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How To Stretch Your Paycheck With Goals-Based Investing

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What happens when you get paid $5,000? If you don’t divide the money, you’ll spend it all, says Dan Ariely, a Duke University professor and author of Dollars And Sense (How We Misthink Money And How To Spend Smarter) and a proponent of goals-based investing. His advice: The day you get paid, divide it 100% among goals.

Ariely, 51, recently opened a checking account and three savings accounts at Qapital, a Fintech bank where he moonlights as chief behavioral economist. Each week (on Mondays), he automatically puts a weekly spending allowance in his checking account that gets loaded onto a debit card and funds his savings accounts: one for his next car, one for next year’s travels, and the other for his 55th birthday. (Separately, he automatically defers pay into a 403(b) retirement account.)

Why weekly? By switching from a monthly spending goal to a weekly spending goal, people buy in more moderation, he’s found. Why Monday? People spend more on the weekends, so if you start on Friday, you might run out of money before the week’s end. If there’s money left over, you can decide which goal to beef up.

“The world is trying to derail you from your objectives,” Ariely says. “Setting up goals and automatic savings helps make the flow of money consistent with our agenda for now and later.”

Qapital offers portfolios that match the length of the goal with how to invest. Ariely’s birthday account is invested the most aggressively: “I can live with a small amount or a big amount. I can have friends to dinner or go to Machu Picchu,” he says.

What’s the advantage of the goals-based approach? It helps temper spending. If you see a $1,000 jacket and you have to take money out of your travel account to buy it, you might think twice. By contrast, if you keep putting your whole paycheck in your checking account, you might feel rich, and buy the jacket without really thinking it through, Ariely says. These trade-offs are important at all wealth levels because even if someone is thinking of buying a yacht, that impacts how much they might give to charity or leave to their kids.

“Having your own goals is about being explicit about your priorities and being explicit about how you violate your priorities,” Ariely says. “It’s all about opportunity cost.”

When you think about the goal, it’s not just about the money, rather, “it’s about redirecting our efforts,” Ariely says. In one study where college savings accounts were randomly opened for newborns, those with the accounts tested better on social and cognitive skills. Parents apparently treated these kids differently, as college bound.

Need help defining goals? Ariely suggests looking at your credit card spending from last year, and ask yourself, to what extent you spent your paycheck in the way you wanted. If it wasn’t, say you spent more than you imagined on clothes and didn’t take that trip you’ve dreamed about, create a goal-based account, in this case for travel. That will help you stay more connected to the way you want to spend your money.

See also:

How Top Financial Advisors Are Using Behavioral Science To Rethink Your Investments

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Why investing in the next big start-up could be a disaster for your finances

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Mom-and-pop investors hoping to jump on the next hot tech start-up before it goes public may soon get their wish — and it could cost them.

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In August, Jay Clayton, chairman of the U.S. Securities and Exchange Commission, spoke at a conference in Nashville, outlining plans that would make it easier for individuals to invest in private companies that haven’t yet gone public.

“We should also consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment or other criteria rather than just the wealth of the investor,” Clayton said in his Aug. 29 prepared remarks at the 36|86 Entrepreneurship Festival in Nashville.

He also said that the agency’s staff is working on a concept release that will address the matter.

Under current regulations, so-called private placements — the sale of securities directly to an investor, rather than through a public offering — are only available to a small group of well-to-do individuals, known as accredited investors.

These individuals must have earned income that exceeded $200,000 in each of the last two years ($300,000 if married) and they must reasonably expect the same for the current year.

These investors must also have a net worth exceeding $1 million, excluding the value of their primary residence.

Consumer advocates warn that the current definitions don’t go far enough.

“The accredited investor definition is supposed to identify a population of investors who can fend for themselves without the protections afforded in the public markets — it clearly doesn’t,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

“At least if you raised the financial threshold or you didn’t count retirement assets toward the threshold, you’d be dealing with a population that could better withstand the risks in this market and would be less likely to suffer devastating financial harm,” she said.

In 2017, state securities regulators conducted 179 investigations into private placements.

There were 66 enforcement actions, according to the North American Securities Administrators Association (NASAA).

Here’s what you need to know about these investments.

Private companies that are making their shares available to investors are exempt from certain registration requirements with the SEC.

A rule known as Regulation D requires these firms to turn in a notice (known as Form D) with some details of the offering, including the names and addresses of the company’s promoters.

The companies don’t have to register their securities offering with the SEC or with the states.

Prospective investors may receive a private placement memorandum, detailing the offering itself, the risk factors and other information about the company.

These documents aren’t reviewed by federal or state regulators, and the issuers may not be entirely forthcoming about the investment.

State securities regulators have warned that because these investments are exempt from registration requirements, they expose investors to greater risk.

“It’s an important segment of the market, it’s not very transparent and, by the time we see it, the damage has been done,” said Joseph P. Borg, director of the Alabama Securities Commission and president of NASAA.

He and other securities regulators in NASAA want to be part of the discussion as the SEC evaluates changes to the accredited investor definition.

“If they want to grow this side of the market, as part of the deal, they have to have some reforms in tandem that give regulators like us the tools necessary to redress fraud problems and the misconduct that comes up,” Borg said.

In an ideal scenario, you would identify the right private offering and multiply your investment over a period of years.

The reality isn’t always so rosy.

“The investors all hear the siren song of getting in on the next Google or Facebook, and 99 percent of these deals won’t be one of the big well-known tech companies that we’ve heard of,” said Andrew Stoltmann, an attorney in Chicago and president of the Public Investors Arbitration Bar Association.

“The parade of horribles and the risk associated with these private placements are legendary,” he said.

For starters, private placements may tout double-digit rates of return, but they’re illiquid. That means you have few opportunities to sell your stake if you needed to cash out.

Further, less disclosure and scant regulatory oversight of these private placements means investors must be on the lookout for fraud.

One notable private offering was Medical Capital Holdings, a medical receivables financing company that raised $2.2 billion from more than 20,000 investors through a series of private placement offerings of promissory notes from 2001 to 2009, according to Finra, the industry-funded regulator of the brokerage industry.

The company sold the notes through a group of broker-dealers.

Medical Capital made interest and principal payments to its promissory note investors until July 2008, when it ran into liquidity problems and ceased payments on some of the notes, Finra found.

The SEC charged Medical Capital with fraud in 2009.

Eventually, the company went into receivership.

Investors had net claims of $838 million and recovered $435 million, said Thomas Seaman, the court-appointed receiver of Medical Capital. The average investor lost $50,000, he said.

Company assets Seaman sold off to recover investors’ cash included a large yacht, a nuclear accelerator facility and a feature film.

“Most of these fraudsters circumvent the rules,” said Seaman. “They tell people that they’re selling only to accredited investors, but they in fact don’t bother to get the information or they turn a blind eye and let the people lie.”

“There is greed on both sides of the equation,” he said.

Even if you have the assets and the know-how to participate in a private placement, there is no guarantee that you won’t lose your money.

Henry Yoshida, a certified financial planner and founder of Rocket Dollar, a company that offers self-directed individual retirement accounts, has invested in start-ups as an accredited investor.

Each year, he and his wife allocate about $15,000 to $25,000 to one of these investments, which is about 25 percent to 30 percent of the money that the family earmarks annually for investing opportunities.

He works with accelerators — programs that weed through proposals and provide young companies with funding and mentorship opportunities — to select start-ups he’d like to invest in.

Projects that Yoshida has invested in through this manner include Liveoak Technologies, a tech company that manufactures application software for financial services companies.

Liveoak is still private and expects another round of financing in 2019, said co-founder and CEO Andy Ambrose. The company has inked commercial agreements with a number of banks and insurers, he said.

Accelerator programs vet these small businesses, examining their legal infrastructure and their boards of directors, as well as whether they have non-compete agreements and more.

“That’s my source of due diligence; otherwise you invest in people who are better presenters but aren’t necessarily running stable businesses,” said Yoshida.

Though the accelerators’ round of due diligence may keep him from investing in something fraudulent, it doesn’t minimize the possibility that he might lose his investment.

“Due diligence isn’t the same as risk,” said Yoshida. “You can still lose all of your money on any deal.”

Here’s what you should know if someone approaches you with a pitch to invest in a private offering, according to Borg.

If you don’t understand it, run away: Dig into the details of what you’re being offered. Do you know the founders and the industry? If there’s no documentation, consider it a red flag. Without the appropriate due diligence, you may give your life savings to people who may know how to put together a compelling PowerPoint presentation yet have no idea how to build a viable enterprise.

Don’t be lured in by promises of high returns: For every Facebook, there are thousands of failed ventures and a good number of scams. “If there is anything in the documentation that speaks to making a lot of money and cornering the market, then take it for what it is: hype,” said Borg.

Only invest what you can afford to lose: As with any investment, don’t put your whole nest egg on the line. This is a speculative bet, and even if your venture isn’t a fake, it could still fail.

Do your homework: Go beyond the offering document that you may receive from a start-up. See if they’ve filed anything with state regulators. Research the officers to make sure you’re not funding rip-off artists.

“You want to make sure that the officers weren’t convicted twice of securities fraud,” said Borg. “You are your own investigator.”

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Impact Investors Need To Think Big – And It's Not What They Think It Means

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Tesla has shown what’s possible when you build a business centered around sustainability

Some years ago, I was on a panel with a private equity impact fund manager who was extolling the virtues of an early impact investment they had made. He described an innovative company that was poised to revolutionize clean transportation: Tesla.

Elon Musk’s latest public missteps aside, how could a luxury eco car manufacturer be an impact investment?  I was not only skeptical, I was dismissive.  Our focus at Calvert Impact Capital was on poverty alleviation and I was accustomed to thinking of impact investing as an explicit, exclusive focus on investing in low-income communities.

But shortly after this panel, my thinking began to evolve. If we are going to make a dent in the large scale global challenges we face – income inequality, access to quality basis services, climate change – we need to shift market attitude and behavior by focusing on scalable solutions.  We need to change the mindset focused on augmenting philanthropy to one that views sustainable business models as the way of the future, a large market opportunity that investors cannot ignore.

Impact investing is about understanding and incorporating social and environmental factors into investment decision making – not only because it is the right thing to do, but because it will be the determinant of long-term value creation.

As an industry, impact investing too often gets hung up on creating personalized, perfect impact.  As I wrote in my last Forbes article, “impact is personal and for many investors it has a very particular definition– it’s this sector, this region, this population, measured with these metrics and nothing else.”  Homes built in particular census tracts, jobs created for people with a certain level of education, school seats created for girls in a specific neighborhood. While these outputs are critical measures of change, they are limited, and as they get more intricate, they often distract us from understanding impact within the context of the larger market failure at hand.

To achieve these outputs, and importantly to scale them, we need functioning markets, we need stronger infrastructure, we need different systems.

Today, I can argue that Tesla is an impact investment. It still wouldn’t fit within our portfolio at Calvert Impact Capital, but I can make the case for its impact.  Not solely for the company’s dedication to zero-emission vehicles, but because they made creating electric cars their core business, not a side project or innovation lab aspiration.  They were serious about the positive impact electric cars can make on our planet and their business has been transformative in changing minds about the potential, importance, and dare-I-say sexiness of sustainability-driven businesses.

Imagine the potential if social and environmental projects became core business objectives for more corporates, if banks like Goldman Sachs moved 10,000 Women out of their philanthropic programs and devoted the same resources and attention to supporting women-owned businesses as they would a new business line?

The challenges that we are confronting are urgent and require big thinking. Time is not a luxury we have.  So reflect on your approach to impact investing.  Are you letting outputs you can measure drive your investment approach or are you thinking about the bigger picture?

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Two Simple Techniques Individual Investors Can Use To Outperform The Pros

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Professional investors have teams of analysts who scour the world looking for investment ideas, databases full of historical investment information, and in many instances access to the CEO’s of the companies they invest in. However individual investors have advantages over the professionals that they can exploit to help them outperform. Below are two simple techniques smart investors use when constructing portfolios and making their investments.

  1. Stick to an investing style that works for you (through thick and thin)

It has been a lonely time for value investors. The Russell 1000 value index has underperformed its growth counterpart for 10 of the past 11 years. This has led some pundits to declare the death of value investing, arguing that the aforementioned investing metrics are no longer valid (similar pronouncements were made during the dot.com mania). This has caused some prominent value investors after underperforming for many years to pepper their portfolios with some of the favorites of the day in an effort to temporarily bolster performance and ameliorate dissatisfaction among clients. This is eerily reminiscent of the late 1990s/2000 when once highflying value managers threw in the towel and embraced growth investing just in time to see the NASDAQ decline by almost 80%.

Russell 1000 Growth Price vs. Russell 1000 Growth ValueBoyar Value Group

While I am partial to value investing as I believe it is the best way to preserve and create wealth over the long-term: the style of investing an individual employs is less important than sticking to whatever investing framework you are comfortable with and never materially deviating from it. The worst thing an investor can do is abandon their style because it is not currently working and pivot to a methodology which is long in the tooth (such as now when growth investing has outperformed value for 10 of the past 11 years), and arguably might go into hibernation for a protracted period. Instead of focusing on how others are doing, investors should be laser focused on preserving and protecting their capital and pay little heed to how much money other people are making. Measuring your performance versus others has the unintended consequence of taking on too much risk at precisely the wrong time. I have seen too many money managers self-destruct trying to play catchup. Individual investors have the luxury of not focusing on how others are doing, most professional investors do not.

      2. Be patient

By being patient and looking for opportunities that are either underfollowed (i.e. spinouts or post-bankruptcy reorganizations) or out of favor (due to circumstances that you believe to be temporary), it is possible for individuals to outperform the pros, as many professionals are hamstrung with clients who will fire them if they underperform in the short term. This is a significant competitive advantage for the non-professional investor – the only “client” you need to answer to is yourself. If you adopt the mindset of treating each stock as something you intend to hold on to for many years and pay no heed to the day-to-day stock price fluctuations, you will put the odds of investment success in your favor.

Being a value investor oftentimes entails taking a contrarian position. This is psychologically difficult to do as it can be quite lonely going against the prevailing “wisdom” of the crowd. Value investors are often early to the party but if you conduct proper research and determine that a given company is selling at a significant discount to intrinsic value, it can be quite rewarding provided that you are patient. As legendary investor Jesse Livermore once said, throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.”

In this Feb. 25, 1936 file photo, Jesse Livermore, right, New York stock broker and his present wife (formerly Mrs. Warren Nobel) are shown as they arrived in New York on the liner Santa Maria from a South America cruise. In the abyss of financial ruin, faced with sure disgrace and possibly prison, several of the newly scandalized rich have taken desperate measures in these despairing times. (AP Photo/John Rooney, file)

What is a professional investor to do?

For a professional investor, a corollary of being patient is having the “right” clients. Investors who judge you on your short-term performance results are, a hindrance to you and your other investors. You need to find clients who are true partners that believe in your strategy and will allow you to make investments that are measured in years and not months. During the dotcom bubble when Boyar Asset Management did not purchase a single internet stock we were called dinosaurs. We were told that traditional valuation metrics like price-to-earnings and book value no longer mattered and had been replaced by such reliable financial indicators as “eyeballs”. It was frustrating watching companies with no earnings and questionable prospects become market darlings, while companies with solid balance sheets and good long-term growth prospects were left for dead. However, we stood by our investment philosophy and while we did not participate in the upside, we more than made up for any underperformance when the dotcom bubble burst and our style of investing became in vogue again.

Click here to sign up for the Boyar Value Group’s e-newsletter where we provided investment commentary, complimentary reports, and access to our podcasts.

Its déjà vu all over again

Today we are beginning to experience that same lonely feeling as we did during the internet bubble as stocks like Amazon and Netflix have become the market leaders and our style of investing has underperformed. Our bet is that history will once again repeat itself and purchasing companies for less than they are worth will prove to be the best way to invest over the long term.

Patience in practice

The benefits of patience -and having the right clients -were brought home to me in a particularly memorable meeting shortly after the global financial crisis. I was visiting the office of a successful hedge fund manager client who wanted to know our two highest conviction stock ideas.

“Two of our favorite ideas right now are Home Depot and Madison Square Garden,”  I told him. I then went through our investment case for both companies, and the multiple catalysts we had identified for each.

I discussed how MSG had recently been spun out of Cablevision and one of the reasons we believed it to be undervalued was that it received very little sell-side coverage. According to our calculations, if you took the value of its “trophy” assets – which included the Knicks, the Rangers, and the Garden itself – they were worth significantly more than the current enterprise value of the company.

For Home Depot, we believed that poor industry fundamentals were masking the operational progress made under CEO Frank Blake. In addition, you had a margin of safety because we estimated that the company’s owned real estate accounted for a significant percentage of its current market capitalization.

The manager was intrigued. He asked, “What are the catalysts?”

I explained how Home Depot could profit from an eventual housing recovery, as this would cause both new houses to be built and current home owners to embrace major home improvement projects. Either of these would translate to significantly improved sales and margins.

MSG, I explained, was in the middle of a costly renovation that we believed was masking the firm’s true cash-flow-generating ability, as capital expenditures were temporarily elevated. Also, the new arena would help the Knicks and Rangers command higher ticket prices and create opportunities for high-margin sponsorship revenue. There could also be additional spinouts on the horizon and we believed that the end game for James Dolan, the owner, was to go private.

“So what’s the time frame?” was the hedge fund manager’s next question.

I told him it was impossible to provide a cast-iron time frame. All of it would take time – but meanwhile he’d be owning great assets at a significant discount to intrinsic value. Value gets recognized: it’s just a matter of how long it takes. He had to pass on both ideas.

“If I underperform for a year or two, my investors will disappear,” he said. “These are perfect investments to buy  – for my kids.”

MSG increased its value by ~400% in the ensuing years. Home Depot increased in value by ~350%.

Madison Square Garden (MSG) stands in Manhattan at dusk in this aerial photograph taken with a tilt-shift lens above New York, U.S., on Friday, June 19, 2015. The Standard & Poor’s 500 Index fell, with the gauge dropping below its price for the past 50 days, while Treasuries retreated. Photographer: Craig Warga/Bloomberg

Perhaps I was lucky by citing him these two examples. However, I knew how inexpensive these high-quality businesses were and believed overtime the stock market would value them in a more favorable light.

Patience and persistence pays off.

To receive a complimentary equity research report from Boyar Research on three companies we believe to have ~65% upside, please click here

DISCLAIMER:*Past performance is no guarantee of future results. The performance of The Madison Square Garden and The Home Depot is not necessarily representative of that of any Boyar Asset Management account. Boyar Asset Management owns shares in The Home Depot and The Madison Square Garden.

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