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Wealth Building Strategies

This billionaire’s “$5 million test” will make you a way better investor

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Posted by Simon Black - Sovereign Man

on Thursday, 19 October 2017 19:16

supertankIn 1982, a man named Jim Tisch bought seven supertankers for $42 million. He found them by cold calling companies he found in the Yellow Pages. 

Yes, $42 million is a lot of money… but these tankers were each four football fields long. That’s a lot of steel. And they could carry between 2-3 million barrels of oil. 

And these ships were built just eight years earlier at a cost of $50 million apiece. 

Jim Tisch is the son of the legendary Laurence “Larry” Tisch, the late billionaire founder of Loews. Corp – a conglomerate that has owned hotels, movie theaters, insurance, cigarettes, oil and watches over the years. 

And like his Dad, Jim had a nose for value… 

Low oil prices in the early 1970’s (around $3 a barrel) caused demand to soar. To keep up with the growing demand, everyone rushed to build supertankers (which can take years to complete).   

Then the Arab oil embargo in 1973 sent oil prices soaring to $12 a barrel by 1975. 

The Iranian Revolution (and ousting of the Shah) followed in 1979… And Iran drastically slashed its output. Oil jumped to over $37 a barrel. 

Now there was much less oil coming out of Iran (and a year later, Iraq), but the tankers were still floating in the water. 

Tisch started sniffing around for tankers in the early 80s, when, according to Tisch, only 30% of the global fleet was necessary to meet demand. 

That’s why he was able to buy at an almost 90% discount. As he said at a 2006 speech at Columbia University: 

[S]hips were trading at scrap value. That’s right. Perfectly good seven-year-old ships were selling like hamburger meat – dollars per pound of steel on the ship. Or, to put it another way, one was able to buy fabricated steel for the price of scrap steel. We had confidence that with continued scrapping of ships and increased oil demand, one day the remaining ships would be worth far more than their value as scrap. 

By 1990, the market for tankers was turning around… too many ships were scrapped and the volume of oil coming from the Persian Gulf was increasing. 

Noting the strength, Tisch sold a 50% interest in his ships for 10 times his initial investment.
 
He still maintained half ownership… and collected enormous cashflows from operating those ships. 
 
When he first stepped foot on a supertanker, Tisch said he formulated the “Jim Tisch $5 million test.”


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Wealth Building Strategies

How Much Money Do You Need To Retire On Dividends Alone?

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Posted by Contrarian Outlook

on Wednesday, 18 October 2017 08:12

This is a better question to ask than the typical “magic number” formula that most “first-level” thinking firms tout. Let’s review why their approach is fatally flawed, so that we can derive a more reliable method of our own based in actual reality (and funded by actual dividend payments.)

Fidelity Says What?

You should aim to have 10 times your final salary in savings.

But why? I suppose they are claiming that, if you earned $100,000 in your final year working, that you’ll want to earn this much in income every year for the rest of your life.

So, Fidelity says save a million bucks and you’re in good shape.

But how exactly is $1,000,000 supposed to throw off $100,000 in excess income annually?

Fidelity’s Strategic Dividend & Income Fund (FSDIX) pays 2.38% today. Which means, if you follow their advice to a tee, and buy their flagship income fund, you are earning $23,800 per year in income from your million-dollar stake.

That’s a start. But where exactly is the other 76.2% of you income supposed to come from?

Apparently this is up to us to figure out, because we’ve run out of sage advice from this respected investment firm. So let’s see if we can piece together a full retirement ourselves.

Shall We Also Withdraw 4% Annually?

We saved a million like they said, and we’re earning less than our neighborhood coffee barista. I presume we’re now supposed to sell shares to make up the difference. Most mainstream-following financial advisors say that we can sell 4% of our portfolio annually for income, so let’s try this.

FSDIX has returned 7.54% annually since inception, so a 4% yearly drawdown appears sustainable. However, we see three glaring pitfalls.

First, another 4% means another $40,000 per million for a total of $63,800. Still not what we are looking for.

Second, this particular fund has underperformed the S&P 500 over the last year, three years, five years and ten years. It’s also underperformed the broader market since inception (2003).

So what exactly was the point of buying a dividend fund when we were going to have to sell shares anyway? And see them appreciate less than a dumber, cheaper index fund?

FSDIX (Purple Bar) Underperforms – Always
FSDIX-Always-Underperforms-Graphic



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Wealth Building Strategies

Predicting Dow One Million - Was Warren Buffett Being Bold Or Overly Cautious?

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Posted by Daniel R. Amerman

on Tuesday, 17 October 2017 06:06

Summary

- Warren Buffett recently predicted that the Dow would be over 1 Million in 100 years - and challenged skeptics to do the math.

- This analysis takes the challenge, does the math, and finds some quite surprising results.

- The tax consequences of Dow 1 million are uncovered and the real after-inflation and after-tax return is determined.

- What the Dow would need to be in 100 years for a genuine boldly optimistic prediction is calculated.

- What the wily Fox of Omaha has experienced in his lifetime, and what he understands that most people don't.

In a recent speech, Warren Buffett came down boldly on the side of optimism when it comes to both the economy and financial markets. What he said was"being short America has been a loser's game... And it will continue to be a loser's game."

And to throw down the gauntlet against some the current negative talk in the markets, Mr. Buffett boldly predicted something quite extraordinary - which was that in 100 years "the Dow will be over a million."

Is that even remotely believable, or is Mr. Buffett getting carried away by his own optimism?

The Challenge By Buffett: Check The Math

Warren Buffett knew as he predicted Dow One Million that this would seem unbelievable to many people or even ridiculous. Which is why he also said this "is not a ridiculous forecast at all if you do the math".

In this analysis we will do that math using two key assumptions.

First we will use an absolutely average historical rate of inflation.

We will also take a look at the Dow Jones Industrial Average in the same terms that Mr. Buffett was talking about - which is price changes in an index (but not including dividends). In the process we're going to learn some valuable lessons with a great deal of real-world applicability not just going out 100 years, but also for the next 10, 20 and 30 years when it comes to retirement financial planning and other forms of long-term investment.

A Historically Normal Rate Of Inflation, Past And Future

We will begin by determining the long-term rate of inflation. For this we will go back to 1933 and the end of the gold standard for domestic purposes. The consumer price index for urban consumers, which is usually referred to as the CPI-U, was 13.2 in August of 1933.

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.....continue reading HERE

 

Exactly 84 years later in August of 2017, the CPI-U was up to 245.5. Now there's several different ways of looking at this. One way is what would have cost us $13.20 in 1933, instead costs over $245 dollars in 2017, meaning that we are paying almost 19 times as much for the basic goods and services of daily life in 2017 than we did in 1933.



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Wealth Building Strategies

Chart: The Trillion Dollar Club of Asset Managers

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Posted by Visual Capitalist

on Tuesday, 10 October 2017 07:00

$1T+ CLUB IS DOMINATED BY U.S. BASED ASSET MANAGERS

In the late 1700s, it was the start of the battle of stock exchanges: in 1773, the London Stock Exchange was formed, and the New York Stock Exchange was formed just 19 years later. 

And while London was a preferred destination for international finance at the time, England also had laws that restricted the formation of new joint-stock companies. The law was repealed in 1825, but by then it was already too late.

In the U.S., exchanges in New York City and Philadelphia took full advantage by dealing in stocks early on. Eventually, for this and a variety of other reasons, the NYSE emerged as the most dominant exchange in the world – helping propel New York and Wall Street to the center of finance.

THE CENTER OF FINANCE

Wall Street, and the U.S. in general, is now synonymous with finance – and most of the world’s largest banks, funds, and investors maintain a presence nearby. The biggest asset management companies, which pool investments into securities such as stocks and bonds on behalf of investors, are no exception to this. 

Today’s chart shows all global companies with over $1 trillion in assets under management (AUM).

Not surprisingly, all but 17.1% of assets managed by this $1 Trillion Club are overseen by companies based in the United States.

trillion



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Wealth Building Strategies

Stock Market Crash 2018; will it prove to be another buying opportunity

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Posted by Sol Palha - Tactical Investor

on Friday, 06 October 2017 05:09

Since Trump was elected we noticed something interesting; economic news seems to have less of an impact than Geopolitical developments. Polarisation has had the effect it was intended to trigger; the masses and the markets are focusing on the wrong issues, and so we can expect a slew of legislation favouring the corporate world to be passed with little to no resistance. This, in turn, will help push stocks even higher as corporations will have even less to worry regarding being liable for using questionable methods to boost their earnings.

In the last Market update, we spoke of how the markets are operating in a way that appears to make no sense; how they are working more and more like an insane person. Ask a madman how he is, and he might respond by telling you that “ the road needs to be fixed”. The answer has nothing to do with your question and on the surface has no pattern whatsoever, but if you turned around and looked at the road, maybe you would notice that it is in need of repairs. All you had to do was alter the angle of observance, and in doing so, you spotted something that most would have missed.

What if you asked him another question instead of declaring him insane, for example, “ Are you hungry?”. To which he responds “ I hurt my toe yesterday”. You learnt something from the first question, so instead of trying to figure out the answer, you decide to look down, and you notice he is not wearing a shoe on the right foot and the toe is wrapped up in a bandage. What is the pattern here? The guy is not responding at all to your inquiries; maybe he is not as insane as he appears, maybe he thinks your questions are silly. The second thing to conclude is that he is more concerned with reality as opposed to a possibility. Thus the information is not useless; it appears to be useless because most would be ready to evaluate this person based on what they deemed to be a sane or insane response. In other words, they would be following SOP (standard operating procedure).

This is what is going in the markets today. If you ask the market a question based on what worked in yesteryear, then answer is going to sound insane. However, the answer is not insane. The person asking the same question over and over again and expecting a new outcome is the one that is insane. The markets spoke years ago and continued to speak, but no one listens; experts keep asking the same question. Markets march to their drumbeat, not yours. The logical way to examine this market is to stop looking at what it should be doing and instead focus on what it’s doing and why it's doing this. The reason the markets are erratic is that people today are acting as if they are insane. Everyone has an emotional stake in every possible outcome. A market is nothing but a seething cauldron of emotions. The crowd is insane so don’t expect anything different from the market.

Markets are extremely overbought 

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