Thursday, October 31, 2013

Getting down to business - A conversation starter!

Hypothetical situations:

Guy A:
He has $0 to his name but is completely debt free.  He's in his 40s but lost a lot in his divorce, but the kids are grown, moved out, and perfectly self-sufficient. His expenses and income balance but he's not saving any money.  He does have a budget for travel, nights out, decent food and swanky yet surprisingly affordable rental home. A secure job with a well-funded defined pension plan.  His monthly GROSS is about $6000.  (He's not a reckless spender but just doesn't have anything tying him down and wants to live a little after his marriage exploded... Victim of getting married to young)

Girl B:
Has $1.5 Million of debt but it's financed at Prime.  But owns a portion of a property management business.  Her net-worth however is right around $0.  Her business is profitable and generates a steady cash flow of $8000+ per month.  After paying interest on her loan she's left with $5250 which thanks to clever accountants is not taxable income.  The catch is that the value of her share of the business goes up and she will pay a larger capital gain when she decides to sell her stake.  Aside from her property management company she has NO JOB and NO PENSION.   She is a young widow who lost her husband to cancer.  They have a small child whom she looks after full time.  As they were both in their late 20s when they started their family, he had no life insurance.

Assumptions:  Make your own.  NB: Medical bills are NOT the source of her debt.  I live in Canada and nobody gets stuck with grotesque medical bills for acute care.  After taxes, SHE takes home a bit more every month.

Discussion:  Who is better off?  He's got a clean slate, but he works too many hours.  Should the girl SELL some of her ownership of her business to help pay down her debt?  Should she re-invest some of her business income to help generate MORE monthly cash-flow?  Or should she try to pay it down as fast as possible?

Lastly:  This is a trick question designed to illustrate something that my investing friends will pickup on instantly.

Ok... now go away and think about it, then comment below BEFORE reading on.

Please don't read this part until you comment....

I see you...  You haven't commented yet...  jerk.

Anyway here I go.

The man while debt free, is a wage-slave.  If he gets sick or injured he will lose income.  (Some, if not all.)  In the event of a debilitating illness he might even wind up on disability and be forced into a radical downsizing.

The girl is by far better off.  Yes she lost her husband to Cancer, but this is a financial blog!  She doesn't have to work EVER again and thanks to her SAVVY INVESTING.  Her montly income is steady (and slowly increases) and it's almost completely tax free.

If she sold her SHARES to pay down her debts, then she would have NO monthly income.  She would be broke and destitute.  Her investments include a basket of mostly REITs  (Real Estate Investment Trusts) and some dividend paying companies like Canadian banks and utilities.  Yes she has $1.5M in debt, but the monthly investment proceeds covers the loan interest and her modest yet adequate lifestyle.  Baring the US annexing Canada her investments will be safe and secure for the rest of her life.   Her payouts will increase over time and her debt will depreciate over time due to inflation!  (This is why I think it's foolish to pay down mortgages aggressively... the higher the rate of inflation the SLOWER you should pay it down)

Yes this was a trick question.  But folks out there in the blog-o-sphere...  Debt is not your enemy.  Money doesn't make the world go around.  DEBT does.

Stay hungry my friends.

Wednesday, October 30, 2013

PUT it there suckers!

So, all thanks to Liquid ( I'm writing a drunken post...

I'm not here to boast.

I'm not here to brag.

I'm just here to tell you what I've done:  All nets and costs are AFTER Fx (exchange)

October 10 I SOLD 1 TNA $57 PUT for $0.70 netting $61.01
October 15 I CLOSED the above @ $0.29 at a cost of $41.69
Profit $19.32

October 15 I SOLD 2 TNA $60 PUTs for $1.25 netting $246.11
October 18 I CLOSED the above for $0.12 at a cost of $37.61
Profit $208.50

October 21st I SOLD 2 TNA $69 PUTs for $1.62 netting $320.68
October 25th I CLOSED the above for $1.02 at a cost of $226.02
Profit $94.66

Capital required = Strike price * 100 * No. of Contracts.  Thus for my last trade:
2 puts @ $69 Strike * 100 shares per contract = $13,800.

This capital would have been used to COVER if the option had expired IN THE MONEY.  Which none of them did as I closed ALL of the positions BEFORE expiry.

I did have a couple assignments a month or two ago.  I was able to take the position, hold for a few days, and sell at a profit once the market resumed it's upward course.

NB:  Why am I doing these crazy shenanigans???

1. I'm expecting the US market to do any of the following:
a> go up
b> go sideways
c> go down somewhat.

If it tanks then I get stuck with the shares, or close out my option at a loss.

Also, detail oriented readers will note that the premiums I'm collecting go UP tremendously after the first listing.  Why?  I changed my strategy somewhat.  Instead of calculating how much the market "might" go down to keep me clear from owning the shares (and riding out the option to expiry) I've decided that I'm OK taking $TNA and holding it for short periods of time.  Thus I've changed to selling PUTs that are AT THE MONEY.  Hopefully with the expectation that I WILL be assigned the shares.  But so far I get a juicy day or two of "time-erosion" and I close out the position to keep the profit and cut off my risk.

Clear as mud?

Stay HUNGRY my friends!

Wednesday, October 9, 2013

The freelance life

So, for those of you who care to know how much suffering is involved with the freelance life, here are my numbers for the past 12 months:

 As you might NOT have guessed from this graph, I my net-worth has INCREASED during this time-frame.  Not substantially, but considering I had my worst-ever year for work, even staying flat would have been a triumph.

NB: doesn't handle investing income AT ALL for Canadians.  So this isn't a complete income picture.  So without dropping my pants online any further, I'll only say that my net-worth increased a few thousand dollars from October 2012 to October 2013.  Also, as October isn't yet done, I have a few more hundred dollars I expect to add to my income, and about two thousand dollars to my expenses.

Other notes: in February/March/April, I acquired a new 27" iMac, a 9TB NAS, and a bunch of new software to transition from my 2009 windows PC to mac.  Some of my business software included multiple OS usage, some didn't (requiring updates/re-purchasing).  Also, my car needed a new set of brakes adding up all in all to a world of hurt considering I was almost completely unemployed in March.  (Which however was very useful for getting properly adjusted to the workflow on my new mac)

So, back to the numbers...  Mint shows that I'm running an average shortfall of $1203 per month.  Which as I alluded to earlier (my net worth INCREASING) that I'm covering that with my trading/investing profits.

But without my rather modest capital base (which has taken years of painstaking personal/family austerity) I would be up the creek.

Do you depend on your consistent monthly cheques?  Would you be able to handle radical swings like this?  That's a question I can't answer.

Stay hungry my friends!