The Investors' Dilemma

by William Cate

What does it profit an investor to earn more dollars that buy fewer things?

What's relatively safe isn't profitable. In fact, like the frog in the slowly warming pot of water, the investor will eventually have a pile of dollars than won't buy a loaf of bread. The problem is that inflation and taxes are always greater than the interest earned on relatively safe investments. Consider, the bank six-month CD. Today, if you shop around, you can find a 5% interest rate on your savings certificate. State and Federal taxes will take 2% of your interest payment. Your after-tax return on investment will be 3%. The current US inflation rate is between 7% and 8%. (Double the UWS Department of Labor CPI [Consumer Price Index] to get a rough but far more accurate U.S. inflation rate.) You are losing buying power on your CD at the rate of 3% to 4% each year. At 4%/year loss in buying power, in eighteen years, your dollars will buy half of what they will today. After nearly a decade of 6% annual inflation, the U.S. trend is currently upward and given Government spending and growing competition for non-renewable resources is likely to continue into double digits over the next few years.






Conservative investors have always been losers. There has never been a time in the past fifty years when bonds, bank deposits and related financial instruments have paid a profitable return on investment. The loss of buying power has varied by year and by country, but it is always a loss. If you think you can save your way to wealth, you are sadly mistaken.

What does it profit an investor to lose their risk capital?

Most investment instruments that pay a dollar-profitable return are either very high risk or outright scams. If the investment sounds to be good to be true, the odds are it isn't true. Never risk money on anything that lacks a business plan. If you are supplied a business plan, investigate, investigate, investigate. If you find one false statement, there are ten and don't risk your money. Don't risk money on offers where you don't understand the basic business principles of the industry. Keep your initial investment low. It's better to lose a little money than a great deal of money.

For the average investor, the stock market is a high-risk gamble. The Market is rigged against their making a profit. In fact, about 98% of the Small Capital Investors lose money every year. Half of the stock market annual winners can't repeat their success on a regular basis. The primary reason that public investors are regular loses is that they risk their money without knowing what they are doing.

What's profitable?

1. Single Family Homes are profitable at the bottom of the real estate market cycle. The reason is your investment is leveraged by a factor of five and home values in strong markets can move up 10%+ every year. You buy a home with 20% down. This means that you pay mortgage interest on 80% of your investment. Let's assume that your thirty-year fixed mortgage rate is 7%. At a 10% increase in value, you are earning 50% return on investment, less the 7% paid in mortgage interest. Your pretax profit is 43%. If we assume an 8% inflation rate, you have made a 35% pretax profit. You can defer taxes until you sell the property. If you paid Capital Gains State and Federal taxes each year, you would have a net profit of about 27%. You are a winner in the investment game.

Currently, we passed the peak of a real estate cycle earlier this year. If you own a home, you shouldn't sell it for the next four years or so. If you want to play the real estate investment game, you should wait a couple of years until real estate prices have bottomed.

2. IPO PIPES are profitable as long as the stock market is bullish. We probable have a decade of moderate to strong markets. An IPO PIPE has a financial instrument that allows you to recover your risk capital relatively quickly and with the risk capital recovery allows you to play the stocks without downside risk. A well-designed IPO PIPE program has a potential payout in a few years that is far higher than playing the real estate game. And, it requires a relatively small risk capital investment.

A good example of an IPO PIPE program is the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]. This venture capital club is the granddaddy of IPO PIPEs. Investigate these programs. If they fit your investment goals, join one of these groups.



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About the author:
He is the Managing Director of Beowulf Investments . He's the Executive Director of the Global Village Investment Club He's a Venture Capital & Equity Finance Consultant






Published at Oct, 12 '06 ; read 1224 times;

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