Stocks and Lottery Tickets


lottery ticket

I guess this week is a big one for lottery players… something about Powerball? Okay, so you can probably tell that I don’t play the lottery. In fact I never have other than buying raffle tickets at events. I have nothing against playing the lottery, I have several friends who will buy tickets, I just never got into it.

I have a friend who once said that buying stocks was the same as buying a lottery ticket. Even Efficient Market Hypothesis supports this belief. EMH states that the market is so efficient that you cannot beat the market unless you take on more risk. I have mentioned before in blog posts and videos that there is a difference between speculating and investing.

If you buy a stock purely on a whim, or because somebody told you it was a good idea, then that would be speculating and it is the equivalent of buying a lottery ticket. If you buy a stock because you have studied it and looked closely at it’s fundamentals and you believe the stock is undervalued by the market, then that would be investing.

One of the key things I look at is the company’s earning per share (EPS) and how much the experts are predicting it to grow. I use a 15% expected return (meaning that is the target return that I hope to get on the stock) and I use the company’s expected growth to calculate what the company’s EPS will be in the future. For example, if the analysts’ think a company will grow by 20% over the next 5 years, I will take 1.2 multiplied by its current EPS to the fifth power.

Ex. 20% expected growth, $3 current EPS

$3 x 1.2 x 1.2 x 1.2 x 1.2 x 1.2= $7.46

I next take the industry average PE for that company and multiply it by the projected 5 year EPS.

Ex. PE for industry is 15x

$7.46 x 15= $111.9

Now,  I need to bring this back to today’s price since this is a 5 year projection. This is where my 15% expected return comes into play. If I expect it to grow 15% annually, then mathematically that means it would double in 5 years.

So the $111.90 5 year projection would mean it should be $55.95 today ($111.90 divided by 2). 

So if the stock is significantly below $55, I know I may have found a bargain. How much below? I would like to see it be 50%-75% of that price.

Of course from here I am going to look at many more factors. I need to know this company and their story so I can know if I even think it’s possible they can grow EPS.

So as you can see, I am too busy running these numbers to stop and buy a lottery ticket, but to those of you who have, GOOD LUCK and if you win big remember to put some of that money towards your retirement 🙂



Why Bitcoin Isn’t An Investment, But May Be Worth More In The Future

women s white button up long sleeved shirt

We all love the idea of fast money. After all, wouldn’t it be more fun to become a billionaire overnight versus having to work your tail off for several years? Well, sure it would be nice, but fast money doesn’t come easy and the allure of it causes some folks to make some very stupid investing mistakes.

Cryptocurrency has been a hot topic this past year. In particularly Bitcoin… It has been as high as $20,000, but is $6,473 as of the writing of this article. Many who bought in were hoping to become a millionaire or billionaire off of the cryptocurrency.  Others truly bought in because they love the idea of an unregulated currency that is free from government meddling.

Legendary investors Warren Buffett and Charlie Munger have described cryptocurrency as a bad mistake… something that isn’t going to end well. Others have said that Mr. Buffett and Mr. Munger are simply too old to understand the technology.  They will both admit that technology isn’t their expertise, but what qualifies as a good investment certainly is.

I believe both Buffett and Munger are correct in saying that Bitcoin isn’t an investment. An investment is something that has intrinsic value and has potential to produce a profit on it’s own. An apartment building is an investment because you collect rent and pay expenses. Ideally the rent is more than than the expenses and you have a profit at the end of the year.

Buying a business or a dividend paying stock would be an investment. Bitcoin isn’t.

However, I do believe there is a slight case to be made for the value of Bitcoin increasing. If you look at Bitcoin as a type of money then the case could be made that it will increase in value.

Money derives it’s value from supply and use. If more and more people prefer to use Bitcoin to pay for goods and services then more vendors and retailers will begin to accept it as payment. If this happens, then it is very well possible that Bitcoin goes up in value over time.

My personal opinion is that this isn’t likely. Bitcoin competes with other cryptocurrencies and it has a long way to go before it will be accepted mainstream as a form of payment. If that was to happen, you can also bet that the government will find a way to regulate it, which could hinder it’s value.

With all that said, if you want to speculate on Bitcoin or any other crypto, then go for it. But understand it is a speculation and not an investment. With a speculation, you only use money you could afford to lose if it went to zero.

Getting a Loan for Rental Property


If you are pursuing investing in rental property and you have no clue about financing, hopefully this article will shed some light on the subject for you. Your ability to obtain financing will be critical if you plan to use the bank’s money instead of your own.

There are two ways rental properties can be financed- through a commercial loan or through a conforming loan. A conforming loan means that it will meet fannie mae and freddie mac guidelines. These are typically obtained through a mortgage broker and they will typically be sold to the secondary market.

If you obtain a commercial loan, you will likely get it through a commercial loan officer of a bank. It will be the bank’s money used so typically your loan payment is made to them. Commercial loans are easier to obtain in many ways. The big difference between a commercial loan and a conforming loan is that a commercial loan is based more on the property and less on the individual’s personal finances, whereas a conforming loan is based more on the individual’s debt to income ratio and less on that particular property.

Think of it like this: with a commercial loan the bank is accessing whether or not the property is a good investment and can easily support the debt repayment. With a conforming loan the lender is asking if the individual has the total personal income to make the debt payments (part of the rent of the property is factored into that).

With a commercial loan they will typically ask for a minimum of 20% down and they will lock the rate in for anywhere from 5-10 years depending upon the lender. They will amortize the loan for up to 20 years typically. That means that the loan will balloon at the end of the rate lock (again 5-10 years) and will then be refinanced based upon the current interest rates.

With a conforming loan, they will likely ask for 25% down, but the rate can be fixed for 30 years and the payment amortized over 30 years. With these loans you have no worries about interest rates going up.

Here is what it takes to qualify for a conforming loan: decent credit score, debt to income ratio of less than 50% and some lenders want it even lower, a certain amount of reserves in your checking or savings account, and the property will need to appraise for at least the purchase price.

What is a debt to income ratio? What are reserves? The debt to income ratio, or DTI, is the total of all your monthly installment payments compared to your gross monthly income. Monthly installments include credit cards, car payments, mortgage payments, etc. Basically anything that shows up on a credit report. If your total monthly installments equal $2500 per month and you gross $6,000 in monthly income, your DTI ratio is 41.67% (2500/6000).

Reserves are a certain month’s worth of insurance interest, and taxes for the property you are buying. The lender will want to see you have a certain amount in your bank account. Keep in mind this is in addition to the down-payment required.

With a commercial loan the lender will want to see that the current rent will cover 1.25 times the debt. Some lenders like to look at capitalization rates as well. On the DCR (debt coverage ratio), if a house rents for $1000 per month and the monthly loan payment is $900 you would have a DCR of 1.11 (1000/900). A commercial lender will look less at your personal finances, but they will want to know you are in decent financial shape. They will likely ask for a current financial statement.

So which way is better? Here are the pros and cons of each:

Commercial loan Pro’s:

  • much less documentation to submit to obtain loan
  • can be done in your LLC and not your personal name
  • no limit on number of units of property

Commercial loan Con’s:

  • interest rate can only be fixed for a short period

Conforming loan Pro’s:

  • interest rate can be fixed for up to 30 years

Conforming loan Con’s: 

  • cannot be in LLC, has to be in your personal name
  • much more documentation to obtain loan
  • harder to get loan as your personal finances matter way more
  • can only do up to 4 units
  • there is a limit on how many properties you can own 


So which is better? Well it depends upon what your concerns are. I cannot get conforming loans anymore due to the number of properties I own. But if I still had the choice it would depend upon how concerned I am about interest rates. I like the idea of not having to refinance every 5-10 years. However, I do not like that a conforming mortgage has to be in my personal name. If liability is a concern (which it should be for everyone), a commercial loan might be a better option. I have done both over the years  and you can be successful with either. The main thing is to find a good investment!


automotive cars expressway guardrail

I must admit right off the bat, this week’s blog post is a bit of a copy-cat from a sermon I heard from my good friend and pastor, Bradley Williams, who is a pastor at Forum Christian Church.  Bradley spoke about the importance of having guardrails in our spiritual lives to keep us safe. The same goes for our financial lives- we must have guardrails to protect us from financial disaster. 

As an investor, my portfolio improved dramatically once I developed systems. In the beginning I didn’t know what I was doing and so investing was more of a guessing game than anything. I’m talking about both in my stock and real estate investing portfolios.

Through experience and education I have developed strategies for both types of investing. These systems not only provide me a framework for picking good investments, they also provide guidelines to keep me from losing too much money. For an example, I apply a margin of safety to buying both stocks and real estate. For stocks, I try to figure out the fair value and then I take anywhere from 25-50% off of that price and make that my target price. For example, if I believe a stock’s fair value is $100, I will try to wait to buy it when it dips down to $50-$75. It requires a lot of patience to do that, but it has really helped to protect me.

I also have a point where I will exit a losing position to keep from losing more money. It’s never fun to do, but you have to have stop-losses to protect yourself from losing all your capital. It’s often referred to as “risk management”, but I like to think of it as a guardrail for my money.

There are 5 guardrails that everyone needs to develop to protect themselves financially. Here they are:

  1. Insurance– Often neglected, but having proper protection is key. This includes auto, home, life, business, and health insurance. Think about it, you can have a lot of money in the bank, but you could lose it all to one disaster if you don’t have decent insurance.
  2. Budget– You must establish a monthly budget to keep yourself from spending more than you are earning. It’s hard to have money to invest if you don’t have any money left over at the end of the month.
  3. Tax Protection– I am thankful for police, firefighters, soldiers, and paved roads as much as anyone, and I am well aware that it takes tax revenue to pay for those things. However, I don’t want to have to pay more than my fair share and I want to protect myself from high taxes in retirement. Therefore I use the guardrails of a ROTH IRA to protect myself. I use other tax strategies besides just a ROTH, but that is one example. You need a good tax advisor to assist you in developing strategies for taxes!
  4. Inflation Protection– Experts say that inflation has averaged 3% historically. Simply put, the good and services that we buy will cost more in the future. In other words, ten dollars will buy less goods and services in the future than it will today. This is why you shouldn’t just stuff your money under a mattress. You need to have investments that far out-pace the rate of inflation. If you don’t, you will have less buying power in the future.
  5. Income Protection– In today’s world, technology such as artificial intelligence and automated machines are replacing jobs. We live in a global economy where things change fast. Companies get bought out, jobs move overseas, and some jobs get eliminated all together. I am a big proponent of having a secondary source of income, such as rental property, to protect yourself.

If you drift through life thinking that the government and social security will protect you in retirement, you could be majorly disappointed! You must develop these 5 guardrails early in life for them to work!

Fake News

man using stylus pen for touching the digital tablet screen


Unless you live under a rock, you have heard the phrase “fake news” quite a bit, mostly from our President. I always strive to leave my political views out of Investucate, mostly because that is not what Investucate is for. I do not intend to start now, but this concept of fake news, does affect us as investors and you need to be aware that not all information is good.

I wrote a blog a few weeks ago called “Who to Follow” where I pointed out that advice differs from guru to guru… and sometimes quite a bit!

For example, Dave Ramsey says to avoid debt, but Robert Kiyosaki says to use debt to become rich. Who’s right? Well, I will leave that one for you to decide because it really is a personal choice on who you want to follow. Since people vary in experience, risk tolerance, education, and values, the truth is there usually isn’t a one size fits all best approach.

For this blog post I don’t want to focus on choosing which teacher you should listen to, but rather what information you choose to listen to. The information and news can vary even in the financial world. We expect it to vary in regards to politics, after-all there are some polarizing views out there and it depends upon which end of the spectrum you are on. In the financial world it can vary as well or just sometimes be wrong collectively.

If you’ve been following me or listening to my podcast, Bulls, Bears, and BS,  you know that I am a fan of Phil Town. Back in 2007 Phil Town went on CNBC and did battle with those folks over whether people should get out of the market or not. He caught some grief from the host, Maria Bartiromo, but ultimately he was right as the market crashed in 2009.

I’m not being harsh towards Ms. Bartiromo, she was certainly not the only financial journalist who thought people should stay in the market at the time, but it goes to prove that you have to take what financial journalists say with a grain of salt and look at facts.

I love CNBC and I often have it playing in the background. That doesn’t mean that I believe everything I hear on there. Nor do I believe everything I read in the Wall Street Journal, Barrons, Forbes, etc. You have to think for yourself.

My suggestion is to read a lot of articles from multiple sources and get a balanced dose of information. When it comes to news on particular companies, you will often read biased reports after a company’s conference call. When that happens you should read the transcript of the call for yourself and make a decision based upon facts, not what some financial journalist’s opinion is.

In short, learn to listen to multiple sources but ultimately think for yourself.







Size Matters!


Size Matters when it comes to certain things…. sometimes bigger is better and sometimes smaller is better. When it comes to stock market and real estate investing, size matters a lot! The interesting thing is, it’s the opposite for stocks versus real estate.

When it comes to being a stock market investor, it is an advantage to be smaller. If you have a smaller number of shares, it is much easier to buy and sell positions. Warren Buffett has often been criticized for his “buy and hold” strategy, but the fact is, he doesn’t have a choice.

Whenever Mr. Buffett wants to buy stock in a certain company, he is often buying billions of dollars worth. It takes a long time to acquire that big of a position because of the number of shares that are trading might not be that large.

I once read that it takes large funds several months to exit certain positions because there aren’t enough buyers on the other end of the trade. So basically it takes investors who are dealing with large sums of money a long time to enter and exit a trade because of the large number of shares they own. A lot can happen to a stock’s price in the period of a few weeks or months.  This is why Mr. Buffett and all the large funds who are handling billions must take a long term view. They simply cannot be traders who trade in and out of a stock.

So, if you are a small investor it is much easier to enter and exit a position. If some bad news comes out and you want to sell your shares of a publicly traded company, you can often do it in a matter of seconds. This is a huge advantage!

Real estate investing is the opposite though. With real estate, bigger is better. I am referring to owning rental property when I talk about real estate. With rental property you want to scale as soon as you can. The reason is simple, the more units you have and the more income you have coming in, the easier it is to handle expenses or losses on certain properties.

This week I was notified that one of my units needed a new air-conditioner and it would cost $2,500. There was a time when I would have panicked after hearing such news. Although it wasn’t great news, I really didn’t give it much thought. The reason is because I have plenty of other units with rent coming in to cover it. In fact, I’ll still make a profit this month on all my properties combined.

Here’s another thought, if you own a single family home as a rental and the tenant moves out, guess what- you just lost all your income! This is why I always say “two doors or more”. 

The one thing I would caution you on, though, is the temptation to buy cheaper and less desirable properties all in the name of trying to scale. You need to scale, but you need to scale with good,cash-flowing properties!



If You Could Own 10 Houses And They Wouldn’t Cost You a Dime, How Many Would You Want?

home real estate

When I was fresh out of college, I used to work behind the counter at a feed and farm supply store. It was a fun job, mostly because of the customers who came in. Many of the customers were farmers and so they would come in on a weekly basis to purchase feed for their livestock.

Some of the farmers were wealthy individuals who purchased a farm either as a tax deduction or a hobby (or both) and so I was able to build a relationship with some successful business owners and pick their brains on what made them successful.

I had never thought about rental property investing, but one day one of the regulars came in and this gentleman began to tell me about his business of owning rental real estate. I must have looked a little confused because he finally at one point looked at me and asked “If You Could Own 10 Houses And They Wouldn’t Cost You a Dime, How Many Would You Want?”

He explained that although purchasing rental property often involved a down-payment, if you own the property for several years, you will earn that money back through profit and appreciation and your tenant will pay your mortgage for you. Then he blew my mind by telling me that although you make a profit, thanks to depreciation  your tax bill will be lowered if not completely off-set.

My mind was blown. I asked question after question. And this nice gentleman answered them one by one. Finally I asked, “why then only own 10… why not own 100… or more?”…. He grinned and said “now you get it son….” and he walked away.

Of course owning 100 rentals takes time and is something we have to build up to, but my goal is to get as many as I can. If I live to be an old man, I will someday own those properties free and clear. Even before I become old, though, I can enjoy monthly income from my rentals.

As of this writing, I own 10 units… Next goal- 100!


Make Money While You Sleep!

Buffett quote

A couple of months ago I was talking to a friend and I said “you know, in the small town I grew up in we all thought the rich folks were the doctors”. My friend agreed that society generally thinks that high income earners such as doctors, lawyer, engineers, etc. make up the rich. However, how many of the folks who made the latest Forbes 400 Richest Americans made the list through practicing medicine?

A doctor certainly earns a high enough income to become wealthy if they save and live a modest lifestyle, but what happens when the doctor stops practicing medicine? They would have to practice medicine for a lot of years and save their money to have a big enough pile to live off of.

What I am trying to point out here, is that the doctor or anyone who works to earn a paycheck must keep working to keep earning. Simply put, they work for money.

The self-made ultra rich or anyone who is in a position to live off of their interest, have figured out how to make money work for them. In other words, they could sit at home and literally do nothing while their money earns them more money. This is the number one reason I am so big on rental real estate.

I can purchase a rental property, hire a property management company to manage it, and then sit back and let my money make me more money.  It’s that simple.

If you follow Investucate on Facebook, then you have probably seen the video of me teaching my seven year old son this concept. He doesn’t have the capital yet to buy a rental property on his own, but he does have the money to invest in a vending machine. I hope to teach him this concept through a simple gumball machine.

If you want to be financially free, you have to figure out how to make money while you sleep!


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?


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.