Consult an expert, if you like experts. Talk to your broker. Read your broker’s “research” recommendations.
But don’t ask me what you should be doing with your money right now.
I have no qualifications as a financial advisor. No certificates. No degrees. I’ve never taken a single class in economics or accounting…
I’ve read a few books – ones that came highly recommended.
And yes, I was an advisor to and publisher of investment advice for nearly 40 years….
Which gave me an inside view on how the business works and a contact list of several dozen of the best-known stock analysts in the world. I know how they work and I’ve seen the results of their work, good and bad.
I keep tabs on the best of them. And incorporate the recommendations of a few. But when it comes to making decisions about what do with my (now my family’s) money, I follow my own rules.
My rules are not for everyone. So you may decide that they are not for you.
But if, like me, you are a timid investor…
If, like me, your fear of losing money is greater than your greed…
And if you are willing to work hard to make sure your active income is always increasing… every week and every month and every year…
Then you may be interested in knowing some of these rules that I follow and what, in particular, I plan to do with my money this year.
I have several dozen rules. Here are 10 of them:
- I don’t Invest in anything I don’t fully understand.
- If I am determined to break rule number one, I admit to myself that what I’m doing is gambling, not investing. And I proceed fully expecting to lose every penny I put on the line.
- I would never put all my savings into stocks or even into a portfolio of stocks and bonds. I have my money allocated in at least a half-dozen asset classes at all times.
- I don’t try to get from any asset class (stocks, bonds, real estate, commodities) or subclass (blue chip stocks, growth stocks, etc.) more than 10% to 20% of its natural (historic) rate of return. When someone recommends an investment “sure to” do much better than that, I steer clear.
- Before investing in anything, I have a Plan B in place. A proper Plan B is a pre-set (and if possible automatic) protocol that cashes me out of the deal as quickly as possible and with the least amount of damage.
- As a rule, I don’t invest in growth stocks. I prefer buying shares of world-class, income producing, Warren Buffett type companies that I feel confident will still be strong in 20+ years. And I do not sell these stocks in market downturns. I often buy more of them in order to “average down” my buy-in price.
- I devote the largest portion of my portfolio to income-producing real estate properties and use a trusted partner to manage them.
- The next largest slice of my investment pie goes to private businesses – either in stock or debt or convertible debt. When considering such investments, I ask myself how well I understand it and whether I have some control or at least influence on management should they take actions that seem wrong to me. (And I have my Plan B.)
- I don’t “invest” in hard assets or currencies because I don’t consider them investments. (They have little or no intrinsic value, do not produce value, and do not earn income.)
- I never invest more than a very small portion of my net investible wealth (net worth minus my house and other things I don’t intend to sell) in any single investment. (Long ago, my limit was 5%. Now it’s 1%.)
Now it’s time to tell you what I’m doing with my money this year.
I should say that I’ve been doing this (i.e., writing about it) since 2010. I’ve done well. But again, I’m not contending that this is what you should be doing. For one thing, you may not be willing to put money into rental real estate or private businesses. And my “fine art portfolio” – well, that’s a very personal thing.
But if you have my proclivities as an investor and you like the rules I mentioned above, you may want to consider the following:
My Current Positions/Decisions
Cash
For the last few years, I’ve been accumulating cash.
Not because I think cash is all that great. It’s more a question of some other moves I’ve been making – selling off certain assets and banking the cash till new opportunities come along.
With real estate, for example, I’ve been selling lots of smaller properties (like single-family houses, condos, and small commercial buildings) and trying to replace them them with larger properties (apartment and business complexes). The goal is to simplify my portfolio so that it’s easier for #2 Son to manage it and hopefully to get a slightly better average yield by consolidating management and maintenance expenses.
I’ve been doing a similar thing with my art collection: selling the less valuable pieces (through Ford Fine Art, a business I started 10 years ago), keeping the really good (museum grade) pieces, buying a few good ones, and holding the rest as cash.
My portfolio of municipal bonds, which was once about $10 million, is less than half that now. And it’s getting smaller. I’m not doing anything fancy. I’m just cashing in those that are due. If I could buy new triple-A rated, guaranteed munis at the 5% to 6.5% yield I got when I used to buy them, I would. But I can’t. And I’m not willing to invest in riskier bonds at this time. So that portfolio, too, is converting to cash.
With banks giving me less than 0.5% on my cash savings, I’m not thrilled about having lots of money sitting in the bank, making them money. I’d rather have much of it in safe-as-the-bank investments that give me a decent rate of return. I have identified some opportunities (which I’ll tell you about in a moment), but they are not easy to find. So for the moment, I am sitting on a fair amount of cash.
However, there is an obvious advantage to having cash: When a market corrects and some really good investment opportunities suddenly arise, you’ll have the cash to buy them. You won’t be wiped out as so many millions are every time the stock market or the real estate market takes a dive.
The last time my cash account swelled like this was from 2006 to 2009. It happened because I had stopped buying real estate and municipal bonds (the two primary assets I was buying at the time). I stopped buying real estate because I couldn’t find properties at reasonable prices. I stopped buying municipal bonds because the yields had dropped so low that they were barely keeping up with inflation.
So my cash account got big – to about 10% of my total portfolio. But then, by 2009, prices for the properties I liked at the time (single-family, 3-bedroom, 2-bath houses) were quite cheap. Some were selling at a 70% discount from their highs.
Because I had all that cash, I could tell my real estate partners: “Go out there and buy everything you can.”
Real Estate
As I mentioned above, along with direct investments in private businesses, income-producing real estate represents the biggest slice of my net worth pie. (Each is usually about 25%.)
I like rental real estate for many reasons: It’s real. It’s tangible. It produces an income. It typically tracks inflation. And it’s relatively simple to understand, which means you can leverage it (with mortgages) with a large degree of safety. And you can earn an income from it without spending much time.
As I said, we’ve been selling our small properties and looking to buy larger ones.
It’s a very good time to sell.
Prices for single-family homes and condos are at or near all-time highs in many parts of South Florida, particularly along the coast. In fact, they are approaching or equaling the prices we saw in 2008, before the crash.
There are reasons to believe that the property market today is more stable than it was then. One big reason: Banks are much more restrictive in lending these days. It’s much harder for insolvent people to get mortgages.
But if you compare house prices to rents or to the personal incomes of people that might buy them, you can see that they are generally too high. “Too high” is good for selling, bad for buying.
We’ve sold about 70% to 80% of our lower-level South Florida holdings so far. We intend to sell most of the rest this year.
But we want to buy. So we are holding the cash and actively searching for larger properties in places where the returns (income on investment) are better, where we can get 7% t0 8% unleveraged or as much as 12% leveraged.
This isn’t easy because there’s competition from big players (including REITs) for these larger properties. Last year, we were close to buying two apartment complexes but were outbid.
(I don’t chase deals. My rule of thumb in buying rental real estate, which I learned from my brother, is eight times gross rent. If the complex generates a million a year in gross rent, I’ll pay up to $8 million for it. I will pay less if it needs work. But even if it’s in perfect condition, I won’t pay a penny more.)
Right now, we have a contract on another two. Fingers crossed.
Gold, Silver, Platinum
As I said above, I do not consider gold (or silver or platinum) an investment, because it’s not. It’s an asset that produces no income. Its value, like cash and even digital currency, is based on the value people put on it.
Yet I own gold. I bought a bunch of bullion (and a few rare) coins about 15 or so years ago, when gold was trading at about $450. I did not buy it to double my money. (Although that’s what happened.) Rather, I wanted to insure myself against the possibility that the US economy might one day collapse, as some of my colleagues were predicting.
The theory is this: If things do go to hell in a handbasket, you want to have a stash of gold coins that you can use to get you and your family to a safe place and then support them.
If we have a true worldwide economic collapse, I am not at all sure that gold will have any value. But maybe it will. So I have some.
Actually, I have way more than I probably would ever need. At around 4% of my net investible wealth, my gold cup runneth over. With respect to the possibility of financial Armageddon, I’m over-insured.
So my plan has been to sell some of it, a little bit every month, until my stash feels like the right size. But I haven’t got around to doing that yet because I already have a lot of cash. And I’m thinking that gold may not be better than cash, but it’s probably not worse either.
Art and Collectibles
I can’t pretend my collectibles can equal, in terms of financial rewards, some of my other investments. But I’ve done well with them over the years, and they greatly improve my quality of life.
I have collected lots of things: beer bottles, vintage cars, fancy cigar lighters, watches, jewelry, and first-edition books.
But my biggest investment in collectibles, by far, is in fine art.
There are two major problems with buying art (and other collectibles) for investment purposes. First is the same problem I have with “investing” in gold: Art does not produce an income. The second problem is that if you buy your art through a broker, retailer, or at auction, you are going to pay a serious sales commission – sometimes as much as 30%.
These are serious drawbacks. There are ways to nullify and even take advantage of them. I’ve done it by having my own art business. But for most people, I can’t make a definitive case for buying art as a way of generating a high ROI.
But I can say this: If you invest well, you will eventually have a valuable store of wealth that is portable, non-reportable, and tangible. It is the only sort of investment that can give you aesthetic pleasure a dozen times a day. Plus, it is an asset class that you can liquidate gradually, year by year, to fund your retirement.
As I mentioned, I’ve been selling off a lot of the medium- and lesser-quality pieces in my collection – which is getting close to 2000 pieces. And I intend to continue this. My goal is to end up with two really good collections, each with 50 to 100 pieces.
As with real estate, this is a good time to sell art because the art market is generally strong. I am also buying, but I’m not buying at auction. I’m buying from private collectors through my business. (That’s how I avoid the crazy commissions.)
If you are thinking of starting an art collection now, my advice is to limit yourself, initially, to one or two artists about whom you can become an expert in less than a year. If you can afford it, buy artists whose works sit in museums. If not, keep your spending to a minimum. I’ve written a little course on how to build a million-dollar art collection. I’ll make it available one of these days.
But whatever you do, don’t buy any piece of art unless you know that you will be looking at it and enjoying it every chance you get.
Bonds and Other Debt Instruments
As I said above, I like investing in debt and would still be investing in municipal bonds if they were yielding at least 5%. But since the returns are so paltry now, I’m selling those I have as they mature. My goal is to use that cash to buy some other sort of debt instruments.
For example, I’ve done a fair amount of private lending recently – bridge loans and longer-term collateralized loans to friends, family members, and colleagues. I’m earning 6% to 8% on my money, which nets to about 4% to 6% after taxes. I’ve also been looking at the tax lien market, where returns are higher… but it also takes more time to research and manage.
Stocks
I explained my rules for stock investing above. The stocks I own are all big, dominant, and mostly dividend-paying companies that I’m confident will be big and dominant and income-producing long after I’m gone.
That’s why I don’t sell when the market turns down. Instead, I look for buying opportunities.
And so, when the stock market dropped 8.8% between 1/26/18 and 2/9/18, I was looking to buy. And several of my “Legacy” stocks came into a range that Dominick (my broker) and I felt were attractive. (For readers that have seen my Legacy Portfolio and are interested, these stocks are AXP, IBM, CVX, and PG.)
To be clear: My goal with these stocks is buy and wait till their share values increase and then sell. My goal is to gradually increase my shareholdings. The more stock I own, the richer I feel.
I could do this by automatically reinvesting the dividends, increasing my holding of each stock each year by 2% or 3%. But I prefer to cash out all the dividends and then, when buying opportunities arise, put that cash into just a portion of the stocks – the ones that have the best prices relative to earnings.
Another thing I did was to start a second portfolio that is very much like the Legacy portfolio, except that it tilts more towards high tech. Dominick helped me put this together. We call it Legacy Plus.
I did this not because I favor high tech stocks. I don’t. But it doesn’t take a genius to see that the best of them are the bedrock of our economy’s future wealth. The stocks we chose were selected using the same strict guidelines. We were looking for companies that have firmly held positions in their markets, great fundamentals, and high barriers of entry. Right now, we have 37 stocks (utilizing risk-adjusted position sizing) in this portfolio. That is a considerably larger number of stocks than I have in Legacy One. But the dollar value for Legacy Plus is – at least for the moment – considerably lower.
If you are interested, they are T, VZ, PFE, MRK, KMB, AMGN, CSCO, UPS, LMT, INTC, BA, ADP, UTX, JPM, DWDP, UNP, MSFT, GLW, RTN, ORCL, DIS, AAPL, CSX, SWKS, NKE, GS, FDX, NVDA, AKAM, GOOG, AMZN, CHKP, LITE, NUAN, RHT, CRM, and VC.
Stock Options
I’ve temporarily stopped trading options and I’m trying to decide whether to continue.
My options strategy was extremely conservative: selling puts on the big, safe companies I have in my Legacy portfolio. This strategy aligns nicely with my general preference in making wealth-building decisions. I’m looking for sure and steady income. Assuming I have a choice between two equally safe investments, I’ll pick the one that gives me more income.
The short-term rates of return I was getting by trading Legacy stocks were very encouraging: 8% to 15%. But the actual cash flow I was getting out of my account was less than that. It was more like 6% to 7%. That’s not terrible, considering how safe this strategy is. But it was a bit of work. And since the stocks were traded regularly, it was taxable as ordinary income.
I’m confident I’ll get at least the historic average of 9% to 10% on my Legacy stocks. So unless I can get comfortable selling puts on smaller, somewhat riskier stocks – or unless the market itself becomes more volatile (in a good way), offering me the chance to make more than 9% to 10% – I’m leaving options to others that have more time and risk tolerance.
Direct Investments in Businesses
As I said above, the current value of my private business portfolio represents about 25% of my net worth. (It might actually be much higher, but I tend to value these investments very conservatively because they are somewhat illiquid.)
The returns I’ve enjoyed from these investments are better than anything else, including real estate, by multiples.
But I have an advantage. Having a bird’s-eye view of the booming direct marketing and Internet information industry, I see lots of business opportunities that (1) I understand very well and (2) I can have an influence on.
For the most part, I’m not buying little pieces of established companies. I’m investing in smaller, entrepreneurial companies poised to grow. “Poised to grow” is a phrase I’d run from if it were said about any company in an industry I didn’t understand. But I understand mine. So I am pretty confident I can make good calls.
If you are in position to invest in your industry, small businesses can give you amazing ROIs.
When a young business is in its fast-growth stage (from zero to $50 million in revenue), there are usually three to five years when the asset value of the business will increase by 25%-50%. I can remember half a dozen businesses in which I invested less than $50,000 and, in less than seven years, took out more than $1 million.
Another benefit is income. Once the business becomes cash-positive, you can take some amount of cash from it – as a salary, a consulting fee, or as a distribution.
Yet another benefit – and this may be the best one – is that when you own a profitable business you get to develop it the way you want. You don’t have to kiss anyone’s butt or follow a boss’s stupid mandates.
Benefits notwithstanding, I’m not going to be getting involved in any new businesses, however exciting or potentially profitable.
I have opportunities – plenty of them. At least once a week, someone pitches a new business or joint venture to me. But when I turned 65, I decided that my main priorities would be about family, friendship, and charitable giving. Those things take time. I can’t even pretend I can do a good job of them if I’m still starting up new businesses.
Speculations
As a rule, I don’t like gambling. Why? Because I have almost always lost 100% of my money when I gambled. And I don’t like losing money.
But there is a type of gambling that I sometimes indulge in. It’s a type of gambling that financial pros like to refer to as speculation.
Speculation, they say, differs from gambling because the odds are not predetermined. If you really understand the market (or you have inside knowledge), you can participate like an insider. You can be a casino owner rather than a blackjack player.
I haven’t made a speculative investment in years. But I admit I’ve been tempted to get into the current cryptocurrency mania.
I’m thinking about taking a small position in a handful of cryptocurrencies that (I believe) have the best chance of being around in 10 or 20 years. They are: bitcoin, ethereum, litecoin, and cardano.
My “bet” will be no more than one half of one percent of my net worth or one percent of my net investible savings. In other words, it will be enough to give me bragging rights if I make a lot of money but not more than I can easily shrug off if – like most speculations – they all somehow disappear.
My plan is not to get rich from them, but to possibly see my money double or triple if the markets do continue to inflate.
If you’d like to read my thinking on cryptocurrencies, go HERE https://www.markford.net/cashing-in-or-not-on-cryptocurrency-mania and HERE https://www.markford.net/cryptocurrency-mania-part-2
Looking Forward…
If you’re investing, I would say that this is the year to be very careful. It could be the year when the stock market corrects, the real estate market corrects, the art market corrects…
But it could also be another year of inexplicable growth.
I don’t know. So that’s why I’m going to do what I’ve been doing for 30+ years. I’m going to sell off my lower-quality real estate and art and invest in higher-quality stuff if and when my rules allow me to. In the meantime, I’m going to keep working hard to make sure my active income keeps growing and outpaces any spending (including gambling) I may do.
