Investing Rules from an Old Guy

Are you ready and willing to take more risk and go for higher returns? There are multiple ways to go about doing this, but I don’t have much experience in these areas. I’ll leave it to the reader to research these areas if interested.

• Buy stocks on margin, which is basically borrowing money from your brokerage firm to buy stocks. This amplifies your gains … and losses. To illustrate how leverage using OPM (Other People’s Money) works, buying and selling a house will exaggerate the effect.

• Ignore transaction costs to simplify the math …
• Buy a $1M home with a 10% ($100K) down payment and take out a mortgage/loan at 4% for the remaining $900K.
• After 1 year the house has appreciated by 5% and you sell it for $1.05M. With the proceeds you pay off your mortgage, pay one year of interest, and end up with roughly $114K for a 14% return on your $100K investment.
• The result was a 5% increase in the asset value is amplified to a 14% return because of leverage from borrowing. Of course, losses are also amplified as well.

• Options. Sorry, I don’t have any experience with options. I just know they are risky if you don’t know what you’re doing.

• Commodities and Future Contracts. Sorry, I don’t have any experience with futures. I just know they are risky if you don’t know what you’re doing.

• Alternative investments

• In rule #3 I introduced the concept of 3 buckets. The first was for low-risk stuff, the second was for tax-advantaged retirement accounts, and the third was for higher-risk stuff. There is a 4^th optional bucket for alternative investments.
• These are things like partnerships, real-estate, hedge funds, etc. and these often require you to be an “accredited investor”, which the SEC defines as someone with a net worth of at least $1M excluding your primary residence.
• For now, you should stay away from these risky ventures. Ask me sometime about the ATMs I “bought” from a guy who is now in jail. Or about my investment in the medical marijuana industry that offers to pay dividends in hard cash a.k.a. Benjamins a.k.a. greenbacks!