The Best Investments in Life

MANILA – The Atlantic has a good article out today on the struggles of a typical middle class American with his finances¬†http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/ . Good writing is supposed to make you feel, and as I was reading the article, the years that I spent in the US came back clear as yesterday, and I kept thinking if this was I, what would I have done differently. The writer is clearly smart and he works hard. He didn’t make too many choices that were blatantly wrong. So why is he still in this situation? Let’s park that question for a second. Another thing that gnawed at me inside, was the sense of gentle forlorn in the writing. Is America still great and is our generation still a great time to be alive? I am in Manila, Philippines this week and while Philippines has got its own more than fair share of problems, there is an energy in the air that is alive and pulsating. Throngs of call center workers walk around Makati, laughing, talking, going to late night “lunches” and drinking coffees. Around the Triangle park, people run in the summer night as the heat eases. In Manila people don’t make that much money, a typical call center agent makes around $1,000 per month. But they are young and full of life, and their expenses are low. So the money seems enough and they keep themselves busy climbing up the ranks and keeping themselves fit and healthy. I greatly admire that. It’s easier to be optimistic when you are young and things are on the up and up, and it’s only natural that people start to feel down in the middle ages. So let’s build a solid foundation so that we don’t have to work so much and so hard when we get older.

I have a lot of friends like the writer of the Atlantic essay. They work hard all their lives but they find themselves lagging behind. I am in my forties now so let I not think this is someone else’s problem – but I do find a couple of themes in these friends. What they do as a profession often is a 1 to 1 relationship, and there is not much leveraging going on. By leveraging I am specifically calling out leveraging oneself, leveraging the network, and leveraging your own investments. When I was younger I was often excited by saving 20 dollars or making another 100 dollars. At some point my income got high enough and my investments got large enough that I started to lose the enthusiasm, because if you look at the numbers cold-heartedly, I started to need at least $100 – 200 of income to justify spending an hour of my time, and these types of work is again a linear relationship, you have to keep doing it to keep getting the money. To truly get ahead, you have to keep investing in yourself by getting more knowledge and experience. This is what I mean by leveraging self. We are all getting older, but how do we get better results in life with our declining faculties? It’s clear it’s got to be the wisdom and experience, instead of the raw talent and speed. So these days, if it’s a choice of making $100 vs. working out or spending an hour with my daughter, I’ll pick the latter every time. Because when you work out and spend time with family and friends, you are aging backwards a la Benjamin Button. The more youthful you with a clearer head, will come up with better ideas in life and make more money as a result.

Leveraging your connections is the same thing. I never ask money from family and friends and I never borrow money from them. But I freely admit I tap into my network for advice and ideas all the time, never paying any consulting fees to them. Is that fair to them? Well, I never try to take advantage of people and I always try to do it in a gracious way, perhaps buying them a nice lunch and have a couple of glasses of wine with them, so that they remember it as a fun occasion. But I have gotten ideas worth easily thousands of dollars, for free, and willingly given by my friends. I also take care to pay that forward, by mentoring younger friends and relatives. So far it’s been working out really well. I don’t need to spend a ton of effort, and my network is getting larger and with more interesting expertise on tap. And the best part is, my network is mine. My employer doesn’t own it, and I will own and maintain the network until the day I die. So it’s something that will continue to give value to me for as long as I care about my family and friends, let’s hope that won’t ever change!

The essay writer from the Atlantic happens to have quite a combination of character traits that probably has disadvantaged him in terms of money. He is a writer by trade, which is a lonely bunch. A writer is also paid based on the work produced, so it’s a harder profession to scale. You can write better but it’s hard to write a lot, and it’s REALLY hard to write a lot of good stuff. This is different than writing software whereas you write one piece of software and it can be installed everywhere. But I feel the last point with his plight (which happens to be a lot of Americans’), is that he’s not sophisticated with leveraging his money and investment. It used to be that if you don’t really know finance or investment, you could still get by. Hey, a hamburger used to be 25 cents so who cares, you could always live on a meager retirement income. Unfortunately the World is different now. With the financialization of everything and the money printing, today if you don’t learn some fundamentals of finance, you’ll be in a world of hurt by 35, if not earlier. The biggest and the most important ideas in personal finance and investment, is not to lose principal, and whatever you invest in, make sure it’ll continue to appreciate in most likely scenarios.

That’s a lot to ask. But on the flip side, when you invest into things that you don’t understand, you lose everything. Losing everything is so painful that I took it to heart. But not everyone does the same. People will always invest in Ponzi schemes, MLMs, chase return, buy at the high and sell on the low. Instead of doing something creative which may hurt their pride, they pay. A friend of mine didn’t want to negotiate with the bank on his mortgage rates because he felt small doing it. I say it’s your money and to bargain is glorious. Just do it in a way that’s dignified and fair. It’s possible. So from an investment perspective what does that mean? It means that even though Real Estate is one of my great loves, I don’t buy a house unless the numbers make sense. If I can’t rent it out and have a decent return, I’d rather keep renting it myself. My track record as a live in property owner is not great – in my 40 something years of life I have lived in at least 11 houses, so now I know I am being delusional if I think I will live in a property for the rest of my life. It also means that if there is no better investment vehicles out there, I put money into S&P500 index funds and CDs. A safe investment is a wonderful investment!

Money is not life. Money is but an indication of how you have managed your life thus far as a general manager. Money gives you the freedom to do what you want to do instead of toiling all day. So now I am going to sign off and have some wine with a few friends who also happened to be in Manila today, and hope you all do the same and please enjoy this picture of metro Manila.

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Gold, the Pet Rock that Could

Gold has been called a “pet rock” by more than a few economists. As someone wisely said, gold is dug up from the ground and then usually people put it right back into the ground again, witness all the bank vaults and the famed gold deposits in Fort Knox, USA. Gold has a few problems with it, but late last year I had an urgent use for funds for a real estate investment and I truly appreciated the value of having some gold. I had invested in a unit and I needed to get it funded and close all the contracts and paperwork. Well, I had planned a decent chunk of cash for the closing costs, but I didn’t anticipate property in London cost so much in various lawyer fees, let alone the furnishing and other finishing touches. Long story short, I was about $15K USD short and I needed the money in 2 days. Luckily I had some gold in the house and I sold them via a bullion broker. Both the property investment experience and the bullion selling experience should probably receive their own stories later. But at the end of the day, I sold the gold and the money was in my account in literally 2 minutes. So now, let’s look at the pros and cons of owning physical gold.

Cons:

Storage costs. Gold does have a storage cost, however minimal it might be.

No dividend: Gold also does not generate dividend, so in the long run it tend not to out perform stocks or properties.

Pros:

Not fiat money. As readers know, modern currencies are fiat money and are backed by the trust in the issuing authorities. Hence USD tends to be widely accepted and Zimbabwean money, well, not so accepted and not so valuable. But we have to agree that the post QE 1, 2, 3 world that we are living in is fundamentally different than the one pre – GFC, and fiat money has its own issues. Gold at least is tangible and is limited in the amount of the physical stuff that exists. You may or may not think this is a big deal but evidently enough people care about gold.

Historical relevancy: Gold has been money for at least 5,000 years. Anywhere you go in the world, there is a place where gold can be converted into money.

Not affected by negative interest rate: As we have seen in Europe and Japan, as capitalist societies go through stagnation, one of the last resort weapons that central bankers use is to make interest rates negative. This will make gold look more attractive.

As for me personally, I like gold’s liquidity and anonymity, but I don’t see gold generating income or dividend. Fundamentally I like income generating assets, so I am going to hold maybe 5% – 10% of my total portfolio in gold, but no more. Gold to me is just a rainy day fund with a very small spread between buying and selling, so it’s good for that, but perhaps not much else.

Readers, have you bought gold as an investment, and if you have, have you had the need to use or liquidate it? Leave your comments below please.