Part III: Powerful Investment Strategies
Chapters 19-30
Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
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Chapter 19: The Secrets of Powerful Investing
Objective: Accomplish the three major investment objectives:
1. 20% safe investment return.
2. No commissions.
3. No taxes.
Use the ten best investments:
1. Asset management checking account - Legal float debit card strategy.
2. No load mutual funds - money movement strategy.
3. Mutual fund margin account - Leverage strategy.
4. IRA/Keogh account - Self-directed accounts strategy.
5. Your own home - Leverage and personal use strategy.
6. Employer's retirement - Money movement payroll deducted strategy.
7. Self-directed annuities - Money movement strategy.
8. Discounted mortgages - Guaranteed interest tax deferral strategy.
9. Liened property sales - High government guaranteed interest and leverage strategy.
10. Residential real estate - Leverage and tax shelter strategy.
The Importance of Investing
Other than winning the lottery or inheriting wealth, there are only five ways to increase your wealth.
1. Put yourself to work - Obtain employment.
2. Putting other people to work - Start a business.
3. Put your ideas to work - Inventing, consulting, writing.
4. Put your money to work - Investing.
5. Put other people's money to work - Leverage.
The focus of part III is on methods 4 and 5.
You put your money to work when you invest in stocks, bonds, mutual funds, certificates of deposit, IRAs, Treasury bills, company retirement programs, and any other direct investment using your own money.
You put other people's money to work when you buy a home with a mortgage, use a brokerage firm or mutual fund margin account, take an option on a piece of real state, borrow money for your business, invest in leveraged limited partnerships, borrow the equity on your home to reinvest, and expect any financial rewards from the use of borrowed capital.
Strategies for investing your own money include:
1. Use only the ten best investments mentioned above.
2. Pay no or low commissions by working directly with government and financial institutions.
3. Use tax shelters and tax strategies to protect your investment income.
Chapter 20: The Ten Biggest Investment Mistakes
Objective: Learn to recognize investment schemes, scams, and bad advice.
1. Keep your money out of vacant land. A lot in an appreciating area, or one where you eventually plan to build is an exception.
2. Don't throw away money in time-sharing. You will likely overpay for a couple of weeks of use per year, and the maintenance fees will add insult to injury.
3. Never use life insurance as an investment. Buy term insurance and build your investments using the strategies described in this book.
4. Stay away from individual stocks and bonds. You will pay commissions, and increase your risk compared to investing in mutual funds.
5. Never invest in bonds when interest rates are rising. Bonds lose value as interest rates increase.
6. Don't invest in inflation hedges such as precious metals. You will pay capital gains tax when you sell them.
7. Don't fall for investment phone pitches.
8. Never use a commissioned financial salesman as a financial adviser. They are biased to recommend what they sell, and many have little investment knowledge. Work directly with no-load mutual funds and eliminate the middleman.
9. Don't over leverage in volatile investments like commodities. Commodities are the riskiest of all legal investments, and most commodity traders lose money.
10. Avoid options as a leveraged or hedged investment. An option is a right to buy or sell a specific number of shares of stock at a specified price on or before a specific day. A put is the right to sell. A call is the right to buy.
11. Learn to recognize bad investment advice, i.e., the biggest lies in the investment business.
The Biggest Lies in the Investment Business
1. Stocks and bonds are a good long-term investment. There is no such thing. Stocks and bonds are good investments at different times, but not at the same time.
2. Government securities are always a good safe investment for those who want income. Don't invest in government securities when the prime rate is increasing.
3. Tax-exempt bonds are a good investment if you want tax free income.
4. It always requires bigger risk to make bigger profits. Not true if you use the ten best investments mentioned above.
5. This investment is a hedge against inflation.
6. Using dollar cost averaging will avoid fluctuations in the market. Dollar cost averaging involves making equal investments at equal intervals in the same stock, bond or mutual fund. It violates two rules of successful investing: There is no such thing as a good long-term investment, and there is one best investment for every economic environment.
7. Single-premium life insurance is one of the best tax shelters. Insurance agents agressively promote single premium life insurance because the agent earns a large commission. A self-directed annuity is a much better tax shelter.
8. Zero coupon bonds are a great investment for your children. Investing in mutual funds is a better idea.
9. Life insurance proceeds are tax exempt. Insurance proceeds are subject to estate taxes.
10. You get better advice if you pay commissions. If you have millions to invest, you can qualify to work with a good portfolio manager. Otherwise you can do well by following the advice in this book.
11. A bank trust department should become the trustee for your estate. Use an attorney, a friend, or relative who will follow the investment strategies described in this book.
12. It is not possible to average 20% per year safely. Nonsense.
Objective: Get your million dollar investment plan started on a shoestring.
1. Use the ten percent solution to go from paycheck to prosperity. Send 10% of every paycheck to a mutual fund family, and use the money movement strategy (Chapter 23) to choose the right kind of mutual fund for the current economic environment.
2. Store 20% of one year's income as attitude money.
3. Use the Rule of 76 to determine the doubling power of your money: 76/Expected return = Years required to double your money.
Chapter 22: The Asset Management Account
Objective: Couple the convenience of checking with the power of an investment.
Asset management accounts are available through brokerage firms, mutual funds, or other large financial institutions.
1. Use an asset management account to double the interest you receive from a bank checking account. Asset management accounts pay more than CDs, and you also earn additional interest from daily compounding.
2. Choose an asset management account with a maximum legal float.
3. Write all your checks from your asset management account. Deposit just enough to cover the checks you plan to write.
4. Use a Security Investors Protection Corporation or SIPC-insured asset management account.
5. Choose an asset management account that offers a debit card.
6. Choose an asset management account with a low annual fee.
7. Use an asset management account for your small business checking account.
What to look for in choosing an asset management account: The minimum deposit and minimum balance required, the yearly fee, debit or credit card, if a margin account is available, and a business account is available.
Chapter 23: The Money Movement Strategy
Objective: Time your investments in stocks, bonds, and money market instruments to safely average 20% + per year.
Time your investment moves to earn 20%, pay no commissions, and pay minimum taxes on your earnings.
1. Never store money. You have to move it to get the best return. There are no good long term investments. The best investment this year will become the worst investment as inflation and interest rates change.
2. Invest in stocks, bonds, and money market instruments only through mutual funds. With mutual funds, you get professional management, less risk than buying individual stocks, investments that are easy to evaluate and control, periodic income if desired, liquidity since you can withdraw your money at any time, and many investment options.
3. Only use no-load mutual funds. A load is a sales commission, not a management fee. It's paid to a broker, or brokerage firm, a financial planner, or insurance agent.
4. Choose the right type of mutual fund for each economic climate., i.e., stock, bond, or money market.
5. Invest in only one type of mutual fund at a time. Over diversified investments operate like a seesaw. When one side goes up the other side goes down.
6. Use the prime rate to identify the safest and best mutual fund for each economic environment. (Note: According to Wikipedia, the prime rate is approximately 3 percent above the federal funds rate. The federal funds rate is the rate banks and credit unions send reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain a depository institution's reserve requirements.) See United States (Fed) Prime Rate Chart (fedprimerate.com)
7. Invest in stock mutual funds anytime the prime rate is below the investor's decision line. The author shows a graphic illustration of the prime rate where the investor's decision line is at 10 percent. See the graphic below.
8. Move your money to a money market fund when the prime rate is increasing and goes above the decision line.
9. Move your money to a bond fund when the prime rate is high, but decreasing. Then you get both interest and appreciation. When the prime rate decreases by 1 percent, bonds appreciate 10 percent. When the prime rate increases by 1 percent, bonds depreciate 10 percent.
Note: In June of 2021, the prime rate was 3.25%.
Chapter 24: Mutual Fund Winning Strategies
Objective: Earn a safe 20% per year with no commissions in a liquid investment.
1. Use the money movement strategy in no-load mutual fund families.
2. Invest only in funds that have more than $25 million and less than $3 billion in assets.
3. Invest in good performing no-load funds with telephone switching. Now you can move your money on the internet.
4. Use the fund family sheets to choose the best fund and fund family for you.
Chapter 25: Mutual Fund Margin Accounts
Objective: Use Other Peoples Money (OPM) to increase the earning power of mutual funds.
1. Use a mutual fund margin account to increase your investment capital. A margin account is a line of credit with a broker or mutual fund that allows you to borrow money to invest using your existing investments as collateral.
2. Use a mutual fund margin account to free up capital for other investments.
Chapter 26: IRA and Keogh Investment Super strategies
Objective: Earn over 20% per year in nontraditional IRA and Keogh Investments.
1. Locate an independent trustee for your IRA/Keogh.
2. Invest your IRA/Keogh in mutual fund families.
3. Invest your IRA/Keogh in land lease limited partnerships.
3. Invest your IRA/ Keogh in vacant land or lots. Investing in vacant land is not recommended (Chapter 20) unless the property is appreciating and you plan to do something with the property, e.g., a lot in your neighborhood. You can use your IRA or Keogh money to purchase the property. When you sell the property your profit will be tax sheltered by your IRA or Keogh. However, you can't use your IRA or Keogh as collateral for a loan or mortgage because the transaction would be counted as a withdrawal triggering income taxes and a penalty if you are under 59 and a half.
4. Invest your IRA/Keogh in real estate options on land.
5. Invest your IRA/Keogh in real estate options on residential rental properties.
Note: The Roth IRA was not available when this book was published. The Roth IRA was introduced in 1997 and allows for tax free growth in the account, and qualified tax free withdrawals. A Roth IRA should be part of everyone's retirement income strategy.
Keogh (defined-contribution and defined benefit) plans are employer funded, tax deferred retirement plans designed for unincorporated businesses or self-employed individuals. They are now called "qualified plans" by the IRS.
Chapter 27: Self-Directed Annuities
Objective: Combine the 20% earning power of the money movement strategy with America's best tax shelter.
1. Use a self-directed annuity to earn 20% per year with no commissions or taxes.
2. Never annuitize your annuity account. Withdraw your money in a lump sum, or use the minimum per year withdrawal requirements when you reach age 70 and a half.
3. If you become dissatisfied, use the tax-free rollover rules to move your annuity to another company.
4. Make your annuity account withdrawals tax free by creating equivalent tax deductions, i.e., create an equal amount of tax deductions.
5. Invest in an annuity only with funds you plan to leave invested for five years or longer.
6. Use your self-directed annuity as an estate planning tool. Annuities, like insurance contracts allow you to choose a beneficiary who will receive your annuity without probate or attorney fees.
7. Use a self-directed annuity to beat the kiddie tax for children under 14.
8. Rollover your cash value life insurance, tax-free, into a self-directed annuity.
When choosing annuities, you need to determine the following:
The minimum investment. The minimum addition to your annuity. If the annuity is insured or registered in the state of New York? The different investments available with the annuity. How often you can move your money within the annuity, and how to do it. The load or commission charged? Your objective is to use an annuity with no commission. If you can, make withdrawals with no commission.
Chapter 28: Discounted Mortgages
Objective: Earn 30% per year guaranteed and secured.
1. Invest in discounted mortgages for a guaranteed 30% return. When interest rates are high, a seller would allow the buyer to assume the low interest first mortgage and use a second mortgage for a large part of the down payment. A seller's desire to get cash out of the mortgage creates an investment opportunity.
2. Make an offer for a mortgage by offering no more than 60% of the face value. Sellers are forced to sell mortgages at a discount because there is no established market for mortgages. You make money when the mortgage term is up and you receive the entire face value.
3. Use the county courthouse real estate records room as a discounted mortgage source.
4. Use newspaper ads in search of mortgages you can buy at a discount.
5. Make friends with real estate professionals to help you find mortgages for sale.
6. Expect the best, but arm yourself for the worst (i.e., the borrower doesn't make the mortgage payments), and talk to a real estate attorney first. Be prepared to foreclose on the property if necessary to protect your investment.
7. Buy discounted mortgages with no more than an 80% loan-to-value ratio.
8. Check the credit history of the mortgagee before buying a discounted mortgage.
Chapter 29: Tax Lien Certificates
Objective: Earn 15% to 50% government guaranteed interest.
1. Invest in tax lien certificates for safety and maximum interest. It works like this. A property owner doesn't pay their property taxes. The county puts a lien on the property for the amount of the unpaid taxes. The county sells the lien certificate at auction. You buy the lien certificate for the amount of the unpaid taxes. You earn interest based on the interest rate set by the county. The owner must pay the taxes and interest for the lien to be taken off the property. If the owner doesn't pay within the time limit set by state (e.g., 3 years), the property is sold at auction, or (in some states) the owner of the lien can apply for and receive the deed to the property.
2. Buy a piece of real estate at a huge discount at a tax lien auction.
3. Examine the property before you bid at a tax lien auction including the neighborhood and courthouse records. The property should be in an area where property values are appreciating. Check for other liens. An IRS lien is senior to a property tax lien.
4. Bid no more than 70% of the market value at a liened property auction
Chapter 30: Powerful Investing - How to Structure Your Investment Plan.
Objective: Choose the investments that will accomplish your goals in the shortest amount of time.
Choose from the best investments for maximum growth, maximum tax shelter, or maximum income.
An asset management account should be used as your primary checking account.
A no-load mutual fund family should be used as a high return investment.
A mutual fund margin account can be used as a leveraged growth tool by aggressive investors.
For the longer term (5 years or more) use self-directed annuities.
Put as much as you can into IRA/Keogh, 401(k) or 403(b) tax sheltered plans. Don't forget the Roth IRA.
Use discounted mortgages when available.
Invest in real estate if your have enough money to do so.
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Related summaries:
Williams, J. J. 2018. Help small businesses choose the right employee retirement plans. Journal of Accountancy (February): 14-19. (Summary).
