Don’t Worry, Be Happy; Better: Worry, Work and Study, Be Happy

Timothy Geithner: "Well, I think ..."

Timothy Geithner made me money.  He was on the Charlie Rose show in March of 2009 and mentioned that he thought the government was going to support in some way the Auto Industry.  The market in March 2009 was hovering around 6500.  I thought that night that ‘this is it’, the bottom.  I guessed right.  But it was a guess.

So I bought Ford, GE, GM, GSX (this only 25 shares), and Citi.  A month ago Ford was up 5 times, GE up 2 times, GM gone bust, Citi basically no change (and I expect it to go back to its old yahoo days but they will need new management).  So I sold Ford, GSX and bought Sirius.  Then I bought more Citi and a few days later Ford dropped $2 and I bought it back.  I realize now that I was trading, not investing.  Gambling, not investing. 

I’m still up a fair amount, but very unsure.  This is the first time I’ve invested (really gambling) in stocks.  For the last twenty years all my money went into Kaffe Magnum Opus, and it is the only investment that has positive returns over the twenty year period.  Steady growth, profits after many years of management support and re-investment, and good prospects, although there are challenges in the coffee industry.

So what to do?  I’m reading Ben Stein, yes, that Ben Stein,  “Bulletproof Investing” and it is pretty good, pushing broad investments, not picking stocks, and diversity.  He believes that you will be well off is you get an 5 to 8% annual growth, basically a doubling over 8 to 10 years.  That would be really good for twenty years.  Invest $1 today and in 2030 you have $4 (1 becomes 2 in 10 years, and 2 then becomes 4 in the second 10 year period).  There is a lot more to his strategy, and it is appealing.  The only question: Will I live for 20 years?  I’d be 85.  Maybe. 

So what about real estate?  Commodities (I’m in the commodity business, roasting and selling coffee)?  IPO’s?  I don’t know.  And this is my dilemma.  And then there is Ricky.  Ricky worked with me for a few years while in High School.  After getting a degree in Engineering he now works as a trainer at Best Buy.  He is quite successful and I am happy for his success.  So what does this have to do with making money.  Yesterday he comes to my home to install a bit of electronics and he tells me he realizes that if he is to become a millionaire he must: Pick the Right Stocks and with luck, get rich; pick the right commodities (his friend has farm connections and made some big money); or own a business.  Ricky is about 23 or so.  Wise beyond his years.  Stocks and commodities are pure bets.  But owning your own business is a pretty sure bet if you work really hard, study, and look ahead.  Look around the corner you are approaching.  So …

What to do?  Sell the stocks.  Invest in my business.  It is my livelihood, and I influence directly the actions it takes.  Who knows what it will be worth when I’m 85.  It doesn’t matter too much because it makes me happy.  I worry, sure.  But it makes me happy.

I am a nail biter.  I worry, and even when I worry, I’m happy.  Sometimes a bit jumpy and sometimes a bit biting.  Overall, I’m happy.

If you don’t own a business, I’d suggest you start one.  Or be lucky.  Maybe you can pick the next Microsoft or Google, or for that matter, GM.  GM fifty years ago (1960) was a solid buy.  And my Uncle Mike Buckley made over a million in GM Stock before he died and left it all to charity.  In a funny way he was lucky he died before the management of GM became incompetent.  And let us remember the truth about long-term investing.  GM had a great run for many years, but in the long run?  GM went bust and is now worth nothing.  So much for the long run investor.  I wonder if this is a mortal sin?  Hey Ben, will I go to Hell in a Handbag?

Bob

Coffee Prices on the Rise – Your Business Must Keep Pace

The coffee C has increased substantially this year.  It is due to the rising C contract – the base price for most coffees, and, it is also due to the rapid rise in ‘differentials’ – the component of coffee prices that represent the quality of the coffee. 

To keep it short and to the point.  Managing your business in times like these is not easy but you must keep pace with price increases.  I was born in 1945 and so have experience with several periods of rapid inflation.  You may not remember or know, but the prime rate was over 20% in the seventies.  Nixon, Ford and Carter were Presidents.  Ford wore buttons with the initials WIP - Whip Inflation Now.  Nixon slapped price controls on the American Economy.   The inflation was caused by the huge increase in Government spending for The Great Society and other stuff, and the Vietnam War.

Today we have the Iraq and Afghanistan Wars and Government gone wild.  This is not a political statement for either Democrats or Republicans.  Both share in the economic carnage caused by incredible increases in the debt load.  Bush increased it by 3 Trillion and more and Obama at least that much, some inherited, but none-the-less, on his watch.

My concern is that interest rates are as low as they can go with nowhere to go but …. up.  Inflation may lead the way, or it may follow rates up, but I think we are in for many increases in prices.

So keep watch and keep moving your own price.  You have to maintain margins.

Bob Johnson

Mortgage Appraisals are UnderPriced by Fannie Mae and Freddie Mac

Appraisers approved by Freddie Mac and Fannie Mae are now providing appraisals that are way below the real value of the homes they appraise.   This is helping to slow the economy, defeat the low mortgage rates that are out there in order to drive the economy, and not permit consumers to transfer debt that is not deductable on tax returns to home interest which is deductible.  Low appraisals will permit banks and mortgage companies to collect fees and not provide the financing because the appraisal is too low to allow the refinance or worse too low to allow the purchase of a new home.

It is preposterous.  In this example the appraisal may defeat an investment in a new building for my coffee roasting company, Kaffe Magnum Opus, Inc.  Here is a first hand example.

My home mortgage is $287,000 on a home I purchased for $340,000 on December 31, 2003.  Since then I’ve spent more than  $125,000 improving my home and property.  Most of this went into creating 1700′ of new space including a gym, a very large music room for jams where we have had 30 muscians at one time and a space designed for a kitchen, but now used as a workshop.  All of this is heated, and finished very nicely. 

In June 2006 realtors told us to list the house for $600,000.  In February 2008 three realtors gave us list prices of $650,00-.  So the house would likely have sold around $599,000.

My home appriased yesterday for $420,000 by an appriaser hired by Wells Fargo Bank, who holds my mortgage.

I am refinancing my mortgage and locked in a rate of 5% to pay off my current %6 loan.  I paid 1/2 point for this lock-in.  The question is should I accept this lowball appriasal. 

No.

My plan was to increase my mortgage to 80% of whatever the appraised value would be, which I planned at well over $500,000 plus or minus, given the terrible market, but $420,000 never entered my mind.

The additional cash is going to be invested in Kaffe Magnum Opus, Inc.   Kaffe Magnum Opus would use this money to support expansion into a new building – a new building.  Do you see that Fannie, Freddie, Wells and Tom the appraiser, and Mr. President, who I support wholeheartily.

The appraisal is bunk, and I will not accept it.  And KMOCoffee will go forward with its project.

So the appraisal may stop an expansion; certainly it keeps the $100,000 mortgage proceeds and really more like $600K  (the lowball estimated cost of a new building) out of the economy. 

It is a good example of how a bank can avoid lending money without it showing up in the newspapers.

Our Great Country is in a bit of trouble and I’m willing to spend a lot of money for expansion that will help it, and Kaffe Magnum Opus, Inc. out.  So I hope the Administration will take a closer look at this practice and make the mortgage companies and the people who buy these mortgages enact appropriate practices.

Bob Johnson

Credit Cards

Keep Them.

Don’t cut them up and throw them away.  Here is why.

Liquidity is the ability to pay bills when your vendor wants their money.  You can have cash or bank accounts that you use, or, you can use loans that fund your bill paying when you are short of cash, for any reason.  

The most common cause of the shortage is a seasonal jump in business when you must purchase and pay for an unusual increase in items you resell.

Or, an unexpected slump and you find yourself with too much inventory, or, your customers begin to pay you more slowly.

The second most common reason for a shortage of cash, even in a business that is doing well, is investment in fixed assets without matched financing.  For example, you pay cash for a car.  Matched financing means taking out loans with a term that roughly matches the life of what you purchased. 

Your short term asset turnover can also cause shortages of cash.  This is sometimes called the conversion cycle.  It refers to the time it takes to receive items, inventory them, sell them, and then collect the money from your customer.  If you purchase inventory and/or sell and allow customers to pay later, you are in effect adding fixed assets to your business and you will want to get matched financing.  The inventory and accounts receivable look like short term assets, and the items or customers that make them up are short term.  But in the aggregate, if you stay in business, they never go away, and you must finance them with either invested capital, net income, or long term debt.

Short term lines of credit do not match the life of increased inventory or accounts receivable.  Some folks call these lines of credit working capital lines.  But it is a misnomer.  Unless you have a seasonal peak, they can be a trap that hurts your business.  You need long term financing to fund inventory and receivables at start up, or if you permanently increase either inventory or receivables, due, for example, to a much desired increase in sales.

Real working capital is precious and there are only two sources.  The first is net income (or additional investment) and the second is long term debt.

More on this later.

So what has this to do with Credit Cards?  The credit card is a source of liqudity that may be either short term – you pay it when the bill comes – or long term – you pay it over time.  With teaser rates you can get some pretty cheap financing with credit cards.  Just be sure you pay them on time.

Bob