John-Paul's Blog

Everybody who knows me, knows I love March Madness!  And right now, as of this moment, all 4 of my final four picks are still in it.  Unfortunately, Tennessee, who was one of my Elite Eight, didn’t quite make it, losing to Louisville and Duke. It’s an enormous disappointment along with Clemson, who I took to get to the Sweet 16. They bowed out in the first round. 

I pick UCLA to win it all, edging out North Carolina in the finals.  My “Upset” to make it to the Elite Eight was #3 Wisconsin.  I believe that they are vastly underated.  They will need to get by a hot Davidson to get a match up with Kansas.  Also, I am pulling for the Longhorns today, not just because I reside in Texas, but I took them to get past Stanford and the Lopez twins. 

What teams did you pick?!

I have been following the market lately (especially commodities), and it appears to me that the reason for Silver breaking $20 and Gold breaking $980 and Oil reaching $103 per barrell, is not because of an unbelievable immediate demand for the usage of these products (even though there has been a very nice market for them lately) but because of the falling dollar. Since November 2005, the dollar has dropped twenty cents.  That means that your savings has gone done down by 1/5. 

And when you look at it that way, naturally, you would think that everything else should cost one fifth more (and you should get paid 1/5th more!) just to break even.  Which is what makes falling home prices so scary.  Homes should be skyrocketing in value!  If you bought a house at the end of 2005 at $100,000 dollars, your house should be worth, not including appreciation, $120,000 dollars, but with the falling home prices, it may be worth only $90,000 dollars, which means that your house would have lost 25% of it’s value.  And when you add in the possibility of a recession, already America’s present finances are not looking good, and we haven’t even gotten to the baby boomers starting to draw money out of Social Security!

So how do we combat this?  First, you cannot make good financial decisions and expect to keep your finances afloat without a good financial background, especially in this day and age.  So first, become financially educated, once you do that, you have finished half the battle. 

Secondly, look for other places to put your money, other than the bank.  It may be the “safe” and traditional thing to do, but when you really think about it, how safe is it, if the bank is giving you 2% interest, and the government is inflating at 10% interest?  In reality, inflation is stealing from your bank account!  That is why it is important to have a good financial education.  If you realize that you are and have been losing 8% of your money per year, for the last 2 years, than it doesn’t really matter if your investment doesn’t always perfectly pan out.  If you keep on losing 8% per year, your savings will eventually become almost worthless anyway! 

And finally, if you prefer maximum safety, you might want to get into precious metals, but be very careful, when an investment is making all the news and headlines (like gold and silver), that is the time to usually stay out of that market.  Most of the finance books that I have read recommend that procedure, and so has my bit of stock market experience (sometimes to the chagrin of my virtual bank account!)

I hope that this post has helped you and I welcome your comments.

As my readers know, I trade the stock market daily, and part of that is checking up on the economic market, and lately, the news has been pretty bad.

Despite the Fed cutting interest rate three quarters of a point, and George W. Bush giving out tax rebates, foreign markets have not been convinced that America is heading off recession.  Add a quickly slipping dollar, and America’s financial horizon is not looking pretty.  Many companies’ earning reports have gone down, with a few notable exceptions of course i.e. ~ Walmart, 100B in sales.  America may be in for another interest rate cut at the Fed’s March meeting, or at least, such speculation has been helping the market today in pre-market trading.  The Fed is doing all it can to keep consumers spending money and avoid a strong recession.

So with the interest rates being cut, (and possilbly being cut even more) real estate is starting to look pretty good to me.  Real estate prices drop dramatically in depression/strong recession, and that combined with the low interest rates, would be the time to buy. The Great Depression made more millionaires than any other time in history, so look out for good deals starting to come around sometime soon!  

Last week, I finished, Mr. Alan Greenspan’s new book called, The Age of Turbulance.  It is an amazing book about Mr. Greenspan’s life. He starts off with an inside look at his personal background, where he was born, his environment and his early personal life, all of which he describes in detail before he moves on to his interest in matters of finance and the creation of his first business, Townsend and Greenspan.  And finally, he describes his reign as the Fed Chairman. Here he offers his insights into world issues, such as oil and the National Trade Deficit, and gives his “Delfic Future” in which he predicts who will be the major players in 2030, as well as the world economy at that time.  His predictions I found to be facinating, and I look forward to seeing if they are realized.

Overall, I found the book excellent.  A book that has the perfect mixture of combining learning, (reasons for high interest rates) with entertainment (such as the briefcase indicator).  Learning the everyday work of a high standing goverment official was both exciting and intriguing.  And discovering what Mr. Greenspan did to try to combat the problems such as 9-11 or Black Monday, was thrilling as well as educational.

At a business conference I just attended, I had an idea come to mind regarding a metaphor between stocks and my favorite sport, tennis.  Being able to and knowing when it is appropriate to go long on a stock is like being able to hit an excellent forehand.  Being able to short a stock and having the knowledge when to do so is like hitting a good backhand.  Knowing your stock market patterns is like having anticipation and knowing to what side your opponent will hit the ball to so you can be ready to make money, or as in tennis, to hit a winner.  Volume, which is the likelihood that the stock will continue to go in the direction it was previously moving, whether up or down, is like having the stamina to continue playing tennis at your top level.  And if your stock has momentum, that will be like as tennis players call it “In the Zone” where you are on a roll and hitting your shots well.

Lately, I have been working on checking important economic indicators such as oil, wheat, gold, silver and the unemployment rate to correctly assess the current economy.

Gold and Silver: Gold closed yesterday at a pricey $782.00 per ounce while silver closed at $13.66.  Gold and Silver is a highly important indicator to me because they tell me the overall strength of the dollar.  If the dollar goes down…the price of Gold and Silver will go up and vice versa.  Gold has gone on a run since September from about $675 to $782, an increase of $107 in about a month and a half.  Also, the $DJI has gone DOWN in value compared to real money (Gold and Silver).  So while people say the Dow is reaching new highs, it actually peaked somewhere around 2000, and has been going down relative to the overall strength of the dollar.

Oil:  Oil just hit $88 dollars a barrel and it is becoming a major economic factor quickly. 

Wheat:  Wheat has dropped from $190 to $160, not a good economic sign for commodities, but I believe we are still in the 10 cycle of the 20-10-5 rule.  The 20-10-5 rule states that for 20 years it is good to be in stocks, for 10 years it is good to be in comodities, and every 5 years a tragedy occurs - example: 9-11.

Unemployment Rate:  Unemployment rates have been good this year staying roughly around the 4.5% mark throughout 2007.  Even though last month was the worst unemployment number of the year, it is still down 1.4% from when unemployment peaked in 2003.  I believe this indicates that the economy is still growing steadily, but how this indicator is measured is crucial to its validity and I still need to do my homework on this aspect. 

Scrap metal is also an indicator I am looking at. Think of checking these indicators like checking your blood pressure and pulse. They are general overarching baseline assessments - if something is wrong, one needs to do more testing. Test our economy and listen to its pulse regularly.

You can make money four different ways in real estate via appreciation, depreciation, cashflow and amortization. So for any one deal you need to check out every avenue of financial gain.

I found, through my favorite Realtor, Mom, a RV Park of 37 pads for $1.2 million that appears to be an outstanding investment.  Below is how I work out my four avenues of financial gain.

For the appreciation side of this deal: The real estate deal I am analyzing, is in an area of quickly increasing population growth, 95% in the last 4 years.  That is an excellent indicator that the property in that area will consistantly appreciate, making me more money when and if I put it back on the market.

For the cashflow side of this deal: The deal makes approximately 5-6K profit per month. But the upside is that it is only one-third complete and when it is done it will make $21,000 per month and will be worth $2.7 million. The capital needed to complete the park is 500K but the upside is well worth the investment.

Just an extra tidbit: You value commercial property via the cashflow income that it makes.  For example, a good general rule for valuing properties at a glance is as follows: Take that annual income, and add a zero on the end, and will get roughly what you should be paying.  So if a property makes about $132,000 per year on average, you might look at purchasing it for $1.32 million. Which this property was being listed at originally. That’s just a rough estimate due diligence and other factor methods value this property at around $1.2 million.

Depreciation works like this. For every piece of property you own the government allows you to depreciate the value of it over a 27.5 year span. So you can save on your taxes in this way and that would have money that otherwise would have flowed out of your pocket staying in.  So by buying this property, I will have saved money on my taxes.

And finally, you can save yourself money through amortization by educating yourself about the different types of mortgages that are available.  You can choose the mortgage payments and options that are right for you. Creststar commercial mortgage in Dallas is offering on this property 7.75% interest on a 30 year mortgage.

All in all, this property appears to promise an excellent return on investment! Anyone want to partner? Interested, contact me at JohnPaul@JohnPaulInternational.com!

I have been deeply intrigued by my lastest pursuit in finance, Buffetology and the New Buffettology.  The writer of the book, personally knows Mr. Buffet and has privately learned many of his secret techniques.  She discusses Mr. Buffet’s long term strageties as well as his arbitrage workouts (that’s what he calls them!), but today I would like to discuss the arbitrage part of his portfollio.

One of Mr. Buffet’s ways of growing his wealth is his involvement in arbitrage.  Arbitrage is where one company declares that they will buy/takeover another company for X amount of dollars per share. Remember a share is a percentage of ownership in the company. 

Now what Warren Buffet does, is after the merger is announced, he will buy the shares at a discount price and sell them once the investment realizes it’s full value. 

The stock generally speaking will not sell at the full per share price of the buyout offer until after the buyout has actually taken place because of the simple fact that the investor needs to make a decent ROI and because of the risk that the merger may not be realized.  So let’s see how this works using a hypothetical example.

So you check out www.mergerstat.com to find the listings for all of the mergers for the day.  And you see that company A is selling for $10 per share, and also that company B will buy out company A for $15 per share.  It states that this merger/takeover will close in a year.  So if you buy 100 shares of company A at $10 per share today, you hold onto it for a year until after the buyout, and you would make $500 dollars at the end of the year.  You also would have made a 50% ROI.

While we were discussing stocks, he stressed the importance of having a well diversified knowledge base.  He felt that you must know a little bit about everything, or the one factor that you didn’t even realize was of importance, may come back to bite you.  He also recommended studying psychology to understand your business partner better, as well as your competition. 

He gave me a book to read called Guide to Investment Strategy by Mr. Peter Stanyer.  I am looking forward to learning more.  Join me on the journey!