Online Guide to Investments and Insurance

While there is a charge for a subscription to Inventors’ Digest Magazine, their website is completely free. You can find articles relevant to issues faced by the independent inventor, classified ads for services needed by independent inventors as well as a complete listing of tradeshows for all sectors of the market. For very reasonable fees, usually around $1.50, you can order reprints of past articles that are particularly relevant to the category of your invention or your interest. Inventors’ Digest Magazine costs $35 for a yearly subscription but you can often avoid even that in a couple of ways. If you belong to an inventors group that is a member of the United Inventors Association you are entitled to a discount on your Inventors’ Digest Magazine subscription, or you may look at the copies of the magazine that come to the group as a part of their membership. Many libraries across the country subscribe to Inventors’ Digest Magazine. If your local library subscribes to Inventors Digest Magazine, you can check out copies of the magazine for no charge whatsoever. If your library does not subscribe, you may submit a request that they do so and they will often accommodate you. After all, their job is to meet the needs of their patrons.

You may find, after looking through an issue of Inventors Digest, that you want to subscribe in order to build your own library of these informative magazines. If you choose to subscribe to Inventors’ Digest Magazine, you may order a regular subscription that will come to you in the mail or you may subscribe to the online version. The online version of Inventors’ Digest Magazine is especially valuable to independent inventors since it allows you immediate access to current as well as past editions.

Investors experienced a classic example of this roller coaster during the 1999–2001 period. Growth and tech funds got hot and then abandoned. Value funds and energy funds were abandoned and then got hot. Fund managers were not hurt, though. Fund managers’ pay increased by 35 percent during the period. In the mid-1990s, financial sector funds got hot and then were abandoned in the late 1990s. In 1997, real estate funds were hot, setting up investors for two years of losses in 1998 and 1999.

Some funds have learned to avoid wild swings in value. They do so not for your benefit, but for theirs. The goal of fund management firms is to gather and hold ever-larger amounts of your money. Fund managers are paid a percentage of funds under management. Fees are not based on returns or other criteria that benefit you. The larger the fund, the larger the fee. Primarily, though, fund managers must assure that funds never close.

And in fact, they rarely do. Since 1970, the number of funds has declined in only one year, 1975. Even in bear markets, the number of funds grows. This game is too good to give up, for the fund managers. The average fund manager earns more than $430,000 per year, despite the fact that Morningstar data shows that the average fund manager has never outperformed the market over a single five-year period.

Mediocre funds with low volatility tend to grow their assets under management for decades. You may be happy to pay fees for mediocre results as long as you avoid the roller coaster. Or, you may feel the fund takes advantage of your loyalty. You may find that mutual funds cause resentment. This is not surprising. Your loyalty is being manipulated.

Mutual funds are diversified. Diversification is supposed to create steady returns. I simply do not believe it does. Mass psychology reigns in mutual fund investing. By definition, a mutual fund is a herd of mindless investors led by an adored mutual fund manager.

Mutual fund complexes promote their newest and hottest fund. Investors pour cash into the fund. The manager’s ego soars. He buys more of the same stocks that drew in investors, puffing up the price of the stocks and the return from the fund. The hot fund is discovered by the financial press and more money pours in, more stock is purchased, and returns look even better. When all the buyers are in, a chat room rumor declares the fund and its stocks as over-valued, investors panic about redeeming shares, the fund manager is forced to sell at any price to meet redemptions further depressing stock values and the fund asset price, which panics more investors who redeem and send shares lower still. The depressed fund manager then abandons his old investment style, unloads the rest of the stocks at still lower prices, and moves into stuff remaining shareholders have no interest in owning. They redeem and send prices down again.

Back-end loads may appear to be a good deal to you. Each year you hold the fund, the load goes down. After a year or two, the broker will recommend you switch funds. Many reasons can be given. You can avoid a taxable gain that will be distributed to you if you hold on. A management change or a style change has taken place. There is always a reason to switch funds. So you agree and pay a smaller back-end load and get a new back-end load fund. Two things are happening that you do not realize: First, each year you hold the fund you are paying larger expenses to management than someone who purchased front-end load shares; the back-end load only goes down as you pay it down. Second, your broker gets a larger, but secret, upfront load from the mutual fund company for selling back-end load funds than for selling front-end load funds.

Brokers will offer you many share classes with many varieties of loads. Funds can have A, B, C, D, and E classes. You will never fully understand why one is better than the other, nor why your broker wants you to switch from one fund to another or from one class to another. The reality is that with each purchase and switch, she gets another nice commission. People pleasing will hurt you here.

Even if you are able to find satisfactory funds on your own or with a broker, you may still have an uncomfortable experience.

The process of discovering who you are in relation to investments is different for everybody. We all start at different places based on our genetic makeup, our childhood, and our good or bad fortune, we move through
different experiences in life, and arrive at different places. This book does not claim that this simple three-step program is the only process of achieving emotional compatibility with your investments. These three steps are helpful for most people and have certainly been helpful for me.

If you have severe money dysfunction, realize that you are not likely to accept that immediately. One of the prevailing characteristics of all addiction is that the addict does not believe he or she has a problem. Everyone around him, except coaddicts, believes he has problems, but the addict himself considers his behavior normal. If you work through the exercises in this book, yet you still have a sense of impending doom around your investments, get further help. The answer is out there for you; it is just beyond the scope of this book.

It’s easy to see why you’d want to hire a professional to help you get out of debt. Just sorting out the paperwork can feel like you need an advanced degree. But unfortunately, most of what a financial planner or a debt counselor is going to tell you is either common sense or something you’ll learn by the end of this book.

On top of that, a professional, no matter how good they are, can’t do the most important part for you. They can’t make you spend less. They can tell you to spend less, but you’ve still got to put the plan into action. If you are willing to make dramatic, but temporary, changes in your budget, getting out of debt is as easy as falling off a log. Unfortunately, though, there are a lot of people out there who prey on people in desperate situations. We’ll go into it more in Chapter 22, but people with a ton of debt make great targets for scam artists.

When it comes down to hiring professional help, I generally think you should try reducing your debt on your own before hiring anyone. Give yourself 6 to 12 months. But if you know there’s no way you’ll do it on your own, or you haven’t made much headway after 12 months, consider getting help from a pro. Here are some things you should look for in a debt professional:

Focus on budgeting. I know I repeat this ad nauseam, but getting out of debt is all about controlling the flow of money in and out of your household. A professional who can help you gain control of this is going to be the best kind to hire.

Pay a flat or hourly fee. The best professionals to work with are the ones who charge you for their time, not their results. Professionals who get rewarded to cut your debt by as much as possible, as soon as possible, may offer you advice that is not in your long-term best interest.

Consider a CFP or a CPA. Both Certified Financial Planners (CFPs) and Certified Public Accountants (CPAs) have gone through extensive training and licensing procedures. They may not be the cheapest professionals to hire, but you are guaranteed a certain minimum quality.

Try your Employee Assistance Plan. Many employers now offer Employee Assistance Plans that give their employees free or low-cost access to a variety of financial and legal professionals who will get you started on your way.

A few years ago, one of my friends talked me into a 5k “mud run” at the Marine base near us. This was a day that the base let nonmilitary folks come and run the bootcamp obstacle course for prizes.

My friend, who plays competitive soccer, left me in the dust after the first mile. After another mile, which included a long, winding, uphill dirt road, I decided to walk a little. I hadn’t been walking 20 seconds when I heard screaming behind me.

“Why are you walking!? Who told you that you could walk!?” It was a big, burly Marine drill sergeant, and he was clearly talking to me. I’m not sure whether it was fear, shock, or respect, but my feet started moving.

“I want you to keep running, son. And, if you even think about walking again, you come find me first. I’ll talk you out of it.” I ran the entire rest of the race, though I nearly puked my brains out afterward.

You need accountability when it comes to this plan. You need someone to talk you out of giving up. You need someone to pat you on the back as you succeed. You need someone who can see that you are moving toward the finish line, even though you feel like you’re barely crawling.

My biggest recommendation in finding an accountability partner is to find someone who also wants to get out of debt. That way, you two can run this race together. Here are some other practical pointers on choosing an accountability partner:

Unless you have a spouse who is really excited to get out of debt as well, you should find someone who is emotionally separated from your debt. Even other close family members may make poor choices, because They may not be able to be completely honest.

True accountability takes hearing and saying the hard things sometimes. Your relationship should be secure
enough that your accountability partner can give you a hard time without you taking it personally.

A good accountability partner will be able to grab coffee with you once a month, at a pre-arranged time. They’ll be able to review your Progress Chart from earlier in the chapter with you, and ask the critical questions about why and how things are changing.

If you cannot find an accountability partner on your own, or you think your use of debt may truly border on compulsive, the Debtor’s Anonymous (DA) program may be for you. Modeled after Alcoholics Anonymous and other 12-step programs, this program helps people stop using debt, one day at a time.

A forecast is not a plan. A forecast has no strategic component. Those real-life plans that are forecasts in disguise are immune to our thesis that total value equals economic value plus strategic value. They are trivial but not uncommon examples of my general thesis and occur when operating the existing business is the sum and whole of the business plan. Looking at this circumstance is useful because the distinction between economic value and strategic value becomes very evident.

An example may be helpful. General Power has sales of $4 billion, employs $2 billion in capital, and earns $400 million. It has grown revenues and income over the past five years at a steady 5 percent per annum. Its business plan for the coming year projects revenues of $4.2 billion on a capital base of $2.1 billion with profits of $420 million. Such a plan is merely a forecast. The whole world expects this result. In this event, the business can be valued solely by the discounted sum of its future free cash flow (FCF) growing at 5 percent per annum. Any valuation above that number would not be justified because there are no plans to enter new businesses or to change the business strategy. General Power’s free cash flow would ultimately be used to buy back stock, or it would be distributed as dividends to shareholders because the company has, by our definition, no interest in investing the cash for any other purpose.

If management flexibility, represented by real options, is the key to value creation, logic would seem to tell us that losing flexibility can destroy value. This section will illustrate this point.

The first example occurs under command-and-control conditions. In a planned economy, a plant manager may be rewarded only for producing his quota, which he will attempt to produce whether it is needed or not. This condition alone guarantees that market economies will outperform centrally planned economies. Such “plans” destroy value, at least in comparison to plans that allow for flexibility.

Comrade Zhukov’s plan is to produce one million liters of black paint and to deliver it to the Lada factory. He is given one hundred thousand 10-liter cans, one-half million liters of solvent, and the required amount of polymer base and carbon black. He has no incentive, nor access to resources, to produce more. If Lada doesn’t want the paint, it’s not his problem. And if there is a fire in the carbon black factory, well, that would not be his fault. So in principle he has no options. His Western counterpart, Ms. Jones, with a similar business plan, might trim production and inventory to adjust to a current shortage of cans, prebuy to take advantage of low prices for polymers, and attempt to exploit a new market trend toward red sports cars. She may perceive options to recycle cans, inventory an emergency supply of polymer, and purchase red pigments. All of these options add value.

Modeling risk can be associated with the data quality as well as simple bugs in the calculation engine. The sector came of age at a time when the reporting requirements were minimal. Some servicers have voluntarily increased the volume of reported data. Best practices for disclosure in the sector include web-posted reports, detailed lease rollover information and investor updates detailing extraordinary items—especially related to expenses.

Other securitized assets tend to have reasonable proxies for collateral performance, such as loans of a similar credit profile and vintage. There is no market indicator for the risk and performance of an aircraft lease contract, which means the servicer has a monopoly on the pieces of information necessary to forecast deal performance.

Investors in the aircraft ABS sector must be diligent about doing the work to become comfortable with the risks inherent in this asset class. Modeling aircraft lease cash flow and then evaluating the corresponding liability waterfall is fraught with potential modeling risks. Even though the focus of this discussion is on asset-side modeling, the resulting analytics will also depend on the assumptions made in the liability model. From this perspective, the modeling of interest rate hedges represents a risk. The swap notional amount varies as a percentage of the Class A balance outstanding on each deal with varied standards of disclosure to help or hinder modeling.

Investors should avoid the pitfall of attributing too much predictive power to even the most elegant models. The key from the investor viewpoint is to evaluate opportunities in the sector in such a way as to gain comfort that model error is skewed to the upside.