Insurance Advice and Assistance

Are you an investor?

Investors are ambitious and optimistic. Unlike humble savers, they believe that taking a little risk and exerting a minimal effort will dramatically increase their funds. Investing can be very troubling, but it touches fewer core emotions than savings. When ambition is thwarted and optimism is shattered, investors are miserable. However, they do not storm the capital and start a revolution. Investing concerns one-on-one relationships rather than the role of God and society in safeguarding hard-earned money. Whereas savers trust no one individual, optimistic investors trust too many people. When markets collapse, individuals are blamed, not government or the gods.

Ideally, the investor only invests excess savings. In investing, an individual or a group lends their excess savings to other individuals or groups for a fee. The fee is rent, interest, dividends, or capital appreciation. Groups can be corporations, partnerships, trusts, or other legal entities. The investor relies on the investee to pay the fee over time and to repay the investment.

Investing creates a relationship between the investor and the investee. Each has expectations of the other. Emotions are triggered entering the relationship, during the relationship, and leaving the relationship.

Threat to home equity

The biggest threat to home equity is impulse buying and keeping up appearances in a consumer society. Have you taken out a second mortgage even though you consider home equity your retirement nest egg? Many people run up credit card debt and then refinance it at a lower rate with a second mortgage. At some point, though, the nest egg disappears. Impulse buying and keeping up appearances can turn savers into spendthrifts.

Still, there is some justification for using a home as a savings vehicle. We all need to have a residence. The purpose of saving is to create a sense of financial security in our lives. Renters are subject to rent increases and the whims of landlords. A long-term saver able to pay a mortgage and not take out second and third mortgages will not have rent increases. A longterm saver able to pay off the mortgage will dramatically increase the sense of financial security in his life. Investors and speculators will have little interest in this type of security.

Home ownership works best for long-term savers who are not interested in the value of their home, but the security of their lifestyle. They are able to ignore the ups and downs of home prices, interest rates, and the economy, and focus on paying down the mortgage one payment at a time.

Often, true savers double their mortgage payments to eliminate the mortgage at a faster, orderly pace, whereas investors would not dream of using their excess cash to increase a mortgage payment.

Comparative market analysis

“Comparative market analysis” means nothing more than doing  some comparison shopping before you buy any real estate. Just as  you would compare and shop prices before buying new furniture or  a car, so, too, you need to compare and shop prices for similarly situated  properties before making a purchase. The difference in this  instance is that you are comparing a building that is for sale with  ones that have already been sold.

What do you need to compare? The major considerations are:

Number of units
Square footage of the improvements (structure)
Square footage of the lot (the dirt)
Condition of the surrounding neighborhood
Age and condition of the building
Income-producing capability (current rents versus market rents)
Parking (garages, pads, carports, or none)
Amenities (view, fireplaces, multiple baths, pool, patios or decks, etc.)

The idea when conducting a comparative market analysis is to  locate a few properties in the same or similar neighborhood that  have recently been sold. As outlined previously, look for properties that have traits similar to the one you want to buy. In a perfect  world, the sales should be within the past six months—the more recent,  the better. Once you gather all the data, your job is to compare  and contrast it to determine a fair price for the building you’re considering.

How to deal with financial problems

Ten years ago Michael looked at both real estate and stocks. A stockbroker told him that real estate was too complex. Because stocks and stock mutual funds were simple and easy to understand, he would do better in the stock market. Ironically, in 10 years of study, Michael still does not grasp all the complexities of the stock market; yet with no study, he and Susan were able to purchase three homes. The value of his current home has far outperformed his stock investments.

Despite his own experience, Michael still believes that real estate is too complex and the stock market is relatively simple. In fact, more than 100 factors can influence the price of a stock, whereas less than six factors affect the price of real estate. At first, real estate investing appears complex. After a year or two, it becomes simple. Stocks and stock mutual funds, a first glance, seem simple. After a year or two, the complexities appear. After a decade, the complexities of stock and stock mutual fund investing can become overwhelming. Late-night online investors, including Michael, come to understand why veteran stock managers work 80-hour weeks.

So how do Michael and Susan move out from under their defended position in the stock market and into their comfort zone of real estate? Financially, this can easily be accomplished. In fact, they have so few gains
in their taxable portfolio, they will not pay any taxes to shift into real estate. They will get tax deductions from selling out. Considering the negative investment returns they have been getting in the stock market, it also would be reasonable to take a 10 percent penalty and liquidate their 401(k). But emotionally, Michael and Susan are attached to their dysfunctional relationship with the stock market.

More on compound interest

For every month that goes by, 1% of the balance (12% divided by 12 months) is going to get added to the balance. The following month, that 1% is calculated on the new balance. For example, after one month, the balance would grow to $1,010. That’s $1,000 times 1%.

After another month, with no payments, the balance would grow to $1,020.10. The balance grew not by $10 like the month before, but $10.10. The difference comes from the fact that interest was calculated on the new balance, not the original. It doesn’t take long before this interest-on-interest growth of the balance mushrooms beyond control.

It’s not hard to see that with higher-interest-rate loans, this can spiral out of control. This is especially true when you are making the minimum payments, getting late fees added to your payments, or even skipping payments altogether. To add insult to injury, many companies begin raising their already-high interest rates when you don’t keep your account in good standing.

To make matters worse, most interest is compounded daily, not monthly. This only speeds up the effects of compound interest, and leaves you making much slower progress than you need.

Compound Interest

Albert Einstein, perhaps the most brilliant mind of the twentieth century, had an opinion about compound interest. He’s quoted as saying, “Compound interest is the most powerful force in our universe!”

Now, I know our old friend Albert was being a little sarcastic, but he’s got a semivalid point. Compound interest is a force to be reckoned with. For those who are owed compound interest, it can make them wealthy. For those who owe it to someone else, it can be an anchor around your financial neck.

Guess who loves to charge compound interest? You got it … credit card companies, payday loan providers, and other types of questionable lenders. It’s part of the reason that paying off credit cards is a far greater struggle than paying off a car loan—even when they’re at the same interest rate.

The magic of compound interest is that you are charged interest on your interest until the loan is paid off. In other words, a little bit of interest is added to your debt every month, week, day, or even every second. Then, in turn, you are charged interest on that new slightly higher balance, during the next period.

Like a car that’s lost its brakes on a steep and winding road, it doesn’t take long to go over the edge! Let’s look at an example of a 12% credit card, with a $1,000 balance, that compounds its interest every month.

The Intellectual Capital Landscape

1. Education and experience. Together with talent, these are the key components of human capital. They are typically summarized in an individual’s resume, a document designed in part to establish an individual’s value in the employment marketplace. But the value of individuals is not absolute: It is situational. That is why one is well advised to customize one’s resume for the particular requirements of each prospective position.

2. Traditional intellectual property. Patents, copyrights, and trademarks comprise this domain and are protected by law. In many cases, their value can be appraised, for example, the copyright on an enduring piece of music or a famous movie generates a royalty stream of reasonably predictable value. The same is true of a patent on a commercial drug. Such well defined, income-producing properties are, in fact, equivalent to tangible capital; whether they show up on the books is a matter of accounting convention and/or a business decision. In what may be a new trend, large firms, including Dow Chemical,2 are employing internal or external consultants to appraise and to manage their patent portfolios.

Venture Capital and Diversification

The behavior of venture capitalists (VCs) is interesting in regard to technology risk management and diversification, for many of the companies in which they invest are pure technology plays.

Not only do the VCs seek diversified portfolios overall, but also they strongly prefer a diverse R&D portfolio within a single company—a one-product company is often shunned. However, VCs still are constrained to building relatively inefficient portfolios because start-up capital is concentrated in relatively few fields, such as biotechnology and software, and the performance of stocks within these groups is highly correlated.

We discussed the role of venture capital in creating value from business plans in Chapter 6. However, we are now focusing on how VCs augment their returns because their high-risk portfolios are diversified. We noted that the hypothetical VC’s experience may indicate there is a one-in-ten chance of meeting or beating the plans of the founders, doing an initial public offering (IPO) and hitting a “home run.” There are three chances in ten of a total failure, three chances in ten of a partial failure where the company is acquired and salvaged by a competitor, and three chances in ten that the company survives but produces average business results—a “single.” The VC may create a portfolio of several dozen, or even several hundred, investments on this basis, depending on her financial resources.

Insurance and Macroeconomics Key Factors

Rent is regarded as a surplus amount paid to the landowner by the user after having deducted the unit costs of optimally employed factors of production involved in using land in its most profitable manner from the MRP generated.

The pattern of urban land use is determined by supply and demand. Classical urban location theory states that on the supply side landowners will seek to maximise land value by allocating land to its optimum use, subject to planning regulation. On the demand side demand for urban land is a demand for space and occupiers or tenants of land pay occupation costs or bid rents that reflect a location’s accessibility. This classical view of the relationship between land use and rent explains whether or not a site is brought into economic use, the intensity of that use and the rent that might be charged. The classical theories also posit that spatial variation in cost and revenue determines the optimum profit maximising location.

An extreme view of the heterogeneity of land is that the supply of each unique parcel of land is perfectly inelastic but of course there will be many plots of land that are substitutable to a greater or lesser extent. When considering urban land, sites in the centre are less substitutable than those on the outskirts simply because there are less of them. Consequently the supply of these sites is more inelastic than others. But these sites are the ones in greatest demand because they are the most accessible to raw materials (labour and capital) and the market (consumers); so their rents are higher and they tend to be intensively developed. This inelastic supply means that economic rent is high in the central area and may even represent 100% of the total rent owing to the inability of supply to increase.

INSURANCE AND THE ADVANTAGES OF CDO EQUITY

CDOs provide access to a host of assets that investors cannot easily gain exposure to, either because of liquidity or rating constraints. As previously mentioned, these assets include leveraged loans, noninvestment-grade bonds, residential subprime mortgages, and commercial real estate loans.

By providing access to these assets, CDOs deliver diversification benefits that expand the efficient frontier. In cases where the pool of financial assets is not static, but rather managed by a portfolio manager, CDO equity gives investors access to a manager’s expertise.

CDO structures do not manufacture diversification. CDO equity returns are closely linked to the performance of the underlying assets. They will not be perfectly correlated with the underlying asset performance because of structural provisions that affect the way the collateral cash flows are distributed to equity.

CDO equity offers high dividend payments that are typically front-loaded. The investment typically competes for capital with private equity and hedge funds. CDO equity offers far greater transparency than either of these two asset classes. With CDOs, the funding costs and cash flow allocation rules are known. Moreover, there is a trustee and regular surveillance through which investors can know the contents of a manager’s portfolio. In addition, the rating agencies closely monitor the CDO market and publish regular reports.