Joe Withrow's Blog, page 17

How I met the heroes of capitalism

“Man, Florida drivers are nuts,” I muttered to myself as rows of Florida license plates weaved back-and-forth in front of me as we headed south on I-95.

The traffic had slowed to 45 miles per hour just south of Daytona Beach. And each Florida driver was hell-bent on breaking free. They zoomed left… then right… honking at each other with each mighty swipe of the wheel.

But they didn’t get anywhere.

They remained in the exact same spot on the road… simply alternating between being behind the car ahead in the left lane and the car ahead in the right lane.

I couldn’t help but think – this is a microcosm of the current state of humanity. We just can’t bear to sit still…

It was a sunny day in April. The first blooms of Spring were upon us. And I was on my way to meet my heroes.

My SUV was packed with stuff that might furnish a south Florida apartment. I didn’t have one yet though. Minor details.

More importantly, my head was packed with ideas that might help lift Agora’s newest publishing group from a hodge-podge collection of franchises to something more cohesive. And more profitable.

My destination was Delray Beach – an intercoastal town just north of Fort Lauderdale. That was the corporate headquarters of the Agora’s newest business. It had formed through the merger of four franchises: Bonner & Partners, Casey Research, Palm Beach Research, and Jeff Clark’s option trading service – formerly housed within Stansberry Research.

Bill Bonner was the driving force behind Bonner & Partners. And Bill’s the Godfather of the entire financial publishing industry. More on that in just a minute…

Doug Casey – an Austro-libertarian hero with a radically anti-PC bent – headed up Casey Research.

Mark Ford and Tom Dyson co-founded Palm Beach Research together. Mark was another OG in the industry. He was also an entrepreneurial genius. And Tom, formerly of Stansberry Research, was considered a market wizard and a brilliant writer throughout the Agora network.

Then there was Jeff Clark. He’s one of the few options traders who actually made money trading options. In fact, Jeff made so much money trading that he retired in his early 40s. He got rich and then wrote a newsletter to share his trading wit with people.

These were my heroes. I had been reading their work every day and every month for years.  

To me, these people represented what capitalism was supposed to be. Character. Integrity. Win-win deals. Independence. Self-educated. Customer-focused… they each represented the ideals of the free market.

That’s why I walked away from my cushy career in the corporate banking world, packed up my SUV, and made my way to south Florida. I wanted to meet my heroes… learn their secrets… and maybe even become a major player within the Agora myself. I knew I had a unique perspective to bring to the table.

But I harbored some doubt.

Some 737 miles behind me – way up in the mountains of Virginia – sat an isolated property on five acres at the end of a gravel road. That was my home. But I didn’t know when I would be back. And I didn’t know if my gambit would pay off.

I just knew that Destiny called…

When I walked into the three-story Spanish-colonial building that housed Agora’s newest offices, I was a nobody. I did have a small online business and an email list consisting of about 1,000 customers… but that’s it.

By comparison, the Agora network served hundreds of thousands of customers. And their free e-letters reached well over a million people every day.

That had my head racing. What could I do to drive the business forward? How could I stand out?

For those who have worked in corporate America, you know it’s easy to stand out there. All you need is a personality. And an ability to chuckle at the absurdity of the paper-pushing and daily meetings.

That’s how I stood out when I worked in the corporate banking world. That Joe, he’s a rebel.

But the Agora was entirely different.

Bill Bonner started it back in the ‘70s. And he is fond of saying that the investment newsletter business is perfect. It’s part of the media, but it wouldn’t be mistaken for a reputable part. Here’s Bill reflecting on the industry he helped birth:

What was delightful about the newsletter business were the nuts and kooks, the charlatans and dreamers, the brazen hucksters and earnest geniuses who made up the industry.

Here were thinkers whose thoughts were untainted by any trace of advanced doctrinaire theory, let alone rudimentary training of any sort. Here were mountebanks and scalawags galore… along with a few saints… dispensing market wisdom, stock recommendations, and macro-analysis so far reaching you needed a Hubble telescope to see where it came from…

And here, too, were the sort of men whom rich widows were warned about. And the sort of theorists who made you wonder about the limits of human reason itself.

Colorful eccentrics, careful analysts, cheerful con men, and self-assured delusionals trying to figure out how things are put together — this is the world of investment gurus.

But guess what? The gurus are often right. True, some financial gurus have gone broke following their own advice. But many have gotten rich…

Investment gurus are an original bunch. They come up with all sorts of systems, ideas, and approaches. Almost all of them are successful — sometimes. There are a lot of different ways to invest and to make money.

And often one that works spectacularly well in one period may collapse completely when the market changes course. So, too, an approach that often works poorly under certain market conditions will work poorly in other conditions.

But, generally, an investment advisor who works hard to develop and refine a system and who sticks with it can do reasonably well, sometimes. He can be a technical analyst, a chartist, a Graham and Dodd follower, even an astrologer. Almost any disciplined approach, pursued intelligently and steadily, can pay off.

We have a theory that explains why this is so. Investing is, when you get down to the basement of it, a competitive undertaking. If you do what everyone else does, you will get the same returns as everyone else. In order to get better returns, you have to do things differently.

Investment gurus seem to be favored, in this regard, by their own originality and quirky self-reliance.

“Sometimes right, sometimes wrong,” they say. “But never in doubt.”

Taken together, they are probably the most independent and contrary professional class in the world. And this contrariness, alone, seems to put them at odds with the great mass of lumpen investors, allowing them to make more — or, often less — than the common results.

How do you stand out in that world??

Tomorrow I’ll share with you the three major investment themes on my radar for the coming decade.

-Joe Withrow

P.S. Yesterday I talked about my chat with Tain Nix on his Expat Phyles podcast. The episode is now online – links are below if you care to give it a hearing.

I would also highly recommend subscribing to Tain’s podcast. He’s got a great perspective and a rolodex of very interesting people that he’ll be doing episodes with in the months and years to come.

Apple Podcast Link: https://podcasts.apple.com/us/podcast/joe-withrow-a-world-class-libertarian-analyst-talks/id1686906959?i=1000617572575

YouTube Link: https://www.youtube.com/watch?v=XZ7qwTXTd0Y

The post How I met the heroes of capitalism first appeared on Zenconomics.

The post How I met the heroes of capitalism appeared first on Zenconomics.

On the Agora, economics, and moral philosophy

A large percentage of the people running our institutions are actually at war with reality...

That’s what my old friend Christian Nix said to me last week. I had the privilege of chatting with him on his Expat Phyles podcast… and it was a wide-ranging conversation. I’ll share it with you once the podcast is edited and published.

I met Christian – Tain, as his friends call him – five or six years ago within what used to be called the Agora network. Agora is the ancient Greek word for “gathering place” or “marketplace”.

I don’t believe that name is used to refer to the network much today, but the Agora still exists. It’s the largest financial publishing network on the planet. Except it’s decentralized.

The Agora consists of independent investment research franchises. They all share the same human resources (HR) and information technology (IT) infrastructure. But each franchise operates completely independently. The analysts are free to wander down any rabbit hole they so choose… as long as they put their best investment ideas and macro analysis out there for the benefit of subscribers.

I’ve been immersed in the Agora for over ten years now. First as a customer and then as an analyst working in the industry.

I’ll share with you the story of how I linked up with the Agora tomorrow. It’s all about the people. I’ve gotten to know more than a few extremely high-caliber people within this network. Tain being one of them.

And there was always a strong Austro-libertarian undertone to the network. I believe that dynamic has faded in recent years. But in the network’s prime, most of us had read all the major works from the great Austrian economists.

We could talk about Mises, Hayek, and Rothbard all day. We could refer to Frédéric Bastiat, Jean-Baptiste Say, and the Cantillon effect… and everyone knew what we were talking about. Most of this would sound like a foreign language to anyone outside the network.

Analysts also engaged each other in good-spirited debate. That kept us sharp.

On my very first day in the office a colleague I had just met debated me on the merits of Bitcoin. That was before Bitcoin had ever eclipsed the $1,000 price point… so very few people were paying attention to it.

I’ve also been on email chains where multiple analysts were debating monetary theory. Those discussions centered around how the monetary system actually works. It gets quite arcane when you start to peel back the layers.

That said, when one begins to understand money and economics from the Austrian school’s perspective, one naturally comes to see how economics and moral philosophy go hand in hand. This is something Tain and I talked about a bit last week.

Moral philosophy concerns itself with the nature of moral judgments. That is to say, how can we tell what is right from what is wrong?

Jesus of Nazareth made a great suggestion. “Do unto others as you would have them do unto you”, he said.

Today we call this the Golden Rule. It’s a simple thing. But if we think about it, it’s absolutely brilliant.

What Jesus was really suggesting is that we rely on self-reference to determine right from wrong. To do this, we have to imagine what it would be like if we were on the receiving end of a given action. Would we like it? Or would it cause us harm and distress?

That which causes harm and distress to our fellow humans is wrong. That which benefits our fellow humans is right. And that which does neither is neutral.

It’s a simple thing. But moral philosophy also applies directly to economic policy. If we approach it from this lens, we can very quickly determine the morality of any proposed policy.

If a given policy causes harm or distress to anyone, it is morally wrong. Even if that same policy causes benefit to a particular group.

And that speaks to the importance of analyzing a policy’s impact for everybody across the entire economy. This is the subject of Henry Hazlitt’s great Economics in One Lesson. Here’s Hazlitt:

The art of economics consists of looking not merely at the immediate but at the longer effects of any act or policy. It consists in tracing the consequences of that policy not merely for one group but for all groups.

That’s key. Too often those promoting a given policy talk only about how it will benefit one specific group of people. But what about everybody else? That’s a question we always need to answer.

In other words, economics and moral philosophy go hand-in-hand. As Tain and I discussed on his Expat Phyles podcast last week, you can’t separate the two.

I’ll leave it there for today. Tomorrow I’ll share with you how I came to meet the heroes of capitalism.

-Joe Withrow

P.S. I know the talk about dead economists isn’t for everybody. But as John Maynard Keynes once wrote, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist”.

The point is, ideas run the world. So if any of this catches your fancy, I would highly recommend Tom Woods’ Liberty Classroom.

Tom’s program provides a world-class education on both economics and history, and it does so in a compelling and entertaining way. I’m speaking from experience here.

If you would like to review Liberty Classroom’s course listings, just go right here:

Tom Woods Liberty Classroom Course Listing

The post On the Agora, economics, and moral philosophy first appeared on Zenconomics.

The post On the Agora, economics, and moral philosophy appeared first on Zenconomics.

Shatter the Glass Ceiling with Real Estate

We’ve been talking about real estate as an asset class all week. Today I’d like to wrap up our discussion by zooming out and looking at the big picture.

In every developed industrial country there is a glass ceiling of-sorts hanging over top of the middle class. This is certainly true in the U.S. Here’s what I mean…

When we add up all of the taxes across all levels of government, the average middle class person likely pays out half of their income in taxes each year.

It starts with the taxes that are typically withheld from our paychecks every two weeks. The Federal Income Tax… State Income Tax… Social Security Tax… the Medicare Tax – these taxes are each taken right out of our paycheck before we ever see the money.

Then we have to pay sales taxes on every good or service we purchase. And we pay excise taxes on things like gasoline and alcoholic beverages. We also have to pay property taxes on any real estate we own. Then we pay taxes and registration fees on our vehicles. 

These are taxes that virtually all middle class people pay – year in, year out.

Then if we happen to make any money on our investments, we’re required to pay taxes on our capital gains. Unless we defer those gains through a qualified retirement account. If that’s the case, we’ll be on the hook for normal income taxes on our money down the road.

If we were to add up the dollar amount of all these taxes each year, I bet it would equate to roughly half of our income. Which begs the question – how does one get ahead this way?

That’s the glass ceiling.

Those who simply work a W2 job and save their money in retirement plans are pitting themselves against the tax code every step of the way. I wish it were different… but that’s just reality.

One of the best ways to shatter the glass ceiling is by leveraging the advanced tax benefits that come with rental real estate. This is where the asset class truly shines.

As we discussed yesterday, real estate’s big tax advantage comes from depreciation.

Depreciation is simply an accounting method that allocates the cost of a physical asset over its useful life expectancy. The Internal Revenue Service (IRS) says that single family homes have a useful life of 27.5 years. Thus, real estate investors can depreciate 3.636% of the property’s value every single year.

In other words, depreciation allows investors to expense a small percentage of future repairs every single year… even though they haven’t occurred yet. In this way, depreciation is really just a phantom loss. It’s a loss on paper for tax purposes.

For example, if we own a property worth $100,000, we can write off $3,636 in depreciation every year. This reduces our taxable income, even though we never incurred a real expense.

Not too shabby – right? Well, let’s kick it into hyper-drive.

What I just described is called straight-line depreciation. It’s what happens by default. Your CPA or tax professional will assume straight-line depreciation for your properties unless you take accelerated depreciation.

As the name implies, accelerated depreciation allows you to write off a larger percentage of your asset faster. Here’s how it works…

When it comes to real estate, the tax code acknowledges that certain parts of the home wear out faster than others. If we do a detailed analysis and document the specific value of each part of the home – how much are the windows worth… the flooring… plumbing… HVAC… appliances… and so forth – if we break out the value of each specific item, the tax code says we can write off a percentage of certain items much faster than the standard 27.5 years.

Here’s the best part – we don’t need to do this analysis ourselves. We can hire a professional to do a cost segregation report to accomplish this for us.

I use a company called KBKG to do my cost segregation studies. They charge $300 per study, and all they need is for me to fill out specific details from the property. I get most of these details right from the appraisal.

This $300 report allows us to write off tens of thousands of dollars on our tax return. Maybe more.

This is why we will likely never owe any taxes on our rental income. And with some advanced tax planning, we can use these big write-offs to offset other forms of income as well.

If we do that, the end result is a much bigger tax refund each year. And if we are wise, we will use those big tax refunds to buy even more real estate… thus creating a cycle that fuels itself. That’s how we shatter the glass ceiling.

Now, I want to stop right here and address a common reaction to this. I know some people will read this and think – that’s not fair! Shouldn’t everybody have to pay the same taxes on their income?

Here’s the thing – anybody who pays taxes in the United States can do this. It’s simply using the tax code as it’s written.

You see, the tax code is 100% fair. 

If you follow the rules, you get the designated result no matter who you are. No matter what your net worth is. No matter what your political beliefs are. It doesn’t matter. The code is the same for everybody.

Sure, there are plenty of things about the tax code that I would rather be different. W2 wage earners absolutely get the short-end of the stick. That’s most people. This is a big reason why so many people are stuck in the rat race.

Unfortunately, there’s nothing that we can do about that. We can’t change the tax code. 

All we can do is operate according to the rules as they exist. And as it turns out, those rules are designed to incentivize certain activities. That’s why real estate is favored.

-Joe Withrow

P.S. Rental real estate is a core focus of our new investment membership The Phoenician League. It starts with our robust financial training program. It conveys all the ins, outs, dos, and don’ts of real estate.

Then we get members plugged into a nationwide real estate network and an online property portal. This makes sourcing ideal real estate investments almost as easy as buying stocks online.

And to top it off, we connect members with all the financial professionals they need to make building cash flow with real estate turn-key and tax-advantaged.

In other words, we’re a one-stop shop. And we’ll be opening our doors to new members for just the third time very soon.

If you would like to learn more about what we’re doing, please join our membership’s wait list right here: The Phoenician League Waiting List

The post Shatter the Glass Ceiling with Real Estate first appeared on Zenconomics.

The post Shatter the Glass Ceiling with Real Estate appeared first on Zenconomics.

Why real estate is a better way

Yesterday we talked about why the “nest egg” approach to retirement doesn’t work. And to illustrate, we showed how a retiree creating $70,000 a year in income from a $1 million nest egg would be completely broke in twelve to sixteen years.

A big part of the problem is that taxes eat into a significant portion of the nest egg. In our example we assumed a 15 percent tax rate. That required our retiree to sell $83,000 in assets each year just to get the $70,000 in income.

This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income. It’s an incredibly tax-advantaged asset.

That’s because for every property we buy, the Internal Revenue Service (IRS) says we can “depreciate” a fixed percentage of its total value every year.

In other words, we can write off a portion of the property’s value against our income every year… even though we didn’t lose the money.

So depreciation is a phantom loss. Just for tax purposes.

And that’s just one element to it.

When we talk about investing in real estate, we’re really talking about building a business. So we run everything through LLCs. And then we take deductions.

Home office expenses… subscription fees… educational resources… travel… we can write off any expenses for our business against our rental income. This includes expenses that we may have incurred anyway.

As a result, we shouldn’t owe any taxes on our rental income. That’s 100% by the book.

And it can get far more advanced than that. There are ways to create massive paper losses to offset other sources of income. Again, all by the book. Doing this takes advanced tax planning and a good CPA… but it’s possible.

So the bottom line here is that when we talk about creating extra income using rental real estate – it’s not like the nest egg approach where we get hit with taxes every time we want to access our money. Quite the opposite.

It’s tax free money that we’re talking about. And it just shows up in our bank account. Month in and month out.

And let’s quantify this for a minute. Let’s compare the income approach to the nest egg approach using the same example from above.

As we explored earlier, if we have a financial nest egg of $1 million, we have to sell $83,000 worth of assets each year to end up with $70,000 after taxes to live on. And we can do this for twelve to sixteen years before we run out of money.

But what happens if we spend our working years buying real estate that throws off monthly cash flow for us?

Let’s assume that we spend our time buying single family properties that produce, on average, $600 a month in cash flow. That’s $7,200 a year per property.

In this case all we need is ten properties to have an extra $72,000 in annual income. That’s it.

This is something that’s fully within the grasp of anyone. At least if they have the right resources and network.

And guess what?

These ten properties are going to crank out that $72,000 a year for us indefinitely. Meanwhile, our friends who built a $1 million nest egg will quickly tear through their savings in retirement.

Do you see the magic here? Focusing on income is simply a better way to go.

So I hope this gets the gears turning for you a little bit. Hopefully, I made it all sound simple. Because it is.

Of course, that doesn’t mean it’s easy. Real estate is a slow game at first. It takes some discipline to get started with it.

But what it doesn’t take is luck. Not when we buy real estate right, anyway.

And that’s where our new investment membership The Phoenician League comes in.

The Phoenician League provides comprehensive training around a range of asset classes. It also connects members with investment opportunities across these same asset classes. This includes real estate investments that throw off hundreds of dollars a month in cash flow from day one.

The Phoenician League also helps members plug into a larger professional network. This takes all of the guesswork and the grunt work out of achieving financial independence. Our goal is to help everyone work up to having $10,000 a month in extra income.

If you’d like to learn more about what we’re doing and how we do it, please sign up for the wait list right here: The Phoenician League Waiting List.

We’ll be opening our doors to new members for just the third time very soon.

-Joe Withrow

The post Why real estate is a better way first appeared on Zenconomics.

The post Why real estate is a better way appeared first on Zenconomics.

Why the nest egg retirement model is doomed

“A healthy nest egg can provide a solid foundation for a fulfilling retirement, allowing you to pursue your dreams and create lasting memories.”

This quote highlights the promise of the “nest egg” approach to retirement perfectly. We’re talking about the traditional model that’s been widely accepted since the early 1980s.

This approach says that we should pour our savings into financial assets to work up to this mythical retirement number.

The idea is that we build financial assets and hope our returns get us up to a big enough number that we can live comfortably in retirement. Then, we draw down our assets to create income for ourselves after we quit working.

That is to say, we sell off our stocks and funds and use that money to live on.

The problem is, this approach puts us on a see-saw. It forces us to choose between assets and income. When our assets are going up, we don’t have the income. Then when we want the income, our assets have to come down.

Plus, this model pits us squarely against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts—they are going to get taxed in the end.

I’d like to use an example to illustrate just how fragile this is.

Let’s assume we work up to $1 million dollars. Just for easy numbers. We get to retirement with a million-dollar nest egg—plus, we have a little Social Security money coming in. So we say, “You know what, I want to draw $70,000 a year from my nest egg to live comfortably. That will supplement my Social Security”.

Keep in mind, to get that $70,000 we have to sell our financial assets. Which means we have to pay taxes on the proceeds.

Now, let’s assume a conservative tax rate of 15 percent. At that rate, we have to sell about $83,000 worth of assets to get our $70,000 in income for the year. The other $13,000 goes to taxes.

To keep our example here simple, let’s assume our tax rate stays the same for the rest of our life. If we run the numbers, that means we can sell $83,000 worth of assets each year for exactly twelve years. That’s it. After twelve years, we are out of money.

But wait a minute… sharp readers may point out that I’m assuming no return on investment in this example. That’s correct. But I have bad news for you – it doesn’t get much better.

Let’s suppose we can generate a consistent 4% annual return on our $1 million nest egg. If we can pull this off – without having any down years – then we’ll only have gone through about half our nest egg after ten years.

After that we’ll have seven more years to burn through the rest. By Year Sixteen we’ll only have $72,000 left. By Year Seventeen, we’re completely broke.

The following graphic shows the calculations:

To be fair, we’ll be far more comfortable with our finances for a little while in this scenario. That’s because our nest egg will produce over $20,000 a year in interest income for us for ten years.

But notice how it snowballs in the wrong direction after that. It quickly gets to the point where we can’t afford any emergencies. We can’t afford to really do anything but just try to maintain our standard of living.

To me, this makes no sense. Not when there’s a better way.

If all we are really trying to do here is make sure we have enough income to live on in retirement, why take the round-about way to income? Why not just build the income streams in our working years?

Personally, I would rather have assets and income. And I would like my income to go up when my assets go up. I want the two on the same team.

And that’s exactly what rental real estate can do for us. More on that tomorrow…

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The post Why the nest egg retirement model is doomed first appeared on Zenconomics.

The post Why the nest egg retirement model is doomed appeared first on Zenconomics.

On real estate, cash flow, and timelessness…

“Ninety percent of all millionaires become so through owning real estate.” -Andrew Carnegie

We spent last week talking about building financial security and ultimately financial independence. The key here is that we need to have a system in place. As we discussed, chasing piecemeal investments is likely to keep us stuck on the treadmill.

When we talk about financial independence, we’re talking about a situation where our investments throw off enough cash flow to replace our active income. This isn’t something a 401k can do for us. So when we left off on Thursday, I suggested that rental real estate was the best vehicle to get there.

Simply put, real estate is a tried and true asset class. It’s largely timeless. The above quote from Andrew Carnegie over one hundred years ago highlights that.

I was thinking about this more over the weekend…

The early hints of summer are upon us up here in the mountains of Virginia. Green has gradually engulfed the cliffs that rise majestically above the meandering Jackson River below.

It’s a hidden gem up here. I have to think the old transcendentalist writers like Ralph Waldo Emerson and Henry David Thoreau would have done just as well here as they did in New England. The serenity and natural beauty lends itself to introspection.

That’s why I was thinking about the timeless nature of real estate over the weekend… and I stumbled upon Carnegie’s quote above.

The only thing I know about Carnegie is what I’ve read in Napoleon Hill’s Think and Grow Rich. One day I want to spend more time researching his life. I know there are differing opinions on his work and his character.

But when it comes to real estate, I think Carnegie is spot on here. Getting into rental real estate is likely the fastest way for people of average means to become millionaires.

I can say from first-hand experience that it’s not very difficult to create an extra $3,000 – $5,000 in passive income every month with real estate. Anyone with a steady salary can do this in three or four years if they are focused. That is, if they have the right system in place. That’s critical.

And ultimately I think it’s possible for most people to create an extra $10,000 per month in passive income in six to ten years. That of course depends on their current situation and level of commitment. But it’s 100% doable.

And even if I’m being too generous here… even if it took eleven or twelve years to build $10,000 a month in passive income – who would complain about that?

The traditional model tells us to pour our savings into stocks and funds for 35 or 40 years and hope we reach a mythical retirement number. Compared that that approach, real estate is much faster. And much more secure.

The key to investing in real estate is to focus on cash flow.

Cash flow is simply what’s left over after we use a property’s rent to pay all its expenses. And the beautiful thing about this is that we know what our cash flow will be for any property we’re analyzing before we buy it.

If we stop to think about it – that dynamic is amazing.

With real estate, there’s no guessing what our return on investment (ROI) will be. That’s because the ROI for any property depends upon its monthly rent, purchase price, insurance costs, property taxes, management fees, and homeowners association dues (if any). And we know each of these numbers up front.

So when we run the numbers and find that a property wouldn’t produce adequate cash flow for us, we don’t buy it. Simple. Imagine if investing in the stock market were like this.

As we know, a stock’s ROI depends largely on capital appreciation. That means for us to get a return, the stock has to go up.

So if investing in the stock market were like investing in real estate, we would be able to know if a stock was going to go up, and by how much, ahead of time. And if the stock wasn’t going to go up, we wouldn’t buy it.

Of course, that’s not how it works. Nobody truly knows if a stock will go up. So we can never know what our rate of return in the stock market will be.

This is a big reason why I consider rental real estate to be more secure than an equity portfolio. But it’s just one reason. We’ll spend the week talking about the others…

-Joe Withrow

P.S. Rental real estate is a core focus of our new investment membership The Phoenician League. It starts with our robust financial training program. It conveys all the ins, outs, dos, and don’ts of real estate.

Then we get members plugged into a nationwide real estate network and an online property portal. This makes sourcing ideal real estate investments almost as easy as buying stocks online.

And to top it off, we connect members with all the financial professionals they need to make building cash flow with real estate turn-key and tax-advantaged.

In other words, we’re a one-stop shop. And we’ll be opening our doors to new members for just the third time very soon.

If you would like to learn more about what we’re doing, please join our membership’s wait list right here: The Phoenician League Waiting List

The post On real estate, cash flow, and timelessness… first appeared on Zenconomics.

The post On real estate, cash flow, and timelessness… appeared first on Zenconomics.

How to Systematize Financial Independence

Yesterday we talked about some common financial mistakes. I made them all.

The root cause of my problem came from chasing “piecemeal” investments. These are investment ideas I came across that certainly sounded good… but I had no rhyme, reason, or strategy guiding my decisions.

That experience forced me to develop a comprehensive investment system and stick to it. This is critical if our goal is financial independence.

For me, it all started with an honest and thorough assessment of the monetary system and the macroeconomic climate. This sounds like a simple thing… but the current monetary system is rather insidious. That’s because our money loses purchasing power year after year.  

As Tom Dyson pointed out in our membership call last month, this makes it very difficult to plan. This is why Tom’s philosophy centers around owning energy.

So understanding the monetary system and the macroeconomic climate is critical. And we can use that knowledge to construct a strategic asset allocation model.

Asset allocation is all about financial security. It’s about strategically allocating capital to a wide range of assets. Cash, gold, stocks, bonds, Bitcoin, real estate, private notes, and early stage investments are the main assets on my radar.

This is how we achieve true diversification. The key here is that our asset allocation model becomes our reserve. We can instantly turn most of these assets into cash in the event of an emergency. They are our safety net. 

However, to my way of thinking, our asset portfolio is not our retirement savings. In fact, I reject the idea of retirement entirely.

Think about it this way: the traditional approach to retirement promotes the “nest egg” model, the idea that we need to pour our savings into financial assets to work up to this mythical retirement number. “What’s Your Number?” I remember old commercials promoting that slogan.

The idea was that we build financial assets and hope our returns get us up to a big enough number that we can live comfortably in retirement. Then, we draw down our assets to create income for ourselves after we quit working. That is to say, we sell off our stocks and funds and use that money to live on.

Notice how it’s always a choice between assets and income?

When our assets are going up, we don’t have the income. Then when we want the income, our assets have to come down.

And it gets worse.

This approach pits us against the tax code. It doesn’t matter if our financial assets are in 401(k)s, IRAs, or regular brokerage accounts—they are going to get taxed in the end, and tax rates could very well go up in the coming years. That’s not a bad bet.

So the traditional approach puts us on an unstable see-saw. We constantly have to choose between having assets or having income.

Personally, I would rather have assets and income. And I would like my income to go up when my assets go up. I want the two on the same team.

To accomplish this, I use my asset allocation model as a jump-off point to build passive income. That is to say, once I’ve built my asset base up to a reasonable level, I shift my focus to building passive income.

The key here is to acquire assets that throw off cash flow. This way we put assets and income on the same team. When our assets go up, so does our income. And when we want more income… we just buy more assets. It’s afar more robust approach.

And guess what? We’re no longer talking about traditional retirement here.

If we can work up to having monthly income that supports all our needs and wants… Well, we can retire any time we want. It doesn’t matter if we are 65 or 45. All we have to do is build up the income.

So what about taxes?

This is why I see real estate – old fashioned rental real estate – as the best vehicle for building income.

Real estate is an incredibly tax-advantaged asset. By default, we shouldn’t owe any taxes on our rental income. And that’s 100% by the book. It’s all baked right into the tax code.

I’ll leave it there for today. Next week we’ll talk about how to real estate can help us achieve financial independence much faster than we might think possible.

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

Our program within The Phoenician League walks members through the steps of implementing everything that we’ve been discussing in these pages. And we have a great support system in place. We’re all walking the same journey together.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The post How to Systematize Financial Independence first appeared on Zenconomics.

The post How to Systematize Financial Independence appeared first on Zenconomics.

The common financial mistakes I made…

The true purpose of money is to acquire assets.

That’s the key lesson in the classic board game Monopoly. If we acquire assets, we will always have the financial means to take care of ourselves and our families. That’s even if our active income were to go away.

If we accept this statement as true, the only remaining question becomes: what assets should we acquire?

Our core focus in these pages is how to get our personal finances right given the shifting macroeconomic climate we find ourselves in. My belief is that simply funneling a little money into 401k funds won’t cut it anymore.

So what’s the solution? Here we run into the information problem.

It’s funny… it used to be that a lack of information was one of our biggest challenges. Before the internet, finding information was much more difficult and time-consuming.

Today we have the opposite problem. We are inundated with incredible amounts of information all day, every day.

And if we go online and search for investment ideas and strategies, we are going to find an avalanche of what I call piecemeal investment advice.

There are plenty of services that focus on buying stocks or bonds in a particular sector or market. There are also scores of trading systems out there. They all promise to help us line our pockets with big gains.

To be sure, some of these services are decent. But none of them provide a comprehensive approach to finance.

They don’t provide an integrated system for becoming financially independent. Nor do they help us implement a complimentary tax strategy to maximize our investment returns. Most of the time they’ll keep mum on the tax issue for liability purposes.

I spent the first ten years of my professional life chasing these kind of piecemeal investments.

I would stumble upon a few stock ideas that I liked, so I would buy them. Then I would hear about a great set-up in the corporate bond space, so I would buy it. Then I would learn about a new approach to trading options, so I would try it out.

As a result, I was always bouncing from one thing to another. There was no structure or system to it. And taxes were an afterthought. When it came time to file my tax return, I just hoped for the best.

And I made all the common mistakes along the way.

I’ve poured too much money into short-term speculations that went nowhere. I’ve watched one of my stocks go from $7 a share to $80 a share… only to ride the elevator all the way back down to $10 per share. That wiped out nearly all my gains.

And because I didn’t have a tax strategy in place, one year I found myself having to dip into my individual retirement account (IRA) early. I took out a sizeable withdrawal to cover myself. Then the Internal Revenue Service (IRS) hit me with a 10 percent early withdrawal fee for my efforts.

I had to pay income taxes and a big penalty on the money I took out. You just can’t get financially independent by making mistakes like that.

As a result, I spent nearly ten years in corporate banking for my first career… and I walked away with almost nothing to show for it.

That’s because I squandered my savings on short-term speculations and piecemeal investments. Sure, I made a little money on some ideas. But thatwas often offset by losing money in other areas.

Needless to say, I didn’t start to see any real financial results until I wised up and developed a comprehensive investment strategy. Once I got my system in place, the rest was history. Results came far faster than I ever thought possible.

And here’s the thing – nothing about it is overly difficult or complex. I’ll share with you my system and how to implement it tomorrow.

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The post The common financial mistakes I made… first appeared on Zenconomics.

The post The common financial mistakes I made… appeared first on Zenconomics.

My experience cleaning up the 2008 mortgage crisis

The art of economics consists of looking not merely at the immediate but at the longer effects of any act or policy. It consists in tracing the consequences of that policy not merely for one group but for all groups.

This is the key lesson found in Henry Hazlitt’s masterpiece Economics in One Lesson. This book is required reading for anyone who fancies themselves an educated person. I learned far more about economics from this one short book than I ever did from my university economics courses.

What Hazlitt’s talking about here is the importance of understanding second order effects. That is to say, we need to consider the indirect consequences of a policy or decision to truly get a feel for its effectiveness.

This sounds perfectly logical. I doubt anyone would argue against its merit.

The problem is, second order effects typically aren’t immediately visible to us. Thus, people tend to focus only on the short term, direct results of a given policy or action – what they can see. Then they tend to ignore the indirect consequences that occur down the road. Out of sight, out of mind.

That being the case, I’ll share with you how I came to understand the importance of second order effects… and why they are often ignored.

My first career was in corporate banking. I got my start in the loss mitigation division of a major U.S. bank. And we were tasked with cleaning up the mortgage crisis in the wake of the 2008 fiasco.

For context, it’s estimated that around ten million homes in the U.S. went into foreclosure as a result of the financial crisis. The movie The Big Short does a pretty good job of telling that story.

But here’s the thing – the U.S. government decided that it was bad optics to allow so many foreclosures to happen. So the various government departments and government-sponsored entities involved in the mortgage market (HUD/FHA, VA, USDA, Fannie Mae/Freddie Mac) each developed loan modification guidelines for their mortgage products. Then they asked the banks to make them a priority.

The idea was that the banks could modify the loans for those who qualified per the new guidelines. Doing so would bring the mortgage current and stop foreclosure proceedings.

And the government entities even incentivized the banks to do as many modifications as possible. They agreed to pay the banks a flat fee for every modification completed.

Of course this sounded great to everybody. Let’s stop the foreclosures and let people stay in their homes. That’s how they sold the initiative.

Now, I worked in the HUD/FHA loss mitigation division within the bank. HUD refers to the Department of Housing and Urban Development. FHA stands for the Federal Housing Administration.

These two departments were instrumental in enabling people to buy a home with very little money down.

Per underwriting guidelines, homebuyers must put 20% on real estate purchases. But those who qualify for HUD/FHA loans can buy homes with just 3.5% down. That’s because the FHA backstops these loans by providing mortgage insurance to the lenders. The insurance protects the lender in case the borrower defaults.

So the bank instructed my group to comb through our entire portfolio of HUD/FHA loans and modify as many of them as we could. The modification process was as follows…

First, we took the past-due balance, including late payment fees and attorney fees, and we recapitalized it back into the mortgage. That means we added these fees to the mortgage’s principal balance. We basically stuck them at the end of the loan. This brought the loan current.

Next we dropped the interest rate to whatever the FHA’s floor rate was for the day. And then we re-amortized the mortgage back out to thirty years. That’s regardless of how many years the borrower had left on their loan.

Often this process would reduce the borrower’s monthly payment. They always saw that as a great deal. They went from nearly losing their home to having their house payment reduced. What’s not to like?

But here’s the thing I started to notice… 

Sometimes these modifications would increase the mortgage balance materially. That’s because we were writing all the outstanding fees into the loan itself.

After I saw that happen a few times something important occurred to me. We weren’t comparing the new mortgage balance to the home’s market value before proceeding with these modifications. That wasn’t part of the process.

And if we remember, housing prices collapsed in light of the crisis. On the national level, U.S. homes fell by about 30% on average. But the decline was much worse in certain cities.

So many of our modifications likely made the homeowners severely underwater on their mortgage. They were walking out of the deal owing more on their home than it was worth.

I couldn’t help but wonder – were we setting people up to fail?

What if something happened and they needed to sell their house quickly in the coming years? They wouldn’t be able to. They were now stuck with an overvalued mortgage.

I brought this up at one of our morning meetings. I asked if we were assessing valuations at any point in the process. And I asked if we were going to track these modified mortgages to see how they perform in the years ahead. I figured that was the only way to know if these efforts were in fact successful.

Management didn’t like these questions. Those were things for the “higher ups” to worry about, they told me. My job was to get the modifications done.

That’s when I learned the hard way that nobody cared about the second order effects. They didn’t care if our modification initiative was successful long term.

For the government, they just wanted the foreclosure numbers to come way down. Then they could talk about how they saved the day.

And for the banks, they wanted to collect as much revenue from the government incentives as possible. I’m sure they were thinking about the massive bonuses they’d be able to pay themselves that year.

This single lesson likely changed the course of my professional life. Once I saw that nobody cared about the second order effects of what they were doing, I realized that I didn’t want to work in corporate banking much longer.

It also opened my eyes to just how negligent the government and major financial institutions are when it comes to economics. I suppose that’s why we’re in the position we’re in today…

-Joe Withrow

P.S. Don’t forget that we’ll be opening the doors of our investment membership The Phoenician League very soon. This will be just the third time we’ve accepted new members since we launched last year.

If you’re interested to learn more about what we’re doing, you can do so right here: The Phoenician League Waiting List

The post My experience cleaning up the 2008 mortgage crisis first appeared on Zenconomics.

The post My experience cleaning up the 2008 mortgage crisis appeared first on Zenconomics.

The spirit of the ancient Phoenicians is alive and well…

“The Maronite Church is an ancient Christian community with a unique spiritual heritage rooted in the Syriac tradition.”

In the spirit of our discussion on the ancient Phoenicians last week, I attended a traditional Lebanese festival over the weekend. The Maronite Church in a neighboring town hosted the event… and the turn-out was great.

Here’s a snapshot of the scene walking in:

Here we can see the walkway lined with tents and vendors. In the background we can see a majestic bell tower. It rises above the beautiful stone walls that encircle the Maronite Church’s campus.

Walking through the arched doorways beneath the bell tower leads to a circular courtyard. It connects the church itself with the dining hall and the office facilities.

A beautiful fountain sits in the middle of the courtyard. And over the weekend this area featured traditional Lebanese music and dance performances.

Here’s a look at the courtyard:

The line we see in the background here led into the dining hall. The church volunteers in there served up some traditional Lebanese dishes. I enjoyed a chicken shawarma wrap with Lebanese-style rice. My kids went for the meat pies. Those were amazing.

As a reminder, the Phoenician civilization centered around modern-day Lebanon. That’s where the Maronite Church originated as well. This is something I didn’t know much about before…

The Maronite Church was founded in the 4th century by a Syriac monk named Maron. Today he’s called Saint Maron.

The Maronite Church is Catholic. But it isn’t beholden to the Pope and the Vatican as the Roman Catholic Church is. Instead, the Maronites are self-governing. They do not recognize some of the decrees that came from the Vatican over the Roman Catholic Church’s history.

What’s more, the Maronites have maintained their own distinct liturgy and traditions over the years. And get this – part of the Maronite mass is still said in Aramaic. That caught my attention.

Aramaic is an ancient language. It dates back to what we believe to be the first human civilizations in Mesopotamia. Jesus of Nazareth would have almost certainly spoken Aramaic. The Maronites point to that as one reason why they seek to preserve the Aramaic part of the liturgy.

I appreciate this effort to preserve ancient culture and history. I think it’s important that we maintain our links to the past.

As such, I’m going to carve out some time to go attend a Maronite mass one day soon. I suspect that will be quite an experience.

Getting back to the festival… I’m happy to report that the spirit of the ancient Phoenicians is alive and well.

If we remember, the Phoenicians were a commercial civilization. They connected the Mediterranean region with parts of Asia, Africa, and Europe via robust trade routes.

And those trade routes weren’t just for the exchange of goods. The routes allowed ideas to spread and cultural exchange to flourish as well. In that sense, the Phoenicians brought people together.

This Lebanese festival certainly did the same thing. There must have been 200 people there when we were. And it was a three-day event. I’ll wager several thousand people attended over the weekend.

And I learned that the Maronite Church uses the revenue it raises from this event to finance its beautiful facilities for the year. That strikes me as a particularly Phoenician thing to do. It’s all about mutual benefit.

Alright, I suppose it’s time to move on from the Phoenicians now. I’m sure some readers are wondering what this kind of talk has to do with the topics of money, finance, and investing that we’re supposed to be covering.

That said, learning about the Maronite tradition has me in an introspective mood this week. Tomorrow I’ll share with you how I came to learn the importance of what economists call second order effects.-Joe Withrow

P.S. We named our new investment membership The Phoenician League partly in honor of the ancient Phoenician civilization. It’s all about the free flow of information and mutual collaboration.

What’s more, The Phoenician League connects members with specific investments across a range of asset classes.

In fact, we help members build a customized asset allocation model. We maintain a core equity portfolio. And we get members plugged into investments that generate passive income immediately. Our goal is to help everyone achieve financial independence in six to twelve years’ time.

If this sounds like it may be something that’s up your alley, I’d like to invite you to join our membership’s wait list. You can do so right here: The Phoenician League Waiting List

We’ll be opening our doors to new members for just the third time very soon…

The post The spirit of the ancient Phoenicians is alive and well… first appeared on Zenconomics.

The post The spirit of the ancient Phoenicians is alive and well… appeared first on Zenconomics.