One of the stories to hit headlines recently were the allegations that serial entrepreneur and Venture Captial Investor Peter Thiel has a Roth IRA balance of $5Billion. Many have begun to question how this is possible with only a $6,000 maximum contribution for those under 50 and an additional $1,000 for those over 50.  The part that is especially important to note is that as long as Thiel waits until he is 59.5 or older, he can take money out of that Roth IRA completely tax free. I recently shared my thoughts on Roth IRA’s with Laura Saunders in this Wall Street Journal article recently: HERE Thiel started his Roth IRA with $1,700 and invested in Paypal several years before the company went public. However, private company investments are not possible in a regular Roth IRA.

Self-Directed IRA’s are most commonly used to invest in real estate.  Peter Thiel is not the only one to have benefited from the added investment options of a Self-Directed IRA. Famously, Mitt Romney also capitalized of the flexible investment options of a Self-Directed IRA. Through his Private Equity firm, Bain Capital, Romney was able to amass over $100M in his IRA.  Romney was able to use investments in companies alongside Bain Capital.  This can only be accomplished through a Self-Directed IRA.  Here is a quick overview of what a Self-Directed IRA is and what it can be invested in.

Overview

This form of IRA varies from other IRAs because these portfolios may possess a variety of different alternative investments that are excluded from other IRAs. Real estate is the investment that is most commonly used for Self-Directed IRA’s. This is a great way to defer the gains on real estate that is sold until the money is withdrawn from the account.

The investments available in Self-Directed IRA’s include: real estate, private companies, cryptocurrencies, debt notes, and more.

These IRAs can be classified as either a traditional IRA or a Roth IRA

Additionally, the account is also managed by a trustee or custodian, but hence its name, is self-managed by the account holder, meaning that the holder can choose to sell and buy these investments themselves.

Risks

If the holder lacks experience with portfolio management, they put themselves at risk of a lower return or loss money all together.

Moreover, if the holder breaks a rule, whether knowingly or unknowingly, they can be held liable for these rules and it may make all of the money in the IRA taxable. There is a strict list of rules that must be followed within these accounts and they oftentimes can lead to audits.  

Benefits

If the holder does have experience in investments that are not publicly traded this can be a way to invest in those companies on a tax deferred basis. This can be a great way for real estate investments to buy and sell properties and shield the gains from taxes either until the money is withdrawn or completely within a Roth IRA. This can also be used for private companies, startups and crypto currencies. These can supercharge returns but also adds significantly more risk. 

The holder may also invest in companies that are not publicly traded, meaning that they could further diversified their investments as well as increase their market for potential high-growth securities.

Opening an Account

Although the account is by its name, “self-directed”, the account still requires a custodian to sign off on the account

Most often, brokerage firms can act as custodians for IRAs. However, most big name custodians do not offer Self-Directed IRA’s. Here is a list according to Investopedia of 6 firms that offer Self-Directed IRAs. 

• Best Overall:Equity Trust
• Best for Audit Protection:IRA Financial
• Best for Real Estate Investing:uDirect IRA
• Best Online Portal:The Entrust Group
• Best Investor Experience:Alto IRA
• Best for Larger Portfolios:Rocket Dollar

Investors should always do their due diligence on a self-directed IRA company before moving funds into it. Not only do these accounts have more stringent IRS rules, but the industry also attracts fraudulent companies that prey upon investors.

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I have compiled a list of my favorite and best books about money to help those that are interested in learning from some of the experts. The image shows these books as a pyramid, starting with the foundation and working yourself up to the book at the top.

The Foundation:

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

Book by Thomas J. Stanley

What comes to mind when you think of a millionaire? If you are like most Americans, you probably think of someone in an expensive suit, siting on expensive sports carts, in front of expensive mansion with tall, white, Corinthian columns. Well, if you read Thomas Stanley’s The Millionaire Next Door, you might be surprised to find out that more often than not, the average millionaire is actually like your more humble and pleasant, “blue-collar” or “middle class” neighbor. After reading this book, you might find that your neighbor is actually much richer than what you had originally thought. In fact, more often than not, your stereotypical image of a millionaire is actually someone who is much poorer and debt ridden than you might have thought. Why is this? Well, reading this essential classic of personal finance will teach you that that the key to becoming a millionaire is rooted in a healthy perception of wealth and income, good habits, and a wise investing plan.

Key takeaways: living below your means, save on the big ticket items, majority of millionaires are business owners. 

Wisdom from Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and the Middle Class Do Not!

Book by Robert Kiyosaki 

Ever feel like you are not just getting enough out of your hard work in both a financial and spiritually fulfilling way? Well, Robert Kiyosaki’s Rich Dad, Poor Dad, another foundational book on personal finance, will teach how to get more out of your income and work life. If you dread waking up every day to a job that you just don’t really care that all much about, this book will teach you the essentials of personal finance when it comes to using your income more efficiently and finding new, more fulfilling ways to make that income.

Kiyosaki wrote this book in a the style of easily digestible parables that each tell the story of his poor dad and his friend’s rich dad. In these parables, you will find that even though each dad both started out in a similar position working just as hard, the rich dad, through his entrepreneurship and savvy investing, was able to become much richer and work much less over time, while the poor dad spent his entire life working hard without seeing nearly as much wealth.  Through improving your financial IQ with strategies like investing in real estate and other assets, as well as starting your own businesses, you can get more money out of your hard work. Not only that, you can start making your money work for you, and end up more like the rich dad and less like the poor dad.

Key takeaways: the quicker you can turn you earned income into passive income the better off you can be. Using assets to pay for your expenses will allow you to ext the “rat race.” 

The Total Money Makeover: A Proven Plan for Financial Fitness

Book by Dave Ramsey

In Ramsey’s Total Money Makeover, you will learn of the essentials to climbing out of debt through budgeting with his “The seven baby steps”:

1. Save a $1,000 beginner emergency fund
2. Get out of debt using the debt snowball
3. Building a fully funded emergency fund
4. Invest 15% of household income for retirement
5. Save for children’s college
6. Pay off your home early
7. Build wealth and be generous

Each chapter will go into depth on each of these steps on how to go through them for each individual situation that you may have. There is a good reason that the Dave Ramsey brand is so successfully and even taught in schools across the world. Read this book to find out why and find how to achieve financial peace.

Intermediate Phase:

The Intelligent Investor: The Definitive Book on Value Investing

Book by Benjamin Graham

Benjamin Graham is widely known as the father of value investing and the mentor to billionaire investor Warren Buffett. Often called the greatest investment advisor of the 20th century, Benjamin Graham, is undoubtedly respected and known across the financial world. Reading this book is an effective way to take anyone’s basic understanding of investing to the next level. Despite being publish in 1949, this classic investing book contains timeless wisdom and advice for understanding and interpreting market conditions. Even so, various financial experts, like Warren Buffet, have repeatedly made contributions and revisions throughout the years to keep it as relevant as ever. All and all, Benjamin Graham’s The Intelligent Investor is truly the definitive book on value investing.

MONEY Master the Game: 7 Simple Steps to Financial Freedom

Book by Tony Robbins

Combining the methods of the old and of the new, Robbins’s Money Master the Game really is book that tries to take a holistic approach to personal finance.  Tony does not try to hold himself out as an expert on money, instead, he conducts hours of interviews with some of the best minds in finance and investing. They share the principals they believe in to help you become financially free.  Along with direct financial advice, this book also gives advising for improving the reader’s life in many aspects like diet, health, confidence, leadership, and personal relationships, which will ultimately lead to overall better financial health and vice versa. In the process of going to depth with these steps, Robbins debunks many financial myths and provides many strategies for a variety of situations in order to achieve the titular “Financial Freedom”.

The Psychology of Money: Timeless lessons on wealth, greed, and happiness

Book by Morgan Housel

The most recent book on this list, just published last September, Housel’s The Psychology of Money differs from most of other the books on this list. To illustrate, this book focuses on how and why we make money decisions, providing a view of money revolving around people, the world, marketing methods, history, etc. We often think of money management and finance as complicated series of mathematics and algorithms. While this undoubtedly true, we cannot forget that ultimately on an individual, psychological level, money decisions are made by and for the individuals. If you want to get a better understanding of what influences your or someone else’s decision to buy the brand name item over the store brand at the grocery store—or what influences someone to make life-changing financial decisions like going to college or applying for a mortgage, I highly recommend Housel’s The Psychology of Money.

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There has been a lot of talk over the past year about inflation and how that might affect the price of stocks, the price of goods and services and the value of the US Dollar.  Inflation, by definition, is a general increase in prices and fall in the purchasing value of money.  Throughout this past year we have seen trillions of dollars printed and put into circulation.  In addition to the fiscal stimulus, improving pandemic conditions, private sector liquidity ad pent-up consumer demand could also spur more inflation. This has led many to believe the US dollar will start to lose its value due to a finite number of assets to use our dollars on. These dynamics could also drive-up long-term interest rates. With inflation happening all around us and vast shortages of supplies, where is a good place to invest your money today? Here are 3 areas to look at investing during a period of inflation.

1. Real Estate

During times of inflation real estate values tend to increase with inflation. In addition to the values of real estate appreciating so does the amount landlords can charge in rent.  Both value and the rent tend to outpace inflation. Unlike bonds that offer fixed cash flows, yields from real estate can rise over time. Real estate assets that have longer duration leases can include rent escalators to mitigate inflationary risks. Supply has remained in check for real estate even with high demand industries like industrials. The cost of land, supplies and labor will more likely reduce a surge in supply for real estate.  When investing in private real estate, this typically makes sense for long term investors that are willing to deal with a lack of liquidity for these investments.  There are several ways to invest in real estate including: direct ownership, private equity funds and publicly traded REITS.  Real estate offer unique tax benefits and these benefits can be passed on to investors.  Lastly, an additional benefit to real estate is diversification. Real estate tends to perform differently from stocks, bonds and commodities and this diversification can help to add to long term performance. 

This chart from a recent Blackstone article shows the values of U.S. Private real estate during periods of rising interest rates. 

2. S&P 500

Over the long term stocks offer more upside potential than bonds. The Standard and Poors 500 index tracks the stock price of the 500 largest companies within the United States. During periods of high inflation some companies are impacted by their costs of goods rising and this may negatively impact their stock prices. However, companies that pay a good divided can offset drops in purchasing price with the yield the dividend provides.  Also, a rise in interest rates has a positive impact on value companies with large cash amounts on their balance sheets. 

3. TIPS

Treasury inflation protected securities are the 3 asset class to look at investing in during periods of inflation. TIPS are a U.S. Treasury bond whose price is indexed to inflation.  The purpose of these investments is to explicitly protect investors from inflation.  The principal value of TIPS is fluctuates based off the inflation rate.  TIPS are designed for conservative investors that are looking to protect the purchasing power of their money. These investments are not designed for growth and historically provide a lower overall return than other bonds.  Pictured are two examples of TIPS ETF’s that you can look to invest in via: https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

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Warren Buffett, the Oracle of Omaha is one of the best investors the world has ever known. Accumulating a fortune that was over $80Billion at certain times.  Studying the words and publications of Warren Buffett has always been a common practice amongst investors. Warren Buffett started investing at the age of 10 and if there is anyone that exemplifies playing the long game it is Buffett.  Buffett is still running his company, Berkshire Hathaway, at the age of 90. He works alongside his long time business partner, Charlie Munger, who is 97 years of age.  Buffett is a great example of the power of compounding and the miraculous effect it can have on multiplying your wealth.  $81.5 Billion of Buffett’s $84.5 Billion net worth came after the age of 65.  Each year Buffett writes a letter to the shareholders of Berkshire Hathaway to give an update on their business. This has traditionally been something that is highly valued by all investors, not just shareholders of Berkshire, because of the investment insight it can help to provide.  Buffett is known as a value investor, that is someone that studies the fundamentals of a company relative to the price it is trading at, and if that is low enough, will purchase shares of the stock.  Coca-Cola is one of his most famous investments, big blue chip companies that have a track record for paying and growing their dividend. Coca-Cola has been able to continue to grow its dividend for 57 years.

Should investors still put an emphasis on these letters?

Buffett has had a track record of compounded annual returns of 20% since 1965 compared to 10% compounded return of the S&P 500 during that same time frame.  However, last year he made some ill timed trades, including selling out of all his airline stocks at what seemed to be their bottom. He also sold a large portion of his bank stocks and invested in Barrick Gold. I already stated his massive net worth which has come from his investment knowledge and temperament.  The returns and his success are reasons why investors pay so close attention to his letters and his 13F. This and because when these positions get post publicly it can oftentimes cause the price of those stocks to see a nice pop.  However, with underperformance against the S&P 500 and some questionable trades made in 2021, many people are starting to wonder if these letters and 13F disclosures hold the same amount of weight that they used to.  After all, everyone now has a microphone when it comes to investing and there were or are now others that can make public statements that seem to drive up the price of a stock (think Elon Musk, Donald Trump) or message boards that have that same effect. Another reason why some believe that the Buffett positions do not hold as much weight is the underperformance of value stocks in recent years.  Growth stocks have drastically outperformed value stocks over the past 10 years. Buffett is known for being a famed value investor. Here are Berkshire Hathaway’s largest positions.

Key Takeaways from this letter

One of the things I love about Warren Buffett is his entrepreneurial spirit and belief in the American Dream.  Buffett used one of his most famous quotes again in this letter when he stated, “Never bet against America.” This quote may cause many to stay the course and keep a long-term perspective in mind. That in and of itself is a good enough reason for many to read his letters.  Buffett gives great explanations of Berkshire Hathaway and how they use three key elements to decide an investment purchase: 1. A steep competitive advantage 2. Managers who have character and are capable 3. Price.  Buffett highlighted several businesses that were on the brink of elimination and found a way to turn things around to thrive for years to come. He mentioned See’s Candies, whose business is over 100 years old and has employed thousands of men and women. Another successful venture for Berkshire Hathaway has been GEICO which recently did $35 billion in business and has been around since 1937.  It would be difficult to find someone with a track record like Buffet’s it comes to investing and helping to build businesses over the long term. However, there have been fund managers that have well outpaced Buffett during their time, Jim Simons, of Renaissance Technologies averaged 66% over his tenure but did not start investing until the age of 50. Most recently Cathie Wood has been producing astonishing returns for her ETF, ARKK. It is yet to be seen if they can have the same staying power that Buffett has had throughout his career. Here is a full copy of the annual Berkshire Hathaway letter. 

https://www.berkshirehathaway.com/letters/2020ltr.pdf 

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The debate of a $15 minimum wage has been in the news lately and seems to be a talking point for most politicians.  However, taking politics out of this, would this truly be better for the United State economy? According to statistics there are approximately 1.7 million workers who work for minimum wage.  That is approximately 2.3% of US workers.  The industry that employs the most minimum wage workers is leisure and hospitality. Frankly, the industry that has been hit hardest by the pandemic. Raising the minimum wage to $15 would more than double the US Federal minimum wage of $7.25.

There are people that believe that by increasing the minimum wage this would help to stimulate the economy by giving workers more money that they spend which could very well be the case. This could also allow some workers to provide a better livelihood for their families.  However, by implementing these changes this could cause sweeping job cuts and reduction in the work force.  When talking to several business owners they were very opposed to this proposition because of the impact it would have on their workforce. They expressed that by doubling the minimum wage this would cause business owners to have to cut back on their staff. Not only would this cause stress for the employees that are laid off, but also added stress for the remaining staff. The reduction in employees would force workers still employed to take on extra duties and responsibilities that they may not have had to do before.  This would also cause many to wonder that if they are laid off, where could they find additional work.  

A doubling of the minimum wage could be a big hurdle for companies that are struggling to make it through the pandemic.  This would cause them to close their doors.  Another effect of this would be the increase in much of the food and products we eat and use.  Many believe this would cause widespread price increases making it harder for families to afford basic goods.  Some companies in the private sector have taken it upon themselves to issue their own minimum wage, such as Amazon and Walmart that have implemented $15 minimum wages.  These companies have the size and scale to increase minimum wage.  Other companies have already started to increase automation and the use of machines to run their business. Simply look at the self-checkout lanes and ordering kiosks to see what the future could look like.

Below is an article that shows what other financial advisors have to say about a $15 minimum wage.

Where financial advisers sit on the $15 minimum wage divide

This is a recent study by the Congressional Budge Office that goes into details about what a $15 minimum wage would mean.

https://www.cbo.gov/system/files/2021-02/56975-Minimum-Wage.pdf

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Over the course of two blog posts I will be cover the topic of investing in innovative disruption.  It has been said that the pandemic has drastically sped up the adoption of technology and innovation. This thought could be seen amongst the stocks that many considered to be the “stay at home” stocks. Examples of these stocks include: Zoom, Peloton, Etsy, Netflix and Wayfair. These stocks had tremendous returns over the past 12 months.  Many have stated that they may have just frontloaded the growth for these stocks and have them all in one year as opposed to the growth they would have seen over the next 3-5 years. However, looking beyond just these stay at home names, 2020 has introduced certain trends that will be here to stay. Although many believe these stocks might be overvalued many now have a fear of missing the next best innovative stock or company. One investment company that is tapping right into this innovation trend is Ark Invest. Ark Invest is an investment manager that invests solely in disruptive innovation.  As their website states: “ARK’s thematic investment strategies span market capitalizations, sectors, and geographies to focus on public companies that we expect to be the leaders, enablers, and beneficiaries of disruptive innovation. ARK’s strategies aim to deliver long-term growth with low correlation to traditional investment strategies.” You can visit ARK’s website here: https://ark-invest.com

Ark invests with a long term perspective in mind and since inception in 2016 this approach has paid off handily for investors. Some of Ark’s (symbol ARKK) top holdings are: Tesla, Roku, Spotify, Crispr Therapeutics, Square and Teladoc Health. This fund now has around $22.6 Billion in assets.   One of the ways that ARK helps to educate it’s investors is through the publishing of their “Big Ideas” for the year. They published their “Big Idea’s” insights back in January of 2021. Today I will cover 3 topics that jumped out to me while reading their big ideas for 2021.

1.Electric Vehicles (EV)

ARK forecasts that EV sales should increase roughly 20-fold from 2.2 million in 2020 to 40 million units in 2025.  One of the major reasons for this increase is that the cost of the electric vehicles will start to cost the same as the gas-powered vehicles. This will be driven by the decreasing costs of the battery that is used in EV vehicles. The mass production of these batteries is starting to drive down the cost of the battery. Image of EV costs.

ARK believes that Tesla will still lead in the electric vehicles space in both the United States and China. They also see Baidu playing a significant role in the EV space. 

2. Bitcoin

Ark was an early investor in bitcoin and they have been investing in bitcoin through the ETF symbol: GBTC.  Bitcoin has started and continued to gain adoption and credibility throughout 2020. Bitcoin has gain credibility through major institutions starting to invest their cash and also accepting bitcoin as payment.  There are several appeals to bitcoin and one of them is the decentralization of bitcoin as a truly global currency.  Most recently we have seen Tesla make an investment in bitcoin and allow for the use of bitcoin to buy their cars.  Another situation was Mass Mutual adding bitcoin to its balance sheet to the tune of $100M dollars.  Bitcoin is one of the only asset classes that has consistently low correlations to other asset classes. ARK believes that bitcoin has now earned a spot in well diversified portfolio. This chart demonstrates how the incorporation of large institutions using bitcoin can have an effect on the price of bitcoin.

3.Multi Cancer Screenings

According to ARK’s research use of innovative technologies has pushed the cost of multi-cancer screening down by 20-fold from $30,000 in 2015 to $1,500 today and it should drop to $250 by 2025.  The ability to have these multi screened cancer studies can lead to early detection through a more robust testing process. The Big Idea’s template states “Routine blood-based, multi- cancer screening combined with improvements in single-cancer screening could prevent 40% of metastatic diagnoses and increase loco-regional diagnoses by 10%.”  This could also move the recommended age of cancer screenings from 45 down to 40 to help with early detection.

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