at the right moment also helps.

When the words don't match the body language, the mixed message indicates a lie or untruth. It was said that communications actually has three parts: visual, vocal, and verbal. Visual communication is at well over 55%, while vocal is about 35%, and verbal... much less than the others. Yes, more than half of the communication is non-verbal, and that includes body language. If your words and gestures don't agree, people will believe the gestures.

Consider videotaping yourself, and see how you really perform, and get some honest critiques from friends and such.

5) Synchronize and empathize

Building rapport is possible naturally, but you can help the process along by using synchronization. Match the other party's gestures, the small ones... leaning from one elbow to another, hand on the hip, leaning forward at the same time, sip water at the same time, whatever.

Don't be too obvious though. Apeing someone is stupid. The idea is mirror him or her just for a few minutes, along with open body language and warm attitude to establish a good impression. When you got the rapport, you can lead the conversation.

Remember, there's synchronizing the attitude, the body language, AND the voice (tonality and all). Once you got the synchronization, you've also empathized.

6) Less talking, more asking and listening

Questions are the "spark plugs" of conversation, if you pick the right ones. There are two types of questions: starter questions, and ender questions. Starter questions starts conversations, and ender conversations end them. Starter questions are also known as open questions because they require one to give an answer AND an opinion, while ender questions, also known as closed questions, just require a yes/no answer, and thus, no conversation. When you are conversing, you need open questions. Closed questions belong in a courtroom.

To start a conversation, start by making a statement, usually about the current location, then a starter question. Starter question always involves the six questions... Who? When? Why? What? When? How? And a long explanation is required. That's why the cliche conversation opener is often about the weather: there is some truth in that.

You can also start conversation by offering information. One would be "Hi I am ______", another would be a relevant observation, like "That's a good book/cd/whatever." If someone gives out free info, and gets free info in return, one should follow up on the free info received to "tune" the conversation.

7) Don't parrot listen, active listen instead

Parrot listeners can repeat back almost every word that was said, but not the meaning. The words did not penetrate much beyond the ears. Active listeners actually hear the emotional issues behind the talk,and hone in on them, and turn it into a question (or more questions) leading to better conversation(s). Here's an example.

A: "What terrible weather we are having for the past few days, heavy occasional showers and wind really can be annoying."
B: "I have no problem with the rain and wind. However, my fiancee prefer the snowy climate up north. I wasn't quite sure."

Parrot Listener A would respond:

A (PL): "Sounds like you like the wind and rain, but you may have to endure snow if you want to stay together."

Active Listener A would respond:

A (AL): "Decision time, eh? I can see you are troubled. What will you do?"

B gave out free information with the sentence, and it is up to A to active listen for those information, and to act upon them. B may not be broadcasting all that information intentionally, but B will notice (maybe not consciously) that A have seized upon that information and continued the conversation on that topic, and thus, building rapport. B will also notice (maybe not consciously) if A ignored the information and talked about something else.

The active listeners also demonstrate both spoken and physical feedback, to further establish rapport, by using the synchronization techniques above.

8) Don't talk, provide feedback instead (except conversation starters)

Building rapport means less talk about yourself or your topics, more talk about themselves and their topics. That means keeping up with the current topics, have an opinion about most of the current issues. Not bigoted opinion, but an informed opinion. Be curious and open, start the conversation if need be, and give sincere feedback, then try to establish common interests, goals, and experiences.

Hold up your end of the conversation. Slow down your normal speech by a bit. Excited people talk too fast and often fail to listen. Slower speech usually improves your confidence. Read the newspaper or watch the news or listen to All-News Radio Channel to get a sense of the major topics so you can join in a conversation and have something to say.

9) Things to avoid in a conversation

Interruptions are bad, unless it's an emergency. As Dale Carnegie said, don't criticize, don't complain, and don't condemn. Don't answer closed questions or even give one-word answers in general. That kills the conversation. Don't monopolize the conversation either, as that come off as egotistical and rude. Do look at who you are conversing with. It's very disconcerting, and Asians have biggest problems with this, as they are often taught to keep head bowed and all that. And finally, don't mess up your personal hygiene. Something like the "Wisp" (a tiny toothbrush for touchups) and a little mouthwash never hurts, nor would any cologne / perfume (don't go overboard though, just a hint / dash should be enough).

10) Add a personal touch to stand out from the rest

You need a personal touch to stand out from the rest. For men, wearing a bow tie instead of a regular necktie is an idea, esp. it is of an odd color. Ladies can be wearing hats, or have a particular hairdo. Fashion accessories such as a vest, a particular pair of shoes, a pair of expensive eyeglasses, a flower as an accessory, a distinct brooch or pin, a particular hair color... The ideas are infinite. If you keep doing it, it becomes your personal characteristic, and makes you memorable.

Use these tips, and you will leave a favorable impression on people you meet for the first time. Enjoy.

How to use P/E ratio to evaluate investment

2010-03-25T18:13:00.000-07:00

Image via Wikipedia

P/E is basically price per share of the stock divided by annual earnings per share.

Beware that there are several definitions of P/E, depending on which earnings you use. The commonly used definition is trailing P/E, which is earnings in the last 12 months. A "forward" P/E on the other hand, uses "projected earnings" over next 12 months. There's also another variation that uses last six months and projected six months.

P/E Ratio is a comparative stat. By itself, it means nothing. It is only useful when compared to some OTHER P/E ratio.

In a way, it's like a vehicle's MPG rating. If I tell you that this vehicle's MPG is 6.5 on the highway. You'd call that a gas guzzler.

But what if I tell you that this vehicle is a 45' motorcoach (i.e. a highway bus), and the industry average for a bus is merely 5.5 MPG? (and that's DIESEL, by the way). So now this is actually quite economical.

To compare MPG, you need to know the TYPE of vehicle. Sports car? SUV? Sedan? Truck? etc. Then you compare it against type average, or against another specific model.

P/E ratio is the same. It is usually used to measure whether the stock is overvalued, or properly valued, but it is impossible to use by itself. You need to compare it to something, either another company's P/E, or the sector average P/E.

A related number is P/E10, which uses averaged earnings of past 10 years. This should even out the spikes in earnings, if any. However, it won't help much if company is young.

Another related number is PEG, which is P/E, divided by earning growth rate. Say the company has grown its earnings by 8% every year. And their PE right now is 32 to 1. If you divided 32 by 8, you get 4, which is the PEG. This number is popularized by Peter Lynch, the Wall Street legend and former manager of the Magellan fund. He stated that people will gravitate toward companies with high growth, causing their stocks to be overvalued. Thus, if you divided the P/E by growth, you'll normalize the number, making for a more meaningful comparison against other companies. According to Lynch, most companies should have a PEG of 1, at least for Stalwarts (see 6 Stock archetypes). If a company has a PEG of 2 or high, it is probably overvalued, and vice versa.

There is myth called "rule of 20". Basically, it says that 20 is the threshold between value and over-valued, if "adjusted for inflation", by adding the annual rate of inflation to the entire stock market's P/E ratio. If that's over 20, the market is overvalued, and you may want to get out.

Frankly, with so many stocks now, there is really no such thing as "the entire stock market". You usually will have to calculate the P/E for a specific index, such as the DJIA, or the S&P 500, and so on. The problem is the market can and have gone higher. In 1995, the market is at P/E of 22. In 1999, peak of dot.com boom, market's P/E is at 33! However, In 2003 the S&P 500's P/E is creeping back to 30. Now the S^P 500's P/E is back down to 20 or 21.

However, keep in mind that different industries have different average P/E ratios. The Internet/tech sectors tend to have much higher P/E ratios, average of 51, according to USA Today's column. Again, proving that it really is all relative. A P/E of 40 would be high compared to overall, but low against tech sector.

[For more on the "Rule of 20" and dozens of other Wall Street myths and see them dissected, get the book "Buy the Rumor, Sell the Fact" from McGraw Hill. It's published in 2004, so some of the stats are a bit out of date, but it's still a fun read. ]

However, looking just at P/E is NEVER enough. There are companies with no P/E (they likely haven't had any earnings, or are currently losing money, or simply don't report any earnings), for instance. You need to take into account their debt situation (just because they're earning money doesn't mean it's NET profit), their cashflow, and so on. Thus, it's best to keep your eyes open and use multiple ratios compared with multiple other companies to determine what to buy.

Four opportunities that are not what they seem

2010-03-11T16:08:00.000-08:00

I spend quite a bit of time on Yahoo! Answers, and I noticed a disturbing trend: a lot of people are looking for supposedly "safe and easy ways to make money". Alarm bells go off in my head when I see words like that. The main problem is, they won't take good advice even if it bites them in the ***.

My friend was a perfect example. He got taken in by a "confidence scam". Someone online, allegedly female, befriended him through Internet chat over course of weeks, and managed to convince him to raise some money so she can pay some fees on her inheritance in Europe, which will solve all financial problems, both his and hers. My friend was so taken, he actually asked to borrow a thousand dollars from me and his other relatives and friends, to raise the "$5000 needed". He claims that FBI have given blessing to the deal and he had talked to the trust manager in Europe. It got so bad, that SFPD have to invite him down to their HQ for a long chat to tell him something that was obvious to me from the start: he had been conned. I would hate for you to experience something similar. Fortunately for my friend, he lost no money because he had none. But you may not be so fortunate.

I will go over some of these alleged "opportunities" that often appear on Internet forums or late night TV infomercials. I will point out a few things that you need to think about before you jump in. Then I will point out some things that goes into a "real" opportunity, some questions you need to ask about any supposed opportunity.

* Find me a reliable dropshipper/wholesaler! *

One the most frequently asked question on Yahoo! Answers Business and Finance section is "Who is a reliable dropshipper/wholesaler?" (Incidently, the most frequently asked was "How can I make money fast [as _______ ]?") Basically, the person who wants a dropshipper is trying to open a perfect business: stock nothing, sell something that you don't even have. Take the money, pay a dropshipper who will ship from their location straight to the customer. Keep the difference as your profit. In fact they supposedly heard of many people who are making money this way. No risk, just profit. Right? If you think there is a business like that, ask the following questions and see if you can give yourself answers that YOU can believe in.

== How *do* you sell something you don't have? If you advertise on classifieds or Craigslist, people would expect you to be local with product in hand that they can see touch. So would they actually trust you enough to pay you money, and HOPE something will arrive in the mail later? It is another matter if you do a special demo event or demo party, but just off Craigslist or such? I think not! eBay, maybe, but there are already bazillion people on eBay, and they already have the positive feedbacks, you don't.

== How *do* you take the money now, and deliver later? Mail merchants can do that by charging credit card, but you will probably have to take cash or check or money order... Esp. if the buyer is "local" to you. How would YOU know that the check or money order you got is real? Remember, if you deposit a bad check, YOU are the one who will be in trouble! And credit card machine cost $$$! (and monthly fees, AND transaction fees!)

If you sell over the Internet, like eBay or Amazon, payment and such is not a problem as you can take Paypal/credit card, but you still have the following problems...

== How *do* you ensure that the dropshipper will ship out the product as promised? You don't. You can't even be sure that the dropshipper *have* the stock. Guess that's where "reliable" comes in.

== Why don't the dropshipper sell the stuff direct by doing what you're doing, and cut you out of the deal altogether? You aren't adding anything to the deal that they can't do. If you can put up a website, they can put up a website. If you can post ads, they can post ads. Why you? Why not them?

The last question is the hardest to answer, and what most people fail to consider. How does having YOU add to the value of the product? Retailers add to the value by providing convenience of location. That's why your corner convenience store have prices higher than that of supermarket 15 blocks away, and why supermarket have prices higher than that of a warehouse store 15 miles away. Avon, Amway, and other MLMs actually have their reps demonstrate their products either as actual user or by demo parties. The reps are doing hands-on marketing locally, in your face, in truly interactive fashion, which is more effective than TV or print advertising. The reps are adding value to the products, by adding local presence, sampling, demonstrations, and marketing.

When you sell through the internet, you lose all of the local presence, samples, demonstrations, and your personal charm. You can add pictures and descriptions, but you're back to "print advertising". So you just tossed away all your local advantages. What you *do* gain is a much wider audience, and possibly tighter targeting of your audience, but then so can bazillion other people do the same thing. In other words, you just gained bazillion competitors. Or to put it this way: you just tossed away ALL of your advantages, so you're now just another winnow in the ocean.

What did you add to the product, other than your "markup"? If the answer is NOTHING, then do you really have a business at all? And just WHO did you find that actually IS making money off Criagslist or whatever that way? Can THEY answer those questions? Do *they* even exist? And are they still making money?

* Make money with the Robot Profit System! *

Every once in a while you see questions on Yahoo! Answers like "should I buy ________ robot system that supposedly can make money in ________ market automatically?" The market can be stock, bond, forex, commodity... whatever. The name of the system will vary, but the idea is you just follow its signals, and you will make $$$. Without naming names, you may have seen the infomercial: "Buy when it's green, and sell when it's red!"

Those who actually trade would have heard about Dr. Alexander Elder. I'll paraphrase something from one of his books:

"Whitebox software is a toolbox that professionals use. Blackbox software is for people who believe in Santa Claus." * (I'll find you the exact quote later)

So what is blackbox software? Blackbox software just gives you signals without explaining what factors it had used to calculate the index or whatever, and what triggers the signal. You can't see inside the box, so it's called "blackbox". You just feed it some data, and out pops "buy" or "sell". It's like those "supercomputers" in the 1960's sci-fi movies, esp. Colossus. All these "robot systems" are blackbox software. So folks, do you believe in Santa Claus?

But wait, they have testimonials of people making lots of money on it!

Those people may be real, but let me put it this way: did they tell you how much money they NET'ed over a year? Or did they just tell you about their biggest gain? I can tell you about my biggest trade profit without telling you about my 99 other losses, and it'd be technically true! It's just not the whole picture.

But wait, they claim to have predicted the _______ disaster ahead of time! or the boom!

Sure, they tweaked their blackbox formulas AFTER the disaster happened, to make sure it will show the right results with HINDSIGHT. That doesn't mean it can predict anything in the future.

Of course they will make a profit... off of you who buys such systems!

* Profit from the Cash Flow Business! *

Every once in a while you'll see infomercials about the "cashflow business". So how do you profit from that? It's actually a real business, but you won't be the one making lots of money from it.

Cashflow is basically $$$. A business needs money to run. It needs to pay for material, labor, maintainance, utilities, and more. However, a lot of the money is on credit now. "Net 30" being very common, which basically means you pay 30 days later. So what if the business need money during those 30 days? They can "sell" those invoices at a discount to get cash now.

To give an example... let's say XYZ Widgets just sold $10000 worth of widgets to Widgets R Us, for terms of "Net 30". That means it won't get that 10000 for 30 days. What if it needs money now? It can get a loan, or it can sell the $10000 invoice to a broker at a discount, like $9000. You may think, "Wait a minute, why would any one sell something worth $10000 for only $9000?" The problem here is TIME. Business gets the $9000 now, vs. $10000 in 30 days. Yes, that's like 10% interest in 30 days, or 120% interest per year! But for people who need money right now, it is a source of money when loans and credit have been maxed out or simply not available. Business will lose some money, but it is better than stop running altogether. Remember, a business can be profitable, and still fail, due to lack of cashflow.

In a way, this is a lot like the check cashing business: you write them a check for $250 for the near future, and you get $210 now. They make that $40 difference, but later. You get the $210 now.

Cashflow business basically have you go out and search for businesses who needs money now, and can't wait the "net 30" or whatever terms they gave to their client. You find these businesses with invoices they can't quite collect yet, and tell the main guy (probably the guy who taught the course), who will then buy the invoices at a discount. And you get a cut of the profit he'll make off the invoices.

However, keep in mind that the people who really will be raking in the money is NOT you, but the people with the money to BUY those invoices. They make large amount of money in just a month or two, with you doing all the legwork! They just need a few hours of attorney time and few hours of their own time looking over the contracts of the invoices, and of their own contract to buy the invoice. Let's say you make 20% of whatever they make. In the above example, their profit is $1000, so your compensation is $200. Not a lot, is there? Guess how many deals you have to find in order to make a decent living?

Please note that I am NOT saying that you won't make money off of the cashflow business. You just won't make a lot of it, and mostly you'll be making OTHER people rich. It's a job, not a business. And it is NOT as easy as you think. Do you think business are eager to tell you about their financial difficulties? I think not! You are more likely to have doors slammed in your face than to be invited into the office for a chat.

* Make thousands of dollars while you sleep with our automatic Internet money machine! *

That's one of the most ridiculous things I've ever heard, because it contradicts the first rule of real business: it is too good to be true. And you may have recognized the line from another one of those late-night infomercials. And if you listen carefully to the pitch, you'll realize they never explain HOW they make the money, just that it has to do with Internet, and websites, which they will give you, no computer or Internet experience required! All you hear about is how their life has changed after they got the money, how easy it is to make the money once you set it up, how great their life is now after they've done it, and why don't you join them by signing up with your credit card right now.

(And if you call during the next 15 minutes, you also get this bonus, how to make even MORE money off the Internet!) (That's my sarcasm, sorry)

Frankly, the idea of setting up something on the Internet and make money by someone with no experience and no skills is utterly ridiculous. It's be like telling someone that they can be making money off car repairs without knowing anything about cars! It may technically be true, but it won't be done overnight, that's for sure! In fact, it reminds me of a joke:

Man: "Doctor, can I dance when these casts come off"
Doctor: "Sure! Your legs are as good as new!"
Man: "Good, I never did learn how to dance!"

Computer and Internet is exotic enough that some people may just be naive enough to believe it, esp. with the announcer crooning "order now and we will take 50% off our regular price, and we will throw in this bonus item, absolutely free! AND if you order in the next five minutes, you get FREE shipping!"

If they won't even tell you *how*, even just a hint of how they make the money, then it's probably 1) legal gray area 2) vastly exaggerated 3) relies on your ignorance 4) distasteful, 5) any or all of the above.

Making money on the Internet "automatically" is actually not very difficult, it's just that you won't make MUCH of it, and it's not as "automatic" as you think. One such is display some ads, like for Google Adsense, which anybody can join. However, you need people to actually visit your website to see the ads. And most people nowadays surf the web with adblockers. So that won't help much. And you get like pennies, if anything at all. You need content to entice people to see the ads you display. Another way is join some sort of referral system to help someone else sell things. Amazon have Amazon Associates, where you display ads linked to Amazon.com's items for sale, and you get a cut of the sale.

The problem is... Nobody will visit YOUR website, unless you have something else to offer them, something good enough get readers to come to read your stuff, and maybe then you can sell something related, or display some ads. If you have no content, nobody will come. It is not as easy as you think. Nobody browse for ads. People want to see CONTENT. They tolerate some ads or sell if they see useful content.

And don't think about "stealing" content. With a search engine, it is VERY easy to check for plagiarists. And your webhost frowns upon having to deal with content pirates. Your site will be deleted as soon as it can be verified to contained plagiarized content, as they don't want to be held liable for YOUR illegal actions. And then you still have not considered how to put your website in front of potential buyers/readers.

Thus, selling on the Internet is nowhere as simple as you may think. And any one that says you can EASILY make lots of money while doing little if any work is at best, misrepresenting the truth. (Worst case: outright scam) There's no talk about the initial time setting up the whole thing, and no talk about the long process maintaining the thing, and the constant marketing costs that must be done to bring people to your website. And I am assuming BEST CASE. The truth may be much worse.

All business opportunities must be evaluated on the following terms:

* What product or service will you be selling? If you don't understand it, or there's nothing to sell, then that's probably not a business, but a scam, and you may as well skip it now.

* How does the product or service compare to what's available now? Is there any competition?

* WHO would actually pay for the product or service? Would YOU pay for it as a customer?

* How much will you be paying to FIND those customers? (i.e. marketing costs) Most ran out of "friends and family" very quickly, and people ignore telemarketers and spammers. Marketing cost is also ongoing. So this is often the most underestimated expense of a business.

* How much can you make per sale? This is dependent on the cost (labor, material, etc.) and the price of the service/product.

* How many sales must you make to "break even", just to make back the cost of buying this "opportunity"?

* How much time does it take to sell the product or provide the service to one customer? Facial, manicure, and pedicures cost $$$ because they are time intensive. Only X customers can be served a day by one person. You are not going to make a lot of money if you end up only making $10 per customer and service one customer per hour.

* Is this something you can handle alone, or will you need employees? (and cost of such employees?) How much do you plan to pay yourself?

* What special training will you need for this "opportunity"? Can you get this training elsewhere or will they sell you some sort of DVD training course for exorbitant prices?

* Is it possible to buy the equipment elsewhere for cheaper, if any special equipments are needed? Some of these opportunities will include a whole turnkey system, just plug it in and start working, but very often the equipment is obsolescent and vastly overpriced.

* What reputation does this opportunity offering business have? Check the FTC and BBB for any complaints about them, as well as the Internet. You want to read about the BAD stuff, not the good.

* Anybody else in the same business in your area, and what did *they* say about this opportunity? A lot of thes supposedly testomonials on TV are from shills and actors. You want to hear the REAL story from people who were actually IN it, used it, and hopefully, made some money from it.

* If there is component about recruiting more members, such as MLM, how much reward is from recruiting new members, and how much is from the actual sales? If there is more reward about recruiting than about making sales, you should be VERY VERY wary, because this is a sign of pyramid scam, where the older members are paid by the newer members.

In Conclusion...

There are plenty of ways to make money, even in this down economy. However, there are plenty of ways to lose money as well, esp. by going into businesses and investing with inadequate training and preparation. Infomercials are advertisements that will emphasize the good, imply the best, hide and disguise the bad, and simply not mention the ugly. They do NOT represent a balanced view of the stuff. Do NOT jump into anything without thorough investigation, or you have only yourself to blame.

What NOT to do when facing a foreclosure

2010-03-11T16:00:00.000-08:00

Image by respres via Flickr

A lot of desperate home owners, hoping to prevent foreclosure, end up digging themselves a deeper hole by doing a lot of foolish things. Here are some things that you should NOT do when it comes to foreclosure, and why.

* Declaring homestead -- declaring homestead will protect your house from creditors for your OTHER debts, such as business, credit card, auto, and so on, but it will not stop the lender of your mortgage from foreclosing. This will not work even in Florida, with one of the strongest homestead laws in the United States. Florida Constitution spefically states that mortgages are exempt from homestead provisions. After all, it would make no sense to buy a home, pay a down payment, and keep living in the house and make NO monthly payments EVER by declaring homestead, right?

* Deed-ing your home to someone else -- while the home may belong to someone else legally, the mortgage itself (i.e. the money you owe) is still in YOUR name. If any one suggest that this will delay the foreclosure, run away. How is "I give up my house, and I don't want anything for it, even though I still owe a boatload of money" going to help you financially? And besides, the lien on the house predates your transfer. So it won't stop the foreclosure at all. All you will lose is your equity in the house, and the lender can always ask the court to declare the transfer fraudulent, and void it.

* Get conned into signing away your house -- scammer comes to your house with offers to save you, and you need to sign a bunch of documents, stacks of them, each needs 10-20 signatures. Hidden somewhere in the 2nd or 3rd stack is a quit-claim deed where you just signed away your house. They then use refinancing, or second mortgage to cash out YOUR equity, pocket it, and disappear. Or worse, they list the property for sale, and as they now have the title, you're now a tenant. Someone else buys the house, and can legally evict you. Either way, you end up with NOTHING.

* Get conned by refinancing -- let's say you're behind on your mortgage, got foreclosed, but you can still redeem the mortgage, but you need a large amount of money to do so. if you can borrow enough to redeem your mortgage and arrange some sort of monthly payment to the investor, recover your credit rating from the foreclosure, then reapply for a loan to pay off this loan, that's great. However, scammers can get you there, as technically, you have to sign away the title of the house during the time you make the payments to the first loan. If they want to con you, they can simply take your payment(s), and NOT redeem the loan. You still get evicted. Or worse, they use some sort of excuse to claim you did not follow all the rules in the agreement and they keep the title of your house even after all your payments. You still get evicted, just further down the road.

* yet another variation of refinancing scam: tax lien scam -- tax liens are very legitimate... if you owe property tax, nothing will override it except maybe an IRS tax lien. And if you can't pay, your house can be sold from under you, with NO redemption possible (in a tax deed state) or you will have to pay the tax lien with interest (tax lien state). Scammers will scan the public list of tax lien sales and offer you a high interest loan to pay the lien off... but somewhere in the stack is a quit-claim deed... where you give up your house. Now with your signature on the quit claim deed, they can use your name to refinance the house, take out YOUR equity, pocket the money, and disappear. You end up owing even MORE money.

* Fall for overbid scam -- if you have enough equity in the house, and the bid at the sheriff's sale is enough to satisfy the debt / mortgage, you get the excess, i.e. overbid, back, but you have to go down to the courthouse to get it. And scammers will try to "help" you collect the overbid... for like 50%. As some properties can have a lot of equity, this amount can be quite large. Another way is they promise to apply the overbid to down payment of a new mortgage... if you sign the check over to them. Of course, there is no "new mortgage", and they simply disappear with the money.

* Fall for predatory lenders -- predatory lenders are lenders who lie and cheat to get your business. Often they will fake paperwork, such as claiming you have higher income than you actually do, or not mention that the mortgage rate, which seems very low, adjusts upward in a few months or years, or offer you a "silent second mortgage" for your down payment when such thing should have been documented in your mortgage application. It could be said that predatory lenders are one of the primary causes to this "subprime" mortgage toxic asset problem that lead to the recession of 2007-2009. While you probably fell for predatory lender earlier to get into this mess, you don't have to fall for one again for your refinancing.

* Sign ANYTHING you do NOT understand -- have an attorney review EVERYTHING that you may need to sign. If you get any high pressure sales pitch about "must sign now", be very very suspicious. Real business people understand you need to review the paperwork and will give you some time. However, keep in mind that some deadlines are set in stone. That's why any foreclosure defense starts when you first realize that you may miss a payment on the mortgage. The more time you have, the more options you have.

* Assign power of attorney, especialy durable and unlimited power of attorney -- durable and unlimited power of attorney empowers someone to sign ANYTHING on your behalf, including access to your bank account, even sell your house from under you, and is very hard to "cancel"! If you can sign it yourself, sign it yourself, and only assign LIMITED power of attorney if you can't physically be there! Be VERY weary if a stack of documents you need to sign includes a power of attorney!

* Pay up-front for loan modification lawyers / law groups / consultants -- any one who wants money upfront is automatically suspect. Even if they aren't really out to scam you, they often do nothing, wasting your valuable time when you could be doing something more useful to fend off foreclosure, and waste your limited money.

* Damage the property in any way -- do NOT try to take out the anger by damaging the house after you lost the title to the property. You can be charged with destruction of property, vandalism, and more. And they can always sue you for damages. And home owner's insurance may or may not cover you on this, the operative word being "owner".

* Move out before you have to (i.e. you got the pre-eviction notice to vacate) -- If you move out, squatters may move in, and destroy the place. Thieves can go in and steal water heaters, appliances, and more. Metal thieves may go in and strip out any valuable scrap metal such as pipes and wires, and so on. Worse, YOU may get charged for destructon of property and vandalism, even though you didn't do it! Also, the owner may change the locks and move your stuff out before they legally evict you. Once you're out, it'd be hard to get back in. And if you are homeless, you don't exactly have a lot of energy to countersue, do you?

* Accept ANY offer without thorough investigation -- lenders will want you OUT as soon as possible, so they may offer "cash for keys" deal, where they take your keys now (i.e. accept the house) for some small token payment. It's good for them as they take possession of the house sooner, saves the legal eviction costs, and makes sure you won't destroy the place. On the other hand, what's good for them is not necessarily good for you, as that small payment, often just a few hundred dollars, likely won't even cover one month's rent.

There are always scammers out there preying on the weak and desperate. Don't be victimized when you're already down on your luck, or do things that will make things worse. Even if you were not hit by a scam, you can be pressured into accepting something that may not be the best for you. Be vigilant, not fearful, and you should be fine.

Velocity of Information

2010-03-11T15:56:00.000-08:00

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Perhaps you've heard of this oxymoron: "old news". There is no such thing as old news, as news must be, well, new. When it gets old, it's no longer "news", or as interesting.

A new "term" coined for this is "velocity of information". In other words, how fast can information travel? While theoretically it can go quite fast (nowadays, we have mobile phones, Blackberries, e-mail, and so on), how fast does the information get acted upon? The information is no good if it's sitting in your inbox unread, no matter how fast it's delivered. And this applies to a lot more area than you think. There was the expression "the check is in the mail." If the check is in the mail, it's not in your bank, and thus it is no good for you.

Velocity of information has a LOT to do with running a successful business and/or investing. It involves getting the right information to the right people who can then act upon them. A company who cannot communicate is a slow company and in this day and age, a soon-to-be DEAD company. Similarly, an investor who lacks the proper information will not succeed.

Dell is probably the most information driven company ever. A lot of its success came from its direct sales model, and its zero-inventory philosophy. HOW it gets to that zero-inventory involves information, information, and more information. In other words, one of the 5 layers of the B-I Triangle: Communcations.

At Dell, inventory is equated with ignorance, in that one cannot predict customer demand, and thus, require inventory to "buffer" the demand spikes. Customer demand is information, pure and simple, and so is amount of inventory and how it will be used. By predicting customer demand properly, inventory can be reduced to a minimum, requiring less capital, and make the entire operation much more flexible, all due to high information velocity. If the prediction is off, just have a promotion selling something equivalent, until the imbalance is addressed. Then "learn from your mistakes".

At Dell, metrics are used to measure productivity, inventory onhand, average time to ship, and so on and so forth, and each is displayed right on the manufacturing line. If there are any problems, supervisors can spot it almost immediately, and if the problem is big enough, corporate officers will know it within a few hours. At a typical large corporation, a problem can persist for days or even MONTHS before it was noticed and acted upon. That cannot happen at Dell, due to its high velocity of information.

Dell enlists its suppliers for the information flow as well. Dell survived the dockworker's strike a while back with no problem at all, because it was warned by its suppliers as much as SIX MONTHS ahead of time, and have a team of logistical experts in place planning contingencies and recoveries. It was able to charter jumbo jets ahead of time from all of the major international cargo carriers, from UPS on down, each of which carries 10 container-full of components, for half a million each, before any one else did. When the strike actually happened, the charter price for a jumbo jet MORE THAN DOUBLED (to 1.1 million per flight), but Dell has already locked in their prices, due to their velocity of information and prompt action. The cost may have gone up, but the business continued without any interruptions. The same can't be said for others.

Dell segments itself into a series of market segment teams, each with its own separate structure, from sales and website all the way down to support and manufacturing, instead of consolidating. Each segment "team" exchanges data in real-time within the team. It is almost a separate company in itself, except they share some common infrastructures with the other teams. Small integrated teams react better than big corporate bureaucracy. Again, high velocity of informaton.

I can go on and on about how the high velocity of information helps Dell beat their competition, but I think I've made my point. [For more complete picture, you can read "How Dell Does It" by Steven Holzner]

The price Dell pays for this high velocity of information is a relatively stressful management, as there can be no slack. Everything has to be nearly spot-on, or the whole system falls apart. The three sides of B-I Triangle: leadership, team, and mission are strong and on the job.

So how, as a business owner and an investor, can you learn from Dell, regarding velocity of information?

Business owner should evaluate the various metrics that defines a business operation daily, or at least weekly, depending on the size. For example, if you have a business that is cyclical: good at mid-month, then steadily falls at the end of the month, picks up against a little at beginning of the month, then falls back down until next mid-month, you can use that cycle to predict demand, esp. if the cycle repeats month after month. You can also use it to predict cashflow, as a business runs on cashflow, not profit. You need to calculate return on investment for almost everything. How is sales growing or shrinking? Do we know who are our best customers, and who are our worst? How many new customers did we get this month? Can you justify another phone line and another sales person? Can you justify a new computer system? Or a faster printer? How about a photocopier? Or other machinery? What sort of revenue is the current one generating? Its expenses? Is it worth keeping? There are a LOT of questions you must ask when it comes to your business, and if you can't answer them, perhaps you're not getting the data, and perhaps, having a low velocity of information.

An investor also needs metrics, but depending on your investment strategy, you can do with somewhat less information. If you're Warren Buffet- type investor, who does all the research ahead of time, and once you buy, you hold forever, information velocity isn't quite as crucial to you, except as initial research. On the other hand, if you're the day-trader type, do a LOT of small transactions, hoping to eek out the tiniest of margins, seeking patterns in the chaos, and all that, then you need EVERY last bit of information possible, from real-time stock quote/chart to instant relevant news alerts and so on.

One more reason why you're recommended to start in the Warren Buffet style of investing... It' s simply less stressful overall, but that's a different article altogether.

6 Levels of Focus Horizon

2010-03-11T15:50:00.000-08:00

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In GTD, David Allen discusses the 6 different levels of "horizon of focus". Why do we need different "horizons of focus"? All work has different levels of importance. Different people weigh things differently. However, all weighing decisions need to fit within one's perspective(s). And it's not merely importance, but the perspective themselves also help you actually DEFINE work from generic "tasks".

The metaphor used in GTD is one of altitude... from ground level, up to 50000 ft. In GTD, it's called "horizon of focus". The higher you are, the broader your perspective, but the less details you see. When you're at 50000 ft, you're looking at your entire life, but you don't see specific tasks any more, just general guidelines. On the ground, you have individual action items, but you can't see beyond the immediate horizon. In between, you have long term goals, short term goals, and so on.

The 6 levels "horizon of focus" are:

50000 ft / Purpose & Principles: review when you have a MAJOR decision to make, such as something that affects your life-long ambitions or beliefs

40000 ft/ Vision: review when you need long-term vision and direction, as in 3-5 years, or longer down the line.

30000 ft / Goals: review to ensure you are on your way to achieve your vision, think what you need to do in about a year or two.

20000 ft / Responsibilities: review to ensure you have balance in your life, this technically does not have a time limit, but it's actually ongoing... Are you taking on too much responsibilities, or too little? Is one of them overwhelming the others? If so, how to reachieve balance?

10000 ft / Projects: review for short-term commitments, from a week to several months

Ground / Calendar and Action items: review for dated and ASAP commitments

It's not really a "list", but areas you need to think about, on why you're doing something. Why are you buying your wife flowers? Because you love her, and you forgot last week. Is that more important than getting your car's oil changed? Absolutely! But if you don't "know" why you're buying flowers, and just wrote "buy flowers" vs "change oil of car", change oil would look more important! Buy flower for wife is like a 20K ft responsibility task, whereas change oil in car is more of a project as in "keep my car running well", even though you may not think about it that way.

Thus, by examining the WHY, through different levels of perspective, you have determined the importance level of a task.

For example, when you think about changing jobs, or get married, or such, it's a question at the 50K perspective. Your principles and purpose will guide you. Do you believe you are here to achieve something in life? Does this action item contribute to that purpose/principle? Desire to be financially free is the 50K level. Major life decision, of course.

At 40K level, think 3-5 year goals. Does the task contribute to the long-term vision? What are you doing to support that vision, perhaps "achieve 50% passive income to expenses ratio"?

Shorter term is 30K level. Decide on real estate, stock investment, or start a business would be on this horizon. Think 1-2 years. Does the task contribute to the goals you have at this level? Like "Grow real estate holding to 2 million"?

The 20K level is what is sometimes referred to as the work/life balance, but it goes much further than that. This is where you decide how you balance your various responsibilities, like investor, family man, employee, father, spouse, etc. Does the task significant tilt the responsibility toward one side or the other? Can you compensate? What is the "price", so to speak? Can you "afford" it?

The 10K level is your shorter-term commitments, like a week to few months. One example is "invest in one single-family or duplex within 6 months". Does the task fit within your short-term goals?

Ground level would be your actual action items. For financial freedom, it'd be something like "research one property this week" or "research 5 stocks this week"

By being aware of these levels, your decision on what is important, and what is not, can be justified properly. In other words, they help you define work, not just determine the importance.

Once you have full understanding of the different horizons of focus, you can use them to help you define work, as well as classify work as being important or unimportant. Then it is much simpler to decide whether to work on something or not.

Defining Value

2010-03-01T19:23:00.000-08:00

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Your business must present some unique value in order to rise above the competition. What you can offer depends availability of resources, and what customers perceive as value, which will vary from market to market.

Let us take a toy retailer as an example.

First of all, what kinds of toys are there? Toys is such an all-encompassing word. It varies from balls and bicycles / tricycles and dolls, to board games, to action figures, all the way to game consoles and related games, accessories, and more. It could be for babies all the way up to teens. Everything from alphabet blocks and Legos (tm) to Nintendo Wii (tm) and Tickle-Me Elmo (tm) are toys. Thus, there are quite a few sub-market for toys: toddlers, kindergarten, elementary, middle-school, and high school. All have different interests and thus, different toys.

Second, who buys toys? Kids usually don't buy their own toys, until they are older, like middle-school and high school. Usually, it's the adults that buy toys... with or without the child's input.

Third, who sells toys? (i.e. who's the competition?) Toy's R Us is still around, but have severely shrunk in retail presence. Wal-Mart and Target / K-Mart have pretty much taken over. Specialty stores like Warner Brothers / Disney stores have lost quite a few retail stores as well, and only those specialty stores like Discovery Store or Zany Brainy with special emphasis survived. Kay Bee Toys specialize in closeout stuff, but who really buy those in malls? And finally, FAO Schwartz have pretty much went the way of the dodo. What do each of them offer?
Wal-Mart -- cheapest prices, only the bestsellers and nothing else (except maybe end-year season) and convenience when shopping other things

Toys R Us -- great selection, so-so prices

Kay Bee Toys -- lousy selection, low prices, good location in malls

Disney/WB stores -- great brand name leverage, relatively high prices, unique products

Specialty stores -- unique products and high prices

So where can a toy retailer compete? It's clear that without the size leverage, a smaller retailer can never get close to the size of a typical Toys R Us, or the low prices of Wal-Mart, or compete with brand stores and/or specialty stores. Thus, one must study what constitutes value in the mind of a customer, and how to provide more of it to compete.

What constitutes value in terms of a toy shopper?

* price
* selection
* helpful advice in what to buy
* availability of must-have items
* gift-wrapping (very important for Birthdays and holidays)
* easier availability / financing
* and more

It's clear that a normal retailer can't compete with Wal-Mart on price, and not with Toys R Us on price / selection. Thus, a new retailer must go after a "niche", so to speak, that nobody would be able to get into without significant cost.

Having good advisers (for the shoppers) is good, and this is where things gets a bit conflicting. The more selection you have, the less your employees know about each one. That's why specialty stores do so well: their staff are trained on limited amount of products, and can easily demonstrate many of them to prospective buyers. This basically is going after customer intimacy, and solving the problem of "gift-giving". Of course, you will have to at least offer a range of products for various price ranges.

Gift-wrapping is good, and staff can be trained to offer this easily for slight additional charge (or even free as special promotion). Cost is minimal, it's mostly labor.

Availability of must-have items is tough. If it's that must-have, the big stores would have gotten them first. So there's not too much one can do there, except suggest alternatives.

Well, that's just from some brainstorming sessions. If you are honest, and gather a team that gives honest ideas, and don't discard ideas until after MUCH debate (i.e. never dismiss an idea out of hand as "we can't do that") you should get a bunch of ideas. Only then should you start culling the ideas.

Beware of NVI (not invented here) syndrome. It is automatic rejection of any new ideas that came from the outside, i.e. "if it's that good of an idea, we'd be the first to do it. We didn't, so it can't be good." That's circular logic. It's corporate pride and bravado, and that's emotion, which should not be running the business.

Another syndrome to beware is WDDTH, or "we don't do that here". When Southwest Airlines started, all of the existing airlines laughed and said "nobody will fly that: no meal, no baggage handling, tiny planes, no long flights." Who's laughing now? All the other airlines had WDDTH, and as a result, lost the short-haul market to Southwest. UA came closest in recapturing some of the market with United Shuttle, by copying Southwest (only small planes, only busiest airports, like SFO to LAX, short flights). Guess imitation is sincerest form of flattery, as everybody has pretty much eliminated meals except a very light sandwich. Some will even sell you sandwiches onboard for $$$. If you are told WDDTH and nobody can utter a particular reason that makes sense, you have a problem.

So remember, in order to provide customers with more value, you have to first identify what value will they actually go for. THEN you can think about what values CAN you provide what sets you apart from your competitors that they cannot copy. THAT is your edge.

More psychology of money

2010-03-01T19:21:00.000-08:00

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There are several more psychological effects you need to be aware of when it comes to investing. Any of them could cause you to "see things" that aren't there, and make irrational decisions.

Anchoring effect is basically psychology to "anchor" an answer to a number given. Say I ask you... "What is the population of Armenia?" You would have no idea, unless you're Armenian or is a trivia champ. However, if I phrase the question as "is the population of Armenia above or below 100 million?" Then I ask the same question again, you would guess the answer to be a bit above, or below 100 million, depending on which way your logic goes. In investment, it's known as "earning targets", "earning estimates", and so on, and if a company can meet those earning estimates (or not). Your expectations are anchored to it.

Availability error is the tendency for people to see every thing as a repeat of some past event. Every US military expedition since Vietnam was described as "another Vietnam". Iraq was another Vietnam. Afghanistan is another Vietnam. Any political scandal is described as something-gate, as if it can be compared to Watergate. Company-wise, any accounting scandal is another Enron / Worldcom. Any tech company having trouble is another dot-com bust. There is a Chinese saying: once you've been bitten by a snake, you'll be scared by a rope for seven years. Same idea.

Another problem we often run into is known as "confirmation bias". When you search for data to prove or disprove your hypothesis, you tend to pick data what will prove the stuff, and ignore the data that disprove the stuff. You pick the analysts who like your stock, and ignore the ones that don't. Don't you? You pick the technical indicators that way. You pick the good news about the company you liked, and ignored the bad news about the same company. All that are illogical.

Another thing to be aware of it is the "status quo bias". Say someone was given a million and ask how to distribute it among the 4 types of investments: aggressive portfolio, balanced portfolio, bonds, or US treasuries, people will divide it up about evenly, 25% each. HOWEVER, if that same someone was told that they just inherited one million in just one of the four categories, about half would keep the money where it is, doesn't matter which category it is in. It's a bit of "inertia" at work.

Another is the "favoritism bias", or "endowment effect". If you hold something, you attribute more "value" to it. In other words, I love this stock because I own it, instead of it being the other way around. This leads one to hold on to declining stock hoping it'll go back up. In fact, it's been shown that people are less regretful when the loss is suffered passively, instead of actively. An old investment that lost money is far less upseting than a brand new investment that lost money, even if the amount lost is the same.

People feel their losses more than they feel their gains, and will be induced to take great risks in order to "avoid loss". Consider the following mind game: Say in group X, everybody gets $10000, and gets to choose between a) get $5000 extra, or b) depending on coin flip, get either extra $10000, or $0. Most people will choose $5000, the "sure thing", right? Same setup... In group Y, everybody gets $20000, then chooses between a) take back $5000, or b) take back $10000, or $0, depending on coin flip. Most people will choose the coin flip to 'avoid the loss'. The problem is, both scenario have exactly the same odds, and end up with the same results... except for pscyhology: a sure thing for $15000, or coin flip between $10000 and $20000. However, just the way the scenario is presented changes the game. People, in order to "avoid" losses, and "ensure" gains, makes illogical decisions.

Also, the mind perceives loss differently depending on where you "file" the loss in your mental account. Say, you manage to lose your $100 concert ticket on your way to the concert. Do you see yourself as being out $200... $100 in the ticket itself, and $100 for the replacement? Most do. Whereas people lost the $100 cash they plan to buy the concert ticket with... are more likely to just shell out $100 to buy another ticket. Somehow, uncommitted money is slightly less valued. This is a bit related to the favoritism bias, but in a different way.

All of these psychological effects are created by our brain to make "shortcuts" in our analysis of our daily situation in our lives. And when they lead us astray, the results can be spectacular. That's reason behind the adage: hindsight is 20/20. Once the situation has passed, you are no longer emotionally evolved, and thus can analyze the situation with pure logic.

Let's look at a spectacular failure... Everyone remember the Washington D.C. sniper case of 2002? Yep, that case. Police relied on their profilers which predicted that the sniper would be alone, probably overweight white male in late 40's / early 50's, own a van, a bunch of rifles, and books on sniper tactics. As we all know now, the perps does NOT fit any of this. They owned a large older sedan (with modifications), one single rifle, took turns shooting people (they are a pair, J. Muhammad and J. Malvo), and no books at all, and black. The profilers relied on past experiences and statistics, and that lead them astray.

And if you analyze this from a statistical point of view... Let's say there are 4 million people in the area. Ten people have the van, the rifles, and the sniper manual. For the sake of the scenario, let's say ONE is guilty of the shootings. Which is higher:

a) probability that an innocent man would own the van, the rifles, and the sniper manual; or
b) probability that a man who own all the three items would be innocent?

No, I'm not playing word sophistry here. The answers are very different.

a) is about 9 in 4 million (9 innocent owners... out of 4 million -1 innocent total)
b) is 9 out of 10 (there are only 10 of them, and 9 are innocent)

If you don't recognize these psychological / cognitive "blindspots", you will have problems. That's why almost all investment books recommend following a system without fail. Following a system takes the emotion out of the process, and thus, avoiding a lot of these blindspots.

Asset protection and real estate

2010-02-27T22:13:00.000-08:00

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Mr. Sutton, esq., wrote a very nice article in "The Real Book of Real Estate" about asset protection. I will go into a tiny bit of that. Please keep in mind, he is the attorney, I am not. So this is NOT legal advice. And to read the whole thing, you need to get that book (there's a link at the end to Amazon.com). However, here's a taste, just a tiny bit.

So what do you need to know about asset protection when it comes to real-estate? A lot, and the earlier you know the better. Basically, it is to setup a 'separate you' to own the properties, so that what happens to 'separate you' will not wipe you out, and vice versa.

First of all, asset protection is an overall strategy, one that starts when you invest, not something tacked onto it much later. You should have the entities that you will use setup before you invest. After all, a corporation is just a few pieces of paper and some annual paperwork. You can have it setup way ahead of time.

Second, asset protection is a strategy consists of MORE than just arranging some corporations. Insurance is an important part of the equation, but NOT the only part. Rely on only one or the other invites disaster. It is always better to have a backup. If you have one defense that works 90% of the time, and you install two layer of it, you now have a defense that works 99% of the time! Furthermore, having the right entity setup will tell the plaintiff's attorneys that they won't get any more money by suing than claiming insurance alone, so they shouldn't bother to sue and rack up attorney fees. In other words, it will discourage lawsuits.

Third, don't believe offshore companies, land trusts, living trusts, and so on when it comes to real estate asset protection. You run into those "seminars" all the time, all trying to sell you their services. They have their uses when it comes to estates, foundations, and whatnot, but they will NOT protect your assets. Have an attorney explain to you why that is the case, or get the book. :D

Fourth, stay AWAY from "joint tenancy" and "tenants in common". They provide NO protection at all. They may be fine for private ownership (esp. married couples), but they are horrible for investment properties. It's like general partnership: multiple exposure to risk. Even worse, one's personal property may be at risk. What's worse, one can "petition for partition", which basically means one party can force the asset to be sold so he can pocket his share.

Fifth, the true protection when it comes to real estate are LPs and LLCs. Those are flexible, easy to setup, and provides almost ironclad protection when combined with proper insurance. And they are not subject to double-tax if you decided to choose partnership tax rules for your LLC. In the example above, if one uses multiple LLCs to own the separate interests in "tenants in common", then they are protected from each other's liabilities.

Why not a C Corp? Two primary reason: 1) C Corp is subject to both a corporate tax, AND the individual shareholder's individual tax. That can almost DOUBLE your tax load. 2) a real estate holding corp would have little if any expenses to write off, but plenty of income. There are other reasons, but you'll need to read the book. :D

Six, California has one of the weakest laws protecting assets, so you really should consider incorporate in Nevada or Wyoming where laws are better at protecting assets. The trick here is called "charging order". This takes a little to explain:

Example. There's John, who formed an LLC that owns a 4-plex. If John owns the 4-plex directly, then any one who slipped at the 4-plex can sue John (as the owner), and John's personal assets are at risk (car, home, bank account...) However, John has setup the LLC as the owner, so whoever slipped can only sue the LLC, not John directly. Only the LLC is at risk.

But what if the suit is again John himself? What if there's an auto accident, and John was ruled at fault, insurance aren't enough, and attorneys are out for blood? Attorneys can sue John for all his personal assets, but they can't sue the LLC. They can sue to get John's portion of the LLC, which is quite different. This is where charging order comes in. (Without the LLC, the 4-plex is at risk)

Charging order says that whoever sued John, let's called him Nate, even if Nate wins, Nate cannot actually take ownership of John's interest in the LLC. If he did, he could sell the property, and pocket what he won. Instead, charging order says that he can only sit in line, and take John's distribution (it's not called dividend because this is not actually a Corp), with NO voting/ownership rights. In other words, it's a lien, not a levy, so he gets "first dibs"... if there's anything to dib at all. John, with his ownership rights still intact, can elect NOT TO PAY OUT any distribution, not even for the taxes. If Nate want to stick around and get paid, Nate would actually have to pay the taxes, on money he did not receive! This is called "phantom income", and this would force almost any creditor to settle for pennies on the dollar, or not even file a suit at all.

Remember, this is best done with a Nevada or Wyoming corporation, as NV and WY limits any creditors suing an LLC's owner to ONLY a charging order, whereas in CA there have been cases where the creditor was able to force an LLC's asset to be sold to cover the judgement.

Seventh, segregate the assets under different LLCs. Individual properties should be under separate LLCs, so problems at one property cannot affect other properties, even though they are all controlled by you ultimately. While this involves a lot more paperwork, this, as shown before, would also discourage lawsuits. When lawyers see that they won't be able to touch anything else, they will probably settle for the insurance max payout and be done with it.

Eighth, don't go overboard when it comes to setting up entities. Mostly one entity per property is enough. Beware of those who suggest a bunch of trusts and LLCs and C corps. and such, like a Babushkha Russian doll, one inside another, and charge you a bundle for it. Remember, you have to actually DEED the title to the entity, or else the entity don't do squat. The trick is making sure that fees and taxes are paid, and that differs from state to state. So beware.

As eight is a lucky Chinese number, I'll stop there. However, I do want to share Mr. Sutton's final points:

* is the 'expert' really an expert?

In other words, does this person actually qualified to give advice in that field? Only attorneys can give legal advice, and so on. If you see a salesperson telling you something is perfectly legal, alarm bells should go off immediately.

(And I must emphasize that the stuff above is NOT legal advice, and you should consult a real estate attorney in your state for your particular situation, preferably someone who is familiar with "asset protection".)

* is whatever being "sold" for your benefit, or for theirs?

The more complicated the "scheme" seems, and the more it costs, the less likely it is for your benefit. In all "free" seminars that offer services and whatnot for sale at the end, it's THOSE that actually makes money.

(I can tell you that I just promote the books that are related to the topic, and get a tiny bit of commission from the sales)

* "trust, but verify"

Find a REAL expert, unrelated to you or them, and see that the expert says about it. It is very easy to get swept up in the fever "greatest offer ever, limited time only!" In fact, I'll bet you that in those seminars, somebody there are shills. They have been paid to jump up at the first sign of offer and wave their money (provided by the promoters) in order to tempt the people who're hesitating.

It's also commonly known that in some seminars the local promoter splits the profits with the service provider. I don't sell you services. I offer information. I'll tell you outright that I want to sell you the books I've mentioned. If you want to retain Mr. Sutton's services (http://www.sutlaw.com) that is your business. :D

So, to sum up, asset protection is a strategy with multiple components, and there are plenty of special considerations when it comes to real-estate, which also has implications in taxes among other things. By setting things up the right way, you can substantially reduce you risk when it comes to lawsuits, perhaps even discourage some of the more frivolous lawsuits, with relatively minimal cost, but it must be done EARLY, BEFORE there is a problem.

Creating an unexpected niche

2010-02-27T22:09:00.000-08:00

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Those of you who visit Radio Shack or electronic stores could not have failed to notice a new buzzword: "netbooks". Basically, they are tiny portable computers, with a 9 or 10 inch screen (most laptops are now 15 inch screens) with correspondingly tiny keyboards and everything else, and they cost $200-250, with refurbished ones as low as $125, compared to a decent notebook at $500 or so. When closed, they are not much bigger than some people's portable executio folios in which they keep their Day-Timers (tm) and such.
The problem is they are lowest of the low-end. Even though they are x86 compatible (i.e. it will run Windows, even Vista and the upcoming Windows 7), they run VERY VERY slowly. They are good for netsurfing, word processing, e-mail, basically stuff that doesn't require much computing power.

So why am I telling you all this? Almost all the netbooks now on the market uses Intel's Atom series CPU. However, that was NOT the intended purpose of the CPU. Intel had originally planned them to be used in high-end cellphones, i.e. SmartPhones. However, the netbook was created to fill a niche that didn't exist before, and that is what's important.

Why did the netbook makers choose Atom-series CPUs? Because 1) Atoms CPUs are much cheaper than the Pentium / Core series CPUs, about 75% cheaper. 2) Atom CPUs are VERY frugal on power, less than 10 watts in most cases, giving netbooks phenomenal battery life, and 3) Intel doesn't have an "intermediate" family of CPUs, and neither does anybody else.

It's estimated that the actual cost of making an netbook is no more than $150 (out of which $35-40 goes to Intel for the Atom CPU). With netbooks on the market for $200-250, that's 25-50% profit, unheard-of in the computer segment where the average profit is 3%.

Of course it helps when the price has dropped low enough to make it a "commodity". Retail experts have told us for years that the "impulse buy price threshold", where the "cut off" price for something that one can justify for an impulse buy, is $200-$250, maybe a little higher for really techy gadget. And netbooks have reached that point.

Frankly, not even Intel had seen this coming, because it's basically a MIS-application of Intel's CPU. And often Intel gets blamed for the lack of power in the netbooks. People don't realize that it's not meant for the role it was being used. It's like making a compact pickup do a full-sized pickup's job. You get exactly what you pay for. Fortunately, most people don't need a full-sized pickup in everyday life. So, most people don't "see" the limitation.

Acer, in creating the eee PC, has created a new niche, by recognizing the availability of parts and the capability of their manufacturing, plus the power of "impulse buy price threshold". BY now, Acer has developed this niche to death because everybody else, even Dell and HP, have jumped in (and only after others have developed the niche thoroughly), but presumably they have made a good bundle already, and have already moved onto PREMIUM netbooks (the ones that costs $350 or more) that are closer to capability to "real" notebooks, but still maintain most of the portability and power.

So what's the lesson here? Recognize a market niche, and exploit it before any one else can get in. Acer's eee PC is still the most recognized name in netbooks today. And it's not an accident.

The only problem here is Acer cannot protect this niche they had created, not even for a few months.

There has been "new niche" exploitation before. Chrysler created the minivan way back when. Later, they hit upon the PT Cruiser, a retro-looking compact car that's probably the first 'cross-over', just the right size with good styling. However, they can't protect their success. Within months others joined the minivan craze, and PT cruiser was quickly joined by the Chevy HHR. Chrysler since have not been able to repeat their success, which is part of the reason they are selling out to FIAT of Europe now

The problem with niche-defining is the company has to repeat the success over-and-over, or else it becomes a one-hit-wonder, like a lot of 80's rock-and-roll bands... one song, and they disappear into history. Any one remember Polaroid? Those instant cameras that spit out a square piece of "film" with images that appear right in front of your eye in minutes? They are pretty much dead, as they can't react fast enough to the digital photography market. A lot of bio-tech bio-med firms are also one-hit wonders, but often they would be acquired by larger firms.

One company that has avoided being a one-hit wonder would be HP. HP started as a test equipment maker, and later developed and popularized computer printers by introducing the Deskjet and Laserjet to the world. Nowadays, HP is still famous for their printers, but by merging with Compaq a while back, HP is now neck to neck with Dell in terms of PC market share, forcing Dell to partner with Lexmark to add printers to its product offerings. By continually reinventing itself, HP has stood the test of time.

Another niche-carver is Sony. Sony made its name as an electronics maker, and invented the personal music player business with the "Walkman" personal cassette player. They kept innovating and shrinking the player until it's barely larger than the cassette itself, and when the music industry switched to CDs, they created the Discman. However, they have somehow missed the MP3 wave, and is only now getting back into it, but others have beat them to the game. By merging with Ericcson to make cellphones, they were able to leverage their Walkman brand with the phone business to create a unique multipurpose hybrid.

If you see such a niche-carving company, time it right and get out while you can, unless you have faith in their R&D to come out with even MORE niche-defining products.

How to start a small business

2010-02-27T22:06:00.000-08:00

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Starting a small business is a major investment, not merely of money, but also of your time. So you'd want to do it right. Do you know ALL the issues that is involved in starting a small business?

I answer a lot questions on Yahoo Answers! and a lot of the questions seem to be "how do I start a business?" So here's a summary, with a bit of help from Nolo Books... (Buy them!)

A. Evaluating your business idea

B. What ownership structure will you choose? (SP, GP, LP, CC, SC, LLC)

C. Choose a name and register the name

D. Prepare the ownership structure paperwork

E. Find a business location and meet legal requirements

F. Apply for necessary licenses and permits

G. Get insurance

H. Setup Tax reporting and accounting

I. Hire employees and know the relevant laws

A. Evaluating your business idea

A business idea is a bit more than "I'll open a shop selling _____". Can you answer all these questions honestly? Can you convince someone ELSE of your answers?

Does your business idea actually make sense? Not just to you, but to complete strangers in a few sentences lasting no more than 15 seconds?

Can you actually MAKE MONEY from it? Don't use "gut instinct" here. You have to perform a real "breakeven analysis". WHO would buy the stuff you sell (service or product)? How much would they pay for it? How much can you make per sale? How many can you sell per day? In a year?

Did you write a business plan yet? Did you perform a SWOT analysis? (SWOT=Strength Weakness Opportunity Threat) How about profit/loss forecast, and cashflow analysis for the next 12-48 months?

Do you need to borrow money? You will need business plan, cashflow analysis, and so on to get a loan from a bank. Even if you only borrow from relatives, it is better to get a promissory note / loan document done, so you don't turn them into partners, dragging them into legal trouble should you run into problems.

How will you market your business? Do you have a marketing plan? Word of mouth can only go so far, and marketing is one of the most underestimated costs of a business.

B. What ownership structure will you choose? (SP, GP, LP, CC, SC, LLC)

While Sole Proprietorship (SP) is the simplest, it is also risky, because if you ran into several financial problems, you can lose MORE than you put in. General partnership is even worse, as you now have MORE points exposed to risk. Limited Partnership is useful in some circumstances. C Corporation and S Corporation are somewhat more traditional, and LLC is a relatively new organization you can choose that combines some of the best features of corporations and sole proprietorships.

This topic is a very complicated one, as each have their advantages and disadvantages, but mainly they differ in ownership, asset protection, and taxation. Please consult a book or a real corporate law expert before making any decisions. I'll just give a short summary:

Sole Proprietorship -- the default, one person business

General Partnership -- default if you have more than one owner

Limited Partnership -- special form of GP, more control to some partners, more legal protection for others

C-Corporation -- the normal corporation, stocks and stuff like that, profits taxed as corporate tax, then dividends taxed again as personal income

S-Corproation -- simplified, no corporate tax, all profits, if any, are "flow-through" as personal income

Limited Liability Company -- also known as a "limited", LLC combines aspects of both S-Corp and partnership

C. Choose a name and register the name

A CPA or attorney, or someone at City Hall, can help you find a suitable name with a local/state search. You should come up with a whole list of names, and have them checked one at a time until you get one that you can use. Keep in mind that if you want to go nation-wide eventually, a local search may not be good enough, and you may need to get the full "trademark search". That cost more money. And even if you do NOT go nationa-wide, you may still run into a name conflict and be forced to change your name.

REAL STORY: An Alaska clothing store called "Out of the Closet" got on the news when it was revealed that ex-Governor Sarah Palin is their frequent customer. Normally, this is good... Except that a thrift store chain in California actually got the name first by years, and sent a cease-and-desist letter to the store in Alaska, that basically says, "Change your name or see you in court." The Alaskan store name was changed.

Once you find a good one, register the name as "dba" or fictitious business name first. You may also want to incorporate the corporation or LLC for more legal protection. If you want to do business nationally, or regionally, you need to register trade mark or service mark. This topic is worth a book in itself. If you want investors, you will need to incorporate, just to protect the investors.

D. Prepare the ownership structure paperwork

All corporate structures needs paperwork to make it legal. Corporation, either C-Corp or S-Corp, need corporate bylaws, articles of incorporation, pre-incorporation agreement, and issue some actual stocks. LLC needs article of organization and operating agreement. Even partnerships need partnership agreement. Get a book to do it right, or pay someone else to do it right for you. If you do it wrong, it can be disastrous.

You also need to file these documents with your state's secretary of state with appropriate fees. If you do business across state lines, you will need to be "qualified" or "domesticated" in other states. Keep in mind that some states are better for busines sthan others. A frequent place to incorporate is Nevada, which has some of the most pro-corporation laws in the nation.

Remember, if you do it wrong, it may even be worse than NOT doing it at all, because you'd have filed all the taxes and other stuff wrong, and it would lead you to think you were protected when you are not.

E. Find a business location and meet legal requirements

While most people do start running a business from home, eventually you will want to move out and find a REAL place. Even if you *do* run the business from home, you will need some preparations.

What do you really need for the business? Space? Electricity? Water? Gas? Parking? Phone lines? Internet? What is the max you are willing to pay? (again, business plan!)

Talk to a commercial real estate lease broker, and see what's available. Which fits? Any room for negotiation? Is it a good location for your type of business? Can you negotiate for better terms? Would you know what to ask for?

Even if you are just running business from home, you should check...

1) Does your homeowner's insurance actually cover your home-based business? If it doesn't, how much more will you need to pay for the coverage? If you rent, will your renter's insurance cover that?

2) Does your current lease or local bylaws/rules/restrictions allow you to run a home-based business? Even if you own your home, there may be homeowner's associations and such that have rules that governs your area. And if you rent, there may be provisions in your lease that says you can't run a business out of the unit. Violation of those terms may subject you to penalties or eviction!

3) Does your local area have zoning restrictions? CAN you operate business from your zone? If not, can you get a "home occupation" permit, if that is possible?

4) Did you calculate the taxes properly based on IRS rules? Home office must be "separate" for the IRS rules. Deductions and depreciations are some of the benefits of a home office, but only if you do it right, else you will owe IRS back taxes!

F. Apply for necesary licenses and permits

If you need employees, or if you are forming a partnership or corporation, you will need to get a Federal Tax ID number, also known as EIN, Employer ID Number.

Almost every jurisdiction require a business to register a "basic business license", often at city or county level.

If you plan to go retail, and your state collects "sales tax", you will need a reseller's permit, so that when you buy things, from wholesalers, you are not charged sales tax, and you have to periodically report and pay sales tax to the state. You will then need to know which products are charged sales tax and which are not.

If you deal with the public a lot, you may need special business licenses, such as alcohol, food, firearms, and so on. Almost all thing that involve food requires health department inspection and safety permits.

Some specialist occupations also need special registration, such as physicians, pharmacists, and so on.

Other states may have other requirements. For example, California requires all "sellers of travel" to register as well. Others may require you to be bonded, as well as insured (building contractors, locksmiths, plumbers, etc.).

Finally, your state may require special permits, esp. in regulated industries, such as taxi, restaurant, bar, and such.

There should be a state "Small Business Developement Center" that you can consult for what permits and licenses are needed for your business.

Please don't assume that you don't need one. If you do need one, and you don't have one, you will be in big legal trouble.

G. Get insurance

While insurance is not "required", it is best to buy some "just in case". They generally fall into three categories:

business Insurance (covers yourself) -- insures all business owned assets for loss or theft or damage (may need special coverage for flood, earthquake, and so on). Remember, homeowner's insurance probably does NOT cover home-based business. Check with your insurance agent!

liability insurance (covers other people) -- insures your business, so if you or your employees or products injured / damaged others, your insurance pay for it. Make sure you buy the right policy!

medical and other labor insurance -- worker's compensation insurance, unemployment insurance, medical insurance, and so on, covers medical needs, often tax deductible

Other insurance -- some industries, such as bus charter or taxi, have additional requirements and may require more coverage

Consult an insurance professional that specialize in your business area and see what coverage you will need.

H. Setup Tax reporting and accounting

Do you know how your business is taxed? It depends on what business entity you chose... SP, GP, LP, CC, SC, or LLC? Single taxation or double taxation?

Do you know what expenses are actually deductible for your business (i.e. can spend pre-tax dollars)? Do you know how to depreciate the business assets?

Are you using cash accounting or accrual accounting? (if you don't know what that means, find out!)

Are you using calendar year or fiscal year?

Are you going to use a bookkeeper, or software like Peachtree or Quickbooks? Did you set them up yet?

If you sell things, how will you track and pay sales tax, if any?

How about state, county, and city taxes, if any? (San Francisco charges a city payroll tax)

I. Hire employees and know the relevant laws

Do you know the difference between employees and independent contractors? Keep in mind that just because you SAY they are contractors does not necessarily make them so. They have to qualify under IRS rules and your local employment board rules. Beware, as you'll owe a LOT of back taxes and penalties if you misclassified employees as contractors.

Did you get EIN yet, and setup the business bank account yet? Nowadays IRS take the money straight from your account. Really. And if you mingle the business funds with yoru personal funds, you may lose the corporation protection completely (known as "piercing the corporate veil")

Did you pay unemployment tax, and worker's compensation? How about withholding and payroll taxes? Did you keep all the records?

Do you know what OSHA and Department of Labor requires for your industry? Required posters, training, plans, and such? Can you document all the compliance stuff?

Do you know about the "New Hire Reporting Agency"? It's for chasing after deadbeat dads (and moms, technically) for child support. Did you report to them?

How about USCIS (formerly known as INS) requirements that all workers must show permit to work in the US? Did you document everybody? (ID, Social Security card, etc.)

Did the employee fill out a full employee application, and get an employee handbook? Oh, you didn't write one? You better get started!

Does your city or county have their own employee laws? San Francisco have its own sick leave and minimum wage laws, among other things.

Does your industry have its own employee laws? Commercial drivers are required to meet Federal USDOT regulations, state PUC regulations, and so on.

Yes, that is a LONG list of items you need to be aware of even before you open the door for business. And we're only scratched the surface because each of these areas deserve several books to explain them in detail. Please make sure you *have* considered all the factors before starting your business. It is better to find out now than realized you missed something later.

Credit, and how it affects you

2010-02-10T19:54:00.000-08:00

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If you live in the US of A, you will be affected by "credit". When you get a credit card, you have credit, but nowadays, even applying to rent an apartment will trigger a credit check, or even applying for a job. Thus, it is necessary to know about what exactly is credit, and how you can check them.

So what exactly IS your credit score? Your credit score is a standardized system on how your credit history, how much debt you owe and to whom, how well you pay them back, and other factors are reduced to a number. The Fair Issacs Corporation, aka FICO, is the first to create such a system. In the FICO system, the lowest possible score is 300, and highest possible is 850.

FICO has licensed this algorithm to the three credit bureaus: Equifax, Experian, and TransUnion, who then modified it slightly to suit their own needs. Thus they each maintain their own version of your credit history, and as such, you have three different scores, one at each bureau. And their scores can vary a little. We will just call it "credit score".

So what constitutes a credit score? The exact formula is not known, but it does have FIVE components
Payment History (35%)
Total Debt (30%)
Duration (15%)
New Credit (10%)
Types of Credit (10%)

Payment History: when was the last time you paid late? (not rent) how often do you pay late? How late are you?

The easiest way to fix this is set up auto-billpay either via your bank's website, or via that account holder's website. As long as you have money in the bank, you won't be late, EVER. Cell phone plans, utilities, and more all offer auto-billpay.

This is very important as it's a MAJOR part of your score. Often, ONE late credit card payment can ding your score by like 100 points. Fortunately, the time horizon seems to be relatively short. If you pay on time for a few months your score should improve significantly.

Total Debt: How much debt do you have? How much credit do you have?

The more credit you have in relations to debt, the better your score. In other words, it's the RATIO of debt to credit that is important: the lower the better. When usage ratio is the same, then the bigger credit is better. For example, if you have 10000 credit limit, but only hold 1000 balance, your usage ratio is 1:10, or 10%. You obviously have better credit than someone with 50% usage ratio. Generally, keep your usage ratio below 25% for best score, according to most credit experts.

Canceling credit card you don't use may actually hurt your score as it reduces your overall credit limit, thus raising your usage ratio.

Duration: how long have you had the account? one late payment on a 1 year old account is going to hurt a lot more than an account you've held for 20 years.

Try NOT to cancel your oldest credit cards, and use each card for ONE item per month, and pay it off immediately. This keeps the card in use, giving the card company no excuse to cancel your card. For convenience, use it to automatic payment of cellphones or utilities or something.

New Credit: have you applied for a lot of credit over the past year? Applying for a lot of credit makes you a bigger credit risk.

Each "hard" inquiry, i.e. credit card app turned in will drop your score by some points. However, multiple requests within 45 days actually only count as one ding on your credit score, so try to do it all at once, then don't do anything for a long while.

A "soft" inquiry, such as a pre-approved credit offer (i.e. they already checked your credit history) does NOT count against your score.

Types of Credit: a credit card is worth more on the score than a store card. Mortgage, car loans, and such secured debts are weighed less because unsecured debt is a better indicator of your ability to manage credit .

However, don't go overboard either. Having too many credit cards will create an "out of balance" debt mix, which will also hurt your credit score. Four or five credit cards is enough.

So how can you manage your credit history and improve your score?

First, do NOT believe all those infomercials promising free credit reports if you join a credit monitoring program for like $12.95 a month. You can get one copy of your credit history once per year for free from each bureau. To maximize your coverage without paying some monthly fee, rotate the bureau you get it from, one every 4 months. You can get it from annualcreditreport.com, the only site authorized by the Federal government. Anything else is infomercial.

Second, DO get your reports every 4 months and look over it for mistakes and questionable debts, accounts, and so on. Some common mistakes are:

* account(s) you don't recognize -- the credit bureau may have combined your data with someone who have similar name, or typed in the wrong SSN. Or worse, you may be a victim of Identify Theft. Send off an request for further information and find out what's going on, be it phone or mail. Note very conversation, date, time, representative name and ID number, keep copy of outgoing letter and have delivery confirmation if possible. You're trying to establish a paper trail.

* account(s) you do recognize, but the amount is wrong -- double-check against your existing invoice / statement, then complain to the account holder. It is possible that they made a mistake and entered what's supposed to be CREDIT into the DEBT field, and vice versa, a phenomenon known as "flipping". Thus, if you have 1000 balance on 5000 credit, the flipped entry may say 5000 balance on 1000 credit, thus you've overdrawn by 4000!

Identify the potential mistakes, and write letters to the account holder(s), requesting further clarification, thus, "dispute" an existing entry. Do NOT dispute EVERY negative item, that's just dumb and will annoy the credit bureau, as that is what some unscrupulous so-called "credit repair" companies do. The truth is, they don't work. If it is legit, the item will simply reappear in a month or two.

If you can correct the mistakes you spotted and you followed the advice given earlier, your credit score should improve in a few months. Just keep on it. You may not reach perfect credit, but you can improve your existing score.

What is your effective tax rate?

2010-02-08T19:38:00.000-08:00

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Most people know their income tax rate, but have they considered their EFFECTIVE tax rate?

For people who are single, their effective tax rate is probably nearly the same as their real tax rate. However, for families, esp. those with children, the effective tax rate can be MUCH higher than the real tax rate. Why? It's because of our strange tax system and various income-based incentives in life, such as financial aid for schools, and in recent years, loan modification.

For example, here's a family. Father is working and earning a nice chunk of salary, and as kids are heading for college mother is contemplating going back to work. If she lands a local part-time teacher's position, which pays 35000, she will have to pay 15000 in taxes (income and payroll), lose 10000 of need-based financial aid of her kids (husband earns a lot), leaving her only 10000 ahead. In other words, her effective tax rate is not 35%, not 43%, but actually 71%.

No, the numbers are NOT made up. These are real numbers as published in a Forbes Magazine article (October 5, 2009) called "When Work Doesn't Pay". And this is hardly an anomoly.

Most financial aid are need-based, which is just another way of saying: the more your parents make and/or own, the less we'll give you in financial aid. Or restated for the parents: own little, earn little, and you'll get a lot of financial aid for your kids. And we're talking 10000 to 20000 (or more) PER YEAR PER CHILD in financial aid. That's not chump change. And you thought there's no free money in life? Sure there is... If you are "not rich".

Then there are the tax breaks, and there are several, most of which start disappearing after you go above 60000 per year income. You also lose eligibility for Federal Pell Grants, plus some tax deductions. This makes the effective tax rate higher than the 35% max bracket, without even counting "payroll tax" (i.e. Medicare and Social Security).

Or take the current Obama loan relief program "Making House Affordable" or something like that, which is a huge grant to pay for the loan modifications for mortgages from Fannie Mae and Freddie Mac and so on. In other words, it's okay to owe money; if enough of you owe a lot of money, government will help pay for some of it. Can you imagine some home owners with mortgages would purposely pay late a few payments, and wrangle a rate cut? No need to imagine it, as it has already happened... If your income is "low" enough. if you have higher income than that, you don't qualify for the loan mod, which is more "effective tax" on you.

While the details on the Obama health care reform is still sketchy, there would HAVE to some sort of income-based government subsidy, which will cut off at a certain point. If your income is above that, you are out of luck. Those subsidies you do NOT get are effetively a tax on you: for being not poor.

There's also the "marriage penalty", which I will not discuss here. It's well documented. Suffice to say, it makes NO SENSE for a couple to be married tax-wise in many instances.

A list of the problems with our current tax system will take much longer than I have space here. Suffice to say, the current tax system is seriously flawed. It has gotten away from its purpose to raise revenue to run the government, but has gone into attempt to legislate behavior. Want to discourage smoking? Tax tobacco products. Want to discourage driving? Tax gasoline. Want to encourage retirement savings? Eliminate taxes on retirement savings accounts. Want to help the poor? Give the poor lots of incentives and tax cuts and whatnot. The list goes on and on.

However, it is not my intent to rant about taxes, but rather, to remind you that just having the tax deducted out of your paycheck is not the end of taxation. Remember Rich Dad's lesson... "It's not about how much you earn, but how much you keep". You need to understand all aspects of where money can be saved, in order to make your decisions. You need to know how much of that dollar you can actually keep. If you end up keeping only 30 cents of every dollar you earn, you may want to consider some OTHER forms of income, such as investing in real-estate and stock market or even a business.

The long term solution is to get OUT of the middle class and become RICH. The middle class is under attack. The various tax laws are telling us either become rich (at which point you don't really worry about taxes any more), or don't work so hard (there's various incentives telling us NOT to work so hard). One more reason you need financial education ASAP.

Psychology of Money

2010-02-08T19:35:00.000-08:00

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Did you know how psychology affects money? You may be surprised to find how much psychology dominates thinking about money. It even trumps logic. How? Let me illustrate.

One of the experiments economists and psychologists play on people is known as the ultimatum game. The rules are simple: you need two subjects, let's call them A, and B.

Experimenter gives A $100, and tells A, and B, that A needs to share with B. If B rejects the offer, than experimenter gets all $100 back, so neither A nor B gets anything. Both A and B should think about the amount, and come up with a strategy to maximize one's own gain. So, what should A do? And what should B do?

Logically speaking, B should accept WHATEVER A offers, because it's better than nothing. If he says no, he gets nothing. So he should ALWAYS say yes. By the same logic A should offer as little as possible, in order to maximize his gains.

However, that almost NEVER happens in reality. In reality, B often rejects small offers, as though an offer that's 'too small' offends his or her dignity. The ability to "spoil" the offer, or "spite", is used as a bargaining chip. Either offer me something good, or you get nothing! So A offers up to 50% of $100 in order to secure the cooperation of B.

In other words, psychology trumps logic, when it comes to humans. And because investors are human, psychology is a major component in financial calculations that drive the stock market and such.

Here is another thought experiment: Say you are in a group of 100 people. Everybody must guess within 80% of the AVERAGE of the number the group picks between 0 to 100. Whoever gets the closest gets $100. You cannot confer with any one else. And everybody has the same amount of time to pick. What number should you pick? You have 30 seconds.

The LOGICAL answer is ZERO. 80% of 0 is still 0. However, those smart enough to realize the answer is ZERO immediately is in the MINORITY, and to win, you have to guess out of the 100, how many would be smart enough to guess 50, then 80% of that (40), then 80% of that... you get the idea. Everybody else will eventually come up with the answer zero, but it will take them a lot of time to do it. So, how smart are the people, and how many iterations of that can they do in the time given (in this case, 30 seconds)?

So how does this relate to investing? Guessing at the "right" price level for a stock is a lot like guessing at the right number in the example above. One of the "rules" of Wall Street that in the LONG term, the market is logical, and will "reach 0" like the example, by arriving at the "proper value" of the price. However, in the short term, the market can act irrationally, as people go over, under, and every which way, until the price eventually reach the "proper value".

Profit in stocks is made when the short-term psychological factors force a divergence of the stock price from its "intrinsic value". If the stock is cheaper than the intrinsic cost, you buy low and sell high. If the stock is more expensive than the intrinsic cost, you sell high and buy low (short the stock). Of course, you have to know the "intrinsic" value of a stock to know whether it's undervalued or not.

A lot of the technical analysis tools have their justification/reasoning in investor psychology. One such thing they try to measure is the accumulation/distribution levels: CCI, Chaikins, MFI, etc. By identifying overbought (too high) and oversold (too slow), these are used to confirm pricing trends and signals generated by other technical indicators.

Some of the Japanese candlestick patterns claims to be based on investor psychology as well. Personally, I think those are backwards: looking for pattern in chaos, and attempt to justify the result because there is no scientific basis for the theories. Still, if you find them useful, go right ahead.

To summarize, a lot of investing is about psychology, and how to take advantage of the mass psychology to exploit the difference between depressed or elevated prices and proper prices.

Foreclosure defense preparations

2010-01-31T22:31:00.000-08:00

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Before you can even plan your foreclosure defense, you need to tabulate your assets, your strengths, your weaknesses, and decide on the goal of your defense.

First, what stage of the foreclosure process are you at? (See Six stages of Foreclosure Process) The earlier you are, the better. Preferably, you're still at stage 1, or the hypothetical stage 0, where you know you will not be able to pay the next payment, but it's NOT late yet. The later you are, the worse your options. Here are the stages again:

0) Normal, all payments up to date
1) Pre-foreclosure, some payments are late
2) Foreclosure notice, or "notice of default". Now clock starts ticking
3) Reinstatement period, catch up on payments and penalties and all is forgiven
4) Auction / Sale, house is no longer yours, and you are really in deep trouble
5) Redemption period, pay off the entire loan and you can still have the house back
6) Eviction, where you get tossed out to the sidewalk with all of your belongings

Second, gather every single piece of related documents you have related to your property and the lender. Some of them are as follows:

* mortage, deed of trust, contract for deed, and actual deed, and all related documents
* any modifcaitons to mortgage or promissory note
* every bit of correspondence btween you and the lender (or their reps, such as attorneys)
* actual notice of deault, AND copies of the publication in local papers, as per your local laws
* if already sold, copy of sheriff's deed or trustee's deed (you need to know the terms and redemption period, if any)
* cancelled checks and/or bank statements (proves your payments did go out, and got cashed)
* if you try to sell the property, get listing agreement, actual copy of listing, marketing material, and other stuff related to attempts to sell your house (including log sheet of your agent trying to show your house to prospective buyers)
* current appraisal, even if you don't really plan to sell (you can use this to negotiate loan mod and short sale)
* phone log of calls between you and the lender's reps, put down date/time, and topic at the minimum

Third, knowing what options you have:

* you can borrow from friends and relatives and retirement accounts to catch up on your payments and penalties, and get the loan reinstated (takes time)
* you can declare bankruptcy, but it only buys you time, and unless you have a good bankruptcy attorney it may not buy much time at all (buys some time)
* you can negotiate for forbearance, which basically is reinstatement, but as install payment instead of lump sum (takes time)
* you can negotiate for a loan modification, to reduce the principal owed and interest rates, thus lowering monthly payments (takes time)
* you can refinance the house, which is basically get a NEW loan to pay off the old one, and hopefully the new loan you can live with (takes time)
* you can get a reverse mortgage if you have a LOT of equity in the house and don't plan to pass it on to others (takes a little time)
* you can sell the house, if you have enough equity (takes time, and finding a good agent)
* you can short-sell the house, if you're "underwater" in the loan (i.e. you owe more than the house is worth) (also takes time)
* you can deed the house back to the bank, if they will take it, in lieu of the mortgage (takes time as they need to evaluate proposal)
* finally, you can just "walk away", live for free, and move out before eviction (your credit is pretty much ruined)

As you can see, everything here takes time. So next step is, how much time do you have left?

Fourth, how much time do you really have for these options?

* does your jurisdiction have a reinstatement period? if so, how long? (i.e. how much time after notice of default, but before the foreclosure auction/sale do you have, to catch up with your loan and penalties to get the loan reinstated)

* does your jurisdiction have a redemption period? if so, how long? (i.e. how much time AFTER the auction/sale do you have to redeem the loan and keep the house?)

* how long after the sale do you have to move out? This is important in areas with NO redemption period at all. Will the new owner be able to evict you the next day, or do you have some time to move out?

You may want to put down all the important dates, such as the date of the foreclosure notice, and the dates you see above, on a calendar. These are very important deadlines, as time limits your available options.

Fifth, what delaying tactics can you use to buy more time? IGNORING the problem is NOT an option.

* Did the lender notify you of foreclosure through all the ways as spelled out in the mortgage / promissory note, and applicable laws? If they did not, you may be able to file a suit to slow them down.

* Ask the lender to "produce the note". If they can't produce the note, and remember, notes are often traded between lenders and banks, so the current collector may not be the company you started with, and they may not actually have the note, thus they can't really collect/foreclose without it. This may buy you a few days, even a few weeks.

* go over every single bit of your foreclosure notice and paperwork, and compare it against local laws. Any mistake can be capitalized upon.

One example given in "Foreclosure Defense for Dummies" was a case in Michigan: The couple was about to move out in advance of eviction at the end of 6 month redemption period, when they found out the foreclosure process was invalid, because their property was 3.3 acres, and redemption period for properties larger than 3 acres is TWELVE months, not SIX! So the forecloser would have to start ALL OVER, refile the paperwork, and restart the clock at ZERO for 12 months. They would not have found out had not someone else looked over their paperwork! Eventually the lender accepted a short sale.

* Negotiate with the representative at your lender, local office. You may be able to get a payment plan in place for forebearance, or just a few days to a few weeks before they actually file the notice of default.

Knowing your options is very important, as it determines what you can do. Now that you've gathered all your information, and evaluated your strength and weaknesses, you have to decide on whether to keep the house, delay and buy time for something else, or just forget it. So what should you choose? Let's discuss each one. Keep in mind that, that for most people in selling the house is the best option. By trading down, or even go rent instead of own, you may be able to live within your means.

* If your financial setback is temporary, and you can very soon get back to making payments, then you should go for loan modification, reinstatement, or forbearance. You should also borrow from friends and family for the payment and pay them back when possible, as that's the quickest way to raise money without resorting to high-interest loans and such.

* If you have a decent amount of equity in the house, and you can no longer afford the monthly mortage payments (perhaps you lost your job) and you can't refinance or get a loan mod low enough, or you don't qualify for any, then you should sell the house, and use the money to pick up a smaller house that you CAN afford making the montly payments. If you are older (over 65, generally), you may consider a reverse mortgage.

* If you have little or zero or NEGATIVE equity in the house, you really have a problem. You have to find out whether your jurisfiction allows for "deficiency judgments". Basically, you stop making payments, and live in the house for free until just before they evict you. The money you don't pay stays in the bank and will be used for other things. Deficiency judgment means if the house did not sell for enough to pay off the lien against it, the lender can come after you for the difference. So don't do that if your jurisdiction have it, and go for a short sale or deed back instead.

* If you are simply unsure of your situation, then you need to buy time with the delaying tactics available. Just remember, stay on the LEGAL side. Hiding will NOT help, as they really just need to prove that they had ATTEMPTED to notify you, such as register mail and such. If you refuse to pick up the letter, that's YOUR problem.

* Ultimately, you can declare bankruptcy, chapter 7 (liquidation), and walk away from it all. However, that has VERY drastic consequences and only consider that as your FINAL option.

Again, you should consult a foreclosure specialist / attorney in your area who can help you evaluate your options. Spend a few hours and several hundred dollars to evaluate your situation and your options with a true professional. Just don't pay any one who promises to "help".

13 Signs of a Successful Company

2010-01-30T18:17:00.000-08:00

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Peter Lynch revealed 13 favorable attributes of a company what may warrant your investment in his book "One Up on Wall Street". It basically boils down to the following adages:

* company doing dull, but necessary work, or work that is otherwise stigmatized, and goes undiscovered or unseen, but growing year after year
* company has a competitive edge such as a niche or brand, has room to grow, and a good employees and management with high morale

Having all of these signs won't guarantee you a stellar investment, but these are good signs that a company has growth potential, but so far has not been "mob-rushed", so you can get in "at the bottom". It's useful to "cull the herd".

1) It sounds dull, or better, ridiculous

Frankly, a lot of investors invest in a company because the name sounds trendy and/or exciting and/or exotic. What would you rather invest in: Consolidated Rock, or Genentech? Who would have thought that "Pep Boys -- Manny, Moe, and Jack" would be a great company to invest in? Or "Crown, Cork, and Seal"? Or Lynch's favorite, "Seven Oaks International"?

2) It does something dull

Seven Oaks International processes all those clipped coupons that all the supermarkets receive every day, and tabulates them so the coupon issuers can reimburse the stores properly. Crown Cork and Seal makes cans and bottle caps. The world need them to function, but you've never heard of them... The perfect "background" business.

3) It does something disagreeable

Any one heard of Safety-Kleen? They sell degreasing sinks to autoshops where the parts gets cleaned and degreased. The resulting sludge is stored in a tank below and periodically service guys come out and pump the stuff into their big tanks and recycle them. They also do restaurant grease traps and whatnot. Not a fun business, can be dirty, but definitely a necessity. There are also companies that clean and sanitizes urinals and restrooms, take the dirty tablecloths and napkins from restaurants and clean them in mass, and so on. The more disgusting, the better. (In fact, Mike Rowe's Dirty Jobs series on Discovery may give you some ideas) In fact, anything bathroom related may qualify. Paper towel dispensers, hand dryers, and so on.

4) It's a spin-off

Parent companyof the spin-off have a reputation to uphold... If the spin-off dies, they would look bad. So often, they will make sure the spin-off has good managers and good balance sheet, making the spin-off VERY attractive investments. Of course, there are spin-offs that died, but most spinoffs prospered after the separation, so being a spin-off is usually a good sign.

5) It wasn't owned by any institutions, nor followed by analysts

In other words, it's boring, and nobody has jumped on the bandwagon yet, or the analysts abandoned the stock to concentrate on something more "exciting". A lot of turnaround stocks are no longer covered when they reach bottom, and the sign that nobody cover them may be a sign of possible rebound, esp. if fundamentals are sound. If a company is 95% institutution owned, you're too late to the party.

6) It was rumored to have something to do with toxic waste, or the Mafia

Mafia was rumored to be in the casino business, so for the longest time, casino shares are depressed. Same with the garbage business, esp. those that really had to do with toxic waste. Both have rebounded. Casinos became fashionable when they started adding hotels and resorts and golf courses, and Hilton and Holiday Inn in gambling cities, such as Reno joined in the game. Suddenly it is fashionable to invest in casinos. Now with the economic downturn, it's out of fashion again, but that's the general idea: rumors and perceptions CAN affect the market.

7) It is a depressing business

Service Corporation International has a boring name, and even duller business: the funeral home business. It buys up funeral homes, crematoriums, flower shops, cemetaries, casket distributors, funeral supply makers, and so on, until it is HUGE. It is vertically integrated, one-stop-shop for funerals. It even provides pre-paid plans... Buy your funeral now so your loved ones won't have to worry about it. We do everything. They are doing so well, they are now offering the service to non-affiliasted funeral homes, for a nice premium. Though for TEN YEARS, the Wall Street ignored it. Then in 1986 Wall Street finally took notice, and company stock got mobbed, and it hasn't been the same since. (It bought out two casket makers, but that didn't help them grow, and a downturn in the business, due to medical research, means they can't grow much any more)

8) It is in a no-growth industry

Just because the industry is no-growth doesn't mean the company is a no-growth, and same for low-growth. High-growth industry attracts the capital for competition. X launches Widget. Suddenly three more companies are researching something that'll be better than the Widget. It's just too... bandwagon-y, and competition is fierce. In a no-growth industry, there's no competition, so plenty of room to grow and acclimate. Phillip-Morris, the tobacco company, was ordered to pay out BILLIONS by all the lawsuits. By delaying tactics (its own team of lawyers) and negotiations, they gained time to expand market globally and accepted the shrinking US market as almost beyond salvage. They then used the capital to buy out other tobacco companies and consolidated the market that nobody else wants to get into, improving their own position.

9) It's got a niche

Lynch used the example of a rock pit. Gravel is cheap, a couple dollars will buy you couple hundred pounds. Thus, if you got the only one in the county, you got a niche. There is no competition because transportation costs will kill the competition. It costs more to haul it than to buy it, almost. A rock pit in the next county is not much of a competition.

Pharmaceuticals have their niche with their drugs (until the generics are allowed in). Chemical companies have theirniche with their chemicals (herbicides and such). A tech company (or even non-tech company) with a nice patent would certainly have a niche. Media companies like newspapers and TV stations and radio stations used to have their niche until alternative media like Internet, Satellite TV, Satellite Radio, and so on are starting to eat their niche.

A recognizable brand-name, like McDonalds, Coca-Cola, Tylenol, and so on are almost as good as a patent, but needs periodic advertising as maintainence of the brand name.

Any one in an industry with a huge startup cost also has a niche.

A company with a niche has a competitive edge and room to grow before they have to worry about the competition. The catch is... you need to find it before the rest of the world does.

10) It makes things people need over and over

Companies that makes disposable necesities, like diapers, razor blades, soft drinks, and so on, have a much better long-term outlook than a company that makes one-off wonders, say, a toy. Think about it... How many of that wonderful toy would a child need? Tickle-Me Elmo (tm) was a hit, but one is enough per child. Soon it's tossed or stored away, and few months later child wants some OTHER toy that everybody else wants... probably made by someone else.

I have a friend who used to sell "Quorum" personal security products as his side job. I told him it was a dead-end job, because everybody just need ONE of each product he sells. There is no repeat business, no long-term relationship at all. It's only word-of-mouth recommendation. At least Avon and Amway keep the customers coming back.

11) It can leverage technology

Automatic Data Processing, or ADP, is the largest paycheck printer/sender in the US. It is a boring but necessary business, and with steady leverage of computers and equipment, it is becoming more and more efficient, doing more with less, as computer prices drop and drop. In other words, rather than invest in the technology companies themselves, consider investing in the companies that would BENEFIT from those technologies. Those companies would become more efficient, and thus, more profitable.

If the company you're looking at can leverage technology to be more efficient, great! That can be the difference between okay profits and GREAT profits.

12) It has inside investors

In other words, the company officers and employees are buying stocks of the company they're working in. That is a sign of commitment and strength, and bodes very well for the company. It means high morale, bright outlooks, and so on. After all, if the employees have a stake in the company, it's only good for the investors.

As SEC requires these inside purchases to be made public, it is not hard to find out about them.

13) It is buying back its own stocks

Stock buyback programs are great for investors. The management have decided that the profit they earned is best used to buy back shares, thus raising the overall price of the stock. This makes all stockholders happy, as that helps make THEIR portfolio richer. Think of it this way: the company is investing in itself! A company that does stock buyback is definitely worth a look, as its management is thinking about the stockholders, not themselves.

Even if a company posseses most of these 13 qualities, you will STILL need to check its fundamentals before thinking about investing in it. These factors are just criteria with which you can "cull the herd'.

Harvey Mackey on Networking

2010-01-27T18:05:00.000-08:00

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Harvey Mackey is one of the best authors on networking, and I don't mean between computers, but between people. And one of the concepts he promotes is you should consider networking as having four elements, with the acronym R.I.S.K, which are

Reciprocity
Interdependency
Sharing
Keeping at it

Reciprocity

Reciprocity is about giving something, and get something in return. It is a mutual exchange, in an ongoing basis. It is utility power at one of its purest forms: quid pro quo. You don't need to like everyone you do business with, you just need to network with them. And often, you need to give before you can receive. People *do* remember you helping them, thanking them, informing them, and so on. However, do NOT do anything immoral or illegal. That's bad, bad, bad. Just remember to actually let them know when you did do them a favor, if it's not obvious, like with a third-party. (i.e. "Oh, I mentioned that your son is looking for a job to banker _____. He's looking for an intern and will be in touch."

Interdependency

Think of it as an "old boys" network, except you are helping out all those who are in the same boat, so they will do you a favor in the future. Imagine this: in a restaurant chain, every branch has a manager. If someone comes checking from high above, you can be sure that the news of this "inspector" will be be spread to every branch within 100 miles, to almost every employee, as well as any sister properties. Everyone would be on alert, keeping the nicest table "reserved", assign extra waiter to the table, manager will go polish the most recent sales figures, and so on. If you don't join the network, you can't benefit from it.

Sharing

Sharing of information is meant to bypass bureaucracy. The more rigid the organization, the less networking it actually does. In the miltary, the sergeants have their own informal network, no need to go thru his lieutenant, and pass the paperwork up and down the chain. The flatter the organization, the better the sharing of information. If a lowly sales drone needs to get in touch with the CEO for some emergency information, he should be able to do so without jumping through too many hoops. Getting the right information to the right people helps make good and timely business decisions. You can't act on information you don't have, and having it "stuck" in the bureaucracy is unacceptable.

Keeping At It

You don't know when you will tap your network, so you have to maintain your network, even if there doesn't seem to be any use of it just now. Keep up with your high school buddies doesn't take much... just a Christmas card every year may be enough. It's better than cold-calling them 20 years later and trying to remind the contact that you two went to high school together. After all, people's fortunes rise and fall. Who knows that goofy kid you knew may turn out to be someone you desperately need to seal a deal or help you on some project?

R.I.S.K. it or lose it

Mackey's Maxim: the really big networking mistakes people make in their lives come from the risks they NEVER take.

If you don't establish your network and maintain it, you won't be able to tap it later.

The Relative Strength Index (RSI) Primer

2010-01-20T13:37:00.000-08:00

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Relative Strength Index, commonly known as just "RSI", is first explained by J. Welles Wilder in his 1978 book "New Concepts in Technical Trading Systems". It is an oscillator, meaning it oscillates between two fixed values based on price or index movements. It is a "leading" indicator, meaning it actually predicts price tops and bottoms BEFORE they actually occur. The name is a bit of a misnomer. It is measuring strength relative to ITSELF, not to something else.

RSI has one "setting", the "period" to use. Mr. Wilder used 14, so 14 is the default in most RSI charts. However, 9 and 25 are also used. So how do you calculate RSI? First you need to calculate the RS for the period in question.

RS = average price change on up days + average price change on down days

Then you use that to calculate the RSI

RSI = 100 - (100 + (1 + RS))

RSI has a range of 0 to 100, and most of the time it moves between 30 and 70, unless a MAJOR trend push it outside those boundaries. Consider 30/70 to be the oversold / overbought boundaries, though 20/80 seems to be used more often nowadays. The high number is overbought: too many people bought the stuff and the price can't go up any more. The low number is the opposite: oversold. The prices are so low nobody will be selling much soon, and the prices are about to hit bottom. Keep in mind that these top and bottom boundaries are NOT fixed in stone.

How *do* you use the line as a signal? There are two camps about this: 1) when line go ABOVE the high line, sell. When line go BELOW the low line, buy. This anticipates the trend, but it may get you out of the up trend a little earlier than the peak, and it may get you buy in a little earlier than the true bottom. 2) when line comes back below the high line, sell. When line comes back above the low line, buy. This follows the trend, so you will not at the peak, but past it. You are really using it as a trend-follower instead of trend-leader.

Keep in mind that a shorter range RSI would have sharper and more pronounced peaks than mid- or long-range RSIs. If the market is trending, and your RSI lines are not moving far enough, you may want to chart one with a shorter period and see if that is giving you signals that way. On the other hand, if the market is really volatile and making a lot of ups and downs, and RSI is going up and down like crazy, then you may want to switch to a longer period to "calm it down".

An important thing to check is "divergeance". In this case, you need to compare the RSI chart against the price chart. If the price chart is heading upwards, but the RSI chart is heading downwards. Look for a series of peaks getting higher and higher, while RSI peaks are getting lower and lower, or vice versa: price bottoms making lower lows, while RSI bottom gets higher and higher. Eventually the divergeance will disappear, and RSI will start following the price (or vice versa), but that divergeance is VERY significant event.

The problem with RSI is that it is NOT that useful in trending markets, as the RSI will consistently be too high or too low, so it cannot generate any proper signals, and remain there for a LONG time.

So to summarize... RSI measures strength against itself, and indicates overbought/oversold conditions. however, it is mainly useful in a trading market (i.e. going "sideways"). You can use the "period" of the RSI to act as a smoothing filter. The longer the period, the smoother the curve. If the RSI line is not giving any signals, shorten the period. If the RSI line is giving too many signals, lengthen the period. Default RSI period is 14, though 9 and 21 are also used. Use it to confirm other signals, and watch for divergence as that really confirm the signal.

The Greenspan Folly

2010-01-17T12:00:00.000-08:00

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Everybody thought Alan Greenspan is the greatest economist ever. He was on capital hill for FIVE presidents (started with President Gerald Ford, in fact). And he enjoys the Libertarian view of economic regulation: the less the better. In fact, he said so in his autobiography that he is a fan of Ayn Rand, who believes that government should NOT regulate the economy at all! As a direct result of that, his policy had encouraged the current toxic asset problem, and thus, the recession we all are stuck with right now.

Alan Greenspan was given post of Federal Reserve Chairman by president Reagan, and then, under Clinton as well. Clinton also appointed Bob Reuben as economic advisor, and later Treasury secretary. Both have made fortunes on Wall Street, and both decided to do a little as possible when it comes to regulations. Tim Geitner and Larry Somers are also of the same mind.

On the other side of Washington bureaucracy is a little known agency called CFTC, or Commodities and Futures Trade Commission. Their job is to oversee derivatives and agricultural futures, and its chairperson is Brooksley Born. She was one of the candidates for attorney general under Clinton, but when Janet Reno was chosen, she was offered chairperson of CFTC as sort of a consolation prize. She is a Securities lawyer by trade, and she is troubled by the vast use of derivatives on Wall Street.

Derivatives is basically any sort of financial instrument that is DERIVED from something else, such as asset, index, event, value, or condition. You can trade the derivatives, instead of trading the assets directly. One of the best known derivatives is stock options, another would be commodity futures, but there are many many more. In the most basic explanation, it is essentially a "bet", like "I bet you $5 that DJIA will reach 11000 by ______". In fact, a derivative can be based on another derivative, and new ones are created all the time by Wall Street.

Why so much derivatives? It is basicaly sold as a way to 'hedge' against calamities. As a quick example, say you have a lot of stocks, say, worth $10 million. You want to insure against it losing too much, so you "sell" a put option, which basically guards it against losing value. As prices go down, the put option's value rises, so your loss is mitigated. If the price does NOT go down, the option expires, and you just lose the fees and whatnot on it. In a way, it is insurance.

In another example, say a company had borrowed $1 million, and pays interest on it every six months, which is adjusted then. To "protect" itself from a suddenly hike in interest payment, they can buy a "forward rate agreement" from derivatives seller. If the interest doesn't change or actually goes down, the payment is forfeit. If the rate does go up, the seller of the agreement pays the difference in the interest payment. In a way, it can be considered as "insurance".

The main problem with derivatives is they are EXTREMELY volatile. Even a small change in price of the underlying "whatever" can have HUGE effect on the price of the derivative itself. And that will affect derivatives based on it as well. This allows for huge profits, and huge losses. And when you have derivatives based on derivatives, a small change will snowball into massive shakeups.

The problem in the 1990's is the derivatives are simply unregulated, or even, UNKNOWN to the government. The more complex it is, the more it was sold. Proctor & Gamble sued Banker's Trust for fraud, when Banker's Trust sold it a lot of OTC derivatives, and P&G lost millions. Trillions of dollars are traded every week in the derivatives market, and if something goes wrong, the whole financial system will go down, because banks will have lost too much money to keep running. Brooksley Born of CFTC decided to do something about it.

As Alan Greenspan and his "posse" are opposed to any sort of regulation on Wall Street, and CFTC is in the business of regulating derivatives, it is only a matter of time that they come into conflict. In fact, it was even rumored that Alan Greenspan actually had a bit of verbal sparring with Brooksley Born about how fraud should be handled. Supposedly, Alan Greenspan said that fraud should NOT be criminalized, and that the market will learn and stay away from the fraudsters.

CFTC had a "concept release" of the regulation written up, which is basically a draft regulation on how to regulate the derivatives industry. Alan Greenspan, Larry Somers, and Bob Reuban basically got VERY VERY upset, called in Brooksley Born, head of CFTC, and told her that CFTC will DESTROY the financial services market. Supposedly Bob Reuban told Brooksley Born that CFTC did NOT have the legal authority to regulate derivatives (even though it should be). When the concept release was published any way, SEC, Federal Reserve, and Department of Treasury actually issued a joint statement that CFTC should be SLAPPED DOWN HARD. However, CFTC is an indepedent agency that reports to the president, not to Dept of Treasury, only Congress can stop CFTC. Hundreds, if not thousands of lobbyists descended upon Capitol Hill, lobbying every congressman they can find. And in 1998, CFTC's advice was ignored.

Six weeks later, the LTCM hedge fund is about to go broke, losing millions every day, by investing in OTC derivatives internationally with HUGE amount of leverage. Nobody knew how it worked, yet with their reputation (2 Nobel laureats, one ex Fed Reserve vice chairman, and one ex investment house head) they were able to get 15 of the largest banks to invest a TON of money each, plus hundreds of the richest investors in the US. And if this fund go under, the entire US economy may collapse (Greenspan said so). It is going broke because its mathematical model it used to invest cannot cope with Russia defaulting on its loan obligations. The Feds ordered the banks each to put up MORE money (a couple hundred million EACH) to "buy out" the fund, thus solving this little problem, but not the underlying situation that caused the whole thing.

Congress started a series of hearings, but Alan Greespan held them off. The market was left to run by itself, even today.

Derivatives went up, and up... new derivatives are created based on more derivatives... and Wall Street also bet heavily on real estate, which can also be made into derivatives, known as "mortgage-backed securities". And in 2007/2008 the problem can no longer be hidden... The "toxic assets" of the banks are OTC derivatives, or specifically, "mortgage backed securities", and the ripples caused the recession. When banks panic, everybody else panics.

In hindsight, Brooksley Born's CFTC was prophetic in predicting the collapse of the OTC derivatives market, and its effect on the rest of the economy. Alan Greenspan was called back to Congress in 2008 for a hearing after his retirement from FedReserve in 2006, and it appears that Alan Greenspan was remorseful in allowing the market to run itself. Under questioning by hostile congressmen, Alan Greenspan had admitted that his world view was incomplete, and his "model was wrong" in allowing the market to run itself.

Obama and his staff (which includes many Greenspan proteges) have pledged to solve the problem and regulate the industry, but so far, the financial lobbyists have stalled the regulations. It appears that this legislation will pass in December, but substantially watered down.

(Reference PBS Frontline: The Warning)

Madoff's Ponzi Scheme

2010-01-13T17:22:00.000-08:00

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By now everybody have heard of Bernie Madoff, and his Ponzi scheme finally came unglued after decades of deceiving the investors involving at least 50 billion dollars. So how could he have gotten that big? There are three major factors: secrecy, greed, and deception.

A Ponzi scheme is named after Charles Ponzi. The scheme is relatively simple: the people who got out richer was paid by people who got in later. By steadily attracting new people who put their money in, and have more people coming in than going out, the people who get out will get MORE than they put in, and whoever runs this thing can skim off his share as well from the pool. Of course, when people stopped coming in, or just slow down, then the scheme will unravel. There was no real investment and the money is not growing by itself; any growth is from new investors.

Madoff could have kept running that scheme if the depression of 2007-2008 had not caused some investors to pull their money out to cover their losses elsewhere, only to find that there really is no money.

Secrecy is very much a part of Madoff's scheme. He doesn't accept investors directly. Instead, he only takes funds that took other people's money. In other words, he's like the wizard behind all the smoke and mirrors. He also imposed a condition: that no fund that put money with him can list him in any way. His name must NOT appear anywhere. By making this a condition, he can attract MORE funds than people suspect. It also kept him under the radar of the SEC for a long time. It also made him a smaller target, as having less eyes checking him means less chance of exposure.

Greed is the second component of the scheme. Madoff has attracted investments by promising steady growth, 10% to 12%. The funds fed him money because 1) he had a good reputation, even chairman of NASDAQ at a time, and people can't even consider that he may be a fraud, 2) he promised to split fees or even zero fees, which, for a very large fund, mean MILLIONS for the fund managers, for almost ZERO work. The fund managers can keep charging those fees, thus, it all went into the fund manager's pockets. There was no "due diligence" (a "security check" that verifies that their money is invested "wisely"), even though funds are supposed to be very careful with their client's money.

Deception is the third part of the scheme. Madoff have multiple programmers generating fake trades for the statements. And by refusing to do electronic confirmation, but instead, generate fictitious PAPER confirmation statements, it makes auditing the statements very difficult. Madoff was a securities trader, and initially he PAID people to trade with him (paying for volume). And it provides him a cover to do the Ponzi scheme.

Add all three together, and you have people going "it's generate good money, do I really want to know the details?" He even had one of his underlings basically threaten to give back the people's money if they ask too many questions. As it has gotten bigger, the more reputation it has, and the more money it can attract. By combining all three factors, they reinforce each other. People with greed will get taken in by the deception, and the secrecy makes people feel "exclusive", feeling they are the only ones in the deal when in fact they're just a tiny part of it.

In the end, it all must come down, as it is not possible to keep something like that a secret for so long. In fact, SEC had been warned years before, but took virtually no action. In the end, when the economy went south, and people needed to withdraw their money to cover their other losses, the fact that the whole thing is a Ponzi scheme came to light, as no more money is going in and a lot more money is coming out, and there are no funds left.

So what can you learn from the Madoff Affair?

1) Due diligence: do your own homework, don't rely on someone else's advice exclusively. They may be blind to deception or part of the secrecy

2) If it's too good to be true, it probably is. Don't let greed take you for a ride. You'll regret it.

Foreclosure Process

2010-01-13T17:15:00.000-08:00

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Foreclosure can be caused by a variety of reasons, from emotional problems (depression and grief, leading to disengagement from the world) to outright financial difficulties, or even a combination, such as divorce, or even fraud. There are a variety of options, but the first thing you need to do is acknowledge the problem. After all, you cannot solve the problem if you don't even acknowledge that the problem exists! Of course, you have to LEARN about the problem first.

There have been many cases where one member of the two-person household is in charge of all finances, and the other person does NOTHING. As Reagan said before, "Trust, but verify." You may trust your partner that he or she will do the right thing, but there have been many cases where the other is either too busy to even realize there was a problem, or too ashamed to admit that there was a problem. There were plenty of anecdotes that the owner of the house didn't even know that his house had been foreclosed on, and SOLD OFF in a sheriff's auction on the courthouse steps. He only knew when a real estate professional came to his door to inform him. He had entrusted all financial stuff to his wife, and when his wife failed to send payments, he knew nothing.

The earlier you know about the problem, the better your chances of avoiding foreclosure altogether, because foreclosure is a long process, and there are many things you can do to "buy time".

There are SIX stages to the foreclosure process, though the length of each stage may vary from state to state depending on local laws. The six stages are: pre-foreclosure, foreclosure notice, reinstatement period, auction/sale, redemption period, and finally eviction.

Technically, there is a "stage 0", where everything is "normal". However, if you know you will not be able to pay the next payment, it is time to seek for help, rather than actually wait until stage 1.

STAGE 1: Pre-foreclosure is the first stage in the foreclosure process. Basically, it starts when you are late in paying your monthly mortgage payments. Mortgage companies know that you *could* accidentally forgot to pay or pay late, so you will get written notices and/or calls. DO NOT IGNORE THEM. Pay up and nothing will happen except for a "late payment" entry in your credit report. If you missed payments for SEVERAL months, then you proceed to the next stage. Lenders may or may not publish this information.

STAGE 2: Foreclosure notice, the second stage of the process, is where you get a formal letter that your house is being foreclosed on. There will also be a formal notice of foreclosure posted in your local paper's classifieds, and perhaps, even notices posted at or near your property's location. An auction date/time is given. Once you get the actual notice of foreclosure, you have a deadline after which the property is no longer yours, unless you buy time with delaying tactics. This is public information, so be prepared to be solicited by various "rescue organizations", scammers, investors, and even a few genuine helpers.

STAGE 3: Reinstatement period, may or may not exist depending on your local jurisdiction. Basically, it gives you a chance to get the loan reinstated (i.e. foreclosure cancelled) if you pay all the late payments plus penalties, fees, and so on. If you can't, you go onto next stage. You should get reinstated as much as possible, as you just have to catch up on payments and penalties. HOWEVER, you CANNOT just send in the missing payments as the lender will not accept it. Instead, you will have to talk to their rep and specifically pay the reinstatement cost and penalties and such.

STAGE 4: Fourth stage is the actual auction or sale of your property by the sheriff on local courthouse steps. An investor will likely buy it for less than market value. If nobody bids, then the lender gets the title back and property becomes REO (by lender). The sale / auction usually happens once a month though it can be more or less often depending on the jurisfiction, the number of properties that needed to be sold, and so on.

STAGE 5: Redemption period is the fifth stage, where you still have one more chance left to buy back the property from the buyer at the sale/auction (or the lender, if it ended up back with them), plus various fees. Basically, you have to pay the ENTIRE MORTGAGE to keep the house. It starts right after the sale. Exact procedure will vary by jurisdiction. Keep in mind that redemption period can as short as 15 minutes, and some states don't even have redemption periods, so don't rely on this to keep you in your house. On the other hand, some states allow up to a year in redemption period, giving you a lot of time to do something else.

STAGE 6: The final stage of foreclosure is the eviction, where agent of the new owner, along with law enforcement officer(s), come toss you out along with all your belongings, if you haven't moved out already.

There are defensive strategies you can employ at all stages except eviction, depending upon your circumstances and intentions. Your options essentially falls into three categories:

* save the house -- if you have a lot of equity and your finances will recover, then temporary borrowing and some belt-tightening should get you through this period. The earlier you act, the less you have to borrow. At stage 1, you just need to borrow a payment or two's worth. At stage 3 you need to borrow all missing payments PLUS penalties and fees. At stage 5 you need to borrow the entire remaining amount of the loan plus penalties and fees!

* sell the house -- most people who were laid off need to trade-down to a smaller house that they CAN afford payment on, so the original house need to be sold. You are under time pressure, so you should hire an good agent to sell it in the least amount of time. Even if the house don't really sell, you can use that and the information developed (such as the amounts offered) to help you make a case to the lender to accept one of the alternatives, such as short sale, where the bank accepts amount LESS than amount owed as "full payment". This can be done all the way up to the end of redemption period. If you are older (say, 60's) and you have a lot of equity in your house, you can do a reserve mortgage, where you live off your equity in the house.

* give up the house -- if your house really can't be sold, then the goal becomes damage control, as you need to limit the damage to your credit and finances. There are a few options remaining. One of them is deed back. Basically, you just ask the bank of they will simply take the house back, and you give up ALL your equity in the house. If you don't have much equity in there, and the house is in a relatively hot market, the bank may accept it, but you will need to show that you have at least TRIED to sell at a reasonable price, and gotten no offers. As a final option, you can declare bankruptcy and liquidate all your assets, and tell everybody, that you have no money left, so stop coming after me. You will lose the house, but that's a given.

So what should you do? That depends on the amount of time available, resources available, and what are your ultimate intentions (keep, sell, or give up?) But you can't decide until you have all the stuff and evaluated all the options. There are no miracle cures.

6 signs of stocks to avoid

2010-01-07T12:00:00.000-08:00

Peter Lynch could be called a contrarian investor in many senses, and it is with good reason: so-called hot industries and hot companies are driven up by EMOTION (I consider social pressure an "emotion" here, as "need to conform"). Once the emotion is spent, the company fizzles, and stock price nosedives so fast and so far it'll give you a nosebleed.

Advice 1) AVOID the hottest company in the hottest industry

Why? three main reasons:

a) hottest company have stock prices inflated by speculators, which in turn attracts MORE speculators, which fuels even FURTHER price inflation, until it all inevitably comes back down.
b) Hot industry attracts competitors, unless you got an exclusive niche you can exploit. Xerox was so famous, their name is synonymous with "photocopy". However, when IBM, Kodak, and various Japanese companis got into the copy machine business, Xerox stock prices tumbled, and never really recovered.
c) trend comes and goes, and so do fortunes of the trend-riders. 20 years ago carpet was the hottest thing. Now wood flooring is preferred. When will it switch back to carpet? (Robert Kiyosaki called it "flavor of the month" in Rich Dad's Guide to Investing, I think it was)

Advice 2) AVOID "the next ________"

Promoters will try to explain that this new company is the next _______, and name a hot company. That is usually a bad sign, because a) it is in a hot industry, and b) it is competing against someone else already more established. While this company may have the better product, the risk is tremendous as you can't predict how the market fight will turn out.

When Circuit City stores launched to their success, clones started appearing. Highland, Good Guys, Crazy Eddie... except they all died, and later, so did Circuit City (as a brick-and-mortar retail shop). Most clones are just that: clones, and not as good as the original, unless they truly are different. And if they are different, why would they be described as "the next ________"?

Advice 3) AVOID "di-worse-fications"

Some corporations, flush with cash due to several years of good earnings, instead of helping stockholders by either stock buyback or dividends, decided to go on an acquisition spree, and often in unrelated fields (to their own core business). This is a very bad sign, esp. if they are jumping into unknown territory. Why? a) acquisition usually means paying ABOVE market price, and b) being unfamiliar with the new firm is bad for business. As a result, BOTH companies lose money, and may never rebound. In a few years, the parent company announced a restructuring, and sell off the acquisition at a low price.

The only ones who really gain from di-worse-fications would be the stockholders of that smaller company being acquired. The company selling may be worth checking for turnaround potential, as is the smaller company being divested. It may be also worth an asset play.

So how do you tell good acquisitions vs. di-worse-fications? Look for synergy between the acquirer, and the acquiree. Say, a hotel chain buys a restaurant chain, or restaurant supply chain, that would sort of makes sense, as hotel needs a lot of food and food-related equipment. There is synergy there. However, there would be no synergy if a hotel chain buys an auto parts store chain.

What if the acquiree is some sort of a conglomerate that has a bit of everything? A proper acquisition would acquire the parent, then quickly sell off or spin off the parts that the acquirer doesn't need. If it doesn't, the acquirer's stock should be avoided, as it's clear the management doesn't have a plan or clue.

Advice 4) AVOID "the whisper stock"

The "whisper stock" is something recommended with a whisper, as in "come here... closer. This one looks really good, but it's a longshot... I am telling you this because I value you as a friend..." kind of a whisper. In other words, it's a super-longshot. It is probably a small/tiny company, working on something exotic, but definitely "new and exciting". Could be working on something that may solve some sort of a major problem, like diabetes, oil and alternative energy, jungle remedy (it was noni juice, then mangostreen juice, now acai berries...), some sort of miracle additive that'll revolutionize SOMETHING... Basically, the solution they offer are a) very imaginative, very exotic, or b) impressively complicated techno-jargon-y.

Whisper stocks have an emotional appeal because they look good, at least upon initial glance. They appeal to your "cheer the underdog" instincts, as well as appeal to your greed ("this may be the homerun!"), and even the feel good side (I may be helping saving ______!) The problem is, they, almost without exception, die on the vine, because they have no fundamentals to back up the company. They do the razzle dazzle with some slick presentations, some Ph. D.s talking, some impressive looking labs and whatnot, some high hopes, and some cash from the stock offering, hoping to get some big names attached to the project. There would be no earnings until something useful comes out of that lab, and the rest, well, is mostly smoke and mirrors. Usually such stocks stay worthless and simply folds when it runs out of capital.

Beware of IPO mania, which is a subset of this problem. A lot of the exciting IPOs have speculators drive up the prices multi-fold the first day, making them way too inflated to be worthwhile, unless you were able to buy in at the IPO price, then sell it the same day and cash in the profit. Way too risky, unless you have a huge portfolio to cushion you if you mess up. Lynch recommends you should only buy IPOs of companies that were already in business, either as a private company, or got spun off an existing company, and thus, already have an operating record.

Advice 5) AVOID "one-client" companies

If the company makes stuff, and only one (or a few) clients buy them, then the company is in tremendous risk. That client has enormous leverage over the company to extract price concessions, payment terms, and other stuff... even MORE so if that company has competitors.

Just to give a theoretical example... Let's say, uh... Western Digital, who makes hard drives, currently only sells to Dell Computers (in reality, Western Digital sells retail, wholesale, OEM... all of it). If Dell says "we're a little tight on cash. You'll get paid in 30 days instead of Cash-on-delivery", what is WD going to do? What if Dell says "lower your prices another 10% or we'll switch to Seagate (another computer hard drive maker)"? Or worse, "we don't need you any more. We decided to make hard drives ourselves." (as I said, it's just an theoretical example to illustrate the point)

Such companies, no matter how successful, should be avoided. You never know what their clients may do... especially when some sort of a market pressure, such as bad economy, heavy competition, and so on, starts to show.

Advice 6) AVOID the "trendy name" companies

UAL, parent corporation of United Airlines, changed its name to Allegis, as apparently UAL sounded too dull.

A lot of people, believe it or not, decide to invest in a company because it sounded good. That is simply illogical, but it's true. If the company name has "tron" or "tech" or some nonsense made-up name that sounded good, it may get investment whereas an incredibly dull name like "Crown, Cork, and Seal" or "Seven Oaks International" would not.

So you should do the exact opposite, if only to avoid the mob effect.

A very morbid investment

2010-01-04T12:00:00.000-08:00

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The business of "life settlements", is a morbid one, and unregulated, but there is an opportunity there, for both the buyer, and the seller, and the agents in between.

The idea of life settlement is very simple. Someone bought a nice big chunk of life insurance with "cash value". It's part life insurance, part savings account, so to speak. If the holder surrenders the policy, he gets the cash value back, and that's it (assuming he pays the annual premiums). If the holder dies, the insurer pays out the benefit amount to whoever the holder chooses. So say, you're old, you can no longer keep up the lfie insurance policy yearly payments, and the cash value is negligible, you can opt to sell the policy to a "life settlement investor" (through brokers, escrows, and whatnot), and yield bigger returns.

Forbes Magazine gave an example recently (October 5, 2009 issue, page 48, "Death Squads"). An 82-year old, in so-so health, has a universal life insurance for $500000 upon death. However, the cash value for the policy is a mere $7000. His annual premium is 35000 (i.e. he had to pay that much for the policy to remain in effect). He eventually sold his policy and yielded 224000, which, after various fees and commission, netted him 183000, much better than 7000 cash value, but MUCH lower than his 500000 insured amount.

And in case you are wondering, this is perfectly legal, because it was a Supreme Court ruling at the early 20th century that gave the insured rights to sell their policy to others. And now, in bad economic times, business is booming, as people are still hoping for high returns in a down market.

This is a morbid business, no other way to say it. As an investor, you are basically hoping that the insured keel over as soon as he signs over his policy and get paid. The longer he stays alive, the less return you yield.

In the above case, the investor has basically taken over the policy of that 82-year old. The investor pays the $35000 yearly premium, and gets the 500000 benefit upon the insured's death. Minus the 224000 he paid, he is basically betting that the 82-year old dies within 10 years, the sooner the better. He probably had medical experts go over the insured's medical records and render their "expert" opinions on how many years the man is expected to live, and often, the insured is required to give annual checkups or health updates.

The insurance industry is NOT happy about this, but they can do nothing, as it is completely legal. It also messes up their actuarial calculations (i.e. probability studies) as a lot of their profit comes from surrendered or lapsed policies, and policies sold to investors are something they have a hard time predicting. You can be sure the insurance industry won't help either side.

As the insured, you need to beware that this is NOT a well-regulated industry, therefore your legal protection is minimum, and a life settlement process can take MONTHS during which your life's history will be gone over with a fine-toothed comb to ensure they know EVERYTHING about your medical history and thus can evaluate your life expectancy. Brokers and investors are out to make money, not to help you reach the best decision for you. Fraud is rampant, and you may be easily cheated out of more than you should. As mentioned before, insurance companies won't help you as they don't want you to sell in the first place; it messes up their calculations. You will also need a tax advisor as sometimes this sort of settlement is taxed heavily depending on the details. Brokers would not warn you about things such as taxes. You need a consultant to go over ALL the options with you, and you need to pay this consultant out of your own pocket, just to make sure he is doing this for YOUR benefit.

As an investor, you also need to be aware that this is not a well-regulated industry and full of people who want to make a lot on commission (could be 18% or so) on the settlement amount, so they are out more for the commission than for YOUR benefit. And with new medical treatments and medicine every day, and health care reform on the way, life expectancy is going UP. On the other hand, baby-boomers are reaching their retirement years and the the rising cost of geriatric care is forcing more and more seniors, who bought those policites long time ago, to consider selling them to raise cash. It is an opportunity, but it is risky, and someone else's life is not exactly under your control.

There are money to be made in this arena, but the risks are tremendous, even worse than the stock market, much worse. Let both sides be aware of the risks.

Three Types of Interpersonal Power

2009-12-31T01:19:00.000-08:00

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Dr. Blaine Lee in his book "The Power Principle", have identified 3 types of interpersonal power, i.e. how does one person gain influence over another. This has tremendous implications for everybody, not just managers, but also investors, or even people in general. The three types of power are:

* Coercive power: you will do so because... I am telling you so! (and if you don't, something bad may happen to you or others!)

* Utility power: you will do so because... I can do something for you! (i.e. quid pro quo, backscratching, and so on)

* Principle-based power: you will do so because... You believe in what I believe (or stand for, or hope to achieve)

The powers can be used for good, or evil. That is not the point tough. Let us analyze each type of interpersonal power, and see how each one works, and how you can tap them.

Coersive Power

Coersive Power is the easiest to recognize, easiest to spot, yet probably the weakest, because the moment the coercion is gone, the power is gone as well. Just look at Saddam Hussein and Iraq. The moment American forces toppled him, and most of the officials and security forces decided to hide, the streets decayed into total chaos. Museums and banks are looted, and total anarchy resulted. Iraqis feared Saddam because his secret police are everywhere, and people simply disappear. The moment people know his forces are no more, they erupted, and destroyed government symbols even before the Americans arrived.

Despite what you may think, military does NOT work by coercive power. While it is true that higher rank can order lower rank around, the real principle of military is governed by principle-based power. Most military recruiting uses patriotism, like "Honor, duty, country", to entice you to join up and to get you to stay in, and honor is held above all else. In fact, one of the worst crimes to be accused of in military is "dereliction of duty", in other words, not doing what your principles tell you to do.

One more reason why modern military no longer use "conscription"... it's hard to train soldiers who are not morally motivated. WW2 conscription works because we "know" Germany and Japan to be "evil", because they attacked us, and serving the country, even if conscripted, is the honorable thing to do. Vietnam conscription did not work because we can no longer justify the VC and NVA to be "evil" when they look just the same as the people who we are trying to support, and they didn't exactly attack us, among other problems.

Coersive power can be a physical threat, actual physical violence, or even psychological threat, such as exposing taboos and such. Terrorists use coersive power of fear to influence events. Blackmailers use "shame" tactic to implement power of fear. However, the moment the threat is stopped, there is no more power. Thus, it is at best a short-term solution, and one that can backfire. The longer you use it, the worse the results. Think of it as a bottle of soda, except you're forcing more gas in as well as holding the cap down. Eventually there'd be so much pressure inside that the either the cap flies off any way, or the bottle will burst.

Just look at Iraq, before and after Saddam. It is taking the US a LONG time to get things back under control, by using PBP (your own army have to step up and take over, as it is your own countrymen you are protecting), and sometimes utility power (we're rebuilding the power station and water distribution, you'll have to form a militia to protect them, for your own sake). It took the US forces a while to learn that while killing insurgents helps, it's not the whole answer.

Utility Power

Utility Power, i.e. backscratching, is probably the most applicable in Western societies, i.e. capitalism. You do something for me, I do something for you. One chooses to be under the influence of the other without any sort of force involved. Employment is the most often seen version of utility power, but politics can be as well: vote for me, and I promise this, this, and that for you.

This is definitely better than coercive, because both parties "joned" of their free will. However, the effect of this power is also fleeting. The moment what is being offered for the inflence is no longer acceptable (i.e. either stopped, or a bigger-and-better-deal came along), the influence evaporates. That's why one reason police frowns upon paying informants: you don't know if they're really trying to help, or they're just after the money.

Utility power can be a longer-term solution, and really has no "negative" consequences (i.e. no backfire), unlike coersive power. However, it is not as powerful as principle-based power, because a bigger and better deal can come along at any time. Loyalty at work is a somewhat outdated concept... You work whereever you're paid the best.

An alternate form of utility power is known as "The Godfather Power". I do you a favor now, but I expect to collect sometime in the future.

Principle-based power

Principle-based power, or PBP, is the most powerful and long-lasting type of interpersonal power, because it is based on a common belief. Volunteerism and Public Service are based on PBP, because the volunteers believe in the cause, in service the community, and so on. Please note that this is NOT about the morals or religious believes. Principles are common to ALL religions, and beyond. They are universally held truths.

The best leaders in the world used this to gain influence over a LOT of people. Hitler is one example. By tapping into the German pride in the post-WW1 despair, he was able to raise a group of core supporters, and eventually galvanized the German people by appealing to their pride and honor of the German nation. Unfortunately, he also blamed the Jews for everything, and decided to conquer Europe (and nearly succeeded).

I remember reading a story about how the British explorer, needing a team to explore the North Pole, wrote an ad in the paper that's like "... chance of safe return low to nil, fame and recognition upon return..." Little money was offered, yet a LOT of people answered the call. I mean a LOT of people. There's nothing but honor to offer to those who are willing to accompany him, but that was enough.

People join churches because they share the same belief, not necessarily because the church offers them something (utility power).

With principle-based power, there is no "exchange" involved. People voluntarily let you influence them because you share a common belief with them. It's more like "alignment" of your interests and beliefs. As long as you held your course (your principles), and they held the same belief, the power remained undiminished. Unlike the other two types of powers, this one requires little to no "maintainence". Thus, it is the strongest of the three powers here.

Combination of Powers

By combining more than one power as listed above, one can achieve even more than just one power alone.

The South American drug lords have a saying: "plata, o plomo?", translates to "silver or lead?" Or in other words, do you wish to be paid for your cooperation, or should I put a bullet in your head now? That is a combination of coercive power and utility power.

Today's American military use honor and patriotism as principle-based power (PBP) to get you to join up, but also offers a lot of training, lodging, other benefits, as well as a host of retirement benefits and educational benefits (the new G.I. Bill) when you get out (utility power). Army also has a formal justice system to punish any one who got out of line... "court-martial" (coercive power).

Same as the army, businesses combine PBP and Utility Power (i.e. the "mission", as well as the the compensation) to entice the employees to work hard(er). Companies also have formal disciplinary procedures, usually written out in employee manuals, to determine what punishment to mete out if an employee steps out of line, from suspension to termination of employement (coercive power).

Even religion works the same way. While religion teaches what it holds as universal truths, such as the "Ten Commandments" for the Christian/Jewish faith, and asks you to follow those principles (PBP) through examples of the Messiah / Messenger / Prophet, it also promises rewards (utility power) if you follow, and "hell and damnation" if you don't (coercive power).

These powers really work in concert with the other two. By leveraging all three together, you achieve far better results.

What's more, different people respond a bit differently to the three powers based on their personality.

Three kinds of people

People react to the three types of power differently.

People motivated by fear will react best to coercive power. Fear of losing job, fear of being ostracized, fear of death, fear of pain... the list goes on and on.

People motivated by greed will react best to utility power. That's why bribery still works, and kickbacks still exist. And employees will move to companies offering "bigger and better deals".

People motivated by principles will react best to principle-based power, but only to leaders who hold the same principles as s/he does. They need to have honor in themselves, and hold to their principles.

Most of us react to all three powers in our own unique mix, and as times go on the mix will change. When we are very young, we care more about the first two powers, and that will continue through our teenage years. It is not until we're in late high school / early college when we start to develope our principles, and with our growing independence we start to develope our receptiveness to principle-based power and align ourselves with certain causes. Once we entered "the real world" after graduating we became more "practical" and use/receive more utility power and despise coercive power. Later in life, when we want more security, we'd tolerate a bit more coercive power (i.e. nursing homes, retirement communities).

Our upbringing and environment has a lot to do with our receptiveness to the three types of power as well. Many immigrants who came to the US from oppressive countries absolutely despise police due to their experience with coercive power. Western societies value principle power and utility power whereas Eastern societies value more principle power and coercive power, which accounts for some of the differences in the world view.

Another factor in experience is religion. In my experience, there are two kinds of churches (and I mean religions in general, and "churches" within the religion)... those that teach love of God, whatever his name (principle power), and those that teach the fear/wrath of God, whatever his name (coercive power).

The other three kinds of people

If you look at the powers in a different way, you'll see how the three powers influence different kinds of people.

When you have nothing but your life, and even that life way be rather worthless, you are no longer motivated by fear or greed. You only have principles. One reason why most revolutionaries are poor.

On the other end of the scale, if you're rich enough that fear and greed are no longer major factors in your life, then you're into principles as well. One more reason the rich are into philanthropy.

When you're poor and there is no greed to be had (don't know of any better opportunities), then you're motivated by fear, like your family starving, dying, and so on, and a bit of principles.

Once you do know of better life, then you would be motivated by greed, and partially by fear of backsliding. Sometimes, fear and greed can overpower principles.

Have you tried the three types of power on your children? Or have them tried on you?

I am sure you have, and until the children develope a sense of honor and pride, you can only use coercive and utility power. The three types of power end up looking this like:

Coercive power: "Unless you do your homework, you are not allowed ANY TV or game time!" In other words, do it or you will be punished!

Utility power: "If you do your homework for a whole week, you'll get $70." In other words, bribery.

Principle-based power: "Son/daughter, Daddy and mommy would love you no matter what, but for your own sake, you need to do your homework. You need a good education for yourself, so please don't let yourself down."

The last one is hardest to wield, but also the most powerful in the long-run. It appeals to the children's honor in themselves. Thus, you have to develope that honor first, THEN you can apply the power. It requires a lot of setup.

The school system is intolerant of bullies because bullies make their victims feel worthless, which is the antithesis of believing in themselves. And without the belief, you can't apply PBP. The best teachers encourage students by building their confidence, as well as teaching them knowledge. The best teachers apply principle-based power.

In Conclusion...

When it comes to the B-I triangle, mission is the the foundation of the whole thing. Without a proper mission, the business or investment is doomed to failure, because you cannot appeal to employee's honor (principle-based power), and can only influence them via utility power (compensation) and coercive power (disciplinary actions), which are not that strong and requires maintainence. The stronger the mission, the better the PBP will influence the employees.

The best managers (leadership) use all three powers in concert to influence/inspire their employees. "Team spirit" is nothing but principle-based power applied to concept of a "team", and so are most employee awards. Good pay and benefits (utility power) also help. And finally, a little threat to punish if people get out of line (coercive power) is enough to keep a team running.

Three Types of Work in Getting It Done, or GTD

2009-12-28T01:16:00.000-08:00

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David Allen, author of "Getting Things Done", or GTD, is one of the best known "productivity gurus" known today. GTD itself is a well-thought-out system that deals with every aspect of work, from optimizing the process to optimizing output, this got it all.

So how can GTD help you get rich? Let's analyze some aspects of GTD. Please note that this is NOT an attempt to teach GTD, but rather how GTD can be applied here, and everywhere.

GTD defines three types of work:

* work that has been defined (in other words, a "to do" list)
* unplanned work (i.e. sudden interruptions, minor emergencies, etc.)
* defining work (in other words, figure out what must be done)

Depending on your responsibilities, the mix will be different. If you're an employee, you'll have mostly defined work. If you have more responsibility, like supervisor or manager, you'll do more defining work for self and others.

And this "work" is anything that needs to be "worked on", not just "job" work, but work in general. To buy wife flowers is work. To get car's oil changed is work. To pick up daughter after sports is still work.

The problem with the three types of work is that the mind tends to AVOID "defining work". We often consider that sort of time as "wasteful" "not doing something", even though it's actually often the MOST productive time possible, but we'll get to that later.

Of the remaining two, we TELL ourselves that we prefer planned work, which is why we plan everything, from dinner parties to weekly scheduled meetings. However, "unplanned work" usually takes over and planned stuff got shove aside. Unplanned work is often "urgent" and it gets the adrenaline going. However, if they only do unplanned work, their overall productivity will be lower, as they don't spend time defining work, or doing defined work. I call this "firefighting". People who do this jump from one fire to the other, leaving no time for anything else. They would appear very busy, as they constantly jump from one thing to another, but by neglecting the other two types of work, they are actually much LESS productive as they appear to be.

I have a confession to make: my dad is one such person. He does no long term planning at all, and very little time defining work. The only thing he plans would be the various jobs which he keeps in a calendar. Everything else is ad hoc (i.e. in his head, to be decided when the problem comes up). As the general manager of a company, he should be in an office, deciding what is important for daily operations, and delegating actions to various employees, and only occasionally venture outside to the workers. Instead, he's chosen to keep everything in his head, and only delegate when he thinks he's overwhelmed or doing something. As a result, he deals with unplanned work 95% of the time. He's almost always on the phone (the problem of NOT having a secretary, and giving away his own phone number too often), answering one query after another (define jobs as they come up). In fact, he uses the phone so much, he doesn't even think about how ridiculous some of his delegated tasks are.

One such example: he would call me to call someone else and tell that someone else something. Yes, that really is as stupid as it sounds. Why couldn't he just called that person directly? That's the result of doing way too much unplanned work; He can no longer define work properly. If he had actually defined the work, (i.e. created the action item, like "tell Mr. A about topic X"), he'd actually have realized that the task can be those 2-minute-do-it-myself-now tasks. Instead, he's doing something, then he somehow realized he hasn't called Mr. A back yet about topic X (the reason doesn't matter), but he's can't switch gears (may be in a meeting), so instead, he delegate "ad hoc" without thinking about the real priority of the task, by ordering me to call Mr. A about topic X. That's assuming I actually KNOW about topic X, and I know who Mr. A is.

Or as I read somewhere else (I admit, I forgot where) "If you're are fighting fires all the time, you're NOT doing your job." Think of firefighting for a moment. While certainly it would be fun fighting fires, it's actually better to have PREVENTED fires to start in the first place, wouldn't you agree? After all, even a small fire does a bit of damage, and if you manage to miss one, even for just a short while, it can get serious really quick. As Rich Dad (tm) said, "if you can't leave your post at a business you started, what you have is a job, not a business."

Why do people prefer to do things ad hoc (i.e. no plan?) ? Two reasons: 1) our mind tends to IGNORE jobs with incomplete requirements, and 2) we often need our job as validation of our self-worth.

People's conscious and subconscious mind are processing things all the time. And the mind knows if something's not defined completely, and will automatically skip over it as it can't be done without even MORE work. For example, what's the difference between these two tasks?

* change oil in Volvo
* call local Jiffy Lube (tm) at XXX-XXXX and make appt for Volvo's oil change, this Saturday morning, or Thursday just after work

The first task is incomplete. There are some missing pieces, unless you're the kind of guy that actually changes your own car's oil. Even then you have to drive down to an auto parts store and buy oil filter, filter wrench (unless you already have one), plus oil bucket and a small ramp or back. It's a full project. For most of us, we go to a quick lube place and let someone else do it. Your mind upon reading this task, automatically ignores it because it can't do anything about the task without more information. The second task is complete, can be done by someone else, or done by you in 2 minutes, with no further information needed.

Another reason why people actually *do* unplanned work is that they need to feel important. The job is the source of their ego. If it's the company they started, then hubris/ego becomes a big part of it. The more "problems" they solve, the better they feel about their own abilities. Remember, PREVENTING problems doesn't look as good as SOLVING problems. Some "bad" firefighters actually SET the fires so they can fight it, and thus look good. I am not saying that a business owner would actually sabotage his or her own business, but it may be an subconscious decision.

Or put it another way, it justifies the founder's continued involvement. The founder does not realize that the ideal business runs itself, minimal supervision needed. Their entire self-worth is dependent upon the job, not the business. It could also be that the business has some fundamental problems that requires the continued hands-on treatment. Instead of solving the fundamental problem, the founder instead prefers to deal with the symptoms, partly due to cost of the fundamental fix, partly because s/he doesn't know how to fix it, and partly due to emotion (both ego, and fear). All are dangerous.

The point is: if your business system is good enough, 95% of all work should be PLANNED, and the managers / supervisors will be doing mostly DEFINING / PLANNING work for the employees, in other words, the other 4.9% of the stuff. Unplanned work should the rare exception, the remaining 0.1%, not the rule. Think about it: What kind of problems a McDonald's restaurant would run into that can't be handled by their "system"? Very little, as the existing company policies and guidelines take care of almost everything, from how long to cook each side of the meat patty to what to do in case of an armed robbery. I mean, a branch can be run by kids! In one or two cases where the training doesn't cover, problems are exposed. Any one remember the crazy case where the supervisor was told by some pranksters pretending to be police, over the phone, to do a strip search on an employee? Or the case where the driver with no arms (and drivers with her feet, perfectly legal), handed over the money with her foot, and freaked out one of the drive-thru employees? Both should be handled by on-duty manager, who then must make the proper decision then and there.

As an employee, you're often told to be more "pro-active". What they really meant is instead of waiting for your supervisor or manager to define the work, you should define the work yourself. That shows that 1) you have skill to spot the problem 2) you have brains to SOLVE the problem and create the right work, and 3) you have the welfare of the company in mind. In other words, you have "initiative", and don't need to be told what to do next. It's also sometimes called "low-maintainence", as supervisors don't have to constantly "ride" you to keep you productive.

Thus, to solve this problem of skipping over tasks that must be done, you must define it clearly, so that it is VERY easy to do, you can't be confused about it, and even if you delegate it to someone else they can immediately pick it up and do it without further input. And second, you must realize in your heart that the business is MORE than your ego, even if you are the owner and founder. Unplanned work is fine, but never actually DEFINE work will only burn you out in the long run.

The rest of GTD explains how to process individual action items at the "ground level" to ensure maximum efficiency, and that is not relevent to the discussion here. The point is, having goals and perspectives are important, but having the RIGHT goals is even more important, and most people neglect the goal of "defining work".

Investment lessons from Warren Buffet and Bill Gates

2009-12-24T01:13:00.000-08:00

PBS Logo via Wikipedia

PBS played "Buffet and Gates goes back to school" the other day, and there are a lot of good lessons for investors. These are not in particular order, and are NOT the exact words uttered, but the meaning is accurate.

Gates: Warren [Buffet] taught me this, "Be good at saying no."
Buffet: Save "yes" for important stuff.

Investment-wise: Buffet had said it before, you don't need to invest on every "good" stock that comes by. There is no need to "swing" at every pitch. They meant time management, but it works for investment as well.

Buffet: Outer scorecard is hollow when it's all through. Keep your inner scorecard to be happy internally.

Investment-wise: When you invest, you can't worry about other people's opinion of your investment. Your investment is your problem, your responsibility, and nobody else's. You are investing for yourself. Thus, your own inner scorecard is the one that matter.

Buffet: investing is about thinking for yourself. Groups get homogenized, and brilliant decisions do not come out of a committee.

Investment-wise: If you follow the crowd, you will be late to the party. You can't wait until like X analysts decide your stock is worth investing. Analysts are people too, they hang in groups, and they play "follow the leader" also.

Gates: Advisors should be good at spotting your blindspots and alerting you to them, but should not give you decisions.

Advisors are there to advise, not to make the decision FOR you. They are there to make sure you have considered all angles, or perhaps be aware of a new perpective on the problem. But at the end, you must make your own decision. Else you are letting a committee decide for you.

Buffet: Most investment mistakes are one of omission, as in "things that were not done", instead of an outright "I invested in the wrong company".

Buffet went on to point out that because he doesn't understand tech, he missed out a lot of the opportunities tech companies could offered. And there are plenty of OTHER companies, that he KNEW were good opportunities, but for one reason or another he did nothing, and the opportunity expired. Those he considered his mistakes, but he know they're mistakes.

Buffet: Triumphs are partly triumphs because you can and do make mistakes. Don't dwell on the mistakes, just learn from them and move on.

In other words, if there are no mistakes, there are no triumphs. If there are no darkness there would be no light. And so on. Accept that you can and will make mistakes. No one can be right all the time. Risk is a part of life, especially investing. Learn from the mistake and move on.

Buffet: Surround yourself with high-grade people.

This corresponds with Rich Dad's advice: "Don't be average." Mr. Kiyosaki said once in a seminar (by phone) for an average woman to look beautiful, she should surround herself with three ugly women. It's a joke, but the lesson is people do tend to seek similar people, as a part of one's social needs. Thus, they end up like their peers: average. If you surround yourself with high-grade people, you will rise to their level.

Enjoy the lessons.

Public Speaking Confidence

2009-12-21T00:57:00.000-08:00

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Most people communicate just fine, yet most are extremely uncomfortable speaking in front of crowds. This is usually caused by two problems: presentation, and confidence. There's a third cause, topic, but usually you don't get to choose that. Howeve,r you can often make up for a boring topic by having a good presentation, and a lot of confidence.

Presentation includes a lot of things, from having the right "hook", to a bit of theatrics, humor, involving the audience, and so on. Most public speaking courses focus on presentation techniques, and you can pick up plenty of books on that topic, such as "scan the room in concentric patterns, slowly, from outside in", "present the proper body language", and so on. While they are important, they are practical skills. In terms of the military, presentation techniques are tactics: what you do DURING the battle. You also need to have the proper strategy: what you do BEFORE the battle. That's where confidence comes in.

Confidence is more than simple courage of standing up on stage and face the crowd. A lot of people think that confidence is same as self-esteem. That is VERY WRONG. No amount of mental tricks will give you self-esteem when you have none. Confidence is knowing the material, having practiced the delivery in rehearsals, unlearn any bad habits you may have picked up before, and basicaly speak from your heart, about something you believe in. The problem is most people somehow attribute these things to born talents, like "born speaker", when in fact they have just picked up some very bad habits along the way.

A lot of problem in communication starts young, VERY young. Younger than most people expect. In fact, many problems in communication are best solved by therapists, not speech coaches. Thus, communication problems are NOT solved overnight. There is no "aha" moment where you flip a mental switch labelled "great orator" on. That is simply not possible. In fact, there are a LOT of self-denial going on when it comes to public speaking. Often, you'll hear stuff like "It's not me / not my style / not in my nature" or similar excuse. Frankly, that is... BS.

There is no such thing as "my nature". I am NOT going to debate "nature vs. nurture". It's clear that you do have genetics, and they do influence you. However, what genetics do is give you a set of tinted lenses for you to see life's experiences. It's the PERCEPTION (alread tinted) of these events that shapes your mind. And with enough training, you can see PAST the tint to the real events. On the other hand, it is also possible to look at the tint, and see things that are NOT THERE. And that is where problems develope.

All of us are shaped by experiences we picked up when we were young, all the way until we die. It is simply the way we live. And each of those experiences are "tinted" by our genetics, and previous experiences.

If our taste buds are not that sensitive (regular, instead of "super-tasters") then food doesn't quite taste good to us than to the super-tasters. Same food, different experience. If the food was served in a romantic restaurant with an enchanting partner, vs. someone you can barely tolerate, same food, different experience. If you have had good experience in this retaurant vs. a bad experience, and you came back, same food, different experience. Your perception of the current event is tinted by your prior experience, and genetics.

Thus, while genetics may influence your confidence, don't BLAME it for your lack of confidence. It is merely one more factor you have to compensate for, like audience, topic, facilities, and so on.

Another component of confidence is familiarity of topic material. If you know the topic really well, you will be far more confident than if you are not familiar with the material. However, there's no such thing as "material speaks for itself". Even a brilliant topic can be sunk by a sub-par presentation. And because you are the one speaking, people see the topic via your performance. A great speaker can make mundane exciting, and a bad speaker can make exciting mundane.

Yet another component of confidence is self-esteem. Self-esteem is one's faith in one-self. Self-esteem is NOT confidence. While presentation skills can easily be taught, lack of self-esteem is an endemic problem that takes time to resolve. People with low self-esteem often do NOT take criticism well, and can be quite belligerent, as they have learned the "best defense is a good offense" technique as a coping mechanism. They need to unlearn the coping mechanism to communicate effectively. In fact, very often, people who appear to have the most self-esteem ("I don't have a problem!" "I am doing just fine!" "I don't need any help!") actually have the least, but that's a problem between them and their therapist.

Yet another component of confidence is proper body language. We all can spot people who looks insincere. Their body language and their eyes give them away. They don't fully believe in what they are saying, and it shows in the body language. You would not trust a TV news anchor that reports even grisly murders with a grin on his or her face, would you? On the other hand, one can also get into the habit of using bad body language all the time. When the body language do not match the verbal language or facial expressions, the audience knows you are not being sincere.

Public speaking is a large subject, and many speech coaches don't learn about the players and determine the true cause of the communication problems, but instead present sound-bytes that are short, succint, but may or may not apply to you. To truly upgrade yourself, you need to know yourself.

Peter Lynch's 6 Stock Archetypes

2009-12-17T12:00:00.000-08:00

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Peter Lynch classifies all stocks into roughly 6 categories: slow growers, stalwarts (mid-growers), fast growers, cyclicals, asset plays, and turnarounds. Later, he also gave some human equivalents.

Why human equivalents? Human beings are a lot like businesses. Businesses, like human beings, even if they haven't earned anything, have the POTENTIAL to earn. A 12-year old child has more potential to earn (mow lawn, lemonade stand, etc.) than probably some 80 year old in a nursing home, even though the 12-yr old has no history of earning, while the 80-year old have a very long record. Add up the assets, and the liabilities, and you end up with book value (or in human terms, "net worth").

Slow Growers

Slow growers are extremely stable, like utilities are now (they were fast-growers back in the 1960's). If it pays a generous and regular dividend, it's probably a slow grower. Figure, 2-5% growth per year, right about rate of inflation. [In general, companies pay dividend because the managers can't think of a way to expand their business using their profits, but it doesn't want to buy back its own stocks either, so they give the profit back to the stockholders as dividends to enhance the company prestige and goodwill instead.]

Utilities do NOT grow because it takes too much capital expenditure and bureaucratic red tape to get a power plant approved and built nowadays. Cheaper to buy power from a different state that has a surplus, or even Canada. Watch for signs in an industry that requires HUGE amount of initial expenditure, but those have VERY long life, and thus now has just simple operating expenses.

Slow growers are the stuff you buy when you can't find anything else. Frankly, if you ran that low, you should go buy some Treasury bonds instead.

People-wise, they have slow and steady, but secure jobs. Think teachers, librarians, and so on.

Stalwarts

Stalwarts (or mid-growers) are companies like Coca-Cola, Proctor and Gamble, Bristol-Meyer, etc. They are huge, but they either buy market share or they have retail oomph that they can generate 10-12% annual growth in earnings. If you hold them long enough, they provide decent returns. Not great, just decent, but it sure beats treasury bonds. They usually have a nice brand-name to rely on and sell consumable necesities (i.e. stuff that you need over and over again). They may periodically launch new products, usually they're big enough that one new product doesn't affect them that much.

Stalwarts should be bought and sold as they yield a decent profit, like 30 to 50%. Think of it this way: if your company was going merrily along at about 15% a year, then sudden it yielded 50% over 2 years, don't you wonder if the up cycle is about to end? Thus, shift the money around when you run into stalwarts. On the other hand, they provide a handy hedge against soft economy. Most have VERY few down quarters, if any.

People-wise, think mid-level managers in a corporation... good salary, good raises, but won't be mega-rich either.

Fast Growers

Fast Growers are smaller aggressive companies that can do 20-25% growth in earnings per year. Pick the right one, and in a few years it'll grow multi-fold. It doesn't have to be in a fast growing industry. The right amount of marketing and acquisition savvy can improve earnings as well.

The primary risk in investing in fast growers are 1) overzealous and bit off more than they can chew, or 2) underfinanced, ran out of cashflow. The former would cause it to run out of momentum. If the growth slows, the stock price will get hammered. The latter usually means Chapter 11 bankruptcy.

Fast growers need good clean balance sheets, and steady nice profits, for you to invest in. The trick is figuring out when they will slow/stop growing, and how much will you pay for the growth.

People-wise, you're looking at actors, inventors, small businessmen, musicians, athletes, and so on. They have the potential to make it big.

Cyclicals

Cyclicals are industries / companies that are affected by cyclical changes, such as economy, government elections, and so on. Travel industries like airlines and auto companies and tire companies are affected by the economy a lot. When times are good, travel is up, everything goes up. When economy is down, everything goes down. Defense industries are often affected by national policy and elections (change of administrations). Semi-conductor makers like AMD, Intel often have to make MAJOR infrastructure expenses to upgrade their technology every few years, affecting their earnings for that year or so.

In a sense, cyclicals are the riskiest investments you can make... If you bought in at the wrong time. They appear to be big and steady... Until they hit the downturn. They are often regarded as a stalwart, until their true colors show.

Timing, when it comes to cyclicals, is everything. You need to watch the company for signs of upturn, and get in then. This is where "buy what you know" comes in.

People-wise, you're looking at those with seasonal income, like amusement park workers, summer camp workers, Bering Sea fisherman (3 months out of a year, i.e. "Deadliest Catch"), even writers and actors (they get paid only when a project is on).

Asset Plays

Asset play is when the company's assets exceeds its market cap. So you KNOW you're getting a good deal. The question is... Are you sure you evaluated the assets correctly?

Lynch's example is Pebble Beach. At end of 1976 it has 1.7 million shares outstanding, and stock is trading at 14.5. So the market cap for the whole thing is about 25 million. Less than three years later, Twentieth-Century Fox bought the whole thing for 76 million, then sold off the gravel pit (one tiny part of Pebble Beach) for $30 million. In other words, that gravel pit was worth more than the entire property three years ago. It's like getting the rest of the property for free (two world-famous golf courses, the hotel, a TON of land, 300-year old forests, name recognition, PGA tournament, steady cashflow...)

Keep in mind that assets may not be all tangible, and value of an asset will vary depending on the appraiser / appraisal method. And book value is NOT a reliable indicator of true network, as it can be over- or under-valued.

People-wise, you're looking at someone who inherited a family fortune. Think of it as "what will be left after all the debt have been settled" kind of scenario.

Turnarounds

Turnarounds are companies that either pulled themselves out of a serious slump, or got bailed by by the government. Chrysler is one such exmaple, but that's during the Iacoca era, not the 2009 bailout. In fact, if you buy at at the depressed, price, it may be your biggest movers. However, it is a major risk betting on such company, as it CAN actually sink out of sight in the river of time. There are several subtypes, according to Lynch:

Bail us out or else: Chrysler, Lockheed, would have gone Chapter 11 if they didn't get a government loan way back then. Now, GM and Chrysler DID went chapter 11... AND got the loan... and a government takeover of sorts. A lot of the savings and loans and investments and banks are now in the same boat, weighed down by the wave of foreclosures when the interest rate hiked. You should wait a few months and see if the company can dig itself out before investing in it as a turnaround.

Who would have thought: Con Edison went from 10 to 3 in a year, then 3 to 52 in 12 years. They didn't need any one to help them turnaround. And it's a UTILITY, normally a no-growth/slow-growth industry! Con Ed's edge is that it finally figured out they can buy power from Canada instead of building their own plants. They can continue to earn money instead of investing in infrastructure and grow. If the price went down for no particular reason, or the company found a solution to its problem, then it's time to buy.

Where did that came from (or little problem we didn't anticipate): Three Mile Island was a problem for General Public Utilities. It took 7 years for GPU to climb out of its hole of 3.375 in 1980. In 1988 it went up to 38. However, TMI was more sensational than it looks. When there's a huge disaster, such as Bhopal disaster at Union Carbide plant in India, where THOUSANDS died, Union Carbide isn't really going to climb much out of that. GPU had government and other help in cleaning up the TMI mess, so their fundamentals are sound, thus, their recovery is almost inevitable. It's the timing, and help, that will determine whether it will turn around or not.

Spin-me-out: Toys R Us was a part of the moribund Interstate Department Stores. Once it got spun off, it went up 57 times its initial price. In fact, most spin-offs are worth considering. In fact, spin-offs are often a good sign for investments.

Restructure: a lot of companies, in their spurt of growth, got sidetracked into "diversification", what Lynch called "di-worse-fication". For example, Coca-cola, for a while, invested in fish farms and other stuff. Then during the down times, it sells off those extraneous stuff in "restructuring". Both were applauded by Wall Street when they happened. Fortunately, after a restructure, the parent company may become a turnaround, while the spun-off companies often become fast growers.

People-wise, you're looking at down-and-outers, bankrupts, laid-off workers, and so on. They have the potential of turnarounds... If they can get out of the doldrum.

So what does it all mean?

A company can switch categories several times during its lifetime. When a company starts, it is a fast grower. Then it sinks to stalwart, then slow grower. When competitors join in or new technology appear, they can become cyclical, then turnaround. If the price sinks far enough, they can become asset play. Don't "pigeonhole" a stock just because it "was" in a category.

A stock market want to know what are the chances of a company earning a lot of money. If the chances are good, stock prices go up. Else, it comes down. Thus, for very good growth, you pretty much have to bet on a relative unknown. In human terms, maybe s/he is an actor/ress that has worked in bit roles before moving to the big screen.

Harrison Ford was a carpenter before he got picked by George Lucas to be Han Solo. Who would have thought he'd be the superstar he is today? That's about finding "potential". It is NOT easy, but then, that's because humans don't have to lay their lives bare, like a company does. That's where all the P/E and P/S and balance sheets come in.

Three Types of Market Leadership

2009-12-14T12:00:00.000-08:00

Cover via Amazon

Reading the book "The Discipline of Market Leaders" by Michael Treacy and Fred Wiersema is very interesting... it defines the three ways to achieve market leadership: operational excellence, product leadership, or customer intimacy. Each goes after a different way of perceiving "value" by the customers.

Operational excellence

A market leader of operational excellence has a business that is run extremely efficiently, all in operation and execution of business functions. They often promise lowest prices and/or hassle-free service. They don't innovate, and they don't offer one-on-one customer service. What you get instead is a very smoothly run operation with low operating costs, which enables them to lower prices while consistently delivery quality in either products or service.

One example is PriceCostco. They stock less than 5000 items, compared to over 50000 items in a typical supermarket, but they are as large or LARGER than most supermarkets. You don't go there for the selection; they already selected the "best stuff" for you, and they say on on their newsletters / magazines. The lack of selection to them is an asset, not a liability. They buy in bulk of the best sellers to lower the prices, and pass on the savings to you. They move a LOT of merchandise, and the result shows.

Another example is Dell. They move a LOT of PCs by going direct sale. A typical PC is usually assembled within the hour of the order, and packaged for shipping within 24-48 hours. Dell also offered direct customer support through phone, next day air shipment of parts, even a live technician at your location if you need it, instead of thorugh local vendors. They did not invent the PC, but they invented a new way to do PC business. They did not add too many innovations, but they do have a great operation.

On the service front, an example would be Southwest Airlines. By specializing in short-haul business markets, standardizing on a single smaller plane type (instead of who's offering the cheapest plane of the month), and flying out of cheaper airports (OAK instead of SFO, for example), and cutting stuff like meals, magazines, baggage handling, and so on, they are able to offer more frequent departures and lower prices, both of which are important to business travellers. The lack of amenities is an asset, not a liability. The minimal service (just peanuts and soda per flight) means staff on each plane can be reduced, and planes travel lighter, less fuel spent. Only one plane type means maintainence is simplified. By specializing in mostly business markets with more flights, and only expand into airports with under-served potential, Southwest is able to offer more frequent departures (often, a flight every hour or so, more often than some local bus service!) and still maintain profitability.

What are common among these market leaders?

* Anti-variety -- variety invites inefficiency, esp. when it does not contribute to customer satisfaction, and may in fact add to customer confusion. A cookie is a cookie. People aren't going to eat more cookies just because you packaged them differently.
* Anticipate customer demand -- demand prediction and refinement must be accurate, or you can't maintain efficiency. How you react to moving demand is key to flexible operation. If Dell runs short on Part A, say, 15-inch monitors, they simply have a sale on 17-inch monitors until the imbalance is addressed.
* Refiner, not innovator -- operational leaders are never the first in the industry, but rather, they jump in after studying others and kill the inefficiencies. Dell didn't invent the PC. Southwest didn't invent business travel. However, they were able to NOT spend money on research and developement or extensive customer hand-holding in order to provide sufficient quality for the lowest prices.

Product leadership

A market leader of product leadership has products so new it defined the niche, and/or continue to push the boundaries of what is possible, or quality so high it redefined the existing niche. They are also constantly trying to outdo themselves.

One product niche definer is Johnson & Johnson. Their Vistakon division, maker of specialty contact lenses, heard about an invention in Copenhagen that revolutionizes the way disposable contact lenses can be made. They quickly acquired it, and thus the Accuvue disposable contacts were born. It took them a bit of initial marketing $$$ to define the niche, but once they did, they have virtual monopoly over the market for many years, and still holds the dominant position.

Another product niche definer is Intel. Intel created the first general purpose commercial microprocessor: the 4004. Later it was expanded into the 8008, then 8080, and finally, the processor selected for the IBM PC, the 8088 and its cousin, the 8086 (for the IBM PC XT). What you may not know is that Intel always works abut 2-3 generations ahead. When 486 was launched, the team is already getting the Pentium ready, and Pentium II was already on the design board. If you check Intel's website you'll see that they have "roadmaps" of future products available, and in fact spends $$$ telling everybody at their annual "Intel Developer's Conference".

An example of niche refiner is Apple's personal audio, i.e. iPod. Apple is certainly NOT the first company to get into personal audio. Diamond Rio series was the company and product that defined the era of the MP3 players, but Apple took the idea of a player, put the slickness and super-intuitive touch controls on it with a great screen, add the iTunes store and the software / play manager with it, and redefined the personal audio market. Ever since the iPod's launch, different versions, such as the Nano, the Mini, the Touch, the Classic, and multiple generations of each are constantly pushing the envelope of that a personal audio player is. There are other MP3 players out there... iRiver, Microsoft, Samsung, Sansa, Diamond Rio, Creative Zen... but none are as much a cultural icon as an iPod.

An example of a company doing both would be Sony. Sony invented the "Walkman", a portable tape player size of a paperback novel, that uses small batteries and headphones. As one product is being launched, other teams are already designing the next two or three generations of this product line. They defined the niche of personal audio, and eventually produced a Walkman that's not much larger than the cassette itself, and uses a SINGLE AA battery (the original uses three). As a result Sony virtually cornered the market for personal audio players (Walkman became almost a generic term) until MP3 players came along and changed the game.

What are common among these market leaders?

* Need to innovate -- huge amount of operating budget is spend on research and developement. In fact, up to half of the costs is often in R&D, esp. for Intel, by making things smaller, faster, more powerful, and more reliable. Without innovation, one cannot continue to stay in the lead. NVIDIA, ATI, and 3DFX used to be the 3 powerhouses in PC graphics. 3DFX died when it failed to innovate beyond Voodoo 3/4/5 (which are essentially the same product), and NVIDIA and ATI are constantly trying to outdo each other with a new product line every few months, each leapfrogging the other in terms of performance and price.

* Outdo oneself again and again -- to render one's own product obsolete, so the competitor never get a chance to establish a foothold except in price... competing against an older generation of products. iPods have gotten better each generation, with newer capabilities. Each generation of Japanese 50mm SLR cameras have gotten better and better, with more and more features. Auto-focus, digital back (converts regular SLR into digital SLR), motorized film feed, film dating, smart multi-zone autoexposure, face recognition, red-eye reduction, eye tracking... the list goes on and on. So much so, nobody else bothers making 50mm SLRs any more.

* niche re/definer -- Acer invented the "netbook" category by creating a subnotebook with a 9inch screen using the Atom processor from Intel that was really meant for Smartphones (running Windows mobile), but result is so cheap (under $300), and yet so profitable (up to 25% profit!), everybody is making one. Flip redefined the personal camcorder category by offering a memory camcorder that is compact, almost foolproof, records for hour or two, and uploads straight to the PC via a flip-out USB port, no cable or dock or tape or dubbing needed.

Customer Intimacy

A market leader of customer intimacy has such close relations with its customers it virtually becomes a part of their customer's team. It doesn't have the latest products, or the most efficient operation, but it provides the best customer experience and overall satisfaction. They anticipate customer problems, and helps customer cut costs and offer new services to customers that customer didn't even realize they need.

IBM is probably the best known example, at least back during the 70's and 80's. It used to be said that you can't go wrong recommending IBM. The reason is NOT that the IBM's products are latest and greatest, or cheapest, but that their sales team has enough engineers to help customize the system to really fit a customer's needs. By offering a broad range of products, none of which are actually a class leader, IBM can instead provide a full turn-key solution to solve a problem. The sales team will take the time to learn the business, learn the problem, then customize a system to SOLVE the problem. It's not just the sales team, but the infrastructure and corp culture that's in place to support such a team, that provides the customer intimacy. Other companies tries to do the same by hiring ex-IBM folks, but they didn't have the same corp culture and thus cannot duplicate the success.

Airborne (Express) is probably the latest example. They go after corporations with needs to send out large quantities of stuff to various branch offices, and vice versa. They offer BETTER solutions and more customized solutions than Fedex or UPS. They can't compete on price, so they don't even try. Instead, they offer better service and better integration with their customers that it's something Fedex and UPS simply cannot match. The account managers are practically "shipping consultants" to each client on call to solve any sort of shipping problem. Airborne offers "Sky Courier" for "next-flight-out" emergency orders, as well as "Advanced Logistics" for truck orders, both are affiliated but separate companies, to provide a full range of shipping solutions. In one instance, trying to cut Xerox costs for emergency orders that arrive after 5PM cutoff for next-day air, Airborne introduced the "chase truck", a truck that makes one last run from Xerox HQ at 6:30PM to pick up any last-minute orders, and go straight to the airport, instead of back to the hub for sorting. This cuts down on the Sky Courier use, which costs 10x more.

What are common among these market leaders?

* Not just care about the customers, but BE the customers -- dedicated account managers handling few (or just ONE) client, and being an expert in the field, that the client can rely on for advice on those issues. Some account managers actually have an office at the customer location. With advent of Internet and Computers, often virtual offices can be setup almost anywhere, allowing entry of orders or information almost anywhere. A shipping / logistics company can "receive" inventory for a company as soon as it gets on the truck. An accounts payable team can integrate with client's invoice team so transactions goes through in almost real-time instead of faxes and e-mails back and forth by entering stuff into each other's system linked via the Internet. And so on and so forth. By BEING the customers, the employee can appreciate what sort of challenges the customer faces... and propose solutions, sometimes even before the customer realizes there is a problem.

* Solution delivery, not just product sales -- customer satisfaction comes from having their problem solved, and their profits increased, and that would increase customer loyalty. Instead of just selling the customer a product, you are actually providing an invaluable service that will boost their productivity, not taking it away from them in terms of integration and customization. A small company may not have a fulltime training / support staff to roll out a new product, so by designing the new product to work almost the same way as the old one, but with additional options and other functions, you minimize training and support costs for your client while still achieving your sales, saving them money and increasing their satisfaction.

* Eliminate redundancy and leverage expertise -- The usual model of retail is that the factory hires trucks to ship to retailer's distrubution hub, then more trucks move stuff from hub to the stores. The factory may own trucks, or hire logistics firms. The retailer / distributor may have their own trucks. So there are two to three layers of duplicated work there. By eliminating redundancy and fully integrate the shipping, a logictics company can go straight from factory to the retail stores, eliminating the need for a distribution hub altogether. Faster shipping, more flexible orders, less inventory, lower operating costs, and more are the results by leveraging the shipping expertise of a shipping / logistics company. The retailer no longer needs to own a fleet of trucks and run them / maintain them, further decreasing costs. Similar leverage can be achieved in other industries as well, esp when it involves service.

A Bit of Mutual Exclusivity

Please keep in mind that it is not really possible to do all three. If you have the best operation, you don't really have the resources to hand-hold each and every customer that walks in the door, or the resources to develope the latest and greatest product. If you hand-hold every customer that walks in the door, you don't have the resources to provide the most efficient operation and/or to develope the latest and greatest. If you do want to develope the latest and greatest, you will be spending a lot of resources on R&D, which is not operations, and not customer hand-holding. Thus, the three approaches above are, in a sense, "choose-one". If you choose to do more than one, you'll end up mediocre in all three, and thus, be a nobody.

There was a bit of sales wisdom that goes, "Either be the most expensive, or be the cheapest. You don't want to be in the middle as nobody notices the middle." They are talking about the overlap between the product leadership and the efficient operation. The efficient operation can yield cheaper yet still high quality products, but they are nowhere near as technologically advanced as the products from the leaders. Any proper electronics maker can make MP3 players. Indeed, they are making them cheap enough to be almost disposable nowadays (actual cost is no more than $5). However, people still buy iPods and the expensive players... and the cheap ones. Different markets require different products.

In conclusion

You must choose the way your business will achieve market leadership. Study your business and your market, and pick one of the three methods above through which you will dominate the market. Choose carefully. Your corporate image depends on it.

Achieving Great Work, not just Good Work

2009-12-11T12:00:00.000-08:00

Productivity Magazine (http://www.productivitymagazine.com) has an article about Michael Bungay Stanier, one of Canada's best productivity coaches, where he discusses the concept of bad work, good work, and great work.

Bad work is pointless work, work you need to avoid, no politeness needed. If you have read the cartoon strip Dilbert (tm), he's almost always doing "bad work". Organizations tend to assign bad work. Actual examples would be having you fill out detailed time logs and expense reports that nobody ever reads.

Good work is familar and useful work you do and do well. You have the training, you have the education, and you enjoy the good work. This is good, but it's just that, "good". You do the normal work that you do well.

Great work, on the other hand, is the really exceptional, outstanding work that you do, because 1) you're "in the flow", and 2) what you do is very meaningful to you. However, this great work is also new, challenging, with a risk for failure. New product developement, meeting with a new client, and so on can be "great work".

Mr. Stanier explained that in order to do great work, you have to choose to do LESS good work. This can be difficult, but there's a saying: "Good enough is the enemy of greatness". If you say something is good enough, it will never be "great". So in order to be great, you have to choose to say no to 'good enough'.

One of the best way to say no is to really examine your responsibilities, and decide what to say yes to.

This principle is not new. Bill Gates and Warren Buffet on the program "Buffet and Gates goes back to school" have to same thought. On the show, one student asked them about time management, and Gates was surprised to find that Buffet's appt book pages are virtually blank. Buffet said he says no very often, and added that he only says yes to the important stuff.

Or to put it another way, look at what you're doing, ask yourself WHY you're doing it, and then ask yourself... "Is this true?" or just "Really?"

Let's say you're surfing the Internet, chatting on bulletin boards. Ask yourself, WHY are you chatting when you could be doing more productive work? You may not like the answer, but since it's to yourself, you can be honest... I am on because 1) I need the validation it gives me, and 2) I need the social interaction. Then you ask yourself... Is that true? Which would make you think: perhaps I can get validation from the work I do instead... and thus, my social interaction will be with colleagues and those with similar interests. Well, there you go.

According to Mr. Stanier, a lot of people, once they have a goal, simply go and do things, even though often one must slow oneself down and really think about the choices.

He recommends adding the "five questions" to make sure you got all basis covered.

You will have to define the challenge and the goal first, of course. Once you thought of one solution. Then ask...

1) Okay, we have this solution... AND what else?

Please repeat this step until you are truly out of alternative solutions, even if the solutions are impossible or just plain stupid or ridiculous. It's brainstorming, but with a purpose.

2) What is the easiest thing to do?

And please don't say "nothing". The easiest SOLUTION to achieve the goal is the proper answer. Evaluate the solutions you have.

3) What is the solution that would have the most impact?

Or in other words, the most elegant, yet far-reaching solution?

4) What would YOU want to do? Not what you WILL do, but what you would WANT to do?

Once you've chosen your answer, your final question then is

5) Now with all these choices before you, what WILL you do?

If you have problem deciding, perhaps it's time to ask yourself two questions:

a) What would extraordinary look like? In other words, imagine what would happen if what you intend to do has come true. What would success feel like? (and implicitly, is that worth striving for, vs. NOT achieving that goal?)

b) What would you NOT do to achieve that goal? Or something that clearly cannot happen given what you got? Once you've determined THAT, you can determine what is LEFT that you WILL do to achieve the goal. This is sort of "reverse brainstorming".

All this actually fits well with a lot of the Rich Dad teachings, as well as teachings by Dr. Wayne Dyer in Excuses Begone.

Entrepreneurs, i.e. those in B quadrant, needs to avoid bad work, do good work, and do great work. Good work is the stuff that keeps the business running, but great work is the stuff that will expand the business, such as selling to new clients, developing new products, and so on. And if you do less "good" work by hiring help, you are freed to do more great work.

When it comes to problem solving, Entrepreneurs need to consider all angles, even the unconventional ones. Then, the solution that is the best fit with the mission of the company is the one that will be chosen, as that fits with your mission, the one YOU created and defined.

And finaly, if you have a goal, and you hesitate to move forward, what excuse DO you have? Often, one is simply fear of the unknown. In that case, follow the last two steps, which are from Dr. Dyer's program as well... And a lot like Rich Dad's advice... Why would any one choose NOT to have financial freedom? Can you imagine what your life would be like if you have financial freedom? Not necessarily rich, just that you no longer have to work for a living? And why would you NOT want that? Isn't that worth whatever effort you need to perform to "make it"?

And the 2nd part of the advice is a lot like... What price are you willing to pay for financial freedom? Commit a crime, cheat, or smuggle drugs is out, as the price for that is just too high. Marrying someone for money is likewise. Being cheap... Nah. That's no fun, and loses the spirit of being financially free. That leaves... a lot of prices you *are* willing to pay.

So, when it comes to achieving a goal you need to

* define the goal properly
* decide if you really want the goal or not (including why)
* determine methods of achieving the goal
* choose a method, based on "what price you are willing to pay"
* learn the method and the tactics/mechanics/steps
* then go out and do it.

This applies in all stages of life, even entrepreneurship.

More than just IQ

2009-12-07T12:00:00.000-08:00

Everybody knows what IQ is, but that's just one number. People are good at different things, so why is it that we only ever hear about IQ?

Howard Gardner, in his book "Frames of Mind: The Theory of Multiple Intelligences", wrote that there are actually SEVEN different intelligences, and who'd be good in them

* linguistic -- linguists, polygolots, writers, speech-writers, etc.
* Logical-mathematical -- mathematicians, theoretical physicists, philosophers
* musical -- musicians and singers
* bodily-kinesthetic -- athletes
* spatial -- pilots, architects, team-sports athletes etc.
* interpresonal -- salespeople, teachers, etc.
* intra-personal -- this is an exception: this is more about self-worth and self-image. If you have high intra-personal intelligence, you're described as confident, sure of oneself

Mr. Kiyosaki mentioned him in multiple books, esp. "Increase your financial IQ".

In school, you're tested on linguistic and logical-mathematical INT. SAT is the standard test on English and Math. as we all know. However, the other 5 intelligences are barely touched upon. Now with the public education budget slashed again and again, you can forget musical, interpersonal, and intrapersonal INT training for sure. Some schools still have an atheletic department, so they may have bodily-kinesthetic and spatial INT training left, but ony for team members. The rest of you are out of luck.

Some of us managed to discover and develop some of these INTs on our own. Having good parents sure helps, but it's actually NOT essential. Some have natural talent of making friends and/or be mentors. They have great interpersonal skills. Some are supremely confident in themselves. They have intra-personal skills. Those who have musical INT and discovered early on go on and become musicians (though having good looks never hurts... Britney Spears and Cristina Aguilera both were Mickey Mouse Club members long before they had their solo careers). Those with bodily-kinesthetic INT and/or spatial INT went into team sports or the military, as that's where their skills are highly sought. Can you imagine what goes through a quarterback's mind as he calculates ball trajectory while sizing up who to throw to AND dodge defenders? (That's American football for those of you who missed the reference, but feel free to substitute your favorite sport).

However, your parents may push you toward developing certain INTs and careers stressing those INTs, because that is all they knew. The rest of INTs are ignored as unimportant. There's the usual "engineer, doctor, lawyer" career choices, but what if you actually have a talent in other INTs? You won't get to those until college, uniess you have parents that encourages you to try different things instead of shoving you toward what they *think* would lead to you success. And if you have "Blackhawk Parents" (parents who are overprotective, hovers constantly, landing like military helicopters the instant they see any "threat"), you likely won't learn ANYTHING except the two L's (linguistic and logical-mathematical) INTs.

Thus, it is up to YOU to remedy the situation, by discovering your other INTs, and nurture them, so that you become a well-rounded person. Remember, the best investment you can make is invest in yourself, which means acquiring knowledge all the time.

A lot of people lack interpersonal INT. The related skills would be public-speaking, and salesmanship, but it's also a bit about intra-personal, or confidence. Those subjects are simply NOT taught in school. So it is no wonder a lot of people are weak in that area. However, that is needed when it comes to interviews and such. Thus there are all these interview coaches and such, but they don't address the root of the problem: lack of inter- and intra-personal INT training.

Please keep in mind that we are NOT born equal. We all have different "potential". No matter how hard I train, I will never have the bodily-kinesthetic INT of Michael Jordon or Lebron James, the musical INT of Yo-yo Ma or Josh Groban, the spatial INT of a fighter pilot, and so on and so forth. However, we all have the ability to at least TEST our potential, and then try to fulfill them.

Think of it this way: We all start at ZERO. As babies, we really have NO INT at all. However, we have POTENTIAL. When we reach teenager or adulthood, we have been filling up our "potential" for a while. This is when we discover just how big the bottle is, so to speak. I know my limits when it comes to physical activities... I am at most 30% when it comes to bodily-kinesthetics INT potential, and my actual INT in that area is more like 20%. Someone like Lebron James, on the other hand, would probably have potential of 100%, and actual INT of like 90% (he just needs to learn a few more tricks).

Remember the movie Rudy? Where the kid, who's actually NOT that good in American football, wants to play for Notre Dame, a school known for its college football team, and eventually got on the team more for his determination than for his skill? He has little bodily-kinesthetic INT, average or slightly better spatial INT, but he has very good interpersonal INT and great intra-personal INT. He was able to capitalize on the last two for his goal fulfillment.

So what does all this have to do with investing, you ask? Investing involves intra-personal INT and logical-mathematical INT. In other words, the ability to pick the right investment, and to stick with it with confidence. The rest is knowledge. If you lack the logical-mathematical INT, you can't analyze stocks properly. You can't read a company's books or their SEC filings, so you can't understand how it works or how well it is working, so you can't pick the right stock. If you lack intra-personal INT, you lack confidence in yourself, and thus, you'll constantly second-guess yourself, moving money among various investments and go off in different directions, while achieving nothing.

However, keep in mind that any INT can be developed. It is not merely a measure of potential, but also of skill / knowledge. There would be an upper limit for each INT for each of us, but for most people, they will never approach their upper limit in any of their INTs. Thus, most people remain "average".

As Rich Dad (tm) said, "don't be average". Develop your two investment-related INTs, go and acquire the knowledge you need to invest (what Mr. Kiyosaki calls "financial IQ"), and you'll be ready for success.

The Gold Bubble

2009-12-04T21:29:00.000-08:00

Image via Wikipedia

As gold prices rises to unprecedented levels, one does start to wonder about how it actually rates as an investment vehicle, and what are its long and short term trends. Just as Dec 5,2009's reversal shows, gold has very few reasons to keep going up.

US public weren't allowed to hold gold as result of Great Depression and the ban is only lifted in 1975, we have to start then. As the gold prices did fluctuate a bit, we will take the gold prices at the end of February 1975 as the starting point, which is... 187 per ounce

http://66.38.218.33/charts/historicalgold.html

Today, gold is 1160 per ounce (as of 2009-12-05). However, if you convert that back ti 1975 dollars, you get... about 286, so, about a 36% gain. All that for... 34 years. Not very good, is it?

http://www.dollartimes.com/calculators/inflation.htm

Let's do the stock market... using DJIA, though if you use S&P500 you should get almost the same results. Stock market is up 400% in the same 34 years.

DJIA Jan 1975 adjusted is 704, DJIA today is... 10388
(http://www.data360.org/dataset.aspx?Data_Set_Id=393)

If you think that's too far back, let's use short term: Since Jan 2009.

Jan 2009 to now, gold prices went up 26%

Jan 2009 to now, DJIA went down from 7500 to 6700, then now up over 10000. That's 33% or 50% increase depending on how you look at it.

So either way, stock market is outperforming the gold, both historically and short term.

So is gold a "stable" investment? Not since 1975. It is only in the past 9 years or so that gold enjoyed a steady rise, mainly from the double whammy of 9/11 and dot-com bust AND the subprime mortgage. Gold was all the way down to like 250 an ounce, UNADJUSTED at about 2000, then rose. Since its low in 2000 gold had risen 300% in real value. So mostly the prices have been FALLING. In the 34 years, It had been falling for 25, and rising for 9. That is not a 'stable' investment at all. In fact, I wouldn't even call it a GOOD investment, as DJIA has done better... much better.

Frankly, whoever said gold is a "stable" investment is fooling him- or herself. Gold is actually a "contrarian" investment. It has other uses, such as hedge against the value of the dollar, and also against inflation, but again, it need to move OPPOSITE of SOMETHING. By itself, it is an UNSTABLE investment... Its value since 1975, had fallen in real terms to 20%, and only recently went up to 125%. Those fluctuation in price are HUGE!

During a bull market, gold prices go down because money flows to stock market from other investments, such as gold. When people want to sell gold, gold prices go down. Nowhere is this more apparent than during the peak of dot-com boom, in 2000, when DJIA busted 14000, and gold prices fell to 200, unadjusted. Conversely, during a bear market, traders want to move money OUT of stuff that loses value, and thus, sell stocks and buy more stable stuff, such as gold, so gold prices rise, and rise, and rise, as it has been since 2001, up 300% since the low.

So the big question is... will go continue to go up? How far? And what about long-term?

The answer depends on what do you believe the stock market and other markets will do.

Investors are NOT stupid in the LONG-term, but they CAN be stupid in the short term. People keep piling money into gold is because they are not too sure about the future of the economy, so they want to put money into "gold", which supposedly will RISE in value if the economy tanks (drops like a rock, again). Then when the price of gold rose, "momentum" investors decided they see an uptrend, so they put MORE money, and thus, gold keep rising... until people decide that gold is too expensive.

Remember, gold is a CONTRARIAN investment... When things go bad, people buy gold. As things have been going great since March, one wonders... why is gold still going up? And how long can this go on?

Take a look at the gold chart at
http://www.tfc-charts.w2d.com/chart/GD/C9

RSI was 80 (overbought). MACD is about to intersect. And look at the volume... It was FALLING like a rock. And notice that the gold prices is NOT rising much either before it dropped. The growth level is getting smaller, even though it is rising. When combined with falling volume, this is known as a DIVERGENCE, and it is a SELL signal, because it is indicating that less and less people are buying, less pressure to drive up the prices.

What else do you need that proves this is a sign of trend reversal? Remember, this was written 2009-12-05, and it was actually composed in NOVEMBER 2009. I predicted back in November that gold will not hit 1200. It did, but it can't sustain it.

There is often a lag effect between cause and effect when it comes to commodities, including gold. Effect does not happen immediately after cause. It is, in my opinion, that the current gold rise is a "lag artifact", a temporary situation that will soon expire. However, you will need to form your own opinion with the available evidence.

Bonds can be risky too!

2009-12-04T20:46:00.000-08:00

Most people thought that government bonds, those issued by the Feds, State, or Municipalities are about as safe as they come, and often TAX FREE, making them very attractive in bad economical times when stocks are too volatile, but keep in mind that not all bonds are created equal, and bonds CAN be risky.

Forbes Magazine, October 5th, 2009 issue, page 30, has an article called "Potemkin Village". For the whole thing, you'll have to read the magazine, but I'll summarize for you... Some so-called "municipal bonds" are actually community development district bonds. The CDD bonds are issued by a conglomerate of bankers, land owners, home builders, and developers, with approval of local government, to build expensive communities with golf course, tennis courts, country club, lots of houses, roads, and so on. When the real estate market went bust, it took out a LOT of CDD bonds with it, because the builders won't build houses any more, seeing no profit in it, and without houses, the whole thing goes kaput.

And don't think these are small builders. Pulte Homes (and its subsidiary, Centex), D.R. Horton, and some of the largest home builders in the US of A are involved in some of the biggest failed land developments in Florida in recent years. Even Bank of America's underwriting division underwrote some of these bonds.

Some bond managers are dragging the thing out by dipping into reserve funds to keep paying the "dividends", even though those are meant to be used for cost overruns and such. But even those will soon run out.

If you have "conservative" mutual funds, you should check its portfolio, esp. if they have any municipal bonds. These CDD bonds, also known as "dirt bonds" because the bonds just have some land as collateral, are major portions of many "conservative" mutual funds, such as Oppenheimer's Rochester fund. The question is... how much are those lands (and unfinished foundation) worth, and are they really worth about 50 cents on the dollar the funds are holding them for nowadays?

You have to keep in mind that these fund managers will NOT exactly tell you about the risks they are taking with your money. A year ago Oppenheimer released an annual statement for the fund stating that they see NO problem with the municipal bond market. The tone did not change six months ago either. Instead of selling their dirt bonds (already at almost 19% of their holdings), they are buying more, even as the prices of those bonds drop, now to about 50 cents per dollar.

The fund managers are not crazy either. They think the CDD's have a good chance to turnaround with the revival of the real estate market. And if all else fails, they can always go in and seize all the unbuilt properties from the land owners and try to sell the land later and/or hold them as "asset plays". However that is getting away from the spirit of municipal bond as safe way to invest but instead is getting into a bit of speculation, as the Forbes article pointed out.

The "point" I am trying to make is NOT to cast doubt on municipal bonds, but just to illustrate that NOTHING is clear-cut. For the longest time you hear things like "stocks are risky; bonds are safe". But there are risky stocks, and there are safe stocks. There are risky bonds, and there are safe bonds. Risky stuff can become safe ones, and safe ones can become risky ones. It is up to YOU to keep on top of your investments, and if the fund changes its strategy and its risk profile, it is up to you to keep track of that as well.

Stock trading and computer assistance

2009-11-27T22:35:00.000-08:00

Investors generally three kinds of tools: toolbox, black box, and gray box when it comes to computer asistance.

Or as Alexander Elder puts it... "Toolboxes are for serious traders, black boxes are for people who believe in Santa Claus, and gray boxes are in between."

So, which group do you really belong to?

Toolbox has a whole set of tools for you to apply as you wish. A good charting program, for example, with a full complement of drawing tools, markers, flags, trends, as well as full set of technical indicators, RSI, Stochastics, Moving Averages, envelopes and bands, or even write your own, is a toolbox. You choose which tools to apply, and apply the tools your way. The tools do NOT force their views on you. They just process data, spits out some numbers / charts. You decide if they are good signals.

Black box software basicaly gives you the signals, without really explaining why it is recommending a buy. It's like the mythical supercomputer: you feed it some data, push a button, lights blink, then you get an answer. The problem is, markets can and do change. DJIA has changed its members so many times, that most of the companies that DJIA tracked when it was first created no longer exists. Every investment fund has a disclaimer that says "past records is not indicative of future performance". So, even if such a "blackbox" software has impressive track record of predicting ups and downs, will it really continue to be successful in the future? Be honest: the only people making money from Black Boxes are the sellers. Which is why I chuckle when I see those infomercials... "buy when it's green, and sell when it is red!" Frankly, they probably tuned and retuned their "system" until it CAN flag the major ups and downs, and then use those as the example. Will you really make money with it? All those "testimonies" will have the disclaimer at the bottom "results atypical, your results may vary." Just like those fad diet and exercise gear on those infomercials.

Gray box is still proprietary stuff, but at least they explain a bit what is involved. it gives signals, but you can usually "tune" it somewhat. The closer it is to a "toolbox", the better it is.

Nowadays, you can get charts from the Internet easily. Every financial website, from CNNfn to Yahoo! Finance to Google Finance and many more have excellent charting abilities, with various subcharts, as well as access to all sorts of fundamental data like ownership, financials, and more. And programs such as AptiStock (free) will let you do your own graphing offline.

If you want to do your own charting, we have discussed most of commonly used technical indicators and markers you will often need in your toolbox. Remember, new ones are invented all the time and touted as the next "do-it-all" indicator. Also, not all indicators are supported by all packages.

Here is a list: (the not-so-common ones are marked with asterisk *)

Trendlines (both top and bottm)

Markers / Labels

Brackets (for patterns, like head-and-shoulders, and so on)

Slope angle measure

Fibonacci lines (vertical and horizontal) / fan

Channels (different variations)

Gann line / fan

Pitchfork

Cycle Lines

Bollinger Band

* Moving Average Envelope

* Keltner Channel

* Parabolic Stop Reversal (PSAR)

SMA - simple moving average

EMA - exponential moving average

* VWMA - volume weighted moving average, or just VMA

MACD / Histogram - moving average convergence / divergence

RSI - relative strength index

Stochastic (fast and slow)

Rate of Change (ROC)

Momentum

ADX - average directional index

* ATR - average true range

OBV - on balance volume

* VOLA - volatility

* MFI - money flow index

CCI - commodity channel index

* VAO - volume accumulation index

* Aroon Oscillator

* Ultimate Oscillator

William %

* Chaikin Oscillator

and many many more

Use the tools, but know what you use it FOR. The more practice you do, the better you'll get.

Keep in mind that I am NOT a big fan of technical analysis, as I consider myself 75% fundamental / 25% technical. I pick stocks with fundmental, but buy/sell with technical. You need to come up with your own system, but you can't have a system without figuring out all the tools first.

Pros and Cons of Momentum Investing

2009-11-23T22:33:00.000-08:00

Image via Wikipedia

There are a LOT of myths passed around by various investment advisors, and some involve timing the market.

I've actually heard one speaker at a seminar who actually claims that "Santa Claus Rally", "Sell in May, Stay Away" and so on, are valid advice. You probably heard some others as well. And a lot of months have a myth attached to them. There's the "January Effect", "October Surprise", "Take Profit Just before St. Patrick's Day", and so on.

What I can say is... What utter... nonsense! If trend exists, then you can bet money on someone anticipating it, thus destroying the myth.

Let us take Santa Claus Rally as an example. Santa Claus Rally basically says, "Stocks always rally in December." Just think about it... If you KNOW the stocks will rise in December, you will SELL in December to take the profit! And the selling will destroy the myth, because selling means prices will DROP, thus countering the effect of the alleged December rise!

In fact, the same reasoning applies to all attempts to tie a certain month to ups and downs in the stock market, no matter what the month is.

Frankly, it sounds good (until you do some fact checking and deeper thinking, like I did here), and it's simple and easy to understand, just what seminar speakers need. Whether its actually true or not is a different matter altogether. It may have been true in the past, but that is no guarantee that it will continue to be true in the future.

Another problem is trend prediction without studying the underlying reason for the trend. The word "trend" here can go by many forms... but the most popular term is probably "cycle". One such famous "cycle" is called the Presidential cycle. The claim is the stock market will rise upon the inaugural of the new president, rise to a peak in the second year, then drop in the third to the bottom, and recover in the final year of the term.

If you don' thave a reason, just a trend, you may as well as forget the whole thing, because something doesn't happen just because it had happend yesterday, and the day before that, and the day before that. Or to give another example, you observe that the sun rises from the east, day after day. So you predict the sun will rise from the east tomorrow. Surely you'd be right, but the REASON of your prediction is NOT because it has always risen from the east before. "It's always been that way" is not a "reason". The actual reason is due to the earth's rotation. There is a big difference: one is simply extrapolating a trend, while the other is actually UNDERSTANDING the trend's cause/reason.

While it's true that you don't need to understand the pattern to utilize it, if you don't KNOW WHY the pattern occurs, can you really predict this really IS the beginning of the pattern?

Trend analyzers, esp. the "technical analysis" folks, loves to spot "patterns" in the trading chaos for buy or sell signals, or at least what they THINK are signals. And they pour over all the historical data they can find for patterns they claim will prove their hypotheses. However, that's what I called "lazy research". They are searching for data that fits their hypotheses, not analyzing the data.

In real research, the cycle goes like this

Start -> form hypothesis -> devise experiment / obtain data -> analyze data, proves / disproves hypothesis -> update hypothesis -> restart

And you repeat the cycle until you have a THEORY that will explain ALL of data, not just some of it.

However, if you do "lazy research", you end up with

Start -> form hypothesis -> devise experiment / obtain data -> pick out data that supports your hypothesis -> hypothesis "proven"

If you can pick what data to use, you can prove almost anything. And frankly, the llazy researchers WANT the stuff proven, because it would validate themselves. Then they can write books that cost $15-20 and you will buy them, hoping that they actually KNOW something.

And we've already explained that there's a difference between trend extrapolation and trend cause and effect. Trend extrapolation is just that: a prediction. It has no LOGIC behind it. It just has the HOW, but not the WHY. And if you don't know the WHY, you cannot be sure that it WILL happen again, esp. with something as volatile as the stock market.

I've read a dozen or more different papers and books on technical analysis, and so far I am not impressed. I've read "gap analysis", "1-2-3 pattern", "Japanese Candlestick", and many many more. Some even went as far as explaining each pattern as manifestations of investor psychological states. However, most have one or two examples, and some don't even name a real example, just a "theoretical illustration". If it's a real pattern, it would apply to all stocks, yes? But no, it only applies to the specific examples they found. That is lazy research to me. They leave the task of actually spotting the patterns up to you, the investors, and if the pattern didn't work out, well, they've already sold you the book.

The most complicated, of course, is Japanese Candlestick charts, and how to read them. They have those fancy Japanese names for the "patterns", and there are dozens and dozens of them, and most of them require yet ANOTHER pattern as "confirmation"! To me, that just smacks of spotting something in nothing. In other words, fitting a pattern onto chaos. I mean, if people can spot image of Virgin Mary on a piece of grilled cheese sandwich, or Jesus on the wood grain of a cheap door, what ELSE are you going to see, if you EXPECT to see something? And they made a SCIENCE out of that?

And of course, they have no DATA to back up the accuracy of their predictions. Most Japanese Candlestick books just explains it's ancient Japanese, long history, blah blah blah. Sorry, but I want to see some REAL data. Like some REAL predictions, performed by UNRELATED PEOPLE, and how they turned out. I've yet to see any, just more "lazy research" into more "pseudo-science".

If you enjoy technical analysis, i.e. spotting patterns in the chaos, then candlestick charts can be a powerful tool in your arsenal. However, it has been in my experience that candlestick charts, while visually more pleasing than lines with tickmarks, do not really convey any advantages. All these so-called patterns are spotting something out of nothing. Heck, some books even claim there are over SEVENTY patterns! And they can't even agree that are the basic patterns... Most pin it at about 18, but some say 15, 16, or 17. Just a search on Google will tell you that there sure are a LOT of books on the subject, and a lot of articles as well, but all claims "amazing accuracy" with little data to back up the claim.

Remember what Reagan said... "Trust, but verify". Take all information you receive, but verify all of them through other sources and make up your own conclusions. yes, even this article.

Real Estate Owners: watch out for squatters

2009-11-20T14:36:00.000-08:00

Image by Getty Images via Daylife

If you have a property for sale now that is empty, watch out for squatters. Install alarm system if you have to. As a Bay Area man found out the hard way.

A Bay Area man had a property on the outskirts of town, and it's a pretty nice house. However, his economical situation no longer permits him to keep the house, so he moved to a smaller place, and asked his realtor to sell the house. His realtor lined up a buyer, except when they went to check out the house, there's someone living there.

Welcome to the reality of squatters.

Squatters are basically people who break into empty homes and live there without paying any rent. Most think of squatters as taking over dilapidated ruins, but modern squatters take over regular empty houses and such getting sold and looked empty. They will tell elaborate lies, even provide fake documents, to authorities when questioned. In this down economy, squatters seem to be increasing in numbers, with the number of vacant properties around the area, and lack of job prospects.

Squatters are a MAJOR headache for landlords as it is up to the landlord to prove that squatters are indeed squatters. While squatters cannot gain the title to your property, once they are in residence, they can be hard to get rid of. Squatters must be evicted BY LAW, at least in California, like tenant evictions, once squatters have moved in and established themselves. And that process can take weeks. In this case, even the landlord's wife was fooled, when she went to the location to check it out. Those squatters managed to convince her that they are renting the place, through some agent (fake name). They were so convincing, the landlord's wife even bought them some "welcome" flowers.

The landlord in this case was not so lucky. The sale fell through, and apparently the squatters knew their gig is up and left voluntarily one day. The landlord had to spend $400+ to remove the junk left by the squatters, and the bank foreclosed on the house. At least he's rid of the squatters, but now he'll have a foreclosure on his credit. However, this landlord got off relatively pain-free. Squatters have been known to rip out appliances, graffiti the interior, and generally destroy the whole place before leaving. It *could* have been worse.

One real estate agent estimates that 2% of his listings have been taken over by squatters, in the Greater Bay Area (50-miles or so around San Francisco).

Police consider squatting a low-priority crime, and seldom prosecuted, as it's considered a CIVIL offense, not criminal. In fact, squatting is often lumped under "misc." category. Thus, there is little if any chance that squatters can be "brought to justice" in this case, even though in this case, they have caused this landlord the loss of the sale.

Here are some ways to prevent squatters from targetting your house.

1) Install alarm and and hire security patrols. Short-term contracts are usually available, if you ask for them.

2) Install timers on the TV's, lights, and so on. An empty house attracts attention. Even park an unused clunker in the drive-way may help.

3) Roll your own security system with stuff from Radio Shack and such. Wireless cameras that sends video to a wireles receiver, from which to a recorder is under $200 nowadays.

4) Put up fake "secured by ______" signs in window and lawn, and put in motion-detector lights on the porch and such, combined with a verbal warning (on a recorder, of course).

5) Hire a house-sitter, at least several days a week.

6) Do your only daily patrols. Prepare copies of your ownership papers and keep them in a secure but accessible place. Inspect your property several times a week (even just driving by is fine, if you take a good look). If you spot unfamiliar vehicles in the driveway, lights on when it should not be, and so on, get your documents and call police ASAP.

7) Talk to your neighbors, ask them to call you if they spot anything suspicious.

Good luck in making a quick sale.

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