Archive for February, 2012

I Have to Make Money, Because I am Young

Earning MoneyI have to make more money. What can I do for money? These are thoughts that I am constantly thinking, but why? Why are young people so hungry for cash?

Are you like me, constantly thinking of ways to generate cash inflow?

I have a couple of ideas why young people tend to be so money hungry.

     

  • Being younger usually makes you more ambitious and less jaded towards the world.
    Anything is possible. Maybe you will start a business and strike it rich, who knows. When you are young you also aren’t thinking about responsibilities like children and health insurance (most likely), you are uninhibited in a big world of possibilities. I am confident that this thought process fades with time and added responsibility. 
  • Get a little money while your young and become rich later.
    The power of compounding is a an amazing thing. I myself am confident I can get double digit returns on stocks and options most years, but what’s 20% of $6,000? Starting with a big number allows you to grow exponentially.If you earn 10% for 20 years on $6,000 you will have $40,364 – but if you would have started with $15,000 that first year – it would have been $100,912 after those 20 years.
  • When you have very little money, a little more seems like a lot.
    Last year I did a lot of amazon/eBay selling that probably is going to net out to be about $500 a month before taxes, and I only sold “hardcore” for about 4 months of the year! Here is the thing though, that is $500 on top of my normal salary. If you make $2000 a month and $1500 of it goes towards living expenses, you have $500 of discretionary spending – so getting an extra $500 effectively doubles your discretionary spending/investing.

So what is the post of this article? I am here to say to you – Don’t stop fighting. Keep trying. Never stop. If you failed before – keeping trying.

Getting an extra $5,000 a year even for a few years can drastically change your 10-year picture if you properly invest it.  Think about how much different the world would look with an extra $25k+ in cash?

One step at a time. Take a poke around the blog and you might be inspired for your next business venture.

Borrowing Interest Free Funds to Invest in Stocks?

Zero (0%) Percentage Interest for 12 months. That is the finance offer I received today from one of my credit cards. Should I take out this money to invest in a higher rate of return?

First off, this money really isn’t 0% because they charge a “2% transaction fee.”  You know, because borrowing $1,000 costs them $20 worth of “transactions fees”, and borrowing $100,000 costs them $1,980 more to process. Effectively its 2% APR.
Investing
Let’s talk about why I think it is viable to temporarily borrow this money to invest. As soon as I say that, I know there are going to be “haters.”

Haters Gonna Hate.

How DARE you invest and risk BORROWED money!” some of you might say, but I am here to show you why there is a good chance you are already operating on “borrowed money.”

I assume most people who read this blog own stocks or are options investors. Now lets talk about my track record. I myself have only had 1 negative year in my 13 years of trading (last year). Besides that year, I have had 11 out of my 13 years in double digit gains (percentage wise). I am an extremely aggressive trader, but this isn’t my first time at the rodeo.

So let’s go back to the fact that most of you are traders. Do you own a car? Is that car financed? How about a house or a college loan? Do you have any outstanding debt?

The point is, most people have money in their brokerage accounts BECAUSE THEY BORROWED MONEY. Now there might be a few people out there with no debt at all and what is in their brokerage account is 100% their money, but to them I still have an argument for why this 2% loan could be viable.

Finance OfferIf you trade on margin, there is a 99.9% chance you are paying more than 2% APR to borrow that money (usually more like 12-20% APR) and it would be financially irresponsible for you not to take the lower APR.

For those not trading on margin and without any financed debt (in any form), what kind of return are you earning on your account yearly? How confident are you of that return? These are the questions you should be asking. If you were 90% confident you could earn 10-12% on your money, this is a free 8-10% on the borrowed amount. In my case I have been offered $6,000 on my one credit card, which could equate to about an extra $600 if I end up 12% on the year.

I understand that many people are going to start talking about risk, but stocks ARE risky. I have roughly $6,000 in my account which means I would have to lose 50% of my portfolio after adding in the loan before I would be in trouble of not being able to pay back the principle in full on the loan.

Effectively all this loan does is operate as a margin account with an effective rate of 2%, the loan provides cheaper leverage.

I am 85% confident that I will end this year in double digits return.

I am 99% confident that I will end this year not down –50% or more.

If I was running a risk analysis for a company on whether or not to take this investment, odds are it would be a hands down homerun to the management considering the investment.

Let me disclaim this though, if you are not good about remember when things are due and keeping track of your finances – this is a bad course of action for you. If you are looking to leverage up at a rate of only 2% – this is a sweet deal. Let me also say that this can definitely lead to a slippery slop as well, why not take out a Home equity line of Credit (HELOC) as well? Well you can make an argument for that as well, but that’s for an another article.

Final Disclaimer: Always consult a professional for investment advice. Stock trading is a risky investment and no advice on this website should be taken as advice for how to you to invest.

Buying and selling options can drastically increase your portfolio’s consistent return. Generally options are seen as conservative, but I’m here to tell you that you can easily achieve double digit yearly returns with options.

Since my recent update about my personal portfolio, I have taken a giant hit on my amazon option. This position was not conservative to say the least and Amazon went down about $20 a share in after-hours after earnings reports. Surprisingly even after all the pain I am still up about $120 for the year, which would equate to 26% APR return. Now after hearing that you might think – why would I even take a conservative position with options if yo are clocking 26% APR? Well I might have finished up 2% for the month of January, but at one point I was up more like 18% – Fluctuations can be too sharp of adjustments.

So I restructured my portfolio to take a little more conservative of an approach with a large portion of my portfolio. it first started with me purchasing 100 shares od DOW chemical at $34.12 a share. I then wrote and sold an option with an expiration of 9/22/12 @ a strike price $35 for a premium of $2.60.

What does this all mean?

I own 100 shares of DOW and have given someone the right to buy the shares from me for a price of $35. They have the option to buy them from me until 9/22/12 (231 days from now).

Why DOW Chemical?

Dow Chemical is a relative conservative stock. I feel that the stock is more likely to go up than down, but honestly I really don’t care if it appreciates at all. The goal here is that it does not depreciate. I also considered GE, but the options were not paying as well. Another reason – Dividends. Dow pays 2.93% Dividend Yield, so if I do end up holding onto the stock (which is very possible), I will enjoy a relatively healthy dividend payout.

What am I netting from this Transaction?

If Dow Chemical Appreciates to $35 or more and the option is executed, I will receive: $260 (option selling price) + $82 [$35 (strike price)– $34.12 (price paid) * 100 shares] + any dividends I receive before the execution of the option. But the general idea is I’ll receive $348 on my $3,412 investment (ignoring commissions). That equates to a 10.2% return. If the option is executed on the strike day (231 days from now) that is 16.1% APR (not compounded). If the option is executed earlier than that – it could be even higher of an APR.

If Dow Chemical Depreciates below $34.12 and the option is not executed, I will net: $260 (option selling price) + any dividends received – [(100 shares x current market price) – (100 shares x 34.12)]. It is also important to note that as the price devalues, I can buy back my option for a fraction of the cost and re-write the option to net another premium. My APR will vary from 14.93% + dividends to –92.4% (if the stock completely defaults). My break-even price not considering dividends is: $34.12 – $2.60 = $31.52 a share.

If Dow Chemical doesn’t change in price at all I will net: $260 + dividends received. APR: 260 / 3412 = 7.6% * 365 / 231 = 12% APR + 2.93% Dividends = 14.93% APR.

So there you have it – Why options can be an attractive approach to achieving double digit returns. I will be back with more posts on how to analyze options and how the process of buying back written options to retain a higher APR even in a declining market.

Mortgage and down paymentThe idea of buying an owner occupied duplex is simple, live in one unit and rent the other. Here in the Cincinnati, Ohio area it is very viable that you can cover your entire duplex mortgage payment in full (including taxes and insurance) from the income from your tenant.

I myself am completely fascinated with the idea of living mortgage free, but how likely is it that I will truly live mortgage free at a young age … not very likely without extreme measures. I am currently 25 years old and if I continue normal payments on my mortgage, at age 45 —  I will still owe $56,562 out of the $117,000 balance on my loan. My payments will be exactly the same (except discount for time value of money).  If I paid $500 extra towards my principle every single month, it would still take me about 11 years 6 months to pay off my loan. Going 11.5 years without $500 a month is not viable or financially responsible.

So what are the options for living mortgage and rent free at a young age without piles of money? Buy a very small house (Less than 50k) or buy a duplex or multi-unit building and let the tenants pay your mortgage.

Let’s assess both options:


1295533_1(1) Buy a very small house (less than 50k):

Pros:

  • Small Mortgage
  • The end is in sight, especially after a larger down payment.
  • If real estate drops 10%, you might only be talking 5k.
  • No Sharing Walls  / No Noise / Privacy

Cons:

  • Often in questionable locations – and safety is an absolute must for me.
  • Often these houses need lots of costly work and effort.
  • Without cash inflow from the property– you will never be free of payments entirely, taxes and insurance are still due yearly.

1278958_1(2) Buy a Multi-Unit Home or Building (Such as a Duplex)

Pros:

  • If you land a good tenant, your entire mortgage (including taxes/insurance)  is usually covered (in some regions of the US)
  • You qualify for deductions
  • Certain expenses are half-deductible for duplexes (for example painting the exterior or landscaping).

Cons:

  • You are a landlord, which comes with all kinds of trouble. For example, you are now subject to state landlording laws and possible legal action from your tenant.
  • Even though you have an expense Duplex (or multi-unit), you may not be able to itemize since you have half of it rented out and half of it is depreciated over 27.5 years.
  • Sharing Walls / Noise / Less Privacy
  • Don’t forget you get taxed on any profits


So which makes more sense? Around where I live, I could easily find a house for $72.5k or less which would keep my estimate payment under $500 a month all in (taxes / insurance / everything) or I could find a duplex and most likely pay $0 a month and possibly break just about dead even after taxes (effectively living completely free in a duplex). I suppose it all boils down to this: $500 a month with a small house or $0 a year with a duplex where you have a tenant and have landlord duties. Tough call.

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