A Lesson on Investment

About a week ago I received a somewhat unsettling email. A man, who identified himself as Carl, informed me he reads my articles in the newspaper in which my columns regularly appear, and expressed what I can only describe as displeasure.

His concern is that I provide countless examples of how money can be saved, how investments deserve to be handled and a wide variety of techniques to improve the profitability of whatever is engaged in. However, what he claims he needs more than anything is something I rarely offer: Advice as to how a person in his early years, with a job doing little more than providing bare support, and who is without spare money, can actually go about advancing in life so to become prosperous.

After contemplating what Carl said, I reviewed my prior articles to see if what he inferred seems to be so. Admittedly, I devote little space to providing what he requests. But the real misfortune is his situation is identical to millions of others in the same predicament.

As I scavenged through some of my earlier writings, I came upon one describing how the typical citizen functions. Let me briefly summarize what I said.

Monday through Friday, the man of the house is out of bed by 7 a.m. and off to work and at his job by 8:30. Home by 5:30, he spends time with the wife and children, with dinner at 7. After a couple hours of evening television, he’s in bed at 11.

Saturdays are normally spent at whatever is customary, whether it’s involvement in a sport, odd jobs or a hobby. Perhaps the evening will include dinner out with friends. Sunday may involve morning church services and an afternoon with family. The evening will end with a few more hours of television and back to bed before midnight.

Perhaps you noticed there were no activities of any sort which might be identified as potentially money-making. For the vast majority of Americans, their spare time is not devoted to financial matters … and it is for this reason most people live their entire lives with relatively few assets.

The simple fact is most persons’ employment provides them with their fundamental living expenses. But it is how they utilize their additional hours of the day, as well as the way their Saturdays, Sundays and holidays are spent, which determine how prosperous they will become.

If you are an ordinary individual, without the benefit of family wealth, and hope to succeed financially, your initial requirement will be to scrounge together enough money to put to work making more money.

I will now acknowledge that to do so, you must possess a certain degree of fanaticism. Without at least a touch of passion, the average bloke will not take the time and trouble. I do not know why some of us aggressively pursue involvement while others do not, but this ability is the necessary ingredient.

For Carl’s benefit, and the rest of you reading this testimonial, I will now reveal how I spent some of my earlier years chasing the dollar.

My father died when I was 12 and my mother and I became essentially destitute. I caddied at 13, worked as a soda jerk from 14 to 15, and began earning a respectable wage – usually between $10 to $12 a day – as a bowling alley pin setter when I became 16. While attending high school I set pins from 6 p.m. until 2 a.m. four nights a week. While in the pits, setting double lanes, I studied for my classes between returning bowling balls, which explains why I graduated in the bottom 10% of my class.

Nonetheless, I graduated, and all the while my mother and I managed to pay both the rent and our living expenses. Understandably, these are the sorts of backgrounds which cause people – for better or for worse – to live their lives they way they do. I’ll now describe an event as to how one of my former classmates chose to enhance his net worth.

Shortly after my 17th birthday I became an enlisted member of the U.S. Navy. By 1948 I was a deck seaman on a destroyer in the Pacific. I served my time aboard ship and the Navy treated me well. In 1950 I received a Secretary of the Navy appointment to the U.S. Naval Academy, and four years later graduated to become an ensign – the most junior of officers. We graduating midshipmen received two months leave and, with travel time, up to 77 days free to spend as we chose.

A classmate and I, with assigned duty stations in California, traveled together. I spent most of my leave as you might expect. With my mother living here, and a lady friend I knew and dated in the past still nearby, I enjoyed a delightful respite from four years of Academy routine.

However, my former classmate, Ronald, who I traveled with, chose to spend his leave in a somewhat unique manner. He took a job as a Yellow Cab driver and drove a swing shift in South Central Los Angeles for the entire two months. I recall asking him why he did such as thing. His answer: “A buck here, a buck there … it all adds up.” He must have experienced a traumatic financial ordeal as a youth.

Let me describe another instructive experience. In 1959, a young school teacher, who informed me his salary barely covered his living expenses, described an investment he made several years earlier. He inspected a property for sale in which a real estate agent held open house. It was in the City of Torrance at a purchase price of $10,395. With $900 as a down payment and a pair of mortgage loans totaling $9,495, it became his rental property. The rental’s monthly holding costs of principal, interest, taxes and insurance totaled $90; a tenant occupying it paid $95 per month in rent. With the $5 per month excess he became a real estate investor – of sorts.

He informed me shortly before the end of 1959 that he marketed the property, as a For Sale by Owner, for $14,700, thereby pocketing approximately $6,700. He claims this as a far more satisfying way to make a livelihood than teaching English and math to sixth graders. I can’t comment on his reference to teaching in an elementary school, but I can verify that real estate investment is a profitable and satisfying way to conduct business.

I’ll now present one last episode to provide Carl – and whoever else is paying attention – with an example of how opportunities arise.

In 1968, as a member of my political party’s County Central Committee (never mind which party – it’s not relevant), I served as a volunteer voter registrar. I visited homes to sign up those wanting to register to vote as affiliated with our party.

One evening, while registering a woman, I asked her about her employment, and she said she worked for a trust deed loan company. She then told me her firm was trying to sell a number of loans they held, but had no buyer. As you might guess, I received the information from her supervisor the next day and proceeded to evaluate it. The details will now fill in the picture for you.

There were 12 loans, all in second position to senior loans. Their face amounts totaled about $58,000. I next visited each property to evaluate them, and rejected two. With the other ten I approved, I then calculated what must be paid to yield a 12% annual percentage rate (APR) on each – presuming the loans ran to maturity. This totaled out to just under $30,000; it’s the amount I offered to purchase them.

In 1968 I did not possess $30,000, nor did I know anyone who did. However, I did have $10,000, as did two friends with whom I played tennis each Sunday: my dentist, Stanley and my attorney, Milton. Between sets, I suggested the three of us purchase the notes and share them one-third each. Their response was an immediate affirmative. Our offer was accepted and the three of us became the holders of the 10 notes with face values totaling just over $53,400.

I’ll summarize by saying the Trustors of each note paid as agreed, most of the loans paid off well before their maturity dates, and as a result of the discounts we received upon acquisition, the average APRs we generated on our investments exceeded 26%. And let me add, this is but one way people with less than scads of money can invest profitably.

I now wish to respond directly to Carl: I cannot provide you with a definitive set of rules by which you will prosper, except to say you must do two things. First, spend your available uncommitted hours in doing something generating money, and stack away as much as you can, for if opportunities arise, they will probably require you have certain sums available.

And secondly, keep your eyes constantly open for every investment offering that comes your way … but develop the perception enabling you to reject the multitude of bogus scams flooding the marketplace.

Remember that sound proposals are rare. The investments most persons are introduced into are index funds where never-ending fees proliferate. The roughly 10% annual appreciation, which such indices as the Dow Jones Industrial Average and the Standard & Poor’s 500 boast, are not matched by the funds sold to investors. Thanks to the repetitive fees charged, together with the periodic rebalancing the funds are subjected to, we may be assured the best you can hope to generate is about 4½%. This is not the way to plan for your retirement.

A final thought: I’m aware many of my suggestions do not receive widespread approval, such as my attitude on the index funds most novices are unknowingly sold into, as well as my utter disdain over the lionization of the Fiduciary. Nonetheless, I conduct my advisory services in a way wherein I derive no profit whatever from how you choose to invest. It’s for this reason I can tell it as I truly believe it to be.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at al@abjacobs.com