Zack, Miri, the P-Word and the Laws of Success

by Ouida on April 11, 2009

The “p-word” is Porno and Zack and Miri, life long friends decided to make one. Busted and broke, Zack thinks it would be an easy to make a porno and make money. Miri thinks that if it were easy, everyone would do it. Zack raises the money, finds a studio, writes the script and together they select the cast. They are on a roll and ending their financial problems does seem easy, but before they shoot a scene, they lose their studio, props and investment. Miri was right…not so easy. This movie was not a tale of persistence or success, they never do make their porno and the best we can figure out is that they never do change their financial situation. Friends, Zack and Miri, do fall in love, but nothing else changes.

Their experience is true for so many who seek positive financial change in their lives, assume the change will be easy and rush, headlong, into disappointment.

Not everyone that I talk to about getting started in a home-based business gets started. In fact most don’t. I have learned over the years, that when a prospective business partner says no to me, what they are really saying is that there must be an easier way to make money. There must be an easier way to make money than sales, there must be an easier way to make money than marketing, there must be an easier way to make money than saving and investing, there must be an easier way to make money than taking classes at night to improve skills. There must be an easier way. Period.

As Zack and Miri found and most wealth seekers find: There isn’t. Faced with the harsh reality that there isn’t an easier way, wealth seekers either quit seeking wealth or they vow to acquire the necessary skill sets to gain and retain wealth. Few people choose the latter. The majority, never quite letting go of the misplaced belief that there must be an easier way, drift aimlessly from project to project, opportunity to opportunity becoming increasingly disillusioned with each failure.

Unfortunately few people ever make and complete the journey of wealth creation. According to the Tax Foundation’s July report of individual income tax data, ten percent of American households make over $100,000 per year. In their book, The Millionaire Next Door, Stanley and Danko indicate that the average household income of millionaires is $247,000.

When Stanley and Danko wrote their book, they focused on millionaires because they thought that many American households could attain that level of wealth within a single lifetime. “About 95 percent of millionaires in America have a net worth of between $1million and $10 million. Much of the discussion in this book centers on this segment of the population. Why focus on this group? Because this level of wealth can be attained in one generation. It can be attained by many Americans.”

Why do some succeed while others ultimately fail?

People who seek and ultimately gain wealth gain different skill sets from those who don’t. Napoleon Hill places Specialized Knowledge among the 15 required assets to create wealth in his book, Think and Grow Rich. How long does it take to acquire Specialized Knowledge or a new, useable, skill set? 1000 hours, according to Michael Masterson in his book, Automatic Wealth. That is roughly 2 years at 10 hours a week for the person who has a full-time job and is seeking to change his or her financial picture. So one must either gain Specialized Knowledge or align himself with one who has it. Every other success strategy or characteristic outlined in Napoleon Hill’s Books requires work to attain or practice. Desire, Self-Control, Autosuggestion, Faith and a Definite Aim, require daily practice. Forming a Mastermind group does not require daily practice, but it does require a commitment to that group, and it often does require rearrangements within social networks. That is changing the people you hang out with.

The Success Strategies are also known as Laws of Success. They are so called because they cannot be negotiated with, they simply are.

The irony is that without any knowledge of the Laws of Success, Zack and Miri employed them. They had a Definite Aim: to change their financial picture. Their living situation reinforced that aim daily. Their group of actors and camera-men became their Mastermind Group and their group became self-reinforcing facilitating Faith, Autosuggestion and Specialized Knowledge. Zack initially had Persistence and Imagination to overcome the setback of losing their equipment, set and props. But lost Self-Control and Persistence when he realized he loved Miri. Without knowing the Laws of Success, he used the Laws of Success. Without knowing the Laws of Success, he broke them. Breaking the Laws of Success will undo the plans of success as Zack discovered, because he never did achieve his Definite Aim: to change his financial picture.

The truth is that whether we acknowledge them or not, we live in a world governed by Laws, Rules and Regulations. Many of which we use without acknowledgement and many of which we break in ignorance. We take for granted that we can leave our home without floating away because gravity allows us to walk down the street. We understand that what goes up, must come down and that our best hope is to control the nature of the landing.

Such are the Laws of Success. They exist and they work no matter our state of awareness.

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Bulldoze That House!

by Ouida on February 18, 2009

It is time for a new Television show, Bulldoze That House! The theme for the show could be done to the tune of Elvis Pressley’s Viva Las Vegas; that gambling town. For gambling is what many home owners have done over the last four years; supplementing their income or the lack there of through no-doc-cash-out-refis on their homes, assuming the free money ride would never end.

Home ownership has always been about more than making the minimum payment, but with teaser rates and “pick-a-pay” loans doing the minimum was all this so-called housing boom was about.

The housing boom was about easy credit rather than economic expansion. While the average American family actually lost purchasing power over the last eight years, easy credit allowed us to maintain the illusion of prosperity while masking the truth: that the American economy has transitioned from higher-wage manufacturing jobs to lower-wage service jobs. That the American economy is based on consumption rather than production.

Since 2004, the basic rules of the housing game were thrown out of the window in an effort to put more and more people into homes. Home ownership was no longer something to aspire to through hard work and sound money management. With the barriers, income, assets, savings, a decent credit score, to home ownership removed anyone and everyone could own a home.

According to the Hoover Institution, home ownership was 66% in the year 2000 and peaked at 69.2% in 2004. The rate of homeownership fell to 67.8% in 2008 and reflects the rising tide of foreclosures in America. According to RealtyTrac, foreclosures have exceeded 250,000 units per month for the last 10 months. If current trends continue, 3 million people will lose their homes to foreclosure over the next year. According to the National Association of Realtors (NAR), there was an inventory of 3.8 million existing homes at the end of December 2008. The NAR estimated that it would take 9 months to work off the existing backlog. The median home price has fallen to $181,000 dollars in part because the numbers of homes bought under distressed conditions such as foreclosure are driving the price of homes down. With an estimated 3 million homes coming on the market due to foreclosure, housing prices have nowhere to go but down.

For ill or for good, home ownership has been considered one of the greatest vehicles for creating wealth in America. The decline in home prices means the loss of wealth that may take a generation to recover.

Already the mythology of the housing downturn is shifting to the economy. Previously, foreclosures were blamed on bad loans not bad borrowers. Now the economy is to blame. The reality is that just over one-third of delinquencies were due to job loss in 2006 and 46% of delinquencies were due to job loss in June of 2008. What this means is that if only the economy were to blame fewer than 1.5 million new homes would be on the market due to foreclosure rather than the projected 3 plus million homes.

Now the banks and borrowers are waiting to see what the Obama administration will do. Borrowers don’t want to lose their homes and banks don’t want to face the truth, that many of their assets are worthless. Municipal and state governments don’t want to lose the tax revenue so everyone is waiting to exhale.

But let’s look at the rules of the housing game: the rules as they were 10 years ago. Ten years ago, a borrower had to show income. Not only did that borrower have to show income, they had to show their qualifying income for at least five years. Ten years ago a first time borrower had to have a down payment of at least 5 percent, earnest money and closing costs. Ten years ago principal and interest payments could be no more than 28% of gross income with total debt payments being no more than 33%. Ten years ago, these were the minimum standards for owning a home.

The reality of home ownership is that it takes more than meeting minimum standards to truly own a home. Homes must be maintained and the cost of maintaining a modestly-priced, three-bed room, two bathroom, home is approximately $3000 per year. Property taxes and insurance payments are guaranteed to increase 3% to 20% per year depending on the market. In other words, a home-owner must have sufficient cushion of three to five thousand dollars per year to truly own their home. If not, a water heater, furnace, landscaping or paint job will become an economic catastrophe.

The reality is that many borrowers do not meet the minimum income requirement or debt to income ratios to remain in their homes. Some borrowers purchased $10 dollars worth of house for every $1 dollar in income. The only way to keep that borrower in their home is to re-price that home to 30% of its original value. Housing prices have not fallen 70% from their peak, therefore how does the government setting a new price bottom so that that borrower can remain in their house help the overall market? It doesn’t. What about the borrower who has significant credit card debt and was slightly over leveraged, borrowing 3.2 dollars for every dollar of income in order to purchase a home? That borrower would be helped by stretching the mortgage term to 40 years. What about the borrower who lost his job after qualifying for a mortgage and found a new job at 80% of qualifying salary? That borrower might be helped by stretching out the term of the loan to 40 years and setting the loan at today’s fixed rate of 5.26%

A borrower purchasing a house today at the median home price of 181, 000 and an interest rate of 5.26% will have a payment of $1000.61 (assuming nothing down). The income to afford that house is $61,000 per year. According to the Census Bureau 25% of US households meet or exceed that income.

The reality is that the government has few tools at its disposal to help borrowers without hurting broader society. Those tools are extending the loan term, re-setting the interest rate, re-pricing the homes, direct subsidies to borrowers. Both re-setting the interest rate and extending the loan term are two solutions that are both sustainable and limit the collateral damage. The contract began with borrowers and the banks and it stays there. Re-pricing the homes extends the damage to neighborhoods and potentially creates a windfall for the delinquent borrower. As an example, look at a borrower with and income of $40,000. That borrower leveraged into a $200,000 dollar home during the housing boom.
In order to afford the home, the borrower took out an interest only loan at the teaser rate of 4.85 percent. The interest-only payment was $808 dollars. The loan resets 5 years later to the prevailing interest rate of 5.26% and the principal and interest are amortized over 25 years. The new principal and interest payment for this borrower is $1199.68 more than 1/3 of monthly gross income. The market has already re-priced homes in the neighborhood to $180,000. Re-pricing the outstanding principal to $180,000, the amount set by market conditions, setting the interest rate at 5.26 percent and extending it over 40 years will make the principle and interest payment $899.00. This borrower might just make it. But the presence of other debts, rising insurance and property tax payments will ensure that this borrower’s economic situation remains tenuous at best. The government then re-prices the home to $150,000 dollars in an effort to keep this borrower in his home. Now the cost to the neighborhood exceeds the penalty imposed by market conditions forcing housing losses in that neighborhood of 25% rather than the market losses of 10%. If this borrower cannot maintain his home, the neighborhood still loses. Direct subsidies to borrowers is a solution without end. At a time when this nation is without a plan to deal with the entitlement obligations of Social Security and Medicare direct subsidies to borrowers is both untenable and unsustainable.

There is a reality that too few people seem to want to face: there are too many homes. In an effort to increase the percentage of home ownership from 66% in 2000 to 69% in 2004, credit flowed too freely and too many homes were built. Cities are populated with unfinished neighborhoods, incomplete apartment complexes, vacant-homes falling into disrepair, and boarded up apartment buildings. Neighborhoods suffer as abandoned buildings house squatters and crime instead of working families. Preferring to board up foreclosed buildings, banks have been loathe to maintain them. Because of the now complex relationships among borrowers, banks and investors, local governments are often unable to locate the parties responsible for a given, abandoned property. It is time for state and local governments, through the power of eminent domain, to take possession of abandoned properties and Bulldoze That House! Local governments could turn the new land into green spaces and community gardens or sell the land for commercial purposes such as bookstores, coffee houses, laundromats. Bulldozing that house is another way to preserve neighborhoods and support housing prices by removing excess inventory. Bulldozing that house also has the added advantage of forcing banks and investors to face their losses and re-price their assets, something they have not done despite receiving billions in taxpayer funds.

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Why Won’t Someone Just Tell Me What To Do With My Money?

by Ouida on January 23, 2009

I am sitting here in my office looking over the book titles I have purchased and read over the years. Wealth Cycle Investing, Cash Machine and The Truth About Money are titles that jump out at me. There are many, many others.

Why did I buy those books? Because I, like so many people looking for a way out of financial quick sand, have often just thrown up my hands and wished someone with more brains than me would give me a plan and tell me what to do.

Stephen Greenspan wrote in a recent Wall Street Journal article about financial gullibility. He was swindled by Bernard Madoff. He chalked his gullibility up to financial ignorance and his failure to remedy the situation through financial education. He also outlined social factors that cause us to act contrary to our own financial self-interest. Who is Stephen Greenspan anyway? He is emeritus professor of educational psychology at the University of Connecticut. Oops and oh dear. If he gets swindled with all the tools he has to understand human behavior what about the rest of us? Are we sunk?

I don’t think so. The truth is that no one and I mean no one will care as much about our own personal financial situation than we will. A dear friend of mine used to be an investment banker on Wall Street. She asked me how I was investing my 401K. I said that I was invested in bonds and index funds. She said that that was a good thing because her co-workers who were money managers spent more time managing their own accounts than the accounts of their clients. Humm what a shocker. But isn’t this what the current financial crisis is all about? That money managers, brokers, CEOs, creators of financial instruments were far more worried about their personal bottom lines than the long term implications of their actions in the market place?

What is a person to do? The first thing is to realize that while you may have a trusted financial advisor, that advisor also has mouths to feed and we as a society seem to be a bit beyond the philosophy that payment and compensation should be based on the value one creates in the market place. There has been a giant decoupling of the concept of commissions based on the returns for the investor. Mortgage brokers and realtors were paid based on sales and loans generated for over-priced properties. Now as real estate prices plummet across the country they get to keep their money. Fund managers get to keep their one, two, three, four, five or six percent of assets under management even in a declining market. As a friend of mine recently said, it is a “Yo-Yo”: yo on yo own. One would be well served to realize that it’s a “Yo-Yo” and act accordingly.

Financial planners tell individual investors to consolidate debt by refinancing their homes, to buy and hold, diversify and invest for the long haul. What they neglect to tell individuals is that the long haul is actually a generation. Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); For the investor who invested in mutual funds in 2000 and is asking himself when is he finally going to make money, the answer is probably 2030. Too bad if that investor needed that money in 2010, 2015 or 2020. What about using a home to consolidate debt? Most financial advisors neglect to tell their clients that there is benefit in gaining the skills necessary to eradicate short-term debt. Exchanging short-term debt for long-term debt merely forestalls the problem without addressing the underlying problem for the short-term debt. Lack of skills in debt management simply means that the short-term debt will recur if the reasons for the accumulation of that debt remain unaddressed. From the financial planners’ point of view, consolidation solves their client’s debt problem that is until the debt occurs again. To me the only reason to refinance a house is to free up capital to use for other purposes including gaining the skills to retire short-term debt. Once the debt is retired, the capital can go to other worthwhile financial projects.

Why won’t someone just tell me what to do?

One of the biggest criticisms of financial author Robert Kiyosaki is that he doesn’t give individuals a specific plan to attain financial freedom. He writes, outlining broad concepts, without providing specifics. Robert Kiyosaki does not know each individual’s circumstance, level of financial education or tolerance for risk. How can he simply tell any individual what to do?

Acting the part of the bon vivant, I got a very late start on my financial path and had to make up for lost time. My solution has been to realize first that it is a “Yo-Yo” and to read widely, very widely. Understanding that there is no one size that fits all when it comes to financial matters, I am careful about where I get my financial advice. I was listening to a recent Business Week podcast. The discussion was about credit, the credit markets and ways to protect yourself financially during the current downturn. The correspondent did not even know her credit score when asked. I listened to the podcast, but I certainly wasn’t going to take that correspondent’s advice. I have carved out a plan that works for me. My plan isn’t sexy, it is slow and steady. It isn’t all one strategy, but a combination of strategies gleaned from a few sources. I use free online calculators at bankrate.com and hugh’s calculators to make savings and investment projections. I diligently work my plan. I make mistakes and I blow opportunities but my plan works nonetheless. Yes, I have financial advisors, but the advisors I started out with are not the ones I have today. The advisors I have today have proven over time that they have my interests as well as theirs at heart. I never expect an advisor to throw themselves under the train for my sake but I do expect that if they spy the promised land that they will take my hand and that we will journey there together.

What are the lessons? First, realize that it is a “yo-yo” act accordingly and read widely. Second, financial intelligence is the only remedy for financial ignorance. Third, wealth creation takes time and is not without risk. Fourth develop a plan and work that plan. Fifth, evaluate that plan. Sixth, wealth creation is a team sport so develop your advisors and evaluate those advisors based on the results they get for you. Seventh, as Jesus once said, the poor will always be with you, so understand that whatever is going on in your life that is preventing you from accomplishing steps one through six will always be with you, so the time to start truly is now.

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It is a business decision not a bail out

by Ouida on January 3, 2009

The past few weeks have been breathtaking to watch. Turmoil in the financial markets have roiled, boiled and spilled over into the broader economy.

It would seem that until recently not even our politicians have understood how vital the credit markets and trust in the integrity of the US financial sector are to ours and the global economy.

When the Chinese government announced on the 24th of September that it instructed its banks not to make interbank loans to US banks I felt sure that this was only the first step in the world’s attempt to confine America’s economic woes to American Shores.

Our government and its citizens have become increasingly dependent on the availability and use of both short and long term credit to maintain the illusion of prosperity. The expansion of credit and the increasing indebtedness of US households began during the boom years of the Clinton Administration and accelerated during the comparatively weak Bush expansion.

Since the 1990’s Americans have moved from one bubble to the next, increasing their debt burdens and in so doing becoming the largest consumer market in the world. Manufacturing has left American shores leaving us with a service economy based on consumption and indebtedness to maintain levels of consumption. This necessarily means that the terms of our quality of life will be determined by those who manufacture and sell to us as we become increasingly dependent on imports while simultaneously exporting our money overseas into the coffers of our trading partners.

Now we face a crisis of confidence in our markets and our government must act. On the table was the proposal to inject liquidity into the financial services sector by buying assets.
The US government has the balance sheet and the time to hold these assets to determine which will perform. In all liklihood the American taxpayer will make money. This proposal is, therefore, a business decision rather than a bailout. The Paulson plan was a clean one entailing only the purchase of assets, we are now awaiting the compromise plan put together by congress.

I am a real estate investor and I know that I am far less likely to make another purchase, or otherwise allow a major capital outflow from my accounts, if for some reason one of my assets does not perform as planned.

This psychology is exactly what is going on on a massive scale on Wall Street. Because assets are not or may not perform as planned, financial institutions are hoarding the only asset they can be sure of, capital.

I have also had partners tell me recently that they reason that they continue to do business with me is because I am true to my word.
Sound business dealings are often based on integrity.

Integrity is lacking in the markets right now.

To the person on Main Street who doesn’t have a credit card the Paulson plan or any financial plan will look like a bailout of a “fat cat” at their expense. That is until that Main Street worker misses a paycheck because their employer cannot secure a bridge loan to make payroll.

Our financial system is simply too interconnected for our government not to act. And I am sure that if our government does not act, other nations will. I am a firm believer that it is better for us to implement our own solutions than have terms dictated to us by other nations.

I grow tired of pundits, economists, even Nobel Prize winning ones, whose knowledge is theoretical rather than practical and who have never run a business.

I believe that my greatest disappointment is the fact that our representatives in Washington have done a poor job connecting the dots for themselves and their constituents.

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