When I was 22-years-old, I was lucky enough to have two good friends sit me down and get my first investments account opened. I didn’t start with much. I literally invested $25, per month, into mutual fund. My timing seemed to be terrible because I started investing during a big downturn in the market. The performance of the investments was awful and, on top of that, they came with sky-high fees and commissions. The good news was that a savings and investing habit was formed. The point of all of this isn’t about the performance and associated fees of my first investments, but that I got started early and regularly put away money. Years later, I still love investing and have been able to pay it forward by helping hundreds of others get their financial houses in order and, most importantly, keep them that way.
-What is the first step for stock investing? Where do you start?
There are several places to start. Also, your long-term investing success isn’t determined by your initial investments. The most important thing is that you get started and continue to contribute over time. Pick a mutual fund, or Exchange Traded Fund (ETF) and set up an automatic contribution, monthly. A smart place to start could be a low-cost index fund.
-If you have enough disposable income to invest a hefty amount into stocks, what is the right amount? What type of stocks – companies – industries? How do you determine that?
Pay yourself first. Find out what type of retirement plan your company offers. Examples include 401(k), 403(b) and 457 plans. If your employer offers a company match make sure to contribute at least the minimum amount in order to get the full match. It’s like free money. Not getting the full match could easily be a million-dollar retirement mistake for millennials. You might even get a tax break, since investments that go straight from your paycheck into retirement accounts, like the 401(k), 403(b) and 457 plans, aren’t taxed. Instead, those funds are invested and you are taxed on those investments when you eventually withdraw money from those accounts. If you are just beginning to invest, picking individual stocks will often be too time consuming, and costly. You’ll be better served, and have an easier time, picking a mutual fund or ETF.
-Should millennials with debt still think about making that investment?
There will always be a reason not to invest now. Today, it could be student loans and credit card debt. Down the road it may be a big mortgage or daycare for the kids. I don’t really worry that much about paying off student loans, or car notes, quicker than needed. Credit cards and their astronomically high rates are another issue. Generally, and regardless of debt, make sure to get your company’s match on the 401(k) or whatever type of plan that’s offered to you. Then get serious about avoiding more credit card debt, and paying down debt you’ve already accrued.
-We’ve seen quite a few young adults, like those listed in Business Insider’s ’20 under 20 in Finance’ trading at a very young age. When should someone start investing their money into the stock market?
I always say the best time to start investing is now. It doesn’t matter if you think the market is high or low, or if you are young or old. Get started now and let time and compounding interest work in your favor. I would advise against trying to “time the market” or day trade, which is considered to be much closer to gambling than investing.
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-Does the DIY (do-it-yourself) model work for stock investments or is it safer to have a financial planner who manages your portfolio?
I think the typical person will do much better working with a fiduciary Certified Financial Planner (CFP). The stakes are just too high to risk making a mistake with your investments or financial plan. The richest people I know all work with various financial professionals to help them maximize the benefits of their various accounts. They also don’t let emotions cloud their decisions. Also, money tends to stress out many people and a CFP can take away some of that burden.
In the beginning, you may want to try it on your own. If picking a few funds in your 401(k) account you may be able to get by. Once those account values become larger, you really should seek professional guidance. You also want to make sure you are on track for your various financial goals, and have saved enough money for your current age.
You can’t control the market, tax rates or inflation. What you can control is how much you save, when you get started and how you handle curveballs as they arise. Things like a recession or the bursting of the tech bubble are just two, out of many, potential curveballs. Remember to simply set it up, and leave it alone. Chasing returns is a fool’s journey. Good investing is often slow and boring, which may explain why so many people hate to do it.
Why investing in the next big start-up could be a disaster for your finances
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.
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.”
Impact Investors Need To Think Big – And It's Not What They Think It Means
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?
Two Simple Techniques Individual Investors Can Use To Outperform The Pros
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.
- 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%.
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.”
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.
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%.
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.
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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