Get Rich Slick

The Dow has been flat for 7 years. Take a look at this chart (click it), it shows that the Dow, adjusted for inflation, hasn’t budged an inch in 7 years!

On October 30, 2000 the Dow closed at 10,817. Yesterday, the Dow closed 13,792. You’d think you have a 3000 point gain but that’s deceptive because inflation isn’t factored into the numbers.

Let’s assume 3.5% annual inflation over 7 years (84 months) so when we take 10,817 and adjusted for inflation, it should be at…….13,815!

Yup, you’re reading that right. Over the last 7 years, the Dow has simply adjusted for inflation! It hasn’t moved up in value one bit!

You might have taken the Dow’s gain between the seven years (3000 points) and divided that by the original (10,817) to come up with 27% “return” over the seven years but that doesn’t include or adjust for inflation. Take 27% and divide that by 7 and you get 3.8 pct per year which isn’t adjusted for inflation!

I’m not even going to do the math for the S&P and Nasdaq because those numbers are much uglier! Just look at the graph!

The Fed may lower interest rates later today and the Dow may “rally” but, you guessed it, those “rallies” are doing nothing more than adjusting for inflation.

Keep this in mind and consider ways to make 20% or more per year with your investments to keep ahead 😉 .

If you had a couple of million dollars, what would you do with it? While many people desire to be rich, very few people ever get there and the lucky few who win the lottery end up being bankrupt within five years. Why?

Managing a great deal of money isn’t as easy as it sounds. Let’s look at a few scenarios:

You decide to play it safe, you take two million dollars and buy bank CDs at your favorite bank earning a cool 6%. You figure 2 million earning 6%/year will give you $120k of income without every touching the principle.

The flaw: Banks only insure funds up to 100k so if the bank fails, you could lose 1.9 million dollars. If you don’t think this scenario applies, take a look at the people who recently lost millions here in Netbank’s failure recently.

You decide to avoid the bank FDIC pitfall by buying a $1,000,000 home and keeping the rest of the money in bank (100k) and the rest (900k) in bonds and mutual funds. You have insurance on your home so if it gets destroyed, the insurance company will reimburse you right?

The flaw: Although insurance is pretty reliable, there are many EXCLUSIONS in which an insurance couldn’t or won’t pay. A few quick examples: Insurance won’t pay if your home is destroyed by insurgency, riots, nuclear fallout, or flooding to name a few. The scenario exists that a huge disaster could render an insurance company insolvent and get no claims paid at all. Additionally, your home is only worth what the market is willing to pay for it so if you paid 1 million, it doesn’t mean it will always be worth 1 million. There are plenty of homes in Florida right now that were worth 300k a year ago that are now worth 250k and may be worth 175k by the end of next year.

You decide to live in a modest home (250k), invest the rest of the money in the stock market because even though the stock market goes down, it’ll go up in the long run right?

The flaw: Historically, the market has returned 10% per year, but historically we’ve never had 1/3 of the US population retiring at nearly at the same time. Historically, we’ve never faced random terrorist attacks that send shock waves throughout the economy. Historically, we’ve never faced a labor force of 1 billion Chinese or 1 billion Indians competing for the same jobs, the same resources (food, oil, metals, coffee, etc), and the same lifestyle.  It’s no odd coincidence that Warren Buffet is in China this week looking for investment prospects and perhaps some better opportunities. While stocks generally do return 10%, you need to be sure you’re invested in the RIGHT stocks.

You decide that the best place for your 2 million sans 100k (at the bank) is Treasury Bonds. The US Government has never defaulted on debt so you’re perfectly safe.

The flaw: China and Japan now hold about 2 trillion dollars of US debt. IF they ever decide that they don’t want to subsidize the American lifestyle, they can send the US Treasury market into a panic by dumping Treasuries. It’s an unlikely scenario but still plausible but worse yet is the devaluation of the US Dollar.  If you like eating New Zealand lamb, Chilean Black Grapes, or drinking French wines, you’ll pay through the nose for these “luxuries” with the continued devaluation of the US Dollar. The devaluation of the USD along with inflation will ravage your Treasury savings.

So where is a “safe” place for your money? There really isn’t a “safe” place for money because “safety” and “money” don’t exist anywhere in our financial world.

“Money” is nothing more than a unit of exchange for one thing: labor. At the end of the day, every product and every service that a person wants can be reduced down to the labor involved in producing or servicing something.

So ultimately, the best place for money is in an investment that gives you the best access to the widest variety of labor in a society. I’ll let you figure this out for yourself ;).

If I recall from books like The Grapes of Wrath by Steinbeck, the conditions during the Great Depression of the 30’s don’t appear to be too different from what I’ve been reading recently in the news.

I read this article from MSNBC about U.S. Water Supplies drying up claiming that 36 states will be suffering shortages within 5 years.

From AP,

WEST PALM BEACH, Fla. – An epic drought in Georgia threatens the water supply for millions. Florida doesn’t have nearly enough water for its expected population boom. The Great Lakes are shrinking. Upstate New York’s reservoirs have dropped to record lows. And in the West, the Sierra Nevada snowpack is melting faster each year.

Across America, the picture is critically clear — the nation’s freshwater supplies can no longer quench its thirst.

The government projects that at least 36 states will face water shortages within five years because of a combination of rising temperatures, drought, population growth, urban sprawl, waste and excess.

During the Great Depression, crop failures led to farm failure which in turn led to foreclosures and today we suffer from over zealous bank lending that is leading to an estimated 2 million foreclosures over the next few years as written about here.

By Bloomberg | October 26, 2007

WASHINGTON – About 2 million subprime borrowers will lose their homes to foreclosure through 2009, costing them $71 billion in housing wealth, a congressional report said.

Sub prime foreclosure rates will increase as housing prices stagnate or decline, and the effects of the sub prime crisis may spill over to the broader economy, according to a report by the Joint Economic Committee released yesterday.

During the Great Depression, the country suffered from massive deflation caused by the inability of the common man to secure lines of credit to purchase anything and with oil at $90/barrel, it’s not out of the realm of possibility that massive inflation begins to sap consumer spending into a deflationary spiral.

It doesn’t help that we have 80 million boomers expecting entitlements (Medicaid, social security, Medicare, etc) over the next few years and the overall productivity in the US will DROP as people LEAVE the workforce.

Edgar Cayce, the Mayans, the Hopi, Nostradamus all predicted a great change to society during the great galactic solstice so we’ll see what happens.  One thing for sure is the next 10 years are going to be very interesting.

I love shopping at Costco but the upselling is getting ridiculous.  I went shopping this weekend and as I was checking out with $300 worth of food, a roaming clerk came by and scanned my card.  She started with the usual pitch, “Sir, can I ask you a question?”

I quickly replied, “No, I don’t want to upgrade.”

“But you’ve spent $3000 with us so far this year, you could be saving xxxx….”

I write xxxx because I mentally shut her out of my mind and didn’t listen to the rest of the sales pitch.   It was an offer to upgrade to “Executive” or “platinum” membership or whatever they call it now.   I get it almost every time I shop there now.

Oddly enough, even if I had been interested, there was no way in hell that I would have signed up then and there.

Why?

Because if I did sign up then and there, it would only ENCOURAGE the store to keep doing  things like this over and over and possibly expand it into other areas.   Once other companies found out how well this worked, they too would be encouraged to upsell at the check out.

Imagine dining at a fine restaurant and the hostess comes up to you and says, “Sir, we’ve checked our  records, and you like to dine at our steakhouse twice a week, if you sign up for our new “platinum carnivores card” you can save 10% on all your future steak eating visits.”  This would ruin an otherwise great dinner and really set me off to the point where I wouldn’t come back.

It’s really gone beserk.  I stopped shopping at Best Buy because of the continuous harassment to buy warranties, join the “points club”, buy additional software and accessories every time I stepped inside the store.  I haven’t shopped Best Buy in years for this single reason.

Despite my disdain for the upsell, I still love Costco because it’s the only place I can find high quality wine, food and other products under one roof.

Costco, if you’re readig this, lay off the pushy lady trying to upsell memberships, you’ve got that “executive” thingy plastered all over every wall in the store and I get reminders about it every month with my bill so I am already aware of it.  Thanks but no thanks.

Pretty amazing, oil hit €63/barrel today. What’s that? You don’t know what that € symbol is? It’s the symbol for the EURO which represents the currency of greater Europe. Most oil rich countries have decided that they prefer to get paid in € rather than $ so in the future, you’ll likely see the cost of oil reported in € rather than $. As I write this, one € = $1.43 so €63 = $90

On a trip to Cancun a few years ago, I saw signs at tourist shops all over the place that read, “We take Euros” and I was surprised that Mexico would accept currency from a union 2000+ miles away but they took them way back then. It was a big hint to me that something was off with the US dollar if people in Mexico were eager to take currency from a union so far away.

Flash forward 3 years later and the US Dollar has lost 40% value against the Euro. Perhaps the business owners in Mexico aren’t so naive after all. It could explain why the world’s richest man is currently a Mexican.

It could also explain the strange anomaly of a chain of pizzerias in the southwest accepting pesos as payment for their products and seeing sales jump 35 pct but who knows….

We live in a stranger and stranger world. A world where a person from France can fly down to Mexico and pay for his goods with Euros, get Pesos in return as change, have a stop over in Dallas on his way back, order a pizza from his hotel room and pay for it with Pesos he got in Mexico and perhaps get dollars as change back.

This is all great, except when I do it, I lose about 20% in conversions. When will we have global dollars? Perhaps they’ll be called “Terras” or “Terra-dollars” or maybe “Gaias” 🙂

It occurred to me that one of the key corner stones of my wealth could be attributed to one thing: leverage. I know what you’re thinking, “oh great, leveraging is very risky, I don’t have that tolerance” but that’s where you would be wrong.

I have actually leveraged many things to achieve the wealth I have today. The first leverage took place when I borrowed money to get myself an education. It wasn’t just a college education, although that helped, but it was a cumulation of all the other education and training along the way. The returns here have been astronomical when you consider the median salary out there is 40k compared to the income I currently generate.

The second thing I leverage is money. In the past, I didn’t really consider borrowing as a method to growing wealth but it turns out the more money I seem to borrow at low (or zero) interest rates and leverage into higher returns in the stock market or in bank CDs, the faster my wealth accelerates. There is risk here but it is calculated and managed risk which is factored into the leverage.

The last and most commonly used leverage is time -most people build their wealth by leveraging time. You know those “spend less than you earn” types that tell you to invest in mutual funds over the long haul and you’ll get somewhat rich. Well, it’s true to an extent, the caveat is making sure inflation doesn’t eat away at your wealth as you leverage time.

So what are the three key things to leverage to get rich? Knowledge, Money & Time. If you’ve ever read the profiles of most of the billionaires (Carlos Slim, Warren Buffet, Bill Gates) and understand how they accumulated their wealth, you’ll realize that they all leveraged knowledge, money and/or time to get where they’re at today.

Earlier this week, I banked $4600 with ETF Covered Calls and I’ve been asked how I pick my ETFs for covered call writing. It’s pretty simple, the ETF-Cashinator does most of the work as it scans all ETFs with my special criteria and spits them out in order of highest return possibilities. I look at the top 10 then start my research.

The ETF picks have been fairly consistent and the returns have been quite acceptable to me. Because a few people have asked some questions I figured it was time to go through ETF Covered Call writing 101 again so here it is…..

What is an ETF?

An ETF is similar to a mutual fund, both of these are instruments that hold a basket of stocks. The type of stocks these mutual funds/ETFs hold depends on their creators philosophy and investment management style.

Why do you love ETFs vs. Individual Stocks?

This is the easiest question for me to answer. I initially started trading individual stocks and even moved on to covered calls on individual stocks but the same awful thing kept happening – losses! My losses were almost always exclusively caused the same thing over and over again -fraudulent information! I owned Worldcom, did my research but the company ended up filing for bankruptcy because of fraud. Remember Enron? I can name a dozen other companies that went bankrupt during the dot com boom too where I took some losses all because of some type of fraud or gross mismanagement.

The alternative to individual stocks were pretty slim; the key alternative in the past were mutual funds. High fees, hidden and mysterious stock ownership in the funds along with questionable conflicts of interest by some fund companies kept me clear of mutual funds. The worst part though was lack of options trading – you could never buy puts on a mutual fund or sell calls for additional income.

ETFs jumped into the picture to give us the best of both worlds as they provided the”safety” of a basket of stocks along with the ability to trade options (note: not all ETFs trade options). With ETFs you could buy downside protection if your research shows the markets aren’t going to do well in the future. Heck, you could even profit by buying long and selling short (ETF Covered Calls).

ETFs have become more sophisticated in recent years allowing you to leverage upwardly or downwardly so you can build a truly wildly diverse portfolio.

What about diversification?

This is perhaps the most amazing thing about ETFs! There are now ETFs that can provide exposure to investments that mutual funds couldn’t even dream of such as commodities, precious metals, currencies, international exchanges, energy, real estate, and a whole lot more! ETFs allow you to truly diversify into hundreds of investment vehicles!

Where can I get a list of all these ETFs that have options? Which are your favorite?

My favorite ETFs can be found here and you can find a list of others here but I believe the ETFs I’ve selected are the optimal ones for ETF Covered Call writing since they are within the following parameters: 100k or more of average daily volume, options market, ETF from major market maker. Of course, you must do your own due diligence and make your own determination. The cheat sheet in the first link also includes my favorite leveraged and shorting ETFs.

What is the downside here?

The downside depends on your investment perspective, clearly when you have more choices in an investment you will need to do some research to decide where, how and when you want to invest in a particular ETF. If you think the market will drop, then a shorting ETF might be what you want, if you think the market will rally over the long term then perhaps a leveraged 2x index ETF might be the right for you. If you want to be a long term investor but profit from short dips, then perhaps ETF Covered Calls will work for you. The downside is that you MUST DO YOUR OWN DUE DILIGENCE and appropriately invest your money at your risk comfort level.

If you are a person that prefers to never think about an investment then this type of investment vehicle might not work for you. You might be better off with a lifestyle fund that might get you some safe, predictable returns over the long haul.

How do I make a lot of money with no risk?

If you find that out, please let me know. I believe there is risk in everything we do but to put it in perspective, people lost their life savings in companies like Enron, Worldcom, and various market crashes over the decades. There are many people who are losing their homes right now in the subprime mortgage mess so even a “safe” investment can go sour anytime. I am a strong advocate of ETF Covered calls because it provides some diversification (a basket of stocks), the ability to take risks (options trading), the ability to “insure” your investment (put buying) and the ability to move instantly into cash whenever you want.

Where do I learn more?

I have a few examples of covered call writing with your online brokerage account here. This basically describes the “mechanics” of how to execute a buy/write trade or sell calls on ETFs you may already own. The most difficult thing, in my opinion, is getting over your fear. If it helps to conquer any fears, call a broker and have him/her walk you through the transaction or better yet, have them do it for you. The brokers will usually charge extra for taking an order over the phone but after you do two or three trades and are pleased with the results, you’ll quickly find that there’s no point for the middle man to be taking a big cut of your profits.

Are you a Professional Trader, Broker, CPA, CFP?

No! I am not a professional trader, nor a financial adviser or insurance salesman and I do not offer or sell any type of investment advice. I am a private citizen expressing myself through my constitutionally protected right of free speech. What you read here is NOT advice for you to go out and buy or invest in anything. Consult a professional and do your own due diligence before investing any money in any type of investment.

I’m getting sick of FICO. My score dropped from 825 down to 745 presumably because I took out some arbitrage money and took out a new car loan. Here are the “reasons” my score allegedly dropped:

1. The proportion of balances to credit limits on your revolving/charge accounts is too high.

Analysis of consumer credit behavior repeatedly finds that owing a substantial balance on revolving/charge accounts (Visa, MasterCard, Discover, American Express, Diners Club, department store cards, etc.) relative to the amount of revolving/charge credit available to you represents increased risk. In fact, the level of revolving debt is one of the most important factors in the FICO score. The score evaluates your total balances in relation to your total available credit on revolving/charge accounts, as well as on individual revolving/charge accounts. For a given amount of revolving credit available, a greater amount owed indicates a greater risk, and lowers the score. (For credit cards, the total outstanding balance on your last statement is generally the amount that will show in your credit bureau report. Bear in mind that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts.)

So I’m allegedly an increased risk because I borrow money at 0% and put it into safe investments. Stupid. But what really gets me boiling is this last part, “Bear in mind that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts.” So even if I didn’t carry a balance but borrowed 30k and repaid it every month I’d STILL be penalized with a lower score. How the f*** does this make sense? This rationality is bordering on defamation of character.

The second reason for my score drop,

2. The time since your most recent account opening is very recent.

Research shows that consumers who have recently opened new credit accounts are slightly more likely to miss payments than those who have not. This is not an especially strong risk factor, and therefore usually means a difference of no more than a few points in a consumer’s FICO score.

Source: Fair Isaac

Huh?  People who open accounts  are more likely to default?  So we should never get a car loan or open a credit card account because this is a negative – what would the purpose of FICO be in that case?  No open accounts, no need for FICO but then someone must have had a sense of irony because the whole thing is neutralized with, “This is not an especially strong risk factor, and therefore usually means a difference of no more than a few points in a consumer’s FICO score.”  So if my score went from 825 to 745 and a single new account only accounted for 5 points (or so) then I experienced a 75 point drop (9%) on strictly borrowing some arbitrage money.

I can’t tell you how peeved I am at this right now.  FICO is a SHAM!   I wonder how many BILLIONS of dollars consumers are being overcharged because of the shamsters.  SOMEBODY PLEASE FILE A CLASS ACTION ON THESE CLOWNS!

By the way, in late January, I will likely pay off ALL my debts with cash, it’ll be interesting to see what happens to my score when I pay off my car note, mortgage and all credit card debt.

Here’s a graphical representation of one of my accounts utilizing the ETF Covered Call strategy and it shows how my returns beat the Dow Jones Industrial Average, S&P 500, Russell 2000, and Nasdaq composite from Q1 thru Q3 2007.  I’ll post the 2007 results sometime in January.

First up, ETF Covered Calls vs. Dow Jones Industrial Average

Next, ETF Covered Calls vs. S&P 500

next, ETF Covered Calls vs. Nasdaq Composite

and finally, ETF Covered Calls vs. Russel 2000 Index

What I truly love about this strategy is that it provides an “escape” route during rallies and protection during pull backs and dips.   Right now, my arbitrage account got assigned which means I’ve locked in my profit and am currently sitting in cash.  My mini-account covered calls didn’t get assigned so I still own the shares in UNG which means I can sell on Monday for a profit or sell November or January calls to earn additional profit and buy downside protection.

Only time will tell if this is a profitable long term investment strategy but I’m sticking with it for a while since it’s working so well for me.  To see the transactions, click over here.

Have you ever seen a heroin addict get their fix?   For those that don’t know what heroin is, “a strongly physiologically addictive narcotic C₂₁H₂₃NO₅ that is made by acetylation of but is more potent than morphine…used illicitly for its euphoric effects.”

In case you’ve missed it, the US Markets have been exhibiting systems of a heroin addict with the Fed as the main supplier. We saw the Dow drop a thousand points in August (withdrawal) only to have the Fed step in with an injection of liquidity (dope) to make everything better again.

What you may not know however is that each “fix” of heroin is less effective than the last hit.  “Resistance” builds with each “fix” in a heroin addict and the US Markets are no different, each “fix” (a.k.a rate cut) only gets you so far until the next big withdrawal kicks in and the next time is always worse.  Heroin isn’t exactly cheap either,  it costs a great deal to maintain this habit.

Everyone knows heroin is not good  for you despite the euphoric effects it produces, the long term consequences are all detrimental.   If you follow this blog, you know I shorted the Dow and S&P when the Fed injected the last hit.  I knew what would be coming after that; wasn’t sure how long it would take but I knew what would happen.

In a few weeks, the Fed will meet again to figure out if they want to give the markets another hit or act a little more responsibly and change their ways.   I’m not sure what the Fed will do but it can’t ignore some of the consequences of its actions: Oil at $90, Gold at $770/oz, USD falling off a cliff, etc.

No one cares too much about a heroin addict until they get behind the wheel of the car and kill someone or resort to other desperate despicable acts.  I hope the Fed addicts don’t end up there but that’s where they seem headed.