This 'Detroit' Strategy Turns $1,000 into $5,000
By Tom Dyson
February 11, 2009
I spoke to an old friend yesterday. She was telling me about her property investments...
"I never planned to become a landlord," she says. "It just sort of worked out like that. At first I'd live in it. Then I'd get bored and decide I wanted something bigger. But instead of selling the old place, I figured property prices were rising, and I was making plenty of money, so what the hell... I'd rent it. Next thing you know, I own two flats in central London and a loft in Manhattan."
The problem was, she overpaid for the properties and borrowed too much money. Her rents never covered her mortgage payments. And now that her properties have fallen in price, her loans are more than the properties are worth. I expect she'll have to file for bankruptcy.
Another friend owns property in Detroit. He buys apartment buildings. Prices are so low in Detroit, they can't fall any farther. My friend will never be "upside down." And Detroit has one of the strongest rental markets in America because no one wants the responsibility of property ownership. My friend has no trouble maintaining 95% occupancy. These apartment buildings gush so much cash, his income is double his mortgage payments... and he makes about 20% a year in bottom-line profit.
Compounding is the only mathematically certain way of building a fortune from your investments. To follow a compounding strategy, all you need is patience and a safe investment that generates cash. By plowing the cash back into your initial investment, your money multiplies like bacteria. (I explained more about how a compounding works in this essay.)
If you're serious about building a fortune, you should never make an investment that doesn't generate a positive cash flow. Otherwise you can't compound.
My London friend did not invest for cash flow. She hoped capital appreciation would protect her. But when you use this strategy, you're usually playing the "greater fool" game... You're hoping another sucker will come along and buy your foolish investments at an even greater price.
My Detroit friend is receiving cash flow. Even if his property fell in price – which it wouldn't – he wouldn't care. He's compounding the income, putting his cash in other cash-producing investments. I guarantee you, in 20 years, he'll be a very rich man.
It all boils down to five words: Make sure you get paid.
Never let anyone use your money for free. In the stock market, this means earning a dividend, an interest rate, or an earnings yield. If a stock doesn't pay you a regular fee for investing your cash in it, you're making the mistake of my London friend. This is especially true in the current environment, where cash is precious.
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Take ExxonMobil, which I recently recommended to readers of my 12% Letter... ExxonMobil is the world's largest company and probably the world's safest. It generates an 11% free cash flow yield and pays a 2% dividend yield.
We enhanced this dividend by selling call options against our position. My readers are now making 18% a year from their position in one of the world's greatest blue chips. We'll hold this position for 10 years. Every $1,000 my readers invest will turn into $5,000...
Good investing,
Tom
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OUR INFLATION HOUND IS ON POINT
Like our emerging-market trade, our gold stock rebound trade is in good shape. This week, the Gold Miner ETF (GDX) reached its highest level since September.
It's been a heck of a trade so far. But there's a story developing here that's bigger than a simple rebound. As we mentioned in December, gold stocks are an excellent "inflation hound." Rising gold stocks are a signal all the fake money the government is shoveling out to imprudent borrowers, lenders, and carmakers is producing inflation.
We realize the inflation vs. deflation argument is a great cure for insomnia. A lot of smart investors believe we'll experience deflation (falling prices) in the next few years... and a lot of smart investors believe we'll experience inflation (rising prices) in the next few years.
You can decide who's right by watching the action in gold and gold stocks. If Washington's gargantuan spending plan gets off the ground and into full "boondoggle" mode, the GDX will hit $50... or even $100.
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China overtook the U.S. in monthly vehicle sales in January for the first time, figures from China's auto industry association showed Tuesday, largely because of a plunge in American car sales.
If China can outpace the United States in sales for all of 2009, it will become the world's largest vehicle market.
The China Association of Automobile Manufacturers said Tuesday that 735,000 vehicles were sold in China in January. That surpasses the 656,976 vehicles sold in the U.S. the same month.
China zoomed past Japan to become the world's second-biggest auto market in 2006. With 1.3 billion people, China's climb to the top position is viewed by most in the industry as inevitable.
– Associated Press
Twice as many U.S. companies as previously expected are cutting their travel spending this year in response to economic weakness and uncertainty.
The Association of Corporate Travel Executives says 71% of its member companies now plan to spend less on travel this year than in 2008. That's a huge and unprecedented shift in corporate travel managers' plans from just five months ago, says Susan Gurley, the association's executive director.
Never have corporate spending plans deteriorated this much, or this fast, she says.
"Not even after 9/11," she says."
– USA Today
Good news and bad news from FEMA: The bad news is, FEMA says that some of the disaster relief food they have may contain salmonella-tainted peanut butter.
But the good news is, since it's FEMA, it'll be years before it gets to anybody.
– Jay Leno
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