Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler.
Trusting Financial Information
I talk about money and investing, educating you along the way because I believe that the more educated you are, the more difficult it is to take advantage of you. That’s a challenge, man.
So many times we get information from people who are selling things. It’s typically under the guise of financial planning.
An old friend of mine used to say that financial planning is the problem. And you hate to say that because there are so many good things in financial planning, tax planning if it’s done properly, investment planning if it’s done properly, risk management if it’s done properly, and estate planning if it’s done properly.
But too often, I’m telling you, the information that they give you is just enough to make you feel like you can trust the rest of what somebody says. And that is so often a frustration for me.
So that’s what this show exists for: To help bypass some of that because I believe if you just get what you need to understand, it is really hard to be taken advantage of. It’s really hard to get you to do something that you probably will look back on in the future and say, “Oh man, I can’t believe I fell for that.” So that’s what we do around here.
So one of the big topics this week, of course, has been the Bitcoin conference here in Nashville, advertised pretty heavily, and there are a lot of people who are getting involved in this. It’s not unlike so many other things that I’ve seen in the past where you get these people you think would know better, and they get involved in things just thinking that this sounds like a good idea.
There are a lot of things that sound really good but don’t necessarily pass the smell test as you really get into the details. So I’m going to talk somewhat about that.
What Drives Human Behavior
My wife actually sent me something. It was an article written about the different people who were going to be speaking and guests at the conference.
They were going to be flooding the Bitcoin conference, and they had tickets for a fundraising reception article in Tennessee that points out $844,000 per person discounted, $60,000 a person to snap a photo, and it’s a discounted $60,000 to snap a photo. If you wanted to just get a seat at the conference, you had these passes priced at $21,000 per person, including access to VIP lounges, all exclusive food, and brokerage.
It reminds me so much of the high-end vehicles that come out. People want to be the first to own one. There’s something about prestige. I’ll never forget having this one guy talk to me about the things that drive human behavior.
I’d have a need for certainty. And if I didn’t think things were going to be okay, I would be constantly nervous. I would be constantly in a state of anxiety.
Then you have people that have a need for uncertainty. They like not knowing what’s coming, and sometimes you have a little bit of both, and then you have a need for connection and connecting with people and being with people and being accepted, and so on and so forth.
Then you have a need for significance. That’s the fourth one. And when I was talking to this guy, I thought significance was my thing.
And he was like, “No. Well, no, Paul, you’re connection.” And as I thought about it, he was right. It’s because I want to be significant in that area.
I want to help people, and that’s how I’ve gained significance, is helping people.
So he made a lot of sense when he said that, but he was talking about this one client of his that needed significance and he said he would be going up and down the coast of California, honking the horn on his yacht to get attention. He said that is significance. And I thought, Okay, that makes some sense.
But some people just want to be seen with the right crowd, and they might want access to these VIP lounges and all-inclusive food and beverage services and after-party passes and to be on exclusive panels because they want to be significant, they want to be important, and that’s what they do. So they have these people coming out to talk about this.
The Definition of Investments
Matt was talking this week to some of the guys from the conference, and he and I were going back and forth. He was asking, “Hey, what should I be asking them?” And I said, “Well, there are a lot of things that I would ask. Certain things, certain questions I think need to be answered.”
Now, this is one of the things that I was making a point about, is that I was not necessarily asking these questions because I don’t know the answers, but because I just want people to be a little bit more discerning. As an old friend of mine always said, “Hey, the key to success in life is not having all of the answers but asking the right questions.” And I so agree with that.
So with some of the questions I was asking, I was making a point about the definition of investments. And Matt made this one comment. He was talking about me and he said — Matt Murphy that is — said, “Paul is not convinced.” I think that’s the way he said it, that I’m not convinced or that I’m skeptical. I think he said I’m skeptical.
I think it goes way beyond skeptical because I look at this as a definition of investing. This is a definitional thing. Bitcoin defies the definition of an investment.
An investment is when I get something. Some people will call this stuff investments. It is shaky from an academic standpoint.
Let me just put it that way. If I’m looking at artwork, I might call it an investment. It goes up and down based on supply and demand. Right.
That would be, you could look at that and call it an investment, but that’s not what the academics that I’ve studied under have actually defined as an investment.
There has to be a cost of capital, or somebody’s paying to use your money — that’s really how you define it.
There’s either rent that is being paid for real estate that I own, or there are earnings that are being paid for stocks that I own, or there is interest that is being paid for bonds that I own. And if you look at artwork, it goes up and down based on supply and demand. If there is only one Picasso, one painting, a certain painting by Picasso, you look at that and go, “Well, there’s a limited supply.” So it’s demand.
If nobody wants it, then it’s not worth anything. If people really want it and it’s of high value because maybe you impress your friends or something like that, then they’re going to be willing to pay a large sum of money for it. That’s a whole different deal, but that’s not technically as we would call it an investment because it can go up and down and it’s random.
And as far as it going up and down, the stock market is random as well. Don’t get me wrong, the stock market can be very random. But if you look at history, it’s random and it goes up over time because people are driving the earnings of the company. They want the earnings to go up, and therefore what they’ll do is they’ll try to increase earnings over time, and then there’s also that cost to use your money.
Others Paying to Use Your Money
So there are two aspects of things. Number one, people have to pay to use your money.
If you make a deposit to the local bank and they have to pay you interest, that is the cost to use your capital.
If you buy a house and you rent it out to somebody, when somebody rents it from you, that payment that they’re making to you is the payment to use your house. If we’re looking at, let’s say earnings from stocks, of course, that’s the same thing.
You’re getting the earnings of the company. That’s how they pay you to use your money, and that takes some of the risk off of them because if they don’t have earnings, they don’t have to pay you, right? But let’s look at it this way.
If you’re the CEO of the company, you’re working for the company, you’re employed by the company, you’re on the board of directors for the company, everything in you is screaming, I’ve got to get earnings for this company, not just so I can pay the people back whose money we’re using, but also we’ve got to have earnings or I don’t have a job anymore. And CEOs are paid by the stock price. That is a big way the CEOs are paid.
They have options, contracts, or they’ll have let’s say some kind of a contract that if they have an option to buy it, and what’ll happen is they want to buy it at a certain price. And then they want it to go up, and then they can cash in on that. So a lot of how they are paid is the stock price, so it’s incredibly important for them to get it to work.
Now, interestingly, it’s also important for the government, and I think people forget this. They forget that the government has a dog in this fight. They want the earnings of the company to do well because they don’t get taxes if they don’t have earnings.
But also, the company won’t employ people if they aren’t earning money. And if they’re not employing people, people get kind of mad.
I don’t know if you notice that. If the unemployment rate is really, really high, they get kind of mad at who? They get mad at the government. They get mad at politicians for having policies that cause companies to move out of their district, to move out of the state, to move out of the country.
Pushing Investments
Everything points to, “We’ve got to get earnings to go up.” So hence that’s the first question: Do people at the conference typically try to push Bitcoin as an investment? I knew the answer to that.
Yeah, they do. I see that all the time. Well, why is it looked at as an investment? Why are they pushing it as an investment?
I guess that’s a basic question: Why are you pushing me to buy it? Why don’t you leave me alone?
And you go, “Well, there’s a good reason to try to push me to buy it. Because if I buy it or other people buy it, we will drive up the price. And if you own it, who benefits from that price increase? You do.”
So it’s not unlike when you’re dealing with penny stocks. You used to get these faxes all the time.
“You got to buy this company. This company’s great. This is really awesome. You need to own this company.”
Well, they were trying to get me to buy it so that I would drive up its price and they could sell it. Now, that’s called pump and dump.
Now, I’m not saying that’s quite that nefarious. In this particular case, people do seem to really believe in what they’re doing.
But the question is, what is it? Is it actually an investment? There’s no cost to use.
And one of the examples I give here from time to time is in the Old Testament in the Bible. Back in Solomon’s time, there’s a thing in 2 Chronicles that talks about how silver had no value as nothing was made of silver.
They’re talking about all the things and what they were made of back then. Nothing was made of silver because silver was considered of little value in Solomon’s day. Right there is a really good example of how now, something can no longer be desired, and then it goes down in value.
I’m sure it dropped like crazy when that happened because nobody really wanted it. They wanted gold. A lot of things were made of bronze at that point in time.
The Cost of Capital
So that’s one of the things that you think about: What’s the cost of capital? I’ve said that before. Some people say that it’s a store of value.
But you look at that and say, “Well, it’s like gold, but it’s not a currency.” That’s what it is. Well, there’s no difference between something being a store of value versus being a currency. It’s the same thing.
One of the things that Matt did really well was he pointed out, “This is like numbers on a computer. What happens if we have a problem with the internet?”
And I don’t think that the answer was very satisfactory. It’s kind of scary. We don’t have anything physical.
At least gold has properties where I can wear his jewelry, it can be used in electronics. There are other uses for it. So I think that that was a bad answer right there.
And then of course, you have people that are losing Bitcoin due to hacking, and they’ll say, “Well, that’s when you’re on these other systems.” You systematize something like Bitcoin, and of course, a lot of people are going to own that on other systems.
And really, one of the points that I made with Matt is that these investment companies are loving this stuff. Investment companies and brokerage investment providers are loving this because they get to charge management fees for managing this stuff or putting it in your portfolio.
And I liken that to the people who were making money hand over fist selling axes and tents and shovels during the gold rush. It was a way to make money.
It wasn’t necessarily the way to make money in gold. So that was kind of precarious. And that’s the whole idea.
The whole idea of it being driven by supply and demand is precarious because the demand for it can just dry up.
That seems pretty scary to me.
Stock Valuation
Now, one of the points that the guy who was being interviewed made, he was making a comment about the stock market, and he said that it’s just terrible, stock picking is dumb, and blah, blah, blah, and yeah, I’m in full agreement. Stock picking is dumb.
That’s why often people look at the stock market as gambling, because of the way they approach it. They approach it as, “I’m going to buy this stock for $50, and I’m going to do some research, and I’m going to find out what I think it’s really worth, and I’m going to buy it for $50, and then wait for it to go to $70 because that’s what I really think it’s worth. And when it goes to $70, man, I’m going to cash in and I’m going to sell it.”
Well, that is precarious because the stock market doesn’t work that way. Market at efficiency is something I strongly believe in, that things are properly priced based on all knowable and predictable information.
But stock valuation — I can come up with a reasonable value for stocks based on what the earnings are likely to be in the future. So I can look at the earnings a year from now, two years from now, what they’re likely to be three years from now, and then bring them back to today based on a certain discount rate.
The example I like to give to make it simple is this: I think a company is going to have a dollar of earnings a year from now, they have no assets, just to keep this really simple. They have zero assets, they have nothing, but they’re just going to get a dollar of earnings a year from now, and then they’re going to close the doors. Let’s just say that. That’s a ridiculous example.
But if I think that that’s the case and I think that there’s a decent prospect for those earnings coming in, maybe such that I need a rate of return of 10%, what would I pay for that dollar of earnings coming in one year from now? The answer would be 91 cents.
I could come up with a number that makes sense, and 91 cents times 10% is 9 cents. So 91 plus nine is the dollar that will walk in a year from now. I can make a case that that’s what I ought to pay for those earnings that are going to come in one year from now.
Now, if I have a bank account that is going to pay $4,000 a year — this is another example I like to use for those of you who haven’t heard this before, $4,000 every year — and I know that the interest rate on it is 4%, I could tell you that I’m willing to pay $100,000 for that bank account because $100,000 times 4% is 4,000, and I could make a case that that bank account is worth a hundred thousand dollars. If I have gold, that is not going to produce anything.
I can guess at what the demand may be in the future, and that’s kind of what’s going on with Bitcoin.
If you think about it, they’re guessing at what the demand will be in the future.
The Fluctuation of Cryptocurrency’s Value
The problem, and this was brought up as well, is what about competing cryptocurrencies? And the person said, “Well, most of them are a scam.”
And there are some. There are some of them that are made up as a joke, like Dogecoin. It was just a joke. But there are some that are very serious.
Now, which ones are going to be the winners in the long run? I don’t know. Which ones will the government get behind?
You say, “Well, this is an anti-government thing.” Well, the reality of it is the government will have a say in things like, for example, taxation. There may be something with taxation.
You buy something with Bitcoin and you pay a tax on the gain on whatever it was that you bought it for versus what you sell it for. That was talked about quite a bit.
Are there things like that with cryptocurrencies that will happen? Will the government crack down on the usage of those?
And you say, “Well, I can go to any country.” Well, the reality of it is how mobile are people really? How much are they willing to pick up their toys and leave and go and live in another country?
That’s not quite the given. If you look around the world, what if the major countries around the world just don’t get behind it, the ones that produce the things that we want?
Then you’ve got a problem on your hands. There are just so many problems, not the least of which is that people are pushing it like crazy more, I think, for their own purposes.
But you look at the fluctuation of the value of this thing. It’ll be up at 60,000. It’ll go down to 20,000, then back up to 60,000 and back down.
And that’s a level of volatility that you see that’s worse than what we’ve seen in stock markets, just about, because there have been periods in time where the stock market’s been even more volatile — look back at the Depression — but that’s a huge amount of volatility for something that I don’t even know is going to have a demand, that there’s going to be a demand for it in the future. So if we have a situation where we go to a cryptocurrency as a form of currency, then the companies that I own will be all they accept, and I will be protected in that.
I own the entity that has accepted that as a form of payment, and also the entity itself will be valued in it because it is a hard asset. I have a building, I have equipment, I have machinery, I have intellectual property. I’ve got inventories. I’ve got chairs, tables, desks, and all of these things.
Those are real assets that I can touch. As far as the cryptocurrency, I don’t have anything, just a password that I might forget.
Wow. It’s just like, yeah, all you have to do is memorize these words and you’ve got your password. Well, if I have a mental lapse, we have a problem. What if I write it down, and somebody finds the piece of paper? I don’t know.
Difficult Real Estate Market
One of the things that caught my attention this week was an article in the Tennessean. It was good, I think it just reminded me, brought me back to — those of you that were old enough to remember the late 1970s, early 1980s — what a difficult market for real estate it was. It was just tough.
Main interest rates — you think they’re high now? Oh my goodness, they were terribly high. That’s when they had adjustable rates and balloon notes, and a lot of the things that a lot of people hadn’t even thought about for years. That’s when those things really came in a big way to be used by consumers trying to buy houses because they just couldn’t afford one.
Well, the article started off by saying that interest rates are high, housing supply is low, as a lot of people are sitting in houses and they’ve got really, really low mortgage rates, and who on earth wants to go and ditch a 2% mortgage and go buy another house at 7%?
So what people are doing is they’re sitting on their houses, and that’s one of the reasons that the housing market is so tight.
Well, they said there are many ways to maximize the budget if you’re a buyer. Now, one of the things they talked about was something that I used myself, and that’s why I said this brought back some memories for me. What my wife and I did when we bought our first house is we ended up assuming a mortgage.
And it was like God sent for me, because these people had this house and there wasn’t a lot of equity in it. And in our particular case, it wasn’t a lot of equity, which is a real blessing, because when you buy the house and you assume somebody else’s mortgage, you may have to make a big down payment. That’s the negative of these things.
Matter of fact, I think that, yeah, they gave an example of that in the article. They said if you had a $400,000 loan with a 7% interest rate, your monthly principal and interest would be, I think, what are they using, a 30-year mortgage here? I guess maybe about $2,660. With a 3% rate, the payment drops down to $1,686.
So there’s about a thousand dollars difference between the two of them, which is a huge deal, right? So you look at that and go, “Man, a thousand dollars more per month, just because the interest costs are a lot higher.”
Assumable Mortgages
Well, what happens with an assumable mortgage is you’re taking somebody else’s mortgage over.
Now, there aren’t a lot of these things out there. They said there were just like 23% of them, but it’s almost a quarter of them that are, so they said you can look around and look at some of the listings.
They may have this in the listing that it’s an assumable mortgage, so you can look to see if that’s maybe a selling point of this thing. Now, if that’s the case, you have to come up with the down payment.
And I think that they used an example somewhere in the article that, let’s say it was a $400,000 house and you had, let’s say that you had a $300,000 loan still on it, oh, there it is, it’s a $450,000 house. That’s what it was.
If the person had, let’s say, a $350,000 loan on it, you’re going to have to come up with a hundred thousand dollars at closing for the assumption to make sense. Now, that’s the case where I’ve seen people, maybe mom, dad, grandparents, somebody let’s say has a bunch of money in a CD that’s paying a decent amount of interest rate, but maybe they want to help out, or maybe you can pay a little higher interest rate and borrow from them and then put the down payment, and then pay them back as time goes on.
Especially let’s say it’s parents or grandparents, and maybe let’s say that you’re going to inherit their money anyway, and maybe you put a codicil in the will. You borrow the money and you pay interest only on it.
And then, they pass, because nobody lives forever, it’s just the way stuff works, right? Then you get the money, and let’s say that you were just one of the inheritors, they subtract the hundred thousand, let’s say, if that’s what you borrowed, it’s a hundred thousand. They subtract that from your part of the inheritance.
So there are things that can be done if you get creative, and that way you can come up with that payment. So that was one of the things that they talked about.
Lowering Interest Rates
Now, they said that there are other things that you can negotiate with lenders, application fees and origination fees, which cover the cost of underwriting a loan, processing the application, preparing documents, and looking at your credit profile.
And then you might have rate locks that sometimes people will pay to get the interest rate a little bit lower. That can be a little bit risky, because if interest rates go lower on their own, then you’ve paid for a lower interest rate that you would’ve gotten anyway.
But in this particular case, if we’re talking about not going and getting a new origination of a loan, but you’re assuming somebody else’s loan, it can be a really good way to do this. Now, the other thing that they mentioned in the article, which I often bring up, is PMI. Your down payment is less than 20% of the purchase price, and we’re not talking about assuming in this particular case, we’re talking about the situation where you’re getting a brand new loan.
If your down payment is less than 20%, you might have some extra cost on your loan until you get to a 20% equity on the home. So typically when I’m telling young people, “Get ready, save up for the house, because at some point you’re going to want to buy a house,” trying to get a 20% down payment is a good goal to avoid that.
Some people get beside themselves regarding housing, because they don’t want to rent. “I don’t want to throw money away.” And the thing I always point out with renting is that you’re paying to use the property, right? That’s what rent is.
But when you have a big loan, you’re renting the money to buy the home, so you’ve got the interest payment. That is a big deal. And you have upkeep and you have property taxes, and you have the difference in cost between homeowner’s insurance and renter’s insurance.
So these are all things to really think about, okay? So anyway, I thought that was a good little piece. I didn’t know what the numbers were.
I didn’t realize how many assumable mortgages there were out there. About 23% of active mortgages are assumable.
Now, it doesn’t mean all these people are actually selling their houses, but anyway, it’s just something you might want to know about.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
