Why Some Investors Lose (And How Not to)

Robert Kiyosaki

This post Why Some Investors Lose (And How Not to) appeared first on Daily Reckoning.

At the end of The Rich Dad Radio Show there’s a segment called “Ask Robert.” Listeners submit their various investing questions and I’ll answer them.

“Am I diversified?” is a question that I get more than I’d like. Not because it’s a dumb question, but it’s because the person asking has been told at some point or another—probably a financial planner—that their “portfolio should be diversified.” And the way they mean it is bad advice.

What most people consider diversification isn’t really diversification. Rather it is spreading your money across one asset class. Most financial planners will tell you to invest in stocks, bonds, mutual funds, gold ETFs, REITs, and mutual funds.

In my opinion, the above portfolio is not diversified. It’s is filled with only one class of assets: paper assets. If the stock market crashes, which it will, diversification will not protect you. Gains in one class offset losses in another. Sure, it can be safe, but rarely does someone become wealthy by diversifying.

I was taught to diversify differently.

I own assets in different asset classes, not just in paper assets. For example, I do invest in oil, but I do not invest in oil company stocks.

I do invest in real estate. I do not invest in REITs, Real Estate Investment Trusts, a mutual fund for real estate. Although, I can see the value in them, especially for people starting their journey to wealth.

But, as Buffett himself says, “Diversification is protection against ignorance. [It] makes very little sense for those who know what they’re doing.”

Why Investors are Becoming Losers

In 2007, it disturbed me deeply to watch the stock market crash, knowing the consequences for millions of investors, investors who believed that the stock market always goes up over the long term and that diversification was insurance against losses.

Making matters worse, in 2010, uninsured investors were reentering the market, hoping prices would go up again (capital gains). They invested without insurance.

You do not drive a car without insurance. You do not buy a house without insurance. Yet when most investors invest, they do it without insurance. When the stock market crashed, they lost because they had no insurance.

The biggest losers in the last crash were investors who had their money, uninsured, in retirement plans, plans like the 401(k) in the United States. That is beyond risky. That is foolish.

We should all know the markets will crash again—it’s essentially a life-cycle—yet most investors invest without insuring their protection against that hit.

Amateurs vs. Professionals

This biggest difference between an amateur investor and a professional investor is:

How they manage risk
How they generate income (cash flow vs. capital gains)

Amateurs think they will earn their money in stocks from capital gains (buy low, sell high), and they manage their risk by diversification.

Professionals earn their money with cash flow strategies, and they manage their risk by diversifying across all asset classes.

In real estate, the battle cry is usually “location, location, location.” It …read more

Where to Get Your Cash Flow

Robert Kiyosaki

This post Where to Get Your Cash Flow appeared first on Daily Reckoning.

Most people assume that their financial standing is defined by how much they earn, how much they’re worth, or some combination of both. And there’s no doubt that this has some bearing. Forbes magazine defines “rich” as a person who earns in excess of $1 million per year (about $83,333 per month, or just under $20,000 a week), and “poor” as someone who earns less than $25,000 a year.

But even more important than the quantity of money you make is the quality of money you make. In other words, not just how much you make, but how you make it—where it comes from. There are actually four distinct sources of cash flow. Each is quite different from the other, and each defines and determines a very different lifestyle, regardless of the amount of cash you earn.

After publishing Rich Dad Poor Dad, I wrote a book to explain these four different income worlds. Many people have said that this book, Cashflow Quadrant, is the most important writing I’ve done because it goes right to the heart of the crucial issues involved for people who are ready to make true changes in their lives. And if you’re someone who wants to learn how to create cash flow in the best possible way, you should check out  this page.  In it, I’ll tell you how real investors set up weekly streams of cash flow, for returns of up to $10,600, every week. It really isn’t hard to make high quantity and high quality income.

The cashflow quadrant represents the different ways cash income is generated.

E Quadrant: The overwhelming majority of people learn, live, love, and leave this life entirely within the E quadrant. Our educational system and culture train us, from the cradle to the grave, in how to live in the world of the E quadrant.

S Quadrant:  Driven by the urge for more freedom and self-determination, a lot of people migrate from the E quadrant to the S quadrant. This is the place where people go to “strike out on their own” and pursue the American Dream.

The S quadrant includes a huge range of earning power, all the way from the teenage freelance babysitter or landscaper just starting out in life to the highly paid private-practice lawyer, consultant, or public speaker. In a very real way, the S stands for slavery: You don’t really own your business; your business owns you.

B Quadrant:  The B quadrant is where people go to create big businesses. The difference between an S business and a B business is that you work for your S business, but your B business works for you. Those who live and work in the B quadrant make themselves recession-proof, because they control the source of their own income.

I Quadrant: This is not rocket science. My rich dad taught me to live in the I quadrant by playing Monopoly, and we all know how that works: …read more

How to Legally Print Your Own Money

Robert Kiyosaki

This post How to Legally Print Your Own Money appeared first on Daily Reckoning.

Wages for workers rose to a nearly 10-year high in the second quarter of this year. Inflation continues to rise in the U.S. economy. While that means you see more in your paycheck, ultimately, what this means in simple terms is that your money buys less than it used.

In today’s economy, it’s lunacy to think you’ll get ahead by getting a good job and saving money. Your money becomes worth less and less each day. In the new world of money, it’s imperative that you learn how to print your own money—legally.

To me, one of the best advantages of financial education is the ability to print your own money. The way you can do this, legally, is via a financial term known as return on investment (ROI).

Most people don’t know how to do this well. Which is why I’ve actually started up a brand-new project to guide you through it step by step. The best ROI — the only kind I care about — comes from cash flow. Take a look at this rebroadcast if you want to see how it’s done… check it out before it comes offline tonight.

Now, when you talk to most financial experts, they’ll tell you that 5 to 12% is a good ROI. And it is, if you don’t have financial education. Another thing they’ll say is that the higher the return, the higher the risk.

That is also true, if you don’t have financial intelligence.

Personally, I always look to have an infinite return on my investments. And this can be achieved if you have a high financial IQ.

My wife, Kim and I started the Rich Dad Company at our kitchen table. Rather than use our own money, we raised $250,000 from investors. In less than three years, thanks to the growth of our business, we paid back our investors 100% plus an additional 100% to purchase back their shares.

Today, our business puts millions into our pockets even though we have none of our own money invested in it. That’s an infinite return. In other words, our business prints money for us.

We work with our real estate partner, Ken McElroy, to print money through real estate all the time — if you make it in time for my new service, you can learn all about Ken’s methods. We will find an underperforming apartment community, purchase it with investor money, do upgrades, raise rents, and increase the value of the property. We can then refinance that property tax-free and pay back our investors from the loan proceeds—while still enjoying positive cash flow. Once all investors are paid back, we still enjoy the cash flow. That too is an infinite return.

Infinite Returns

If I have zero in the asset and I receive $1, a return on zero is infinite. It is money for nothing. The asset is free, once we get our money back.

Keeping this overly …read more

Live From Vegas — My Standout Moment of the Week

This post Live From Vegas — My Standout Moment of the Week appeared first on Daily Reckoning.

“Does this look like a recession to you?”

That was the question Fahad Khalid from Jaguar Analytics asked over and over again as he showed visuals of what is going on with our economy.

“Seriously, does this look like a recession to you?”

This fiery presentation happened at the TradersEXPO conference that I attended in Las Vegas this week. And Fahad’s insights were easily one of the standout moments of the week… which is why I want to share the story with you today…

Everywhere you look, the mainstream media is using their platform as an outlet for bears to “call the top” of this 10-year bull market.

Billionaire investor Steve Cohen sees a bear market heading our way — MarketWatch

Billionaire investor Jim Mellon: Sharp sell-off in US stocks is the start of a ‘very major correction’ — CNBC

Blackstone Billionaire Tony James Expects Stocks to Drop 20% — Fortune

There is no shortage of prominent billionaires making bold claims like this in the mainstream media. If you don’t believe me, check out this link with calls like these going back years.

And with every passing day that this market doesn’t go into full correction mode, more and more claims just like this will be made. Because after all, the bull market has to end eventually, right?

Well guess what the mainstream isn’t telling you…

They’re all wrong!

That’s right.

Every single person that’s made a “bold prediction” about the end of the bull market has been nothing but wrong for 10 years. And because of it they’ve missed out on thousands — if not millions — of dollars.

And the mainstream media does nothing to stop these horribly wrong predictions from being spread, because after all, they don’t make money when you make money. They make money based on the number of eyeballs glued to TVs!

“You Do Not Get a Bear Market From This Place of Pessimism!”

This brings me back to Fahad’s presentation at the TradersEXPO.

“Instead of focusing on the top headlines on CNBC or Bloomberg, I encourage you to dig a bit deeper and look at the underlying data, or at least read an outlet that does,” Fahad said.

And I agree. And I hope you can rely on The Daily Edge to be that outlet.

If you did, you’d find that the current state of the stock market and economy are both well better off than they’re being portrayed.

GDP is continuing to grow at a very robust rate. This is a “big picture” view of our economy and right now it’s very positive.

Consumer confidence is near multi-year highs. This is your typical “man on the street” perspective — not necessarily investment related — which shows that even with the market pulling back, the average consumer is still spending money and is very optimistic about the future.

The Small Business Optimism Index (which includes owners of restaurants, gas stations, nail salons, etc.) …read more

The One Time Taxes are a Love Note from the Gov’t

Robert Kiyosaki

This post The One Time Taxes are a Love Note from the Gov’t appeared first on Daily Reckoning.

The tax law is a series of stimulus packages for business owners and investors. Nowhere is this truer than for real estate investors. I’m not talking about people who fix and flip real estate. They are not investors. I’m talking about those who buy, improve, and hold on to real estate for long-term investment.

As an incentive for investors to buy, improve, and hold real estate, the government gives two primary tax benefits.

The first and largest is depreciation. I talked about depreciation in a previous letter and how Jared Kushner and his family company used depreciation to pay zero in taxes. Depreciation is a deduction you receive over time for the cost of the property, whether you bought it with your money or with someone else’s money (debt). Here is how it works.

Say you purchase a rental property for $200,000, 10% of your own money and $180,000 or 90% of the bank’s money. What did you really buy? You bought land worth, say, $40,000 and improvements, including a building, landscaping and fixtures, of $160,000.

The government lets you take a deduction, called depreciation, for the wear and tear on the building. If this is a residential property, your deduction is about 3.64% per year in the United States. (It’s more in some other countries.)

That means that you get a deduction on your tax return of almost $6,000 per year for depreciation ($160,000 x 3.64%). Let’s say your cash flow is 1% per month on your initial investment of $20,000. That means you will have cash flow of $2,400 per year. With a tax deduction of $6,000, you will show a loss on your tax return of $3,600 per year ($2,400 minus $6,000).

Now, this $3,600 loss can be used to reduce your taxes from your salary, your business or your other investments. Depreciation protects your cash flow from taxes and produces an additional tax benefit by lowering your taxes from your other income.

If you’re interested in learning about how to protect and even increase your cash flow, I strongly suggest you check out my brand-new Weekly Cash Flow broadcast. In it, I explain to the audience why everyday folks like you face roadblocks on their quest to get rich. I also reveal a never-before seen way to collect passive income, boosting your cash flow every week…

But in the meantime, remember that you get depreciation, not only on the dollars you invest, but also on the money the bank loaned.

You get a similar benefit called amortization, which refers to your costs of borrowing money from the bank, such as points and loan-origination fees.

You get to take the deduction for amortization even if the bank loaned you the money to pay the fees.

These tax benefits are yours even though the property may be appreciating or going up in value. So real estate gives you benefits through depreciation, amortization, and through appreciation in …read more

Don’t Sell! Our 25% Gain is Just the Beginning…

natural gas chart

That is a big move in such a short period of time, even for the notoriously volatile natural gas.

You do not need to be an expert commodity trader to understand why natural gas traders were so excitable. The United States is entering this winter with an extremely low level of natural gas in storage — almost 20 percent below the trailing five year average.

That is the lowest level in 15 years!

And keep in mind that natural gas demand today is much higher than it was 15 years ago, so we need more in storage now than ever before.

It is a precarious position for the market to be in heading into the winter.

What triggered the big move in natural gas prices this month was a forecast for unusually cold weather in November. Cold weather means more natural gas will be used to heat homes which will pull the already low storage levels down even further.

Look at all of that blue forecast for the entire East Coast calling for below normal temperatures!

temperature forecast

How High Could Natural Gas Prices Realistically Go?

When I wrote you a couple of weeks ago about the potential for this natural gas spike, I worked through some numbers that showed how the commodity price could easily double.

The truth is, there is potential for it to do much more than that.

As I mentioned, the last time supplies were this low in the first week of November was in 2002.  That winter the price of natural gas hit $12 per MMBTU which was a triple from where it was that fall!

With prices today just edging up to $4 per MMBTU, we clearly haven’t scratched the surface on where the commodity could go if we get a cold winter.

Cabot Oil and Gas (COG) – Still My Favorite Way to Play This Trade

Last month I tagged Cabot Oil and Gas (COG) as a “win-win” way to play the potential spike in natural gas.

I called Cabot a “win-win” because I believed that this stock is going higher whether natural gas spikes or not.

A rise in natural gas prices would just make owning Cabot even better.

I still love the stock even though the share price has quickly risen from $21 to almost $26 (just under 25 percent) since I initially wrote about it.

The reason that I feel such love is that Cabot is about to let loose a flood of natural gas production. For years the company has been significantly restrained due to a lack of pipeline capacity in the Marcellus shale region.

But those restraints have now been released!

As of last month, the 200-mile Atlantic Sunrise Pipeline has gone into service. This pipeline will transport enough natural gas to meet the daily needs of more than 7 million American homes — almost 2 percent of U.S. natural gas production on a daily basis.

By itself, Cabot will immediately fill almost half of that massive pipeline with its increased natural gas production!

For Cabot, that means that production is going to immediately increase by 1 billion cubic feet per day. That is a 40 percent production surge for the company and it is happening just as natural gas prices spike.

Talk about perfect timing.

That is the short term for Cabot. The longer term is even better.

By 2020, the company expects to have doubled production from current levels thanks to additional production growth from its Marcellus acreage along Lake Erie’s “Rust Belt.”

This is a company that is going to be generating a lot of free cash flow in the coming quarters. Cabot’s biggest challenge is going to be deciding what to do with that cash, especially if natural gas prices continue moving higher.

A hint may have come in the company’s last quarterly earnings call when Cabot management suggested that a special dividend could be the answer…1

I have to say that I like the sounds of that! And I’m sure Cabot’s shareholders do too.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1

This post Don’t Sell! Our 25% Gain is Just the Beginning… appeared first on Daily Reckoning.

Last month I warned you that we were entering this winter facing a very real chance of a spike in natural gas prices.

Here we are just a couple of weeks later and that natural gas price spike has already taken a pretty major first leg up.

Since the start of November, the commodity has already skyrocketed 25 percent higher than when I wrote to you.

That is a big move in such a short period of time, even for the notoriously volatile natural gas.

You do not need to be an expert commodity trader to understand why natural gas traders were so excitable. The United States is entering this winter with an extremely low level of natural gas in storage — almost 20 percent below the trailing five year average.

That is the lowest level in 15 years!

And keep in mind that natural gas demand today is much higher than it was 15 years ago, so we need more in storage now than ever before.

It is a precarious position for the market to be in heading into the winter.

What triggered the big move in natural gas prices this month was a forecast for unusually cold weather in November. Cold weather means more natural gas will be used to heat homes which will pull the already low storage levels down even further.

Look at all of that blue forecast for the entire East Coast calling for below normal temperatures!

How High Could Natural Gas Prices Realistically Go?

When I wrote you a couple of weeks ago about the potential for this natural gas spike, I worked through some numbers that showed how the commodity price could easily double.

The truth is, there is potential for it to do much more than that.

As I mentioned, the last time supplies were this low in the first week of November was in 2002.  That winter the price of natural gas hit $12 per MMBTU which was a triple from where it was that fall!

With prices today just edging up to $4 per MMBTU, we clearly haven’t scratched the surface on where the commodity could go if we get a cold winter.

Cabot Oil and Gas (COG) – Still My Favorite Way to Play This Trade

Last month I tagged Cabot Oil and Gas (COG) as a “win-win” way to play the potential spike in natural gas.

I called Cabot a “win-win” because I believed that this stock is going higher whether natural gas spikes or not.

A rise in natural gas prices would just make owning Cabot even better.

I still love the stock even though the share price has quickly risen from $21 to almost $26 (just under 25 percent) since I initially wrote about it.

The reason that I feel such love is that Cabot is about to let loose a flood of natural gas production. For years the company has been significantly restrained due to a lack of pipeline capacity in the Marcellus …read more

Tax Changes to Note Before It’s Too Late…

Robert Kiyosaki

This post Tax Changes to Note Before It’s Too Late… appeared first on Daily Reckoning.

It’s your patriotic duty, neigh privilege, to pay your taxes! Yeah, we don’t believe that either. The myth of the “kinder, gentler” IRS has been tossed around for decades now, and President Trump would like to do away with IRS all together.

There are two months left in 2018 and before you know it, April 15, 2019 will be here. Have you started prepping your 2018 tax return?

You might be wondering why I’m giving an almost two months’ notice on taxes but there were some major changes to tax laws this year, and if you’re going to make a difference in what you owe, the last two months of 2018 are crucial. But some of the deductions and tax strategies you used in the past might have changed due to the Tax Cuts and Jobs Act that went into effect this year.

The tax law was not written for the rich; it was written for anyone who is financially educated. There is a tax strategy and advantages gained by investors and entrepreneurs. The talking heads of personal finance only talk of the supposed tax advantages of IRAs and 401(k)s. Discover how that’s not true and how you can set yourself up for success with the right tax strategy.

Let’s start with a refresher on what you need to know with the new tax changes:

1. What is Gone

Almost all miscellaneous deductions were dropped for 2018, it will no longer matter if you accumulate moving expenses for a new job, run up expenses that will not be reimbursed from your employer, or get tax preparation advice or a safety deposit box.

Personal exemptions are also gone, but the standard deduction has doubled (not quite) to $24,000 for couples and $12,000 for individuals.

The marriage penalty is also (mostly) gone. If you’re not familiar, here’s a simplified version of how the marriage penalty works. Let’s say that two single individuals each earned a taxable income of $90,000 per year. Under the old 2018 tax brackets, both of these individuals would fall into the 25% bracket for singles.

However, if they were to get married, their combined income of $180,000 would catapult them into the 28% bracket. Under the new brackets, they would fall into the 24% marginal tax bracket, regardless of whether they got married or not.

In fact, the married filing jointly income thresholds are exactly double the single thresholds for all but the two highest tax brackets in the new tax law. In other words, the marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000.

2. What Has Changed

For people in high tax states, what may be most crucial is that there is now a $10,000 cap on what you can deduct on your federal tax return for everything from property taxes to state income and sales taxes.

Also, if you bought a home in 2018, only mortgage interest on debt up …read more

Gold: 50% Off… Get Yours Before the Sale Ends!

Jody Chudley

This post Gold: 50% Off… Get Yours Before the Sale Ends! appeared first on Daily Reckoning.

For Halloween this year both of my daughters went as students of the Hogwarts School of Witchcraft and Wizardry.

That is from the world of Harry Potter in case you aren’t familiar.

In my house we are very familiar with Hogwarts… Both of my kids are obsessed with the books.

I love that Harry Potter has helped develop a passion for reading in an era were so many children are permanently glued to their electronics.

To continue to encourage that passion, I was willing to pay up for the proper Hogwarts Academy Halloween costumes. Here is what they ran me:

Official Hogwarts Academy Robe — $50

Official Hogwarts Academy Tie — $15

Official Hogwarts Academy Magic Wand — $20

Tally that up and I spent $85 per costume. $170 between the two of them… Ouch!

Whatever happened to cutting two holes in an old bedsheet and going as a ghost?

Anyway… my kids had a great Halloween and I was also able to teach my kids something important about the world in the process.

Because on November 1st I took them back to the Halloween store where we had purchased their costumes. As we walked up to the store I directed their attention to the store windows which were covered in signs.

Can you guess what the signs read? I bet you can.

“50 to 70 Percent Off Sale — All Items Must Go!”

I think my kids understood the lesson. The time to get a great bargain on something isn’t when it is in hot demand. The time to get a great bargain is when nobody else is buying.

And the same lesson holds true in today’s stock market.

Let me explain…

High Quality Gold Mining Stocks Are Dirt Cheap

There is no disputing the fact that the global financial meltdown of 2008 was caused by excessive debt.

With that in mind, we should all be aware that today the global debt situation has actually gotten considerably worse.

The current total global debt figure stands at a record $247 trillion. That is an increase of $150 trillion from 15 years ago.1

What has changed is who holds the debt.

In 2008, the most excessive debt was tied to housing and the financial entities that financed the bubble. Today that debt has moved from housing and onto the balance sheets of governments around the globe.

As a result, every government in the world is now simultaneously trying to promote inflation because that is the easiest way out of this debt mess.

Which brings me back to the Halloween lesson that I taught to my kids…

Today, there aren’t many people worried about protecting their portfolios against inflation. Just like how on November 1st there aren’t many customers worried about buying a Halloween costume.

On November 1st I could buy Halloween costumes at more than 50 percent off. Today I can buy inflation protection — AKA gold — at a similar discount.

The iShares Global Gold Miners ETF (RING) currently trades at book value. That means that these companies …read more

How to Tap into Big Tax Savings In 2018

Robert Kiyosaki

This post How to Tap into Big Tax Savings In 2018 appeared first on Daily Reckoning.

I recently told you about changes to your personal tax return that you should be aware of for the upcoming Tax Day. But there are big tax savings available if you are a business owner or real estate investor.

The Tax Cuts and Jobs Act has changed the outlook for our finances and the profitability of investments. While much of the press coverage around the new rules has been on its drawbacks, there are some positive financial opportunities for those who educate themselves and act on the new breaks.

Rather than get into a discussion about whether the tax code is fair or unfair, or who is paying their fair share, I intend to just tell you what you can legally do to reduce your tax payments to the IRS.

Many people may find reason to complain about this tax code. But I have a different suggestion: rather than get mad, get smart. Figure out how you can be someone who either grows the economy or creates jobs…or both. By doing so you will benefit from the very behaviors the tax code is designed to reward. The economy and your wallet will be better off for it.

Simply put, in the tax reform, you can see that President Trump is setting up the tax code to reward those who grow the economy and create jobs, while also eliminating some pressures for the middle-class.

Depreciation for Business Owners and Real Estate Investors

The Tax Cuts and Jobs Act has opened up opportunities for investors and property investors with a 100% first-year bonus depreciation deduction. This break will be available until 2022, and then will be reduced by 20% per year until phased out.

Under the previous law, roofs, HVAC and alarm systems depreciated as if they were part of the building—which meant depreciation over 39 years for commercial property and 27.5 years for residential rental property. The new bonus depreciation rules make these items entirely deductible. For instance, instead of deducting a new roof through normal depreciation, 100% of the cost is now deductible in the year it was purchased.

If you spend $500,000 improving your office this year, you’ll receive a $500,000 deduction this year. If your rental property needs a new roof or AC unit this year, it’s 100% deductible this year.

Reduced Corporate Taxes

One of the biggest changes (and most talked about) in the TCJA is the cut to the corporate income tax rate. It’s now 21% from a max of 35%. Also, corporations who bring back money from overseas and reinvest it in the U.S. go as low as 8%.

Generally, business owners and real estate investors receive a 20% deduction of their net income after depreciation and amortization. Now, the 20% deduction is capped at either 50% of wages or 25% of wages plus 2.5% of capital assets, whichever is greater. Because many real estate investors do not pay any W-2 wages, the deduction normally will be …read more

How Hard Is Your Money Working for You?

Robert Kiyosaki

This post How Hard Is Your Money Working for You? appeared first on Daily Reckoning.

Back in 1979 and 1980, I remember my poor dad talking about the rate of return he was getting on his bank’s certificates of deposit (CDs). It seemed normal at the time, but their rate was 18%. Who wouldn’t like an 18% return on a CD today?

What I found really interesting though was when the savings-and-loan crisis hit in the 1980s: the bank retracted the 18% interest rate and basically cancelled the outstanding CDs.

Today, if you invested $10,000 in a five-year CD at the national average rate of 1.15%, you would have earned $592 in interest at the end of the five years.

I have always found it amusing that people think saving money is smart. This strategy is not smart if your goal is real wealth.

I often write about investing for cash flow. But the reality is that when it comes to investing, cash flow isn’t the only thing I pay attention to.

In my investments, I have two key focuses: cash flow and return on investment (ROI), which goes hand-in-hand with cash flow.

What Is ROI?

Your return on investment is exactly that: the amount of cash the money you invested is paying or returning to you. In other words, how hard is the money you invest working for you?

Most stockbrokers or real estate agents talk about a 10% return as a good return. But in most cases, that is a 10% return in capital gains, not cash flow. It’s not real money until you sell the entity. Again, that is the problem with getting your financial education in the S quadrant. (In most cases, S can stand for sales.)

As an investor, I must know what kind of ROI the salesperson is talking about. Is it 10% in cash flow or capital gains, and what are the tax consequences? Am I punished with taxes, or given tax breaks?

More importantly, how do I achieve an infinite return (aka “money for nothing” in which I see returns without putting my own money into the deal)?

Keep It Super Simple

There are several ways to calculate return on investment depending on what you’re measuring. Some are more complicated than others.

Some formulas take depreciation into account when calculating ROI. Another formula assumes that the cash flow you are receiving is being re-invested immediately and takes that into account. Each formula is accurate, depending on what you want to measure.

Personally, unless it’s absolutely necessary, I like to follow the K.I.S.S. principle and keep my calculations super simple. So, when I refer to ROI, I typically mean what is called cash-on-cash return on an investment. After all, I’m only interested in one thing: how much cash is flowing into my pocket. It’s all about the cash flow.

Calculating Cash-On-Cash Return

Figuring out your cash-on-cash return is easy. The equation is:

The annual cash flow / Amount of cash invested = Cash-on-cash return on investment

For example, let’s assume you’re buying a rental property that costs $100,000 …read more

As Growth Slows Down, the Fed Will Be the Last to Know

Chart

This post As Growth Slows Down, the Fed Will Be the Last to Know appeared first on Daily Reckoning.

You are well aware that the Federal Reserve is raising interest rates. This policy started in December 2015 with Janet Yellen’s “liftoff” from zero and has continued through seven more rate hikes in 2016, 2017 and 2018, with another hike expected this December.

The cumulative impact is to put the high end of the range for the fed funds rate at 2.5% by year-end. More of the same is widely anticipated for 2019. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going.

The Fed calls this approach “gradual” but it’s not. There’s a huge difference between a 0.25% rate hike (that’s the Fed’s tempo per hike) starting at 2% versus starting at 6%. In both cases, the hike is 0.25%, but the impact on bond prices and economic activity is much greater when you start with the lower base. There are highly technical reasons for this, having to do with concepts called “duration” and “convexity.”

We don’t need to dive into those. Suffice it to say that hikes from a lower base are much more impactful. In short, the Fed’s policy today is a body blow to an economy that’s still recovering from the worst recession since the Great Depression.

Other major central banks are either following in the Fed’s footsteps (Bank of England) or preparing to do so in the near future (European Central Bank). Even the money-printing and stock-buying Bank of Japan has acknowledged the central bank’s game can’t go on forever. Leaving China to one side (it’s a political shell game leading to a historic credit crisis), the central banks are either raising rates or getting ready.

If this rate hiking were the only major monetary development in the world, that would create a challenging environment for investors in stocks, bonds, gold and real estate — all interest-sensitive in different ways. But it’s not the only major development.

Behind the curtain, central banks are either slowing down the printing presses or actually burning money. This marks the end of quantitative easing (QE) for the Bank of Japan and the ECB and the start of quantitative tightening (QT) in the case of the Bank of England and the Fed.

From 2008–2014, U.S. critics of the Fed complained about rampant money printing under the banner of QE. There was even a popular cartoon that showed Ben Bernanke on the outside of a helicopter with one hand on a strut and the other hand throwing money out of the helicopter with a wild-eyed look on his face. This was a send-up of the infamous “helicopter money” that Bernanke advocated, an idea he nicked from uber-monetarist Milton Friedman.

Many U.S. investors assume QE is still going on. It’s not. QE was reduced with the “taper” beginning in December 2013 and was stopped completely by November 2014. The Fed then kept money supply constant …read more

Rickards: The Fed Is “Triple Tightening” Into Crisis

This post Rickards: The Fed Is “Triple Tightening” Into Crisis appeared first on Daily Reckoning.

I’m in Dublin, Ireland, today, where I was honored and humbled to receive a writing award from Trinity College.

It’s my job to continue pointing out the risks to the financial system that we still face and to try to help people prepare for the next crisis. Of course, central banks are a big part of the problem.

If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time. There’s no better example of this than the Federal Reserve.

The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system.

The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship.

The Fed uses “value at risk” modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.

As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy, only to produce the weakest recovery in history.

That’s over now. The Fed’s cycle of monetary tightening has been ongoing in various forms for over five years. First came Bernanke’s taper warning in May 2013. Next came the actual taper in December 2013 that ran until November 2014.

Then came the removal of forward guidance in March 2015, the liftoff in rates in December 2015, seven more rate hikes to date and the start of quantitative tightening in October 2017.

Another rate hike is already in the queue for December, which would be the ninth rate hike since liftoff.

During much of this tightening, the dollar was actually lower because markets believed the Fed would not raise in the first place or was overdoing it and would have to reverse course. Now that the Fed has shown it’s serious and will continue its tightening path (at least until they cause a recession), markets have no choice but to believe them.

And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).

When the Fed started QT last year, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.

It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes. Markets have already suffered two significant sell-offs this year, the most recent being October’s.

While there were other contributing factors like the trade war and political uncertainty leading up to last week’s election, this monetary tightening cannot be dismissed.

Tighter monetary conditions in the …read more