Mark Cuban's Personal Stimulus Plan

This is too interesting a story to pass up. Have you got a good idea for a business? Do you have a business already that's ready to go to the next level? Introducing Mark Cuban's personal Stimulus Plan. For those of you who don't know, Mark Cuban is the owner of the Dallas Mavericks, a thorn in the NBA's side (in a good way), and internet billionaire. He's one of my heroes, and you'll understand why if you hear his story. It doesn't mention his big Options play, but that was huge too - I'll write about that some other day...

Mark Cuban is running his own stimulus package. He is looking for interesting companies or start-ups (preference is on the established ones) to invest in. The rules are on the first link I posted, but basically you have to have a solid business plan and be willing to bare it all on his site. This way, we all can see what's going on and learn. I have had a great time reading through some of the ideas. He says he's received over 1,400 of them and read them all. I love this article, because it illustrates several key ideas that we all need to understand:

1. The rich get richer because they take the time and let good deals come to them. Then they spend the time to make sure.
2. Looking back, we will see this as one of the biggest opportunities of our lifetime. Sure many people will have a hard time, but many people will come out of these economic times much stronger.
3. You get rich by creating value. Cuban will be richer at the end of this, but by helping other people become richer too.
4. Wealth is not a zero-sum game. You can get rich without making other people poorer, and in fact most have. Many of our richest people have enriched the lives of thousands in the process of getting there themselves.
   

So let's take the lessons of Cuban and enrich those around us, creating our own prosperity on the way. And if you have an idea and post to his Stimulus Plan, put a link in the comments so we can all read about it.

Mine? I'm thinking...

Poll Results

The survey for January was: What Are Your Plans For Your Money In 2009? The results were all about paying down debt. Now, given there were about five participants, that doesn't mean much, but it is interesting.

There's a concept called 'expensive money', and it's based on how much you have to pay to borrow money - i.e. interest rates. If interest rates are high, you have to pay more to borrow money, and if they're low, you pay less. Talking to long-term investors, the break-point is around double digits. If you can pay less than 10% on borrowed money, it's pretty cheap. If interest rates are higher, it's expensive.

In What Is an Investor, I put forth that an investor is a person who understands ROI, implying that they'll be on the winning side of that comparison. So as an interesting aside - if under 10% interest is considered 'cheap', then that implies a professional investor is confident that they can make over 10% on their investments. Otherwise 'cheap' would have a different level.

Now, most people out there can get interest rates under 7%, and many can get under 6%. This means that money is quite cheap. And yet people are still looking to pay down debt... So this survey tells me two things:

1. That fear makes cheap money still look risky.
   
2. That those surveyed are not professional investors, or have too much debt already.

What Is an Investor?

It's time for a definition. What EXACTLY is an investor? In this article, I stated that an investment IS a sacrifice. So if an investment is a sacrifice, what is an investor? The best answer I've come up with is that an investor is a person who earns a better return than they pay.

This means that an investor is a person who understands ROI. This also means that a person who buys a house with a 7% mortgage, and makes money renting out the property is an investor. A person who buys a home to live in? Only if that's cheaper than renting. A person who rents out a house for a loss? Not an investor! Unfortunately, I fit into that last example pretty well right now...

That also means that a person who buys stocks and waits for them to go up, or is selling now that they are dropping is NOT an investor. They're speculators, which is another word for a gambler. Same with the person banking on appreciation in their house. Not that there's necessarily something wrong with that, but this site is "dedicated to not daydreaming through life", as I say at the top... Let's see what's really happening here.

Most "investors" are really traders, and that is a game or a job, depending on how they approach it and whether they make money or not.

Funny thing, by this definition, Warren Buffett is an investor - as he buys undervalued assets that will pay a better return on his investment than he is paying (or could get elsewhere). But the people who own his stock (BRK-A or -B) are not, as it doesn't pay dividends and we're just expecting (or hoping) it will go up...

Should I Invest #3: ROI

Question #1 was about your timeframe. Question #2 is about your beliefs. Question #3 is about moving forward or backward. I think that the real difference between investing and consuming is ROI, or Return on Investment. As I said before, Investment = Sacrifice. When you invest, you give up access to something now (usually time, money, or access to some property) for an increase in future value - cash flow, appreciation, more knowledge, etc.

But by this definition, consumerism is sacrifice too. I buy a large-screen TV, I gave up money, and I get a return in value: better viewing, maybe more social interaction as friends come over, and something worth more money. So as a mathematician, it looks like this:

Investment = Sacrifice = Consumerism or
Investment = Consumerism

Is this true? No. One is sacrifice for more and the other for less. At the end of the day, did that sacrifice make you richer or poorer? To do this, of course, you'll have to know what you're actually spending. If you buy a TV for $800 on credit, you could end up spending $1,500 by the time you're done. Also a good thing to understand is the future value of money, which basically says that, all things being equal, you'd rather have $1,000 today over $1,000 in ten years, especially when considering inflation or interest earned.

An investor buys things that go up in value, and a consumer buys things that go down in value. If you borrow money to buy a TV, you're a consumer. If you borrow money at 5% and make 8% on it, you're an investor.

Things to take into account: interest rates, inflation, and taxes...

Some examples
If you take $100 and put it in the bank at 2% interest, in a year you have $102. You've increased your wealth, so that is an investment. Now say that inflation is at 3% - you really have more like $99, so you've lost money!

How about if you can make 8%? Say you're in the 28% tax bracket, now you're really slightly under 6%. If you have a mortgage, you could be paying that down instead, so if you are paying 6% on your mortgage, your money is equally well spent paying down the mortgage or investing it. Or is it? You get a tax break on your mortgage, so you're decreasing your tax savings by paying down the mortgage. Here inflation affects both equally, so we can ignore it.

Now, how about that TV? At 12% interest for putting it on credit now, plus inflation, we're looking at a negative 15% on half of the price. An easy way to think about that last thought - over the length of the loan, you owe on average, half the cost. So our $800 TV ties up an average of $400 over the length of the loan.

Another way to look at that TV - as the latest model comes out, it will be worth less. Now an $800 TV could be on sale for $600 in a year. Supposing you are willing to wait the year, you are looking at this: save $50 a month for a year and you buy it outright. Buy it now, and you'll pay $600 of the $800 + $96 interest, and you still will pay at least $300 by the time you're done with interest. Is it worth $300 to wait a year? Only you can decide, but if we up it by a factor of 3 for a TV worth $2,400 now, it gets a lot more appealing.

A good final point to remember is that money isn't the only way to keep track. Happiness, peace, friendship are all part of that equation too. This is why the final decisions have to be yours and yours alone.

Should I Invest? #2: What Do You Believe?

Question #1 was about your timeframe. Question #2 is about your beliefs. To be a successful investor, you need to be cautiously optimistic. Optimistic because if you didn’t think there was a future, and a better one to spend your money in, you wouldn’t invest. Cautious because if there is any chance you could be wiped out, eventually you will be.

Investment = Sacrifice
You sacrifice something now, usually time or money, because you feel you will get something better in the future. You sacrifice living in this home, and let somebody else live there, so that you’ll have a paid-for home in the future for income or to live in. You sacrifice $1,000 of current spending money for the income it could produce, or the chance that it will be worth more in the future. This is often referred to as Return on Investment (ROI), and a 25% ROI means you’ll get back a quarter of your investment a year – and four years from now, you’ll have your original investment AND your money back out. But you must be optimistic that you will get back your money, and inflation won’t kill your profits, or why would you put off gratification?

The Meaning of Risk
If you have an investment that works 90% of the time, but has a 1% chance of costing you all of your money – you will go broke if you try it enough times. In a more normal world, if you win 55% of the time, and risk even 1/10th of your wealth, there is a 2% chance you’ll lose 5 times in a row – half your wealth! You must be cautious with your money! Warren Buffett’s famous two rules of investing are:
1. Never lose money.
2. Never forget Rule #1.

What Are Your Beliefs?
So what are your beliefs? Do you think the economy will get better or worse? What will the world look like in ten years? Twenty? Will the economy rebuild? Will businesses still be profitable? Will your life be better if you’ve doubled your money over the next ten years? Or will inflation cut money to less than half its value in that time? If you double your money, but the cost of living triples, you’re moving backwards. Take some time and think about these questions:
1. Will things get worse or better in the future? By how much?
2. Will there be inflation, deflation, or high inflation? (2-3% inflation is considered “normal”)
3. Will businesses still be profitable in the future?
4. Will your country’s economy and currency be strong in the future?

Should I Invest? #1: Timeframe

This is the first of a 3-part article. With the economy in what I've heard called 'the Sandpaper stage' (back and forth, rubbing out your savings), I've talked to a lot of people about when to get in the market, or whether to get out completely and take the loss.

To me, this begs a bigger question: Should you be in 'the market' at all? To which I have three questions. The first is: What is your timeframe?

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It has been said the market is long-term a weighing machine, and short-term a popularity contest. This means that a good company, over time, will show it's fundamentals and be valued for being a good company. Unfortunately, it also means that it could take a long time to show that value, and be all over the place in the meantime. This is why most stock charts look so jagged, up and down. It's also why Blue Chips look smoother - their value has been established, so there isn't so much debate on price. See an excerpt of Warren Buffet's view on this here.

In our current economy, I would say that, to be safe, you need a time horizon of at least five years to be reasonably confident that you'll get to the 'weighing machine' part. If you will need your money in less than five years, you might not want to count on fundamentals alone to choose your investments.

Some History
Look at a graph of the S&P 500 over the since the beginning of 2000: it was at 1527 on March 20, 2000; then dropped and climbed back to 1561 on Oct 8, 2007; then fell again since then, and is now at 827. Which means if you bought an S&P 500 index fund in early 2000, you would have spent 7 1/2 years getting back to your starting point, not even a profit. Who knows how long until this latest drop comes back? Forget five years - from 2000, you're looking at ten years at the least!

Question #1
So the first question to ask yourself is, "What is my timeframe?" Think about it seriously and write down when you'll be needing that money back. Only once you know that can you think about the next step, your belief about the future.

Nothing Is Average

The British TV show Human Footprint found that the average person smokes 77,000 cigarettes in their lifetime and breaks wind 15 times a day. Of course, we’ve also been told that the average family has 2.3 children. Quick poll: who here has 2.3 children, breaks wind 15 times a day, and expects to smoke 77,000 cigarettes before they’re done? The point is – none of us are average.

So I’m amazed when people put so much stock in averages. The stock market fell 34% in 2008 – not my stocks. Homes in the US fell 4% for the year ending with the third quarter, but not in California (-20.8%!) or Texas (+3.2%). And not your house, I’m betting. See statistics are a fine way to get a feel for what could happen on average, but pretty lousy in any one specific instance. So the broad markets were down 34%, but McDonald’s wasn’t (up about 12%).

Diversification is a great way to become average. The point of diversifying is to come closer to average and thus avoid as much risk as possible. One company might crash, but the average of one hundred or one thousand won’t. Probably. One home might burn down, but 20 homes in 12 states won’t. Not at the same time, at least. On the other hand, 2008 was a bad year to be average…

And basically what you’re saying is you think you’re in the bottom half, so you’d be happy to get to average. Wouldn’t it be better to beat the average? Could you do that? Sure. All it takes is a little work. Do some research. Take some time to get to know your market. Get a feel for things in general, and specifically for what you’ll be investing in. Know the best neighborhoods in your town, and buy the worst house in those neighborhoods. Find stocks now that have dropped in price, but increased in fundamentals. Stay away from bonds right now – interest rates have no way to go but up!

Next week, I’ll be writing about Should You Invest? The answer shouldn’t surprise you, but it probably will anyway. Stay tuned.

So who’s going to smoke my 77,000 cigarettes?