Is The Stock Market Going To Crash?

Since March of 2009 the stock market has been on a bull run like never before. The very fact that we have experienced a 9 year rally has some folks asking if we are due for a correction. This past February we experienced a 10% correction that had many convinced it was the start of something bigger. However, the market has mostly recovered since then and many folks are back in market euphoria.

I personally believe that within 5 years we are going to have a major market correction. It could be much sooner, but I feel confident in saying it will happen within 60 months. Here’s why:

  1. The Buffett Indicator– Named after the most famous investor of at least our time, Warren Buffett, this indicator measures the total market capitalization against the US GDP. Buffett has stated that this is his favorite indicator to measure if the market is over or under valued. It’s pretty simple- anytime the ratio of the total market is less than 75% of GDP, the market is under-valued. If it’s between 75-100%- the market is fairly valued. If it goes above 100 it is starting to get over-valued. As of July 10th, 2018 the ratio is at 145.9%! This ratio is also known as the Wilshire to GDP ratio since the Wilshire 5000 basically represents the total market cap. If you look at the chart, which is pictured above, you’ll see that it has been pretty accurate at predicting market corrections.
  2. Shiller P/E– Robert Shiller is a professor at Yale and he invented this ratio. It is a cyclically adjusted P/E ratio for the S&P 500 which he discusses in his book, Irrational Exuberance. You take the earnings of the S&P 500 companies over the past 10 years and adjust for inflation using CPI. The Shiller P/E equals the ratio of the price of the S&P Index over the past 10 years average earnings (adjusted for inflation). The average P/E ratio is around 16, so anytime it gets above that it is an indication that the market is getting over-valued. As of July 10th, 2018 the Shiller P/E ratio is 32.3.
  3. Flattening Yield Curve– The yield curve I am talking about is the 2 year Treasury compared to the 10 year Treasury. The gap between the two has been getting more narrow or “flattening” and if the 2 year yield goes above the 10 year yield, a recession is likely coming. Typically, when it comes to bonds the longer the date to maturity, the higher the yield. Think about it, doesn’t it make sense that if you tied your money up for 10 years you would expect a higher return than if you only tied your money up for 2 years? If the 2 year Treasury yield goes above the 10 year Treasury, that is known as yield curve inversion and almost always indicates a recession is soon coming.
  4. Rising Interest Rates– As interest rates rise, bonds will become more attractive to investors and many retirees will shift money away from stocks to bonds since bonds are considered very safe. Also, rising interest rates means it is harder for consumers and businesses to borrow money, which means spending could slow down. With that said, interest rates are still very low and we have a ways to go before that will be felt. But the point is, the Federal Reserve has indicated rates are going up, not down.

I have given you 4 indicators that all point to the market being over-valued. With that said, what will actually cause the correction? It could be lots of things! All-out trade war, corporate earnings turning weak, a softening real estate market, war with North Korea… We could speculate all day long as to what the culprit will be. Perhaps it won’t be just one thing, but multiple things. Who knows! The thing I do know is that the market moves in cycles. There are bullish cycles and bearish cycles. We are on a 9 year bull run and there are some proven indicators that say we are way over-heated. I cannot predict when or how, the 5 year prediction is just a guess,  but I do believe now is a good time to take profits and be patient!

Who to Follow?

follow-the-leader1

I was speaking with my brother-in-law the other day and we were discussing a book on stock market investing that I had recently recommended to him. He made the statement that he had finally found a book that gave him a clear path to investing in the stock market.

I was happy that he was enjoying the book. I have probably read somewhere in the neighborhood of 20-30 books on the subjects of stock investing and real estate investing and I have only found two books that provided me with a roadmap to investing. One was on the subject of stocks and the other was on the subject of real estate investing.

There have been thousands of books written on those subjects, and in all fairness, I have not read all of them. So there could very well be other good books out there, I just haven’t ran across them yet. My main complaint or disappointment with the majority of the “other”  books is that they are full of fluff and no substance. In other words, the authors tend to talk about how great investing can be and some even give some examples of their past investments, but very few really provide a system for investing. Most of them simply don’t “teach”.

Okay, so by now you are wanting me to reveal the two books… Here they are- Rule #1 by Phil Town and Investing In Income Properties by Kenneth Rosen. These two books taught me a great majority of what I know. I want to throw a third book at you though- Rich Dad Poor Dad by Robert Kiyosaki. Although Kiyosaki doesn’t go into strategy on investing, he does do a fantastic job of educating the readers on the mindset of the wealthy, which is very important!

You are going to run across all sorts of “gurus” out there. Every one of them believes that their way is the best way. You will likely get over-whelmed trying to figure out which one to follow. Here are some things to look for when you are picking a guru:

  1. How did they make their money?– Did they become rich by writing books or by investing? I love Phil Town because he is truly an investor and puts his money where his mouth is. But be aware- a lot of the “gurus” out there are not really investors but are just trying to sell you on the idea that they are.
  2. How does their system align with your passions? As much as I love Phil Town, the reality is that not everyone has a passion for the stock market. As much as I enjoyed Kenneth Rosen’s book, the reality is not everyone wants to own investment properties. You are going to be most successful investing in something you love. Therefore, make sure you are following investing advice that aligns with that passion!
  3. Do you know anyone else who has had success following them?– To me this is a big one. Do you know anyone firsthand who has had real life success following this guru’s advice or system?
  4. Can you relate to the guru?– Personally, it’s a lot easier for me to follow someone who I can relate to. Although I’m pretty sure Phil Town’s net worth is higher than mine, he was a regular, blue-collar guy before he became an investor. I can relate to him and his speaking and writing style is something I can understand.
  5. Is their system easily replicatable?– Some books do offer a system that has worked for some, but it’s highly technical, or it’s highly complicated, or it involves a lot of risk. I like systems that are so tried and true, nearly anyone can do it.

The Simplest Way I Know To Start Real Estate Investing!

person holding silver keys

If I could go back in time and talk to my 24 year-old self, I would tell him to take his vitamins, get plenty of sleep, don’t date girls based solely on looks, and…….buy a duplex! My focus as a real estate investor is on accumulating rental property and not flipping,  so duplexes are right up my alley.

As a rental property investor, I do not buy single door, a.k.a single family, homes as rentals! Why? Because if your tenant moves out you have 0% occupancy. I agree with Grant Cardone when he says “Single Door- No More”.

The number one question/excuse I hear from folks is how do you get started investing in real estate if you don’t have a lot of money. In this article I will lay out the simplest strategy that I know of. It’s a strategy that nearly everyone can do.

Let’s go back to my 24 year-old self. Imagine if instead of buying a single family house to live in, I instead purchased a duplex. Single family “starter” homes were going for around $100,000 in my market at the time. These were your standard 3 bedroom, 2 bath ranch homes, usually sitting on a 1/3 acre lot.

At the time you could find duplexes for anywhere from $125,000- $150,000. Interest rates were around 7% on 30 year mortgages. So with that said, a 30 year mortgage on a $100,000 single family was $665. A $150,000 duplex would have been $997. This is assuming no money down (which back then was very possible). Let’s assume taxes and insurance were another $150 per month for the single family and $200 per month for the duplex.

This brings the total monthly payment to $815 for the single family and $1197 for the duplex.

I would have purchased the duplex in an LLC and rented one side for $700 per month and paid myself rent of $700 for the other side. When I say “pay myself rent”, that means I would have written a check to my LLC that owned the duplex and deposited it into a bank account just for the LLC.

So, let’s compare the two… I own a single family home that I live in and I pay $815 per month. Or I own a duplex and pay only $700 per month. The $700 I pay along with the $700 my tenant pays goes towards the mortgage, taxes, and insurance, which was $1197 per month.

So in one example I pay $815 per month and I build a little equity on a $100,000 property, OR I pay $700 for a $150,000 property and also net $203 at the end of the month AND build a little equity. If I lost you, let me recap. I pay $700, the tenant in the other side pays $700, for a total of $1400. The mortgage, taxes, and insurance are $1197 per month, which is where the net of $203 comes from.

After 5 years, assuming I don’t raise the rent, I would have $12, 180 in my LLC’s bank account. For those of you who hate math, let me show how I came up with that number. $203 per month cash flow x 12 months x 5 years= $12,180.

Okay okay… yes I know, this is assuming 100% occupancy and isn’t taking into account any expenses that may arise. So let’s take half out to account for those things. Now you have $6,090.

But keep in mind that I am only paying $700 per month versus $815. So there would be personal savings also.

At 24 years old I was making $30,000 per year, so if I saved 10% of that I would be saving $3,000 per year. In 5 years that would be $15,000. In total, if you include the $6,090 in my LLC account, I would have over $21,000 cash  after 5 years and still own the duplex.

Five years later I’m 29 years old. I meet the girl of my dreams and we get married. If she’s really the girl of my dreams, then she understands the value of owning rental property…

So, we buy another duplex, live in one side and rent out the other. Now I have 4 units total and my wife and I are only occupying 1 unit. We continue to cash flow and store our cash in the LLC’s bank account. Pretty soon we buy another duplex.

At some point in our mid 30’s we grow tired of living in a duplex and decide to buy a single family home to raise our kids. But by this point we own 6 units and we are making somewhere around $600-$900 per month cash flow.

How different would most people’s lives be if they owned 3 duplexes in their mid 30’s? Sure, there’s the hassle of managing them, but at some point you could (and should) hire that done.

Well ,this isn’t the path I took. I instead bought a single family home and lived in it. I did successfully flip it for a nice little profit and I went on to buy rentals after that. It wasn’t a bad way to do it, but for most folks flipping isn’t easy. You have to buy the property at a discount, fix it up without spending too much, and then hope it sells at a decent price. It worked for me and it has worked for others, but it involves a lot more risk.

Therefore, I would tell anyone who is just getting started in life and wants to own property to buy a duplex! This strategy works for nearly everyone. The key is to pay yourself for where you live, don’t over-spend personally, and don’t buy junk properties. If you do those three things, then this strategy should work. Of course there is always risk with anything and I can’t make you any guarantees that this will for sure work for you… But it’s the simplest strategy that I know of to accumulate rental property!

 

How Siberian Tigers and Diarrhea Made Me Money!

 

Man suffering from stomach pain

Siberian-Tiger-HD

 

I know this sounds crazy, but these two things made me money the past 2 years. A lot of money in fact. Okay, so maybe this is a bit of an exaggeration… but not really.

Let’s start with the Tigers. In 2013 Lumber Liquidators (LL) was fined for illegally sourcing lumber from a protected forest in eastern Russia that was home to the Siberian Tiger. Lumber Liquidator’s was fined $13 million dollars and received a lot of bad publicity over the deal.

In March of 2015, 60 Minutes ran a story on excessive formaldehyde in laminate flooring sold by Lumber Liquidators. LL had traded well over $100 at one point, but after the second story emerged, LL started dropping. As the company became embattled in legal fights and fines, investors fled.

The stock touched down somewhere around $10 per share at one point. I started buying it in January 2016 when it was around $15 per share. I sold PUT options on the stock each month and collected premium, occasionally being assigned the shares whenever the stock would dip in response to more bad headlines.

Why did I buy LL stock? Because although they had goofed up, I believed there was still a good company underneath. I believed that as time went on and LL paid their legal fines, folks would forget as they often do and move on to whatever the new hot topic was.

As Benjamin Graham once said “In the short term, the market is a voting machine. In the long-term it is a weighing machine”. Graham was stating that the market often reacts to news and events and the stock prices suffer. In the long-run, however, the fundamentals of the business drive the stock price.

LL eventually went up to $40 per share just last Fall and has since cooled down a bit. I sold my shares when they hit $27.50 so I left some money on the table,but I still made a significant profit on this company!

Okay, and now for diarrhea… I love Chipotle Mexican Grill (CMG)! I eat there a few times per month. Not only is it tasty, but they use fresh ingredients. I love the story of Chipotle and it’s founder Steve Ells. But Chipotle, just like Lumber Liquidators, has had their fair share of drama.

Over the last few years, Chipotle has been in the news for having several food-borne illness incidents with its customers. The news has driven the stock down. I started buying it last July (2017) and kept buying it up as recently as a few months ago. I own it at an average price of $288 per share. Today the stock is trading over $450 per share.

Just like in the case of LL, I believed there was still a good company underneath the broken stock price. Why did I think that? Well, one thing I noticed was that every time I went to a Chipotle the line was out the door. Obviously I did more analysis than just that, but my point is that there was still a good company there.

I could have been wrong about LL and CMG. I could have lost my entire investment. And by the way, this blog post is not recommending that you go buy stock in these companies! I am in no way your investment advisor!

The point I want you to take away from all of this is that there are some opportunities to make big gains off of beaten up companies that still have some life in them. The hard part is knowing if it’s something they can recover from or if it’s something that will ultimately lead the company to ruin. As investors you need to spend some time learning to read financial statements and company reports such as 10-K’s and 10-Q’s. These reports will be valuable tools in helping you to decide if a stock still has a good company underneath it.

 

The Right Mindset!

adult alone bracelet casual

This morning I recorded my weekly podcast on stock market investing with my good friend D-Dub. We do this every Friday morning and I truly enjoy it! First off, I always enjoy talking with D-Dub because our goals and interests are closely aligned. Secondly, we like to give each other a hard time, which is always fun.

We usually answer at least one question towards the last half of the podcast. This morning the question came to D-Dub and it was “how do you stay in the right mindset?” We both give our takes on the question and since this question came to D-Dub, he answered first.

I should probably explain that our podcast is not scripted at all! We want to keep it as close to a real conversation as possible. So, often times I will listen to an episode and think “man I wish I would have said ….” This morning’s question was one of those moments.

Getting into the right mindset is critical if you want to be an investor… or at least a successful one. You need to recognize that if you become an active investor you are embarking on a journey that most don’t dare to take. It doesn’t matter if you are investing in stocks or rental property, you must learn to think different!

You will fail at some point. Accept it and expect it. In fact…. you should fail! Failing is how you learn! I believe that if you learn then you really haven’t failed at all. I have purchased stocks and lost 50% of my money. On a couple of occasions I have lost all my money! By the way, I average over 30% annually  in my stock trading account EVEN with those losses!

But every time I lose I learn and I get a little better. Learning to accept and embrace failure requires you to have a strong mindset. Here are my top tips for getting into the right mindset:

  1. Stay positive and avoid negativity If you hang out with negative people you will become negative yourself. Period end of story. Don’t think you will be different or that you will lift the negative person up and they will become positive… sorry to have to tell you this, but 99.99% of the time it won’t happen! Surround yourself with positive people and work hard to keep positive thoughts in your head!
  2. Take care of your soulI’m not going to get religious on you, but you do need to take care of the most sacred inner part of yourself. You need to have a positive relationship with the universe. I pray and meditate to accomplish this. I’m not pushing my beliefs on you, but you do need to explore this for yourself. Whatever it is that you do, whatever it is that works for you, make sure your spirit is in a good place.
  3. Create a dream-board-  Goals push me to do more each day and week. I need something that I am aiming for to keep my activity high, so I created a dream-board which consists of things that I would like to achieve. Some things are materialistic and some aren’t. At the bottom, I wrote down action steps that I need to take daily/weekly if I ever want to make my dream-board a reality.
  4. Read and listen to podcasts- Find some good books that motivate you! I also highly recommend listening to some good podcasts that both teach you and inspire you!
  5. Have Fun- Don’t forget to have fun!!! Laugh out loud several times a day. Watch funny movies. Be silly. Take vacations. Find a hobby….. Life is too short to not have some fun. Don’t get so caught up chasing your dreams that you forget to enjoy this crazy short life!