MarkFord
The Moth Presents: John Turturro
Principles of Wealth #10*
Every asset class and financial strategy has its own inherent characteristics, investment advantages and disadvantages, profit and growth potentialities, and risk profiles. The smart investor understands this and balances his portfolio accordingly.
Knowing what the current and historic returns are for every type of investment, the smart investor will curtail his ambitions to what is reasonable to expect. For example, the smart investor plans to get 8% to 12% on his stock portfolio over time. He doesn’t try to get much more than that. He knows that if he does try, he will probably make much less. (Studies show he’ll probably make only 2% to 3%.)
The same is true of every other asset class – government securities, corporate bonds, convertible bonds, natural resource stocks, penny stocks, private placement deals, commodities, currencies, real estate, etc. Trying to do much better than general market averages is foolish.
Let’s look at real estate, as an illustration.
Over a period of maybe 20 years, I invested in six or eight deals with EP, a trusted friend, who built high-end residential communities. The investments I made were as a partner in a Limited Liability Corporation (LLC).
I was a limited partner, which means I invested a sum of money in exchange for a percentage of the deal. EP and his partner were general partners. They put the deal together, built the development, sold it, and got a nice piece of the profits even if they didn’t put in any money.
As limited partners, we put up a good chunk of the capital needed to get the project going. We got most of the benefits we’d get from developing real estate ourselves, but with two advantages:
- We didn’t have to run the business.
- Our risk was limited to the money we put in.
The downside was that we had to pay EP and his partner fees for everything they did.
Overall, I did reasonably well for that sort of investment strategy. If I had to guess, I’d say my annual ROI amounted to about 12%. But the individual results varied widely. On one deal, I doubled my money in less than two years. On another, I made a 60% return in three years. One deal went broke and I got nothing back. The results of the rest were somewhere in between.
In all of them, the management group was the same, the deals were structured pretty much the same, and the developments were all in South Florida. So why were my results so varied?
It was because of factors that I had never considered.
Timing, for example…
One deal got held up for almost two years because of evidence that the land had once been an Indian burial ground. Ultimately, it was decided that it wasn’t – or that if it was, it was insignificant. But with large development projects, time is money. And the cost of those two years was so great that the project, even though it sold well, never made a profit.
Another one, a development of about the same size, had three advantages: It was completed ahead of schedule, at the peak of the real estate bubble, and it sold out within three months. This is the one where I doubled my money.
As I said, my overall return was about 12%, which I was satisfied with. But I went into those investments hoping to make 25% or better. Several times, as I said, I had those kinds of returns. But several times, I did worse. What I learned was that these sorts of real estate deals can be good if you invest in a basket of them during an economy that is gradually getting stronger. But I would never again set my hopes at 25% on a limited partnership deal. I know now that a more reasonable expectation is 12% to 18%. (And that’s if you have a fair amount of luck.)
Moving on to single-family homes…
Halfway through my run with EP, I tried something else. I began to buy inexpensive single-family houses, fix them up, and rent them out.
I’m not sure why I was attracted to that particular market. But since I knew nothing about it, I decided to start small and move slowly. And I’m glad I did. Investing in this sort of real estate turned out to be very different than the investing I’d done with EP.
Acquiring rental properties, I found, has some distinct advantages. The first is that the arithmetic is relatively easy to understand. You find out how much it will cost to buy and restore a particular house. You compare that total cost to the yearly rent you can get after it’s fixed up. And if the numbers work, you buy it.
The formula I used was one my brother (who was ahead of me in this game) taught me. Don’t spend more than eight times gross rent, he said. Example: If the house costs $80,000 plus $20,000 to fix it up, my total cost is $100,000. So, based on the formula, I had to be able to rent it for $8400 a year. Conversely, if I found a house that I could rent for $1000 a month or $12,000 a year, I would not pay more than $96,000 for it. (8 x 12,000 = $96,000)
I’ve learned lots more about this kind of real estate investing over the years, but this simple rule of thumb has kept me from making the mistake that kills most people in this market: paying too much for a house just before the market crashes.
Over the years, I’ve probably seen an average return of about 15% to 20% – including income and appreciation – on my rental properties. You can grow a lot of wealth over 20 to 30 years at 15% to 20%.
I’ve also experimented with buying and flipping. This can be fun and profitable if you like that sort of thing. Even in an up market, you can pick up houses that are undervalued because of some aesthetic or structural issue that seems worse than it is. If you can find undervalued properties and have the ability to fix them quickly and cheaply, you can make good money. The big challenge here is your emotions. You have to be able to stop buying and exit the market when the bargains no longer exist.
And apartment buildings…
The big advantage that apartment buildings have over single-family rentals is the cost of management. For a 50-unit building, it could easily be 5% or 6% of your rent roll. For a single-family home, it would be closer to 10%.
The challenge is that apartment buildings are typically valued by cash flow, not intrinsic property value. So if you are in a seller’s market, it’s going to be difficult if not impossible to buy at a good price. Sometimes, however, you can find a building in some sort of distress that can be restored and then rented out at a good rate.
And with apartment buildings, as with single-family homes, if you can find a good partner who is willing to manage the property (for a fee), as I did, you can build a substantial real estate portfolio over the years while having a full-time job and a family. The time commitment with a partner is about an hour a month.
Then land banking…
I’ve sometimes done something called land banking. Land banking means buying up raw land and holding it, hoping it will appreciate. The upside is considerable. If you can afford to hold on to the property for 10 or 20 years, it’s possible to see it rise amazingly in value. A lot that I bought in Nicaragua years ago for about $50,000 is worth at least $500,000 today. A 10-acre parcel of farmland that I bought in western Delray Beach, Florida, five years ago for $800,000 I sold two years later for $1.3 million.
Like every other type of real estate investing, land banking has its unique advantages. Chief among them: There’s very little work to do. You buy the land. You pay the taxes (and sometimes cut the grass) for a few years or decades. And then you sell it for, hopefully, a big profit.
Another advantage is that if you buy the property right, when values are clearly low (as they were for me in Nicaragua), the risk of losing on your investment is relatively small. But the downside is the upside. It might take much longer than you imagined to double or triple your money.
The questions to ask yourself…
As I hope I’ve made clear, every type of investment has its own opportunities, challenges, and risks. The secret to being successful in any one of them is to understand its inherent characteristics. What sort of ROI can you reasonably expect, based on history not promises? What sort of risks are you taking, and can you afford to take them? What level of personal involvement are you getting yourself into?
Before you invest a nickel, do your homework. Do your best to make smart decisions, but expect to get average returns over the long run.
By taking that conservative approach, you will be doing the most important thing to optimize your long-term wealth: choosing the asset classes that you are most comfortable managing, while diversifying your portfolio to achieve safe, realistic returns.
* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.
This essay and others are available for syndication.
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Those Sunscreens Could Kill You
About 10 years ago, I published a book about skin cancer.
Back then, all my smart friends knew that the sun caused skin cancer and that skin cancer can be fatal. So they were lathering themselves and their children with suntan lotion every time they stepped outside.
Like them, I’d read the scary reports. But the idea that the sun could be inherently bad for Homo sapiens made no sense to me. The sun, I knew, was the source of all life on earth. Plus, being outside in the sun felt so naturally good. Like drinking spring water or swimming in the ocean.
A colleague, Jon Herring, did the research and most of the writing for the book. His conclusion was that, yes, I was mostly right. Too much sun – i.e., getting a sunburn – can, if the exposure is repeated, result in the less-harmful forms of skin cancer: squamous and basal cell. But the sun in healthy doses is not only good for you, it is really good at producing Vitamin D. And Vitamin D is superbly good at protecting us from all sorts of cancers, including melanoma, which is the kind of skin cancer that kills.
If this is true, how did we come to believe that even a bit of sun would could kill us?
Jon also discovered that many of the studies that linked sun exposure to skin cancer were funded by… you guessed it! Coppertone!
And here’s another discovery that Jon made: Of the six most popular sunscreens on the market at the time, five had carcinogenic ingredients! And something like three of those ingredients were activated by the sun!
I was hoping that the book would go viral. It didn’t. And most of my smart friends are still coating themselves in sunblock when they go out.
I talk about it now and then. And I’ve given away many copies of the book. But it’s not much on my mind. So I was interested to see this in a recent blog post from my friend Dr. Al Sears:
A new study, commissioned by the FDA, who has told us for years that sunscreen is unsafe, looked at six common toxic sunscreen ingredients – and found that these chemicals don’t just affect your skin. They accumulate in your bloodstream at dangerously high concentrations – far higher than the FDA’s own safety threshold.
An editorial accompanying the FDA research in the Journal of the American Medical Association, admitted: “Sunscreens have not been subjected to standard drug safety testing.” Even The Wall Street Journal has started asking questions about why these toxins are still used in sunscreens.
The six chemicals – avobenzone, oxybenzone, octocrylene, homosalate, octisalate, and octinoxate – have been linked to multiple short- and long-term health problems, including hormone disruption and, ironically, skin cancer. The FDA has also requested safety data from sunscreen manufacturers on further six ingredients known to have toxic effects.
These chemicals mimic estrogen, causing hormonal imbalances, allergic reactions, skin irritations, and reproductive harm. They also attack the cells in your body, causing premature aging. And studies show they can promote the onset of breast cancer.
“Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.” – George Orwell
pentheraphobia (noun)
Pentheraphobia (PEN-thur-uh-foh-bee-ah) is the fear or strong dislike of one’s mother-in-law, a real – and surprisingly common – psychological affliction. The word is derived from the Greek “penthera” (“mother-in-law”). People with this phobia may also have trouble with novercaphobia (fear of one’s stepmother), vitricophobia (fear of one’s stepfather), and/or soceraphobia (fear of one’s parents-in-law).
(I challenge you to use any of these words in casual conversation.)
Rancho Santana has won another Trip Advisor Traveler’s Choice Award! Read about it here.
It’s amazing what the human body can do…
“I’d like to think that anxiety is a form of emotional intelligence – alerting one to future threats that others ignore. The problem is it doesn’t work that way because anxiety is always forward facing. By the time tomorrow comes, you are worried about some new threat.” – Michael Masterson
11 Ways the COVID Lockdown Will Change the World, Good and Bad
- More zoom meetings.
Most breakthrough technologies make only a superficial difference, but Zoom is a game-changer. It has all the benefits of being in a room with others, with none of the drawbacks. Zoom meetings are, without question, more efficient. There is something about them that encourages people to spend less time chatting and stick more closely to the agenda. Plus, nobody has to waste time traveling – in some cases, for hours – to attend.
- Less office space.
The lockdown has woken us up to the reality that most of our work can get done as well, or better, remotely. Even, as I said above, meetings. Office space is expensive. If you don’t need it, why pay for it? Two-thirds of our economy is now information-based. As a result of this trend, I’m guessing that businesses like those of my clients will graduate eventually to about 20% of the office space they currently use.
- A recession in commercial real estate.
My partners and I just put a halt on a plan to raze the converted warehouse I work out of and replace it with a much larger, $14 million, glass and steel office building. We’ve always been big buyers of real estate. That’s over. We’ll be looking, instead, at selling ours. And we won’t be alone. According to Moody Analytics, the country’s office vacancy rate has been rising. So far, it’s gone from 9% in Q1 2020 to 15% in Q2.
- A new market for commercial conversions.
The bulk of the office space that goes empty will be converted to apartments and condos. This will be a boon for construction companies that are able to efficiently do that sort of thing. But it will also put a pause on the new construction of apartments and condos for as many years as it takes to absorb the unused space.
- Subscription services as the norm in selling information.
All forms of information – from entertainment to news to advisory services – will convert their marketing models to subscription-based services. This change has been going on for some time, but it’s going to speed up. According to Zion Market Research, the subscription business model, valued at $3.8 billion in 2018, is expected to grow to $10.5 billion by 2025.
- A much-needed revolution in higher education.
Despite claims that we can’t replace in-class learning, people are quickly discovering that remote education is perfectly well suited for at least 60% of the subject matter being taught today. Private colleges will realize, as other information businesses already have, that they can make more money and do a better job with computer-assisted programs.
Campuses will continue to exist for the social aspects of the college experience, but the amount of time kids spend in class will be slashed by 80%. Even more important – and this, I admit, is a wish rather than a prediction – students will opt out of such useless courses as gender theory and Marxist economics and spend their education dollars on courses they can profit from.
- The end of most shopping malls…
There is no longer any reason to travel to a mall, except for the enjoyment of having someplace to go. Strip malls will be the first to go. Half of those in existence are already dead in the water and won’t be coming back. Some larger, luxurious, shopping malls will thrive, but only a fraction of those that exist today.
Coresight Research predicts that 25% of all the malls in the US will close within five years. In February, Macy’s announced the closing of 125 stores over the next three years. JC Penny has plans to close as many as 150 stores. And, in fact, Simon Property Group (the largest owner of US malls) is working on a potential deal to turn closed department stores into Amazon fulfillment centers.
- And the end of brick-and-mortar retail.
For most products, direct-to-consumer marketing will be the standard in selling. Online shopping and next-day delivery will become the norm. And even for products you might want to try on or try out – like clothes or tools or TV sets – increasingly easy return policies will bolster direct-to-consumer commerce.
- An increase in the use of psychopharmacological drugs and psychiatric services
All this remote (i.e., solo) shopping, entertainment, and education will cause an epidemic of anxiety, addiction, and depression – a serious problem that began surging as early as March.
Three examples:
* In March, the Substance Abuse and Mental Health Administration’s “emotional distress” phone hotlines spiked 338%; their text hotlines skyrocketed from 1790 last April to 20,000 in April of this year.
* An analysis by the White House’s drug policy office reported an 11.4% year-over-year increase in fatal overdoses in the first four months of this year.
* An August poll taken by the CDC revealed that 25% of respondents aged 18-24 had considered suicide in the prior 30 days; 40% reported at least one adverse mental health condition as a result of the coronavirus.
- Amazon’s revenues will double in the next 5 years.
Amazon’s current revenues are more than $300 billion a year, but the lockdown has given millions the opportunity to get used to online shopping. Amazon has big plans, and I don’t see how – other than by some kind of antitrust action – they can be stopped. I wouldn’t be surprised to see them bypass the $500 billion barrier in the next few years and go on to bypass Walmart.
- The Googles and Facebooks of the world will become the first digital countries, eventually replacing nation states.
What is a country but a political, economic, and cultural entity held together by a common mythology of identity and a touch of police and military power? Internet businesses like Google, Facebook, and YouTube have established their own cultures, economies, and politics that are funded by voluntary taxes and enforced by unilateral power over their hundreds of millions of digital citizens.
This essay and others are available for syndication.
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I’m in LA now, visiting the kids.
I came up to the rooftop terrace to work, thinking I’d have a nice view of the hills and the valley. But there’s no view. Just a gray landscape beset by smog.
“No, it’s not smog,” this Latino guy that was cleaning up tells me. “It’s smoke. It’s coming from over there, where I live. It’s a lot worse over there.”
The streets are mostly deserted. The stores are closed – as are almost all of the restaurants, because they still don’t allow inside seating. Those that have tables outside are serving customers, but they are aren’t crowded. It looks like the city has given up.
So many of Hollywood’s apocalyptic movies were shot in LA. Here are two bits of B-roll that could be inserted into Blade Runner 3:
1.- Last night, I was sitting on the curb in front of the hotel, working and smoking a cigar. (They don’t like cigar smokers in California.) A homeless woman came up to me and stood by me, muttering. I tried to ignore her but she wasn’t going to go away. So I handed her a dollar. She took it and furiously ripped it up, threw it on the ground, and walked away.
2.- This morning, as I entered the hotel, two young Black guys who were exiting stopped me.
“That’s a Richard Mille,” one said, looking at my watch.
I acknowledged that it was.
“How much you pay for it? A buck twenty-five?”
I explained that it was a very early model and that I paid “only” thirty-five.
“That’s crazy!” he said. “Can I take a photo?”
“Sure,” I said.
He did.
“How much you want for it?” the other one said.
“Oh, I don’t want to sell it,” I said.
“I’ll give you eighty right now,” he said.
“You know your friend was talking thousands?” I said (only later realizing how racist that was).
“Hey, dude. I know watches,” he scoffed. “And I love Richard Mille. I’ll give you eighty-five thousand cash. Right now.”
I looked at him. He was dead serious.
What a town!
apocalyptic (adjective)
Something that’s apocalyptic (uh-pahk-uh-LIP-tik) shows or prophesies the total destruction of the world – a scenario that is most famously described in the Bible’s Book of Revelation. As I used it today: “So many of Hollywood’s apocalyptic movies were shot in LA.”