Sep 18, 2010

Choosing a Whole Life Policy for Banking Purposes

In Nelson Nash's Book, "Becoming Your Own Banker" he outlines a plan for creating your own banking system through a whole-life policy.

There are a few critical components the plan requires for it to work successfully like a bank.

Those components are as follows:

  1. Guaranteed Cash Value- about 60-70% of the growth is Guaranteed.
  2. Dividends- only a mutual company (not a stock company) can offer this growth since the policy holder "participates" in the profitabiltiy of the company.  (hint: Lafayette Life, the company endorsed by Pamela Yellan, author of "Bank on Yourself", is not a mutual company, but a stock company).
  3. Paid up Additions- (aka a PUA-rider) - This buys increasing amount of Life Insurance which in turn earns greater cash value and dividends
  4. Non-direct recognition- the ability to borrow from your policy and have it continue to grow as though nothing was taken out.  (hint: Guardian Life doesn't offer this in their plans, so it doesn't work like a bank, but more like a bond fund).
  5. Tax Deferred growth-all the growth grows without being taxed allowing the principle of compounding interest to really work efficiently.
  6. Flexabitly and accessability- you can borrow from your policy at any time for anything.  No approvals, no applications. 
  7. Increasing Efficiency - the plan should be designed to become increasingly more efficient over time.  The plans designed by Lafayette and New York Life seem to become less and less efficient over time. One reason may be because they don't reward policy owners equally, in that they play "favorites" with some policyholders who came in during more favorable times.
Disclosure: I'm not an insurance professional - I've merely been a hard-nosed shopper of various whole-life products and I have yet to find the company that mirrors or at least resembles the pattern proposed by Nash. (And yes, I've tried contacting Nelson Nash directly a few times, but have been unsuccessful in getting some basic questions answered from him).

Still a believer in the philosophy & power of using a whole life policy as a banking business - just not convinced I've found the product that does what Nash suggests.

Apr 13, 2010

The Government Effect: More Bankruptcies Than Ever

Has government intervention and the must-have stimulus program helped or hurt the average small to medium sized business owner the last year and a half?

Of the Approximate 147,000 businesses in and throughout Maricopa County, Arizona, 2,846 (about 2 percent) have filed for bankruptcy within the last 3 months of 2010 (Jan-Mar 2010), up from 1,731 that were filed within the first 3 months of 2009, a 64% increase.  These bankruptcy figures fail to mention the many other businesses that have gone belly-up on account of the owners simply closing up shop once and for all.

20,411 bankruptcies filed in 2009 for the year - that's about 14 percent of businesses going under in one year, again not counting the many who don't file who simply close up shop.

The rising bankruptcy issue isn't just hurting Phoenix of course.  158,000 Bankruptcies were filed in March nationally - a rise of 35 percent from February, and 19 percent from March 2009.  (

To those in ivory towers in government power making decisions to saddle us with greater debt and bureaucracy, in vein attempts to "help the little guy," those measures appear to be failing...yet again.

Apr 12, 2010

Patience Brother, Patience...

Buying a good stock, piece of real estate, a business, or any other asset requires knowing the actual value of the asset.  Sort of goes without saying, right?

After all, if it's a "good" or "great" investment (please define "good" or "great"), it's only "good" or "great" in relation to the price I've paid for it and the return I've realized.

But how many times have you or I purchased something we thought was a good investment, only to realize later we bought fool's gold?

If we're to know we got a good bargain on any asset purchase, we need to know the true and relevant value of whatever we're acquiring.  Knowing the underlying or intrinsic value of an asset is what separates the professional, high-return investors from the wanna-be's majority of amateur, low-performing return loosers.

Perhaps calling anyone a looser is simply unrefined and a bit harsh.  But reality shows us that most folks simply choose not to do the research required to separate the gold from the dirt.  There are more false-gold, "pretend" assets in the market than ever before.  Peddlers of stock-tippers, mutual funds, annuities, bonds, etc. will gladly sell you a dollar of value in exchange for your giving them 5 or 10 or 100 or more.  (And count your lucky stars if there really's even a dollar's worth of value there at all, for there are just as many pretend assets that are absolutely worthless - true liabilities and nightmares for the owners who try to manage them -- this statement being more true for privately held companies than those publicly available through the stock market).

(I might add that most "professional" money managers rarely eat their own cooking -- that is, they don't invest their money the same way they would a client's.  Therefore, they're not usually professional investors, but rather "professional" advisors.  If these "professionals" were awarded the title 'professional' on account of their actual performance as investors, rather than through a licence issued by a not-so-well-informed government on account of a multiple-choice exam (really?), we would see a lot less professionals giving us advice on how to invest our money.)

I digress.

Let's just make a simple step-by-step guide.  That's what most folks want nowadays, after all - a simple formula, a quick fix, rather than a paradigm shift, or a new frame of reference or a sound philosophy - (you know: the stuff that really matters...).  Nope, we're the fast-food nation - we want it now, quick, dirty, and we don't care about the details of the meat we're eating.

So to appease the majority - here's 3 tips for investing.

1) Know the value of the acquiring asset.  Do the research, put in the time and effort to truly know the risks of owning the asset, the history of performance, the people you'll be dealing with or who will be managing your asset.

2) Know the market is filled with fool's gold, and pretend assets - be willing to separate the wheat from the tares - the former is few and may not show up for many years, the latter is always in abundance for the taking, and for those of an impatient disposition.

3) If you're too impatient to do the research on a stock, too timid to negotiate and work a good deal on a piece of real estate, or you don't have the balls for buying a privately held business and all the risks that entails, then do yourself a favor: buy a broad index fund and dollar-cost average your way to mediocrity and hope for the best - you've just joined the majority who invest exactly the same way.  (tip: such typically have an entitlement mentality however, which is just too bad.  These folks want to get an 8-10 percent annual return over the long term, as if they're entitled to it.)  Still, this method is best for those unwilling to invest the time to really search out, weed out, and make out with a good asset.

When we truly grasp the reality that there just might be a dollar's worth of value being sold for fifty cents in the market, that idea is very empowering.  It means I can take a small piece of pie and trade it in for a bigger piece of pie.  While I embrace this fundamental idea as a reality of the world we live in, it does have a bit more of a zero-sum, 'I win, you loose' price tag attached to it.  People who know me know me to be extremely frugal - I'm working on it.

But when we take the idea of exchange one step further and realize there really are an unlimited number of needs in the market just waiting for someone to come along to fill them - that is, to align the marketplace horses in the direction they're already going - that assets can be created out of thin air by those willing to take a little initiative - that paradigm of absolute freedom to act and create, that "no-money-required," and "everyone wins" philosophy opens up a whole new world of possibilities and realities.  This second idea transforms the pie, makes it bigger for everyone involved.

Think of assets as units of freedom.  The more units you have, the more freedom you have to take your time, to be patient, to research, discover, create, negotiate, and explore possibilities.  Those with greater material wealth are often better positioned to take advantage of, (and are often found carrying a more abundant supply of), this thing we call patience.

Apr 9, 2010

Choosing Quality Stocks - Step 1

In choosing good stocks to buy, begin with the end in mind.

I buy only those companies with stellar returns, a good history of consistent growth and earnings, strong but humble management, with an identifiable competitive advantage, at a good price.

Most folks recommend you start with products or companies you enjoy or ones you're familiar with.  Ones that have a special "meaning" to you.

Not a good idea.

Investing is for the mind, not the heart.  If you want to build a business, your heart better be in it.  If you're buying any type of investment however, your heart better be out of it, and your mind fully in it.

Plus, this "investing with your heart" mentality typically leads to a lot of dead-end roads.  Either because the products we like are owned by a conglomerate that owns a lot of other less-than-stellar companies or products, or because the company is overpriced due to its popularity in the marketplace, or the most common of all: the numbers indicate that while the products or services may be great, the company’s performance as a whole is anything but great.

Why not start with great performance and work our way backwards?

I use stockscreeners to weed out the potentially good from the potentially bad.  Perhaps the easiest one to use, when it works (sometimes it doesn’t), is google’s stock screener.  Another one I enjoy using is  These are both free tools anyone can use to get a preliminary list of good companies based upon predefined criteria.

The criteria I like to use for growth is the simple 15-rule:

10-year EPS growth of 15% min
10-year revenue growth rate of 15% min
5-year EPS growth rate of 15% min
5-year revenue growth rate of 15% min
5-year Net Income growth rate of 15% min

(note: you may want to leave off the 10-years as a criteria, as this weeds out more than half of the 3500-plus companies that google’s screener features, presumably because they don’t have a 10-year history just yet.)

For the operating metrics, we want:

ROI (TTM) of 15 min
ROI (5 yr) of 15 min
Return on Equity (TTM) of 15 min
Return on Equity (5 yr) of 15 min

As a general rule, I’m not going to be investing in any company priced 15 times or more its earnings, no matter how great the returns – call me old fashion, but I like to buy things when they’re priced at a discount - so I set the P/E ratio to 15 MAXIMUM.

Now the stocks we get as a result of this screen will be different for you, depending upon the day you run this search.  But for today, we get the following 8 stocks.  (If I take out the two 10-year rules as part of my search criteria, I get 32 stocks instead of the 8 listed here.)

ITT Educational Services, Inc.  ESI
Satyam Computer Services Limited(ADR)  SAY
VSE Corporation  VSEC
Garmin Ltd.  GRMN
Jinpan International Limited  JST
Noble Corporation  NE
China Mobile Ltd. (ADR)  CHL
Enstar Group Ltd.  ESGR

This gives us a menu of potentially good companies, for potentially low prices.  I say potentially because this is just step 1 of the research.  We have to dive quite a bit deeper to find out which companies are truly solid and good buys.

We’ll come to that in an upcoming post.

Apr 5, 2010

Look for Oil, then Drill Down Deep

Know your aptitudes, skills, passions, and inclinations.

But focus more on the opportunities in the market.

Too many focus on what they enjoy doing, or a particular skill set, at the expense of the needs of the market.

They make a fetish out of their passions, and eventually become slaves to them.

Here's a hint: Let your passions serve you, not you them.

It's more important to learn how to spot a good opportunity - what I call, looking for oil - than to simply be out and about drilling for drilling's sake.  Better to take the time out, assess one's strengths, look for wonderful opportunities and then apply oneself to the deep drilling required to make the pursued course a success.  We don't know how deep we may have to drill before we hit oil in most cases.  We don't know how many opportunities we'll have to look at before we find one we're willing to invest our blood, sweat and money.

Two Principles:

1) A great entrepreneur can make great money in nearly every industry, in almost any economic situation.  The reason why is because he is focused on the opportunity, taking a bigger-than-me approach to the situation.  He sees the business for what it is - not for what he wants it to be or for what he can enjoy doing in it.  He focuses more on the likelihood of finding oil, rather than the joy of drilling.

2) Once one has spotted likely ground, one must be willing to drill down deep.  That is, one must have the capital, focus, persistence, and yes, an adequate supply of passion and other character-based resources to make the endeavor a success - IF he is to succeed.  There's no guarantee that the spot drilled will yield any oil at all.  But we've all heard the stories of men who've drilled within inches of major oil wells, gold mines, etc.  only to give up a bit too soon before selling out.  To succeed with principle # 2, we must have an accurate assessment of our available emotional and financial inventory.

Apr 1, 2010

Time Allocation of a Capitalist

Fundamental to financial success is allocating a portion of one's time towards investigating investment or business opportunities, building a brand or marketing, and negotiating and closing the deal.

Following is a recap of how a portion of my time is allocated Monday through Friday in a typical week.

Mondays: Brand Development
- Twitter, FacebookYouTube
- Broadcasting media
- Blogging
- Posting to relevant message boards
- Listening and getting involved in the ongoing conversations
- Interview and meet with prospective employees, contractors, or teams

Tuesdays: Businesses for Sale
- Search for industries I'm interested in expanding into
- Talk or meetup with business brokers representing listings I'm interested in
- Call owners of privately owned businesses and ask them if they'd consider selling
- Meet with potential sellers and inspect the business
- Submit NDA's (Non Disclosure Agreement), LOI's (Letter of Intent), or a formal offer
- Review a company's financials (if an LOI has been submitted, with my CPA or attorney)
- Call on relatives, friends, accredited investors, bankers to discuss purchase if additional capital is needed
- Negotiate terms, get commitments

Wednesday: Shop Stocks
- Shop for paper assets: stocks
- Use stock screeners (like google or finviz) to weed out the gold from the garbage
- Read a company's financial statements, and industry & annual reports
- Decide go/no go on a particular company - strive for 30-50% off intrinsic value for buy-in price
- Go? Do technical analysis to get right timing and buy in

Thursday: Build Business
- Expand existing company through new promotion, product, or different marketing medium
- Work on having something good to say, saying it well, and often
- Improve the company in a meaningful way
- Not sure how or what to improve in existing biz?  Build a business plan for another business venture
- Post business plan to and other sites to attract investors
- Raise capital for new ventures through friends/family/angels

Friday: Shop Real Estate
- Search the MLS & Craigslist & equity swap sites for real estate for sale or lease
- Post any assets for sale that I'm willing to part with
- Call on sellers, landlords, etc.
- Inspect properties
- Submit multiple offers
- Negotiate, Due diligence
- Close escrow

Recreation: low or preferably no-cost activities like visiting the library or Barnes and Noble, watching a netflix movie, writing, playing disc golf, hitting the punching bags, playing guitar, or playing with my wife or daughter Braelynn.

Mar 30, 2010

Money: It's Just a Game, Stupid.

Suze Orman was quoted as stating the following:  "Money is one of the most important sources of happiness."

If you buy into that philosophy, you've got a shallow view on life.

Money is just the score of the game.

The money you have says nothing of whether you're enjoying the game, or playing your best, or playing fairly, or building relationships with those you're playing with.

The idea is to have fun, play your best, practice like crazy, and the score (i.e. money) will take care of itself.

The best college basketball coach in history, John Wooden, never wanted his players to focus on the score of the game.  His team won the most games because his players focussed on "the inner score card".

Says Mr. John Wooden: "Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are."

Mar 23, 2010

The 9 Forms of Entrepreneurship

The word "Entrepreneur" conjures up many images, beliefs, and stereotypes. For some, the word points them to determined, ruthless businessmen like Donald Trump or Carlos Slim. For others, it might mean free-spirited, people-focussed folks like Oprah Winfrey or Richard Branson. Perhaps we're thinking of the introverted geeks like Bill Gates or Steve Jobs. Or maybe the humble and reserved Warren Buffet.

They're all great entrepreneurs in their own right.

But entrepreneurship is much more than personality tendencies, though our approaches and behaviors do play a major role in determining the type of industry, business, or business model, one is most likely to succeed in.

There are at least 9 types of entrepreneurs - and while some may disagree with the term and how it's used here, in some small way each of the following 9 carry a little bit of that thing we call "entrepreneur" in them.

1. Small Business Owners/Self-Employed - The most basic unit of entrepreneurship is the classic mom-and-pop shop. These guys wear all the hats and do multiple jobs to keep their typically-small operation afloat. While I'm sure most doctors and attorneys would resent being labeled as such, most of them are operators in their own small businesses. While there are exceptions, almost every successful business starts out at this fundamental, basic level.

2. Small Team Developers- For those who succeed in expanding their small mom-and-pop operations beyond themselves as owner-operators, the work turns to training and developing others. Team building becomes the next phase, and those who succeed here know the value of delegation, accountability, and in many cases, dealing with the people-drama issues of all sorts.

3. Innovators & Inventors - For those who venture out into new and uncharted territory, there's the innovator or inventor. Think of innovators as those who create new business models, which typically have a far higher likelihood of success than those who simply come up with a new invention. There are millions of new inventions and patents that are developed each year, and only 1 out of 500 of those will actually pay for the development costs, let alone make a profit. However, those who invent new business models, or what W. Chan Kim would call "

Blue Ocean Strategies

" will increase their likelihood of success in business significantly.

4. Brand Expanders - These business types use joint-ventures, strategic business relationships, and in many cases, a classical franchise model to expand their brand or system. Those who do well with these types of businesses are typically marketing-driven, strategic, big-picture thinkers.

5. Economies of Scalers - These types do well in manufacturing or in creating efficiencies on a large scale. Those capable of getting inputs in bulk for low cost, while creating outputs efficiently and profitably as the market demands do well here. These types of businesses require strict attention to detail.

6. Capital Switchboarders - These types are capable of bringing together and integrating money with opportunities. Like those of the Economies of Scalers, Capital Switchboards require strict attention to detail, as leverage is nearly always employed in sustaining this type of business. Banks, insurance companies, or even venture capital groups are all examples of capital switchboards.

7. Acquirers - These types pursue the course of buying other businesses, typically as a means of diversification from a core-business. They buy their way into other industries, shrinking the risk and learning curve that would normally be required to start a business from scratch. Buying into unfamiliar territory posses many risks however - the most notable being the lack of focus such a course engenders.

8. Conglomerators - These types buy into a diverse portfolio of businesses. Unlike the Acquirers, however, they rely more upon the management of the business remaining intact. They're more receptive to the idea of being a minority owner, buying the idea that owning 5 percent of a great company is better than owning 100 percent of a mediocre company.

9. Buy-Fix-Sell Dealers - These are the classic takeover artists. Whether it's a takeover of a publicly traded company to clean house of entrenched management, or a bankrupt private company in need of restructuring to survive, these types get in for cheap, do their work, and if they're successful, get out at a profit.

In determining the type of business you wish to build or buy, keep in mind the 9 types of approches used by successful enterprenuers.