Wealth Building Lessons

In our everyday lives we come across investment opportunities very often. Unfortunately most people are blind to them. In his book, One Up On Wall Street : How To Use What You Already Know To Make Money In The Market , Peter Lynch mentioned how easy it was to come across companies that were extremely popular and were doing well.

While I haven’t had any luck finding the next Gap or company that owns Pokemon, I have had decent luck identifying different investments.

Some of the best investment ideas are in your own newspaper!

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Japan’s economy has been dormant for the most of the past two decades but is on the rebound in a big way. It’s the second largest economy in the world and has the third largest stock market after the London Stock Exchange.

Investors have been shying away from Japanese investments in favor of the stronger US economy. This of course is changing rapidly as the US moves closer to a recession and investors are looking to pocket their profits and invest elsewhere.

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We’ve been brain-washed into believing that mutual funds are the only low-risk investment alternatives to stocks and real-estate besides government bonds or direct checking/saving accounts with a financial institution. This is no longer true and Exchange-traded funds (ETFs) is one prime example.

ETFs can best be described as a blend between index mutual funds and market-based securities and are legally classified as open-end companies or Unit Investment Trusts (UITs). ETFs are similar to index funds in that they will primarily invest in the securities of companies that are included in a selected market index (either all securities ore representative sample). ETFs can also track the price of commodities like gold (GLD) and crude oil (USO). EFTs are bought and sold like stocks on major exchanges but differ from traditional open-end companies and UITs in a number of ways:

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A lot of investors get emotional when investing their money. Several studies on the subject reveal repeated patterns of irrationality, inconsistency and incompetence in the ways that people arrive at decisions when faced with uncertainty.

For example, many people place different weightage on gains and losses and on different ranges of probability. Individuals are much more distressed by potential losses than they are by equivalent gains. Typically a loss of $1 is twice as painful as the pleasure received from a $1 gain.

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Real estate is one of my favorite investments and is great for the purpose of creating wealth. It’s highly leveraged and the government gives you several tax deductions to own it. And if done properly it can catapult you to wealth. What’s not to like?

It all started when I attended a real estate bootcamp in the late 1990s. (By the way, I hate bootcamps that charge you $5,000 or more, but that’s a topic for another post. In short they’re not worth it).

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As mentioned in earlier posts on compound interest and paying yourself first, saving small amounts regularly over an extended period of time is a sure shot way of becoming a millionaire. But you can do more to achieve that goal quicker. The best way to create wealth and become a millionaire is by learning what millionaires do and copying them. So once you know how millionaires acquired their wealth, how they live, and how their families function, all you have to do is replicate that system and now you’re living like a millionaire!

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Canadian Royalty Trusts, also called Canroys, are a subset of a class of investments called Canadian Income Trusts. Royalty Trusts invest in oil and gas resources. But Income Trusts can invest in businesses, real estate and utilities.

In terms of taxation, they get similar treatment as US REITs. They have to distribute most of the profits out to the shareholders (only they’re now called unit holders) and the dividends aren’t taxed at the corporate level. This means that there usually more dividends to pass through to the unit holders. And at the unit holders level, there’s a flat 15% tax.

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The trading for New Century Financial (NEW) was halted today as the company is on the verge of bankrupcy. Its lost about 75% of its market cap in the past 1 week.

Thats kind of funny because Bear Sterns upgraded the stock 2 weeks ago to a buy. The sad part is that some of their investors must have believed them and bought the stock at $15. When it dropped to $7 they may have doubled down, thinking they’ll break even when it jumps up a bit. However, its currently trading at $1.66 so any chance of breaking even for those who bought at $15 is gone.

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With global liquidity at an all time high, stocks and other assets aren’t trading at multiples of profit or revenue, but rather as a function of how much money is chasing that asset class. With investors borrowing insane amounts of money via the carry trade and Chinese “investors” borrowing money from pawn shops at 36%/year to invest in the stock market, there seems to be flight from safety and a frenzy to invest in just about anything thats hot.

This reminds me of the good old days in 1999. When hairdressers and car salesmen used to give us stock tips! This scares me and it should scare you too!

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Professional investors have the opportunity to borrow money in japanese yen at interest rates of less than 1% per year. So they borrow hundreds of billions of dollars worth of yen and invest any stock, bond, commodity or derivative that looks like it can produce a higher than 1% yield. (When US treasuries are returning over 4%, that doesn’t seem too difficult). This is whats called the carry trade.

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