Transcript:
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler, talking about the money thing, helping you be a more informed investor, the kind that doesn’t get taken advantage of. That is the idea, the less you fall for sales pitches, and it’s easy to fall for sales pitches. Right with me this hour, Mr. Ira Work.
Ira Work: It’s good. It’s good to be here. And it’s good to be seen.
Don’t Fall for Sales Pitches
Paul Winkler: It is good to be seen. That’s a good response. Alright. So I know we want to just get to you. You were talking to me about something the other day, and I said, you gotta come on the radio and talk about that because that’s that’s good stuff. So it was a situation. And you know, sometimes what we’ll do is we’ll talk about things like meetings that we have and folks don’t worry. We won’t say your name ever when it comes up because you know, we don’t expect you to be the expert in these things, but doggone it, we should hold the advisors accountable for being the expert on things and the people that actually give financial advice.
So what happened with you? I want, I want you to just jump into your story, what happened?
Ira Work: Well, it was really very interesting because it was a client that I was working with, started working with them about five or six, maybe seven years ago. And a couple of years ago, all of a sudden, out of nowhere, the, they transferred their account. And I really didn’t understand. I called them up. And I said, I see the trends of your account, what happened? He’s like, “well, we just decided that we just wanted to do real estate. Well, real estate is like high right now and okay. Real estate has gone up higher in the past two years. I know, because the value of my home, so we wanted to not diversify anymore and put everything, all our eggs in one basket.”
So I said, okay.
Paul Winkler: And by the way, wait, let me, let me just say one thing, because people say, well, what, you know, what’s wrong with real estate and nothing. I, you know, if you look at when you own stocks, you own companies, you already have a higher exposure to real estate is one of things I always like to point out.
Ira Work: Well, plus the fact that you may own a house that might be worth more than your retirement plan, right?
Okay. So I would call, I go into the office Tuesday morning and this couple is sitting here and he says to me, the prodigal son has returned. I said, all right, come on. Let’s go and talk and see what’s going on. Oh yeah. So I kind of had a feeling, I knew what was going on. Yeah. But when we dug into the stuff, I really was shocked as to how bad it was. You know, sometimes, you know, people I’ll take some of their money, they’ll throw it into a real estate investment trust and it’s illiquid. Or they might be able to sell it for pennies on the dollar.
But when we were looking at his stuff, it was even more bizarre. Right. He went to, we got an invitation to a good dentist seminar. So at least he got a good dinner out of the deal. And he transferred an account worth about $83,000, which is now worth about $50,000. Right? Oh my goodness. Yeah.
Paul Winkler: So real estate investment and trust. It’s like a mutual fund that owns real estate. You know, this is a way to understand it where you’re basically you own lots of different properties without other people.
Ira Work: So to kind of make this really not very, very long, one of the investments that he has, if he wanted to get out for the first five years, he has an 8% sales charge. That’s worth about $10,000 right now. Yeah. So they forward, they pay the company that sells the real estate investment trust, fronts a commission to the advisor. And if a person leaves before a certain period of time, they’ve got to get their money back. So that’s what’s going on there. And then he can actually sell it. And whatever the price of it is at that point, they’re going to try to bring it to the public, but there’s no guarantee that they’ll bring it public. So they don’t have a public market.
Liquidity Risk
Paul Winkler: This is what’s called liquidity risk.
Ira Work: Correct. Yeah. The other one, this is called HC government Realty. Common stock. Now you would think, okay, common stock. They can sell that. Yeah. But it’s illiquid. Okay. That’s another $10,000 of their money. So what, what was that? It was HC government realty, common stock. So what they say that is happening real is they’re leasing property to the federal government.
But unlike most REITs that have like a seven, eight year projection of when they’ll actually like to start to bring it public. Right. So it’s a liquid typically for the next six, seven, eight years. And then the goal with a REIT is, you know, with these private placement rates, is that eventually it will go public traded on an exchange and it becomes fully liquid. Yeah.
Paul Winkler: So there’s a real estate investment when he says REITs it’s real estate investment trusts. And you know, it’s interesting because we don’t, we take this for granted that your stock and investments and mutual funds are all liquid, because there’s a ready market for those things. You can’t find a buyer for these things because you have to go search for one. It’s it’s, you know, real estate itself is less liquid, but it makes it even worse when you don’t have a regular already market to go sell this stuff. Yeah.
Ira Work: So to make this even more complicated, this real, this government realty, common stock, it’s also illiquid, plus they don’t have any date of when they might put it onto the exchange to be able to sell it. Yeah. So now when I look, I’ve looked at a real estate investment trust over the years. Sure. And a lot of them have an option where if somebody gets sick and goes into a nursing home, the real estate company that put it out will buy it back. Yeah. So another option that they have on it or feature is that, well, if you die, then your kids can sell it out.
Right. Right. This one is like a timeshare. Yeah. You see, the kids can sell it. There’s no projection date of when the child can sell it.
Paul Winkler: If dad died, that is so frustrating. You inherit basically a liability. Well, with a real estate investment, with the timeshare, excuse me, timeshare liability. And now you inherit something which would be interesting from an estate tax. If a person had an estate tax issue, you know, how do you value the doggone thing? So now here’s how much more complicated this. Yes. Yeah. So they went to this dentist seminar with one broker representative with one company. So now these two real estate properties, they’re actually at another firm. So you have to deal with this other firm, you know, what you got assaulted for.
Ira Work: Then this other money went to some of the money, went to another company for gold and silver. So they basically, right now they’re up a little tiny bit on the gold and silver part of it, but nothing to really speak about. Right. Very volatile, very volatile. Well, in order for them to sell the gold and silver, it’s going to take between six and eight weeks. Yeah. Great. Because they, they, that now that’s with another person. So you have this broker who sent money to one company. We bought real estate. Then the broker sent another company to this other company to buy the gold and silver. So now they have to take the golden silver, send it back to the depository.
Then the depository is going to liquidate it. Or they are going to fund the depository, send it to the broker, then the broker liquidates it. And this whole process can take six to eight weeks. That’s insane. How much can gold drop in six to eight weeks? It can go up, but it can go down to. Right. Right. And it goes down quite a bit. It’s just based on supply and demand and all of a sudden when the bottom drops out, you’re finished. Right. Okay. Well, so far all of these companies are related somehow to people in Salt Lake City and they were kind of religious people.
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Learn from These Mistakes
Paul Winkler: So tell you what you, you know, this is, this is a topic that you need to hear what people, mistakes that people have made so that you can avoid learning from other people’s mistakes. And you know, the reality is I don’t hold the client responsible for this. I look at the advisors that made these recommendations, but you can learn from their mistakes.
So people head out and buy some real estate investment trusts and gold and silver and a lot of different investments that didn’t work out so well. What else happened?
Ira Work: Okay. So then I’m looking at another one of their sheets and now remember all of this is through this part of this company, quote, kingdom trust. So, I called up and I asked about this other thing, and like, “Oh no, you have to call this other broker to get that.” So now there’s three companies involved with these people’s money. So I call up and they answer the phone, “Thank you for calling option IQ.” Oh, can you please explain to me, I’m sitting here with a mutual client and I give him the account number and the client gives his security information to be able to speak and not sure we got permission for them to talk to me.
Can you please explain to me what this investment is? Because there’s nothing here on the statement. Oh, it’s an option trading program.
Paul Winkler: So options basically derived on the value of underlying holdings and you hear lots of commercials and things, late night TV things, trade options to become rich.
Ira Work: They did, they became a $20,000 investment now worth a little less than $11,000.
Oh. So it wasn’t the client that got rich. And you know, when I was working at Shearson Lehman brothers, one of the brokers, I shouldn’t be laughing. Well, one of my salt brokers said straight, you know, two out of three in bed, we made money. The firm made money. That would take you to the super bowl. Yeah. That’s a 66 average.
Paul Winkler: Yeah. I said that that’s amazing. Yeah. You know, but that’s par for the course. So, I had said, you know, kind of joking, like, “Oh my gosh, this shouldn’t make such a great topic on the radio.” He’s like, Oh, please share it. So people go, yeah, good.
Understanding What the Investment Process Is Really About
Ira Work: What’s really going on out there. They felt terrible. They, I mean, he had a really good attitude about it. He says, know, we’ll just have to take the losses. And you know, I made a mistake and he said, but you know, I felt rushed. I felt pressured to do this. Right. I said, well, when you came to me, how much pressure did you feel? He’s like none. No. And I think it’s the fact that, you know, our philosophy around here is we don’t want you to transfer us drill money until you feel comfortable and have an understanding about what is really going to happen, how your investments are really going to be managed. And that’s one of the biggest problems. And I think why this radio show has been so successful for 20 years is the fact that as coaches, we help our clients understand what the investment process is really about.
We combined the combination of behavioral finance, what investors actually think about, which causes them to make often mistakes that they make and what it really takes from the investment side of the business with diversification, asset allocation rebalancing, but our clients understand that. And what is also cool is that our clients understand how much their portfolio can drop in a given year. Yeah. Well, when we can look at them and say, well, if we go into this portfolio shock, if it hadn’t been markets to fluctuate, you don’t get rid of volatility. You don’t get rid of volatility by doing diversification.
Paul Winkler: Well, you dampen it. You can really dampen it some and avoid the big losses like what happened in 2001, 2002, where people weren’t diversified and they went down significantly, but you don’t get rid of it completely.
Ira Work: There’s no, you can’t get rid of risk at all, right? No, no, no. We’re in life. Right. And if, you know, a lot of people say, well, I’m just wanting bonds. They’re guaranteed. Now you got there and realize if interest rates go up, the value of the bonds go down. And if you need the money at that moment in time, you’re going to take a loss on that.
Paul Winkler: And I think people’s people are blown away when I tell them. And I’ve said this several times over the past several weeks, that over just 20 years, the cost of living has gone up by 50%. It’s gone up. And it’s like, are you kidding me? I can feel it because it’s a silent tax. You know, inflation is something that just creates something and you don’t realize it. Right.
Ira Work: And you don’t. Yeah. I was like, if you think about it, you know, if you’re going to buy a can of beans for, you know, 20 cents and next week you’re going and Beth, that same can of beans is 25 cents. Since y’all went up a nickel, we went up 25%. Right? Exactly. Exactly. And we don’t realize that. And everything else, probably the biggest expense as far as inflation goes without realizing it, because it’s something that we just have to buy. Right. I mean, there’s really not much of a choice long term, not eating? Right. You know?
Share What You’re Thinking of Doing
Paul Winkler: No, it’s not a good plan. And, you know, you were just talking, as you were talking about, you know, the idea, I love the idea of this show. It’s reinforcement of what people learn. You know, we have clients that listen, and I have, I get emails all the time from clients that listen to people that, and they go, Oh yeah, yeah. You know, I like it because it reinforces, but there’s always something new. There’s always adding news to what’s happening so that you reinforce it and show that, Hey, what I touched 20 years ago still stands. Right. You know, it’s very powerful, but that is a huge part of the process. And then hearing how things are progressing as far as out there in the news and the world doesn’t change.
But your responses that you’re so tempted to do have to be thwarted so that you don’t go take a misstep because you look at investor returns versus market returns. And it’s a significant difference. And the reason being, I did a thing at a workshop on a 20-year, taking a distribution from two major huge mutual fund companies and their managed portfolios. And the outcomes were really, really bad as far as taking in income. And the reason had to do with just breaking basic rules of investing, because it appealed to it when investors thought they wanted now, what they really needed to have. And it is so easy to go to these workshops.
And here’s something that you want to hear. I want to hear that I’m going to get income. I want to hear that it’s guaranteed that it’s real estate. They’re going to pay rent to me and I’m going to get this money and I’m going to have gold and silver. And that’s going to protect me from inflation. And it’s going to protect the downside because you know, the dollars going to heck in a handbasket. But the reality of it is you’re getting a sales pitch and you don’t even realize it. And then once you step off, once you go do that, there is no fixing it. You know, we can’t come in and fix it after you’ve done something like this. So we always urge our clients. Don’t tell us what you’ve gone and done. Tell us what you’re thinking of doing. Make sure you understand what you’re doing before you go and do it because you can’t reverse a lot of these things.
I’m Paul Winkler. You’re listening to The Investor Coaching Show, along with Ira Work.
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