What Happened on Wall Street on Thursday, May 6, 2010?
I am sure that the talking heads would be spinning a lot of stories but what actually happened is this.
There is a feature in stock market software called “stop loss”. Stop loss automatically sells a stock when its price drops down to certain level.
For example, if you owned Proctor and Gamble stock you would place a stop loss at a price that is 10% below the current value. What this does is to take you out of the stock if a company pulls an Enron on you or the whole market starts tanking.
The advice to set up of stop losses is as common in the investing world as the advice by grandmothers to take chicken soup for cold. Check this out:
“Risk management methodologies are designed to help you avoid devastating losses. The stop loss is the most basic tactic in your arsenal. Stops work because they define losses in advance. They provide an investor with an objective set of criteria for selling any position. This allows an investor to exit a holding before becoming emotionally involved.
Whenever I review a portfolio down 50 percent or worse, I know I’m seeing the handiwork of an investor who lacks a sell discipline.” Source.
When millions of people have stop losses set up, that information is available to people. Even if that information is not available everyone in on the Street knows that people have stop losses on their stocks and if a vacuum cleaner similar to what happened on Thursday is run then all the shares with stop losses will be picked up by the giant vacuum cleaner.
The vacuum cleaner works two ways:
Purchase the stocks at lower price and then immediately sell them back at a higher price. Pocket the difference.
My book contains 37 pages of comparisons between stocks and real estate in the areas of performance, leverage, taxes, transparency, effort, volatility and diversification. Check it out at the main page of the website http://www.bankfreeinvesting.com/
The Age-Based Discrimination Continues
The House Bill HR 1728 or “Mortgage Reform and Anti-Predatory Lending Act” which was recently passed by the House of Representatives of the 111th Congress in a record 3-day time has the potential to delay real estate recovery by subjecting older Americans to unnecessary federal regulations.
While I was writing my book, “Private Money: The #1 Solution to Eliminate Booms and Busts in Real Estate Forever!“, I researched seller-financing in detail as one of the primary sources of “money” to provide liquidity to the real estate market. According to Census 2000, 33% of owner-occupied houses were “free and clear” which is about 30-40 million houses today–depending upon whose estimate you use.
According to a February 10, 2009 statement by National Association of REALTORS, “Real estate encompasses approximately $20 trillion in owner-occupied housing.” Which makes the owner-occupied housing to represent $6.6 trillion in “free and clear” equity. Which is like, “Look Ma, No Banks,” or a proud state of not having to write a mortgage check every month.
Most of these owners are 52 years-old and older because it takes decades to pay off one’s mortgage. Many of these owners choose to sell their properties through seller-financing due to a variety of reasons,
such as:
1. They want to make 6%-7% on their equity “money” instead of 2% in a bank CD, or
2. They want to generate steady cashflow to supplement their current sources of income, or
3. They just want to make someone else’s dream of ownership come true while generating income, or
4. They want to defer tax payment on the properties which they acquired over the years as income properties.
If HR 1728 is passed with its current language, these proud sellers will be regulated as if they were mortgage lenders. They will have to go through onerous exercise of getting property appraisals, verifying
buyers’ income, filling numerous forms and providing periodic statements to the buyers. In some cases these owners will have to acquire mortgage license. They may also have to deal with HUD certified counselors who may get involved on behalf of buyers.
HR 1728 contains built-in age discrimination against baby boomers and older Americans who have worked hard to build equity in their house(s) and other residential properties.
Until credit markets open up, seller financing is the primary mode of selling houses at a decent price, especially for those who have “free and clear” equity in their houses and want to sell their properties at
a price higher than the throw-away prices which bank-owned properties are fetching.
HR 1728 will take property selling options away from older Americans who are more likely than younger Americans to have “free and clear” equity in their properties. HR 1728 will require older Americans to
unnecessarily learn the mortgage business, or be subject to fines and other legal consequences every time they sell their properties on a seller-financing basis.
HR 1728 will also take tax planning and saving options away from older Americans.
Two years ago, I fought a city in Connecticut against their age-based discrimination against younger Americans and won a substantial monetary settlement out of court. The state department which went to
bat on my behalf was CHRO (Commission on Human Rights and Opportunities) http://www.ct.gov/chro/site/default.asp
If you are a 55+ owner who has one or more “free and clear” properties and you are considering seller-financing, please lodge a discrimination complaint with your state’s commission which has the same charter as CHRO.
Whether or not you have a “free and clear” property, if you are a 55+ owner, you may still lodge a discrimination complaint with CHRO-like department in your state. It is not just about economic options. It is about your unalienable right to not be discriminated based on age which you don’t want to give it up without a fight.
If you are a member of a group, such as AARP (American Association of Retired Persons), you may want to discuss legal counsels at such organizations. They can communicate with senators who will soon vote
on the Senate version of this Bill to change the language of the Bill to remove owner-financing out of this Bill.
Make no mistake about it. If owner-financing stays in the Bill, it will affect older Americans.
About the Author: Lee Ali is the author of “Private Money: The #1 Solution to Eliminate Booms and Busts in Real Estate Forever!” and can be reached at lee [at] BankFreeInvesting.com.
The “Expert” Business.
Folks, I am a researcher, writer, investor and educator. My research and writing is as good as the questions I ask.
Believe it or not, by asking right questions, laypeople can get to knowledge which “experts” may either be blindsided about or prefer that the laypeople don’t find out, lest their expertise is diluted.
“Experts” don’t like to make statements which make them sound less of an “expert” in front of other “experts.” Laypeople can just mind their own business and pay up because these “experts” need to get paid so they sell products/services around their expertise.
The more question laypeople are able to ask, the less money these “experts” make.
Besides, “experts” are busy making products/services so that they can sell it to you and I. They don’t have time to respond to questions. 
Wisdom of the Crowds by James Surowiecki is a great read. http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds
In the dealer-broker world, when non-experts outperform the experts 2 to 1, the non-experts are termed: Savvy. http://www.investmentnews.com/article/20060918/SUB/609180713
Australia’s newly-appointed Minister for Financial Services, Superannuation and Corporate Law Chris Bowen agrees. “Where you have the issue of commissions you are always going to bring into question the genuineness of the advice. There’s always going to be a perceived conflict, if not a real conflict,” he said. “I think either way it’s better to avoid that conflict. I do think commissions are problematic.”
CHAPTER 10: Are Mutual Funds Any Better?
CHAPTER 10: Are Mutual Funds Any Better?
The overwhelming message from the financial media is that the stock markets will recover sooner or later from the current recession levels. Hold your nerve they say and your 401k and Individual Retirement Accounts will give you the promised income in your sunset years. Not much comfort there for people currently depending on their investment portfolio for money in their retirement right now. The mutual fund sector of the investment market is where most people have their retirement capital.
Sound finance and economics begins with a foundation of company stocks that are making real products and supplying real customers who need and are pleased to go on buying those products. This is how Warren Buffet and Berkshire Hathaway are weathering very nicely, the current downturn. Not so with mutual funds in general.
Mutual funds do not produce anything. Take a look at the website of any mutual fund and the banner headlines are their performance ratings. These are very tough economic circumstances and mutual funds like all finance products are showing very poor returns. Should you be discouraged? After all mutual funds performance follows closely that of the stock market and stock markets the World over are down but not out, if you believe the financial media.
When you consider mutual funds from the perspective of their assets they look the same but when considered from the viewpoint of their ownership and management they are very different.
Mutual funds are like big baskets full of a variety of finance products but predominantly stocks. Stocks are certificates of ownership of shares in all the limited companies on the stock market. So mutual funds, while they rely on manufacturing, agriculture, energy etc. they are not actually in the real business of creating wealth. Therefore hedge funds are more prone to being blown about by economic ill winds.
Mutual funds have also changed for the worse since their creation in the ‘40s. There has been a migration of management towards hedge funds in the last 10 years and a corrosive decadence of investing culture toward speculation. It is the owners of retail mutual funds; the little guys with their 401k funds that have paid the price. Returns are lower, risks are greater and fees and taxes are higher.
The better ones among the retail mutual funds will come about with the stock market as whole. These mutual funds have a financial strength. They are sounder because they are in the business for the long term. The managers of these funds have their own money invested in these funds along with that of their investors. They share the risks and are not interested in the short-term speculative gains. They will have a diversified portfolio of stocks and are not overloaded with finance stocks like Bear Stearns, Citgroup, AIG and Bank of America.
There has been a dramatic trend towards a short-term culture in all mutual funds. In 1945 the average stock holding period was 5 years or more. Each successive year has seen this figure come down until 2004, since when it has been under 6 months. In 1945 too, less than 20% of stock holdings were sold in any one-year until now, when it is the norm to turn the whole portfolio over in a year or less. Short term trading for quick profit is the signature of hedge funds and very bad for the long term needs of retirement retail mutual funds.
Mutual funds are all about the expertise and skill of the managers. A particular management team earned all the advertised returns that attract investors. Change the team and you fundamentally change the product. Unfortunately fewer than 8% of retail mutual fund managers have been in post for ten years or more. 20% of them have less than 2 years experience. Unsophisticated ‘little guy’ investors buy into mutual funds because of the track record of the managers and those managers are no longer there. The prospectuses of most funds are out of date when they hit the press. When we buy mutual funds we are buying the knowledge and expertise of the managers.
New brooms sweep clean, as the old saying goes and this is very true of new fund managers who on average turnover 95% of their new portfolio. So a new manager means a totally new product. All of this happens behind closed doors of course because funds are not obligated to tell fund owners of personnel changes.
Thus the majority of mutual funds are a very shaky prospect indeed. These are the mutual funds that have made unrealistic promises to attract depositors. The promised eye-catching returns have been earned through the boom years of easy credit and speculation. Professionally managed funds that merely reflect one or other of the stock market indices will collapse in a heap along with the S&P 500.
The cash value of all the stocks in the mutual fund stock market baskets has shrunk immensely with credit crisis and Wall Street crash of 2008. But those baskets were so large and there are so many varied mutuals, that the trading of mutuals has become a big nest egg of finance for many individual retirement funds. The stock market trading of mutual funds is entirely on the Internet and you can watch the whole house of cards come tumbling down on your own computer.
Mutual funds are huge business because Americans, very wisely, want to plan for a well-funded retirement. According to the last count there are more than 10,000 mutual funds in North America! That means there are more mutual funds than stocks. So a lot of us are putting our futures into the hands of the retail fund managers.
In 2006 Morningstar reported that 450 retail fund managers were holding down second jobs as hedge fund managers at the same time as managing your portfolios. Now hard work and enterprise is the American way but there is a big conflict of interest between retail mutual funds and hedge funds. The fees and the profits for managers are exponentially greater in hedge fund management than in mutual funds. Where do you think they will be expending their time and effort? Furthermore there are many ways in which changes in mutual fund portfolios can benefit hedge funds but to the detriment of the little guy’s fund. Do you think this might happen?
When you look at mutual funds from the perspective of their assets each mutual fund has a unique risks and reward profile. The risk of loss and the size of the return are positively correlated. Although some funds are more risk averse than others, all funds have some level of risk.
Each fund markets themselves on the basis of their investment objectives that customize the fund’s assets in ways such as regions of investments and investment strategies. Basically there are three varieties of mutual funds: Funds mostly with stocks called ‘equity’ funds, funds with a majority of bonds called ‘fixed income’ funds and ‘money market funds with lots of short-term debt instruments, mostly Treasury bills.
All mutual funds are variations on these three asset class themes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds. But the real truth about mutual funds lies in their ownership and management structure rather than their asset classes or stated investment objectives.
While both mutual and hedge funds are managed portfolios, hedge funds are managed much more aggressively than their mutual fund counterparts. They are also the province of the super rich and speculate in derivative securities such as derivatives. They will routinely use such practices as short selling and leverage to make more money in riskier ventures. This means that hedge funds can make money even when the market is falling. Mutual funds, on the other hand, are not permitted to take these highly leveraged positions and are typically safer as a result.
But safety is a relative term for mutual funds; relative to hedge funds of course but also relative to how mutual funds used to be. Time was mutual funds would hold on to their stock investment for an average of five years, but no longer because mutual funds now turn over the whole of their portfolios nearly twice a year. They have become caught up in the short-term quick profit culture of the hedge funds.
The mutual fund market has some very sharp practices that are to the benefit of the hedge funds but the cost of the retail mutual funds:
1. The high turnover of portfolio stocks already mentioned is very expensive. Trading fees rocket and when the fund does generate a quick windfall profit the taxes are paid by the members.
2. Too fast a turnover of stocks within a portfolio also causes inconsistency and something termed ‘style drift’. You may have bought into your mutual fund because it promised investment objectives of value stocks but it can very easily and quickly change to growth stocks. Worst of all you would never know. Morningstar again report that half of retail mutual funds have drifted far from their investment objectives. ‘Bracket creep’ is a form of style drift but where stocks in one capitalization band are replace with stocks in a different band.
3. Would it surprise you to know that the average mutual fund do not use 100% of your deposits to purchase stocks. This is a practice known as ‘excessive cash’ or ‘margin’. Many fund managers also take the cash on hand and do what is called ‘borrowing on the margin’. They take on loans in order to increase the investment funds, but of course the members pay the interest. It is all part of the short term speculative culture that has overtaken your retirement funding investments.
4. Mutual fund annual reports do not tell prospective investors exactly when particular stocks are bought. Mutual fund marketers thus have an opportunity to ‘window dress’ their wares. This involves displaying only high performing stocks that they have only just acquired.
5. Yale University’s ‘Journal of Business and Economics’ reports that 54% of mutual funds are not actually what they say they are and have misleading fund names. So you may believe you are investing in only ‘green’ or ‘ethical’ stocks when in truth you are not.
6. A mutual fund by any other name would earn as much? Many funds go in for pure name changes without any deeper changes. Why? Because unsophisticated fund buyers are fooled into purchasing. Some funds have increased their investment pots by as much as 28% just with marketing re-launch under a new name. This does not benefit current members in any substantial way.
7. Money for nothing is what some fund managers get because they are ‘closet indexers’. Rather than actively manage a fund to maximize returns some funds simply follow one or other of the many S&P indices. If it is the index by which their performance is assessed it is far easier than all that active stuff.
8. Marketing people call it the ‘strawberry effect’. Consumers buy more when supply is limited or finite. Retail mutual funds do something similar when they announce they are about to close. Funds flood in prior to the closing down date, boosting fund company income with affecting performance or fees for members. Then the fund reopens under different name. Do you think consumers are that gullible? You better believe it.
9. Small is profitable and flexible while big is bloated and slow. At least this seems to be the case with retail mutual funds. Morningstar again report that the top 30% of retail mutual funds in size perform worse than the smallest 30%.
10. When mutual funds close this means that it cannot accept any new members but current members are free to put more money in. The mutual fund industry has a practice then of opening the ‘The Empire Fund Strikes Back’ or opening a clone of the successful original. They advertise it as being just like the original and therefore just as successful, but it isn’t and can never be the same.
11. Lies, damn lies and mutual fund statistics. Mutual funds will publicize their overall performance ratings by averaging out performance as whole across all of their funds. What they have done in this case is closed down or merged the failed funds so that the figures have a very rosy ‘survivorship’ glow.
12. Ever wonder why you only ever see mutual funds with 4 or 5 star ratings? Never a 1 star rating. Morningstar do not rate funds with a track record of less than 3 years. So the mutual fund industry makes a practice of evaluating all their funds at the end of three years and only the fittest survive. It’s called the ‘incubation strategy’.
13. A practice known as ‘fund seeding’ reinforces the attractiveness of the ‘new’ funds out of the incubation period. Seeding is where a mutual fund company buys as many new issue shares as it can but does not allocate them to any particular fund or funds until it wants to show an excellent performance for that fund. New buyers are attracted to the ‘great’ fund but will hardly ever get a repeat of the performance that attracted them in the first place.
14. Mutual fund companies deliberately confuse buyers with an outlandishly complicated share class pricing structure.
15. What other industry would get away with hiding the actual fees they charge? All mutual funds charge what is known as an ‘annual expense ratio’. But while it is said to be an annual fee it is charged on a daily basis and therefore hidden. The average is 1.3% but many charge 2% and the highest is 15%. This charge covers only the operating costs of the fund and there are always fees for trading. The average retail mutual fund charges investors 2.58%, up from 0.76% in 1945. Fees are never displayed on your statements but only in the prospectus.
16. Then there is the stink of stale prices. Funds never tell you the real time net asset value of your share of the fund. They use an obsolete calculation method called ‘T+’ accounting, which means that we see in the press the value of the fund at closing bell of the day before yesterday…’It’s too expensive to change’!
17. Personal trading by portfolio managers is both illegal and in direct conflict with your interests as a stockholder. Buying stocks for the fund they manage while at the same time selling it for their personal profit is not uncommon.
18. ‘Shelf space payments’ is a financial smoke screen that masks bribery and corruption. Individual brokers are allowed to recommend and sell stocks that are on the shelves of their brokerage houses. In other words approved by the brokerage board. Mutual funds make large unseen payments to brokerage house to get their fund stocks approved.
In summary then, there are 5 reasons to mistrust mutual funds: 1) they are not real in the sense that manufacturing companies are. 2) They lose talent to hedge funds and that causes them to fall back on indexing. This also means that their prospectuses are not truthful descriptions of what you are getting for your money. 3) Often the management of both types of fund is the same people and there is a conflict of interest where the inevitable loser is the lower paying retail mutual fund. 4) They aren’t well enough regulated to protect them from speculation. 5) They are marketed competitively and a lot of the publicity is window dressing.
When it comes to investing for your retirement it is difficult to know who to trust and you need to be very skeptical of the financial media. They are owned and operated by the super rich. Their audience is made up of the very insider finance people who use hedge funds rather than retail mutual funds. It is best to do it yourself and base it on the principles of real products and service companies, and better yet, invest in real estate.
What is Private Money Anyway?
In this article, I will elaborate various types of Private Money which are available to entrepreneurs; especially to real estate investors.
Many people equate Private Money with hard money loans. Hard money is only a small part of the Private Money space. Hard money is geared toward short-term financing. In the boom phase of the real estate market, it provides a quick source of money for the borrower, and a lucrative way of making short-term gains for the lender.
However, in the down cycle, when the valuations are attractive but there is no breakout in sight, hard money lenders tend to stay out of the market, or invest their money directly in real estate.
There are some clear-cut examples of Private Money, such as, when an individual lends money to another individual on mutually agreeable terms, it is considered Private Money; When a bank or a government department lends to an individual or organization, it is not.
The definition of Private Money gets interesting when we look into situations where institutions, such as, insurance companies or retirement funds, mutual funds, hedge funds, etc., lend large sums of monies to individuals or business entities for real estate deals, or take equity positions with the same.
Private Money, in my mind, has two critical qualification requirements:
1. The owner of the money is directly lending or investing it. That is, if there is an intermediary involved, then it is not Private Money.
2. The terms are flexible throughout the duration of the loan or investment period.
Based on the above, in the institutional space, insurance companies and hedge funds may be at the opposite ends of the qualification requirements in terms of ownership of the money and flexibility.
Insurance companies, by their nature, would not come into flexible contract. They may lower the interest rates, but their underwriting requirements on the front-end of the relationship and their foreclosure approach at the tail end of the relationship may be as stringent as a bank.
On the other end of the spectrum, hedge funds don’t own the money, but they could be pretty flexible with their underwriting and foreclosure approaches.
So even though we may want to classify certain non-bank entities’ money as Private Money, it would be ill-advised to do so. The borrower might as well get a loan from a bank.
Therefore, the true Private Money sources are individuals or business entities which lend/invest directly, and whose underwriting and foreclosure approaches are flexible and are in tune with borrowers’/entrepreneurs’, collateral’s and market’s conditions.
The flexibility of Private Money is not due to charitable or “Good Samaritan” reasons. The flexibility is by design to allow the entrepreneur enough time to provide decent and long-term return on investment to the source of Private Money.
Cheap money is always better than expensive money. However, savvy real estate entrepreneurs take quick and flexible Private Money over onerously underwritten cheap money, which comes with operational straight-jacket, any day.
Lee Ali teaches real estate investors how to find and leverage Private Money in their investments. He also guides private lenders to find and evaluate right real estate entrepreneurs for their lending or investment needs. For a free report on Private Money visit http://www.BankFreeInvesting.com
Some Sellers are Causing Real Estate Prices to Come Down.
Some sellers and their nickle and dimming of REALTORS’ commissions are shooting all sellers on their feet. The REALTOR Network is solidly designed for seller brokers first, and then for sellers. Check this out:
“By focusing on seller listings, they put the two biggest advantages in the business to work for them:
1. Economic Advantage: Seller listings, as cost of sale, are less expensive to obtain than buyer listings and sales. At a cost of sale of around $100,000 vs $600,000 for the same volume of buyer sales, the Millionaire Real Estate Agent realizes a $5000,000 cost savings.”
2. Lead Generation Advantage: Properly marketing seller listings not only begets a 2 for 1 (1 seller = 1 buyer) but also begets more seller listings. Until a way is invented to effectively market buyers so sellers will contact us, marketing the seller has a huge leverage advantage for the real estate agent.
Millionaire Real Estate Agents are seller listing lead generators first, marketers of those seller listings second, and buyer listing lead generators third. Any other order and the odds of achieving millionaire sales numbers drop dramatically.”
Source: Gary Keller, founder of Keller Williams, “The Millionaire Real Estate Agent, Rellek Publishing Partners, LLC. 2003.
Monkeying around with REALTORS’ incentive to work hard on sellers’ behalf, as the whole industry is geared to do, some sellers assume that the price of their house is the same in the REALTORS NETWORK as it is in the open market.
BIG MISTAKE!!!
Thoughts on Banking and Real Estate Crises
If you were to believe Ben Bernanke who recently appeared on 60 Minutes, who happens to be a Great Depression expert, the problem during the Great Depression was that Fed did not pump enough money in the economy. So Bernanke wants to make sure that he prints as much money as he thinks he needs to.
Investors from from all over the world trusted Wall Street with $27 trillion to invest in the US assets, primarily real estate http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a0jln3.CSS6c
Churning $27 trillion, which is twice the amount of the US GDP, in 5-6 years, has created institutions which don’t have solid foundations. Many people made a lot of money in “fees” by continuously inflating the prices of all kinds of assets. Even a boring commodity, such as, copper went from $1/lb. in 2004 to $4/lb. in 2006. http://www.kitcometals.com/charts/copper_historical.html
A little diversion here. I went to see Pink Panther 2 today with my kids. Christine Ammanpour with CNN logo was breaking fictional news about the theft in the movie. Similarly our whole economy seems to be based on speculation and fantasy. No one knows what is real and what is hot air.
Aside from the $27 trillion churn, the US corporate infrastructure is bloated with unncessary processes to start off with. You may whip the economy in shape today. It will go back on slide and will require external capital to feed the beast of “exit strategies” which most, if not all, economic entities play on each other.
The solution is the elimination of as many middle(wo)men as possible. Crowdsourcing will take care of this issue anyway. “The Firm” is pretty much dead.
Please allow me to present an example from National Association of Realtors (NAR) with a Realtor example which is as good an example as any of the inflation created by all kinds of experts, advisers and service providers in real estate. This example could be extrapolated to any service industry.
National Association of Realtors claims ( http://www.realtor.org/research/commentary_falling_fsbo ) that in 2008, smack in the middle of “depression”, Realtors sold real estate at up to 26% higher prices compared to real estate sold on For Sale by Owner (FSBO) basis.
A median home of 1,515 square feet was sold at $116 per square foot in agent-assisted sales compared to $92 per square foot with in FSBO sales thus pushing the price up by $36,360. Hey, great for the sellers. But what about the buyers who paid $36,360 more?
The problem is NOT that the real estate agents are making commission. They should. The problem is that in order to make their 6% commission, they are inflating the prices. However, if you dissect the 6% commission, a typical sales person is making no more than 1.5%-2.0%. The rest of the commission is used to “keep the lights on” which don’t necessarily need to stay on much longer. Most of the real estate agents are generating leads from the Internet and working from their cell phones and home-offices.
Also, the nature of hit or miss efficiency of real estate agents in the past, they could not charge less than 5%-6% to cover for all the sales which did not materialize. With the new efficiencies, agents don’t need to charge 5%-6% to make 1.5%. They can charge less and keep most of it instead of sharing too much of it with their Realtor buddies.
For example, if a listing agent sells the house without the assistance of a buyer agent and his broker does not charge him too much, then why should he get 6%? The reason he wants to get this 6% is because he is not sure when he is going to get the next 6%. If he can consistently get 1.5% with the use of the efficient technologies and systems, then why not? Welcome to http://www.Redfin.com
Another approach is a mass movement of real estate agents towards becoming brokers (thus becoming really self-employed) and use the Internet for lead generation. Check this out: http://activerain.com/blogsview/997606/How-to-respond-to-Email-enquiries
Again 5%-6% commission in not the “main” problem, but all the debate in the industry is focused on it. The main issue is the elimination of the inflation which is benefiting the seller and not the buyer. It is the yesterday’s buyer, who bought/built incorrectly and is today’s foreclosee. The seller is sitting pretty.
The main culprits are the banks and Wall Street which, every 10 years of so, flood the market with cheap money so everyone and his grandmother becomes an investor and starts buying properties at valuation which those properties cannot sustain. The banker makes his “churn fee” and dumps the note to the next fool. This video covers the problem very well. http://www.vimeo.com/3261363
The main solution is to eliminate the “funny money” from real estate by utilizing the “stable capital” from American retirement accounts. These retirement accounts don’t need to churn money to support the unsupportable gambling mindset prevelent in our financial industry. They can lend against real estate on short term (8%-15% depending on opportunities) or long term (5%-7%) basis. But I don’t want the government to pull a Kirchner on us. http://dealbook.blogs.nytimes.com/2008/10/22/argentina-nationalizes-30-billion-in-private-pensions/
According to some estimates 1/3 of American real estate is owned “free and clear.” The equity in real estate can also be tapped by popularizing seller financing with protections for the sellers.
The biggest concern sellers have–even bigger than the sale price or the interest rate–is that they don’t want the buyer to milk it for whatever it is worth and to toss it back to the seller. If there is some kind of “real estate maintenance” insurance to cover sellers in those situations, then we will have more sellers playing banks with their equity.
They will not have much choice in the next few years because interest rates will stay lower and Wall Street will continue to devour people’s money through stocks and mutual funds. Beside, selling real estate against cash is a taxable event. Seller financing spreads the tax liability over the life of the seller financing period.
We have tens of trillions of dollars between the paid up equity and retirement plans. Crowdfunding taps into those sources of funds by eliminating banks and Wall Street.
Lee Ali
http://www.BankFreeInvesting.com/blog
Lee Ali is the author of, “Crowdfunding: The Solution to Eliminate Booms and Busts in Real Estate Forever!”
Is Wall Street World’s Largest Ponzi Scheme where Madoff is Just a Poster Child?
Folks, here are a couple of interesting links which describe how Wall Street operates.
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220533
I am also reading Ric Edelman’s “The Lies About Money” where Edelman, on pages 107-108 talks about Fund Seeding and Fund Incubation.
Fund Incubation is where mutual fund companies incubate numerous funds for three years. Whichever one’s are successful, are submitted to MorningStar for 5 star rating. The others don’t see the light of day because MorningStar does not rate funds which are less than 3 years old. The newly minted funds with 20%-30% ROI are then marketed heavily to retirement plans and general public.
Fund Seeding is when a mutual fund company buys IPOs or other financial instrument, without allocating to any specific fund. If it goes up heavily, it allocates the windfall to newer funds to artificially boost their performance.
Is Wall Street world’s largest Ponzi Scheme where Madoff is just a poster child?
Lee Ali
BankFreeInvesting.com
Mr. Ali is the author of, “Crowdfunding: The Solution to Eliminate Booms and Busts in Real Estate Forever!”
What are the best ways to enable grassroots stimulus, esp. with entrepreneurship?
Folks, Reid Hoffman of LinkedIn asked this:
What are the best ways to enable grassroots stimulus, esp. with
entrepreneurship?
I recently made some efforts to stimulate ideas, since generating new
businesses will be the best form of stimulus. In short, stimulus as
investment rather than spending.
Washington Post:
http://tinyurl.com/reidhoffman-oped
Charlie Rose:
http://www.charlierose.com/schedule/?date=2009/3/4.
Techcrunch:
http://tinyurl.com/reidhoffman-techcrunch
Further ideas sought, plus commentary. Hence, this question.
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Reid,
The first thing to do is to rescue American people’s “stable capital”
from Wall Street. This “stable capital” is none other than the
American retirement accounts. It used to be $10 trillion strong in the
Summar of 2007. Now it is around $6-$7 trillion, and is rapidly
evaporating. If it is not rescued from Wall Street, we would be left
with $4-$5 trillion, or less, in the next couple of years.
Warren Buffet: “I never attempt to make money on the stock market. I
buy on the assumption that they could close the market the next day
and not reopen it for five years.”
If Buffet can live without Wall Street for five years, we can live
without it for two years. The American people could be saved from the
daily agony of watching the Dow go down. It will plunge to 3,800,
according to some experts. We will have less people dying of heart
attack in the next two years if Wall Street’s financial masturbation
err…trading was just shut down for a couple of years.
The second thing to do is to stabilize housing by using this “stable
capital.” Thus providing an existential, emotional, logistical, and
financial breathing room to the American people directly, and the rest
of the world indirectly.
In a “crowdfunding” fashion, retirement accounts can buy mortgage
notes from banks at discounted prices, thus creating instant “paper”
gains for their retirement portfolios. Since this is the “stable
capital”, which cannot even be withdrawn until the account holders are
59 1/2, there is no need to foreclose on people who are not able to
make payments in a timely fashion. The payments will accrue, but the
collections could be lenient.
Note, this is NOT charity. This is just great customer service of
providing the homeowners breathing room so that they can put their
financial houses in order. When the economy stabilizes and people try
to play deadbeat, then foreclosure or evictions can be re-instituted.
Housing rehabilitation can engage tens, if not hundreds, of thousands
of housing-related people.
The third thing to do is to take the cash flow from housing into new
enterprises. Money from retirement accounts can come directly as well,
but housing needs to get the priority. The business dinosaurs, built
on “greed is good”, must be allowed to die. Through crowdsourcing and
crowdfunding, by “The Billion” people, connected through the Internet,
new business models, widgets and services will be introduced in the
marketplace; efficiently and cost-effectively.
The venture capital and angel model is broken. It is based on the
curse of “exit strategy” which has plagued our capital markets for
decades.
Warren Buffet: Our favorite holding period is forever.
Why must venture capital and angels recycle their investments every
3-5 years? The losers must be allowed to die early, and the winners
must be kept forever to generate cash to invest on more ventures.
If “forever” is good strategy for Buffet, it is a good strategy for
the rest of us. The curse of “exit strategy” creates a group of
opportunists who continuously “duct tape” companies together to sell
them to fools who purchase Wall Street hot air aka securities. Some
even buy hot air about hot air aka derivatives.
The stimulus, bailouts, etc., aren’t needed to start off with. Even if
some can argue in the favor of their temporary “band aid” value, these
programs will put serious downward pressure on the dollar which so
vigilantly protected by our armed forces.
In summary, have respect for the life savings of the Boomers AND leave
the dollar alone.
PS: Reid, all of your investments are located on hard-disks. Learn from Google top executives, who are all on the Real Estate Committee, and buy some real estate, my man.