Editor’s Note: You know the “rule of three,” right? Yes, you do.
For example, there’s the Holy Trinity. Heaven, earth and you-know-where. The Three Little Pigs. The three (original) tenors. Once, twice, three times a lady (whatever that means).
I can go on… but lucky for you, I won’t.
People also say good (and bad) things come in threes.
Today we’re just focused on the good – the third and final installment of Mark Ford’s column “What I’m Doing With My Money Now (and for the Rest of 2018).”
– Donna DiVenuto-Ball, Managing Editor
6. Direct Investments in Businesses
As I mentioned in Part One, the current value of my private business portfolio represents about 25% of my net worth. (It might actually be much higher, but I tend to value these investments very conservatively because they are somewhat illiquid.)
The returns I’ve enjoyed from these investments are better than anything else, including real estate, by multiples.
But I have an advantage. Having a bird’s-eye view of the booming direct marketing and online information industry, I see lots of business opportunities that (1) I understand very well and (2) I can have an influence on.
For the most part I’m not buying little pieces of established companies. I’m investing in smaller, entrepreneurial companies poised to grow. “Poised to grow” is a phrase I’d run from if it were said about any company in any industry I didn’t understand. But mine I do. And so I am pretty confident I can make good calls.
If you are in position to invest in your industry, a small business can give you an amazing return on investment.
When a young business is in its fast-growth stage (from zero to $50 million in revenue), there are usually three to five years when the asset value of the business will increase by 25% to 50%. I can remember half a dozen businesses in which I invested less than $50,000 and, in less than seven years, took out more than $1 million.
Another benefit is income. Once the business becomes cash-positive, you can take some amount of cash from it – as a salary, consulting fee or distribution.
Yet another benefit – and this may be the best benefit – is that when you own a profitable business you get to develop it the way you want. You don’t have to kiss anyone’s butt or follow a boss’s stupid mandates.
Benefits notwithstanding, I’m not going to be getting involved in any new businesses, however exciting or potentially profitable.
I have opportunities – plenty of them. At least once a week someone pitches a new business or joint venture to me.
But when I turned 65, I decided that my main priorities in life would be family, friendship and charitable giving. Those things take time. I can’t even pretend I can do a good job with them if I’m still starting up new businesses.
7. Real Estate
Along with direct investments in private businesses, income-producing real estate represents the biggest slice of my net worth pie. (Each is usually about 25%.)
I like rental real estate for many reasons: It’s real. It’s tangible. It produces income. It typically tracks inflation. And it’s relatively simple to understand, which means you can leverage it (with mortgages) with a large degree of safety. And you can earn an income from it without spending much time.
We’ve been selling our small properties and looking to buy larger ones.
It’s a very good time to sell.
Prices for single-family homes and condos are at or near all-time highs in many parts of South Florida, particularly along the coast. In fact, they are approaching or equaling the prices we saw in 2008 before the crash.
There are reasons to believe that the property market today is more stable than it was then. One big reason: Banks are much more restrictive in lending these days. It’s much harder for insolvent people to get mortgages.
But if you compare house prices with rents or with the personal incomes of people who might buy them, you can see that they are generally too high. “Too high” is good for selling, bad for buying.
We’ve sold about 70% to 80% of our lower-level South Florida holdings so far. We intend to sell most of the rest this year.
But we want to buy. So we are holding the cash and actively searching for larger properties in places where the returns (income on investment) are better, where we can get 7% to 8% unleveraged or as much as 12% leveraged.
This isn’t easy because there’s competition from big players (including REITs) for these larger properties. Last year we were close to buying two apartment complexes but were outbid.
(I don’t chase deals. My rule of thumb for buying rental real estate I learned from my brother. Eight times gross rent. If the complex generates a million a year in gross rent, I’ll pay up to $8 million for it. I will pay less if it needs work. But even if it’s in perfect condition I won’t pay a penny more.)
Right now we have a contract on another two. Fingers crossed.
8. Art and Collectibles
I can’t pretend my collectibles can equal, in terms of financial rewards, some of my other investments. But I’ve done well with them over the years and they greatly improve my quality of life.
I have collected lots of things over the years: beer bottles, vintage cars, fancy cigar lighters, watches, jewelry and first-edition books.
But my biggest investment in collectibles, by far, is in fine art.
There are two serious problems with buying art (and other collectibles) for investment purposes.
The first is the same problem I have with “investing” in gold: Art does not produce any income.
The second problem is that if you buy your art through a broker, retailer or at auction you are going to pay a serious sales commission – sometimes as much as 30%.
These are serious drawbacks. There are ways to nullify and even take advantage of them. I’ve done that personally by having my own art business. But for most people I can’t make a definitive case for buying art as a way of generating a high return on investment.
But I can say this… If you invest well, you will eventually have a valuable store of wealth that is portable, non-reportable and tangible. It is the only sort of investment that can give you aesthetic pleasure a dozen times a day. It is also an asset class that you can liquidate gradually, year by year, to fund your retirement.
I’ve been selling off a lot of the medium- and lesser-quality pieces in my collection, which is getting close to 2,000 pieces. And I intend to continue this. My goal is to end up with two really good collections, each with 50 to 100 pieces.
As with real estate, this is a good time to sell art because the art market is generally strong. I am also buying, but I’m not buying at auction. I’m buying only from private collectors through my business. (That’s how I avoid the crazy commissions.)
If you are thinking of starting an art collection now, I’d say start off very carefully. Limit the scope of your interest initially to one or two artists about whom you can become an expert in less than a year.
If you can afford to, buy artists whose works sit in museums. If not, keep your spending to a minimum. But whatever you do, don’t buy art unless you know that you will be looking at it and enjoying it every chance you get.
As a rule, I don’t like gambling. Why? Because I have almost always lost 100% of my money when I gambled. And I don’t like losing money.
But there is a type of gambling that I sometimes indulge in. It’s a type of gambling that financial pros like to refer to as speculation.
Speculation, they say, differs from gambling because the odds are not predetermined. If you really understand the market or if you have inside knowledge, you can participate like an insider. You can be a casino owner rather than a blackjack player.
I haven’t made a speculative investment in years. But I admit I’ve been tempted to get into this crypto currency mania.
I’m thinking about taking a small position in a handful of cryptocurrencies that (I believe) have the best chance of being around in 10 or 20 years. They are bitcoin, ethereum, litecoin and cardano.
My “bet” will be no more than one-half of 1% of my net worth, or 1% of my net investible savings. In other words, it will be enough to give me bragging rights if I make a lot of money but not more than I can easily shrug off if – like most speculations, these cryptocurrencies all somehow disappear.
My plan is not to get rich from them, but to possibly see my money double or triple if the markets continue to inflate.
If you’re investing, I would say that this is the year to be very careful. It could be the year when the stock market corrects, the real estate market corrects, the art market corrects…
But it could also be another year of inexplicable growth.
I don’t know. So that’s why I’m going to do what I’ve been doing for more than 30 years. I’m going to sell off my lower-quality real estate and art and invest in higher-quality stuff if and when my rules allow me to.
And in the meantime I’m going to keep working hard to make sure my active income keeps growing and outpaces any spending (including gambling) I may do.