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I am retired and live off my portfolio income and real estate rental income. I follow a simple investment strategy: (1) spend less than I earn; (2) use the savings to add more dividend paying stocks and rental properties to my portfolio. By doing this for many years, I've been able to grow my... More
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  • Mr. M, Leveraged Speculation, And Irresponsible Dog Owners

    I've made a couple of friends in Lisbon so far, one of whom is the broker who found us this remarkable apartment we live in. I will call him "M" to preserve his privacy. M is a bundle of energy. Contrary to every single facet of Portuguese life that I have ever experienced, M is in a hurry. And for this, he gets results. Things got done yesterday, not tomorrow. He carries multiple cell phones, carries on two conversations at once, drives like a maniac, and barks out orders to lawyers and waiters like a drill sergeant. It's actually a bit much, to be honest, and so last time I went out with him, I picked a restaurant that is located in a stone basement below street level. Zero cell phone reception. He still bossed the waitress around - but that's nothing I can engineer around.

    To hear M speak of it, the Lisbon real estate market is in something like a feeding frenzy. Much of this is due to mainland Chinese investors fleeing the sinking ship of the Chinese capital market, securing Portuguese visas in exchange for purchasing Portuguese real estate. M is closing deals all over the place, so it seems, but I guess he really is doing enough to enable him to finally scraped together enough cash to purchase his own property. His first property in Lisbon. He is turning it into a vacation rental.

    Now, M is Portuguese but worked in America for years before returning to Portugal. He settled in the Algarve, but relocated to Lisbon many months ago to participate in the great real estate boom. For personal reasons involving an estate and some debts of one of his parents, he came to Lisbon with virtually no capital to his name. But M has been around long enough to know that ultimately, if you do it correctly, your money will pay you more than anyone else ever will. The key is, you need to have the money to begin with, which M did not.

    As we were eating in the basement surrounded by 2 meter thick stone walls, I shared with M what I see as the secret ingredient behind the success of almost every single wealthy client I ever had when I was practicing law (other than those who simply inherited it). (1) Use someone else's money (2) get someone else to pay it back for you; and (3) hire someone else to do all the work. This is the golden trident. Buying real estate, renting it out and hiring someone to do the cleaning and key drop offs is more or less a perfect business model to accomplish all the core aspects of the golden trident, which M understood perfectly from an intuitive standpoint. However, the visual aid gave him something important to work with, a back of the napkin simple business model that can, frankly, be replicated to an almost arbitrary degree.

    Which lead me to a question: when something good can be replicated an infinite number of times, it will end horribly. The only uncertainty is when it will end horribly, and how much more horrible than you imagined will it end? Accordingly, it becomes imperative to know when it is time to stop. I put the question to M and he figured that as long as he can rent his space out for 100% more than the interest rate on his bank loan, he's safe and can replicate the game of ring around the rosy like Agent Smith copying himself ad infinitum in the Matrix trilogy. I just had to ask, why 100%? Why not 50% or 200%? Unsurprisingly, M has no clue, and quite honestly neither do I.

    We all come up with these interesting little arbitrary rules. I mean, I own a mortgage on a rental property, and my thinking is that since I borrowed at 3.5%, and can take a tax deduction that renders my effective borrowing rate closer to 2.3%. Since inflation clocks in at around 2.3%, in my worldview, I feel like I got the bank's money for free. My intuition is that getting free money is a good business model. But the problem is that free money is one of those "too good to be true" things. When something is too good to be true it can only mean it either isn't good, it isn't true, or both. I'm just not smart enough to know which, or when the truth will finally erupt like an unstoppable volcano, taking me and who knows how many others with it.

    But then there is a third, gravity-defying possibility that "too good to be true" actually means that it really IS too good and it really IS true. I guess the only hope when you live at the base of Mt. Vesuvius is that if the truth is sufficiently inconvenient for a sufficiently large number of people (or a small number of sufficiently important people), the truth will actually NEVER erupt. It will simply be readjusted, reclassified, reconfigured, and then fall away. The rational among you will dismiss this third possibility as pure idiocy - my only defense is that complete blithering idiots and sages are virtual twins in ALL things besides hindsight.

    Which brings me back to M. When you start out with nothing to lose, any arbitrary rule is complete genius, compared to the alternative of just waiting for your employer to cut you checks for a fraction of what your time and efforts are actually worth. I congratulate M for recognizing his self worth and doing something to capitalize on it. For my part, I never really used the golden trident approach to any meaningful degree. I started out with a modest inheritance, hit a few huge investment homeruns out of pure dumb luck, scored some jobs I wasn't qualified for but got anyway because of my law school grades, saved most of my earnings and... most importantly by far... bought stock of companies at times when experts gave the ticker symbols looks that they'd typically reserve for fresh dog droppings smeared on the bottom of their Brooks Brothers' alligator wingtips. So you see, my business model is more of a dog-droppings scraper approach than a golden trident approach. And yet what's interesting is that it's brought me to Lisbon, just as M rode into Lisbon on his golden trident. And it's landed me (quite fittingly) in a medieval section of town where dog droppings frequently line the street.

    street

    Aug 19 6:13 PM | Link | Comment!
  • Portuguese Lessons Today

    My wife, son and I took our group Portuguese lessons today, and as always, learned a bit about the language, and a bit more about the culture. Our teacher told us something surprising, which is that the minimum wage in Portugal is 6,600 Euros A YEAR. A more moderate wage level - like the one our teacher earns - is about twice that amount. Even with the relatively low prices you find around Lisbon, there is almost no way I can imagine anyone being able to afford eating at a restaurant here on that sort of wage.

    And yet, when we do go out to eat, we hear plenty of people speaking Portuguese. Consequently, there is a disconnect in my mind between the earnings statistic we learned today, and what we see around us on the street and at the local watering holes around Lisbon. How are people buying a pair of loafers for 124 Euros when that amount equates to one week's salary? It just doesn't add up.

    I had the same cognitive frustration in America. I have never been able to find a way to square how a family of four living on $65,000 a year affords a BMW 3 series. In Puerto Rico, the statistics made far more sense to me. In Puerto Rico, the average wage is somewhat higher than in Portugal, but when you see that brand new Jaguar parked in front of a house made of cinder blocks and rusting corrugated steel for a roof, it makes PERFECT sense. Why? Simple. In Puerto Rico it seems like people will forego food and electricity in order to afford their luxury automobiles. It's a unique trade off, and oddly comprehensible when you see the reaction people get when they pull up their white Mercedes in Old San Juan. Big man on campus does not even come within a one mile circumferance of describing how a dude in a big cream colored Mercedes gets treated.

    In Lisbon, foregoing food doesn't seem to be the as far as I can tell. There's something else going on, some other way people are getting by, and I don't know any polite way to ask. Perhaps time and experience will shed light. I painted this photo and it reminds me a bit of whatever it is I think I might be learning about the local economy and how it impacts the cultural state of things here.

    (click to enlarge)Wall

    Meanwhile, I took time today to watch the global equities and commodities markets, and am now satisfied that China really seems to be going down the tubes. It had too. They were building entire Disney theme park inspired cities in the middle of the Chinese boondox, all on borrowed funds, where nobody will ever buy apartments (let alone live in them). They were hiring foreigners to just basically stand around and lend a patina of international respectability to local businesses. Of course it had to end badly, and now, it seems like that may finally be happening. The only thing that will surprise any of us in the end is just HOW badly and HOW quickly things will turn out, and I am betting it will be surprising just HOW surprisingly bad and quickly bad it will all be.

    The Chinese government probably doesn't understand that when Atlantis is sinking, thrashing at the ocean won't help or change things. I suspect a surprise devaluation of the currency will only scare away even more foreign investors, and bring in even MORE short sellers like a pack of ravenous hyenas. The traders won't stop pounding the stuffing out of the Chinese stock market until they find a better way to make money. That story could end another 70% lower from where we are today. The Chinese government will play straight into their hands, too. It must be fun to short sell anything with a twinge of Chinese to it.

    Alas, for any company that so much as has one pinky toe dipped into the Chinese economy, this spells vast amounts of pain on the floor of the NYSE. In fact, I would suspect that quite a few highly leveraged firms that do business in China are going to go bankrupt - I just have no idea which companies that might be. And since China is a gluttonous consumer of commodities, the price for everything from copper to oil is dropping and shows no sign of coming back again. That's made commodity producers, like Exxon, and shipping firms (many of whom are highly leveraged and do enormous amount of business shipping things like coal and iron ore to China), about as popular as the class doofus at a high school prom.

    So again, I broke my usual rule, and decided to reinvest some dividends today. I was tempted to purchase stock of Textainer, with it's PE ratio of 5 and dividend yield in the low double digits. Doofus number one. I just don't know enough about the business to fully grasp what it would take for the firm to go bankrupt. By contrast, I feel like I have a decent handle on what might cause Exxon to go the way of the dinosaur. It makes Exxon, with it's PE ratio of 13 and earnings yield of 4%, a relative bargain. I bought shares of Exxon, the second ugliest and least attractive of the class doofuses I could see as I sat up in the balcony here surveying the global equity markets.

    As always, though, I find that I really need to hold my nose whenever I invest money in wildly unpopular businesses that appear headed for Armageddon. In fact, a renegade black hole may be speeding through the galaxy straight towards Exxon mobile as we speak - I don't know any better than the stock market as a whole knows. I simply suspect that if the stock carries a black hole price tag, and all that happens is a killer asteroid hits and wipes out merely 90% of life on Earth, Exxon stock will turn out to have been a bargain. I put slightly better odds on the killer asteroid impact than I do on a renegade black hole consuming the planet. I have no scientific basis for my book making - I guess if Exxon goes bankrupt, or if a black hole consumes the planet, we'll all have bigger problems to worry about than stock prices.

    Nevertheless, after doing the distasteful deed, I find that I require a bit of a treat. So, tonight, it was this:

    (click to enlarge)Octo

    To my son, this looked like something you'd find at a typical fast food restaurant on the Klingon homeworld. In fact, it is a Portuguese delicacy: roast octopus. Simply delicious, and frankly, even more fun to eat when sitting across from a wide-eyed 10 year old who cannot believe you are actually putting it into your mouth. It cost a fraction of what I spent today on 40 shares of Exxon stock, but nevertheless equaled a day's pay at Portuguese minimum wage. The entire dinner for me and my family: three days salary. And everyone in the place was speaking Portuguese, so either the wage statistics are off, or there's some secret to how people get by that I haven't figured out. Maybe there's a secret to guessing how low Exxon stock will drop before the party is out - I don't know that secret, either.

    Tags: XOM
    Aug 19 4:32 PM | Link | 10 Comments
  • How To Not Catch A Trolley

    (click to enlarge)zTrol

    Today we did not buy mops. Or pot holders. We need some little glass food storage containers to keep leftovers in. We need them, but today we did not buy any. Nor did we hang around at Vodaphone trying to work out the fine points of our internet connection. We didn't camp out at EDP for 4 hours trying to get our electricity switched on. Instead, we made a simple choice to catch a trolley car from our neighborhood, and ride up to the castle Sao Jorge with a bag of stale bread that we've been keeping to feed to the wild peacocks.

    Castillo Sao Jorge is perched at a high point overlooking the harbor of Lisbon. The oldest parts of the castle date back to 700 BC, although much of the walls you see today date from 1100 AD, during the Moorish conquest of the Iberian peninsula. The beauty of the view up here is difficult to describe, but even a pacifist like myself can appreciate the singular military significance of this vantage point. The phalanx of cannons trained treacherously towards the harbor make it only too clear that whomever controls this castle owns the river, and with it, the gateway to the Atlantic ocean and all the priceless trade routs that lay beyond it. Is it possible that one single view can explain the ascendancy of an entire maritime imperialistic culture? Perhaps. Sir Martin Muniz certainly appreciated the strategic and, indeed, historic importance of this vantage point. Hundreds and hundreds of years ago, this brave knight hurled his body in between the castle gates as they were closing, using himself like a doorstop. His sacrifice kept the gates from closing, which enabled the castle to be taken, the city captured, and the first Portuguese king to commence a reign that would last centuries. A brave and selfless act, but completely sensible when you look down at an unimpeded 250 degree field of fire from a distance where return fire would land impotently many meters below your walls.

    (click to enlarge)view

    But our idea of catching a trolley to the castle was flawed. We figured that if we walked to a remote area where tourists never climb aboard or off a trolley, we'd be almost guaranteed a seat. 40 minutes later, as the fourth packed trolley car rattled past us without stopping (notwithstanding the fact that we were hopping about around the bus stop like psychotic bunnies brandishing our tickets), we figured out that our way of catching trolley cars is a failure. We ended up hoofing it.

    When we got up to the castle, though, we had a delightful surprise. Lisbon residents can enter any museum, attend any cultural event, or visit any historical site FREE OF CHARGE. I have a copy of the sales contract to our apartment on my cell phone - that was enough proof to get into the castle gratis, saving us a pleasing 17 Euros. 17 Euros that I later spent on a bottle of Ginja, which is a type of cherry liquor that is almost unheard of outside of Portugal. In fact, the only people I see drinking it are elderly Portuguese people with missing teeth - them, and newly transplanted immigrants with a taste for Portuguese history and tradition. One day, mixology experts (not to be mistaken with bartenders) in lower Manhattan will sell drinks flavored with Ginja for $45 apiece to young investment bankers. That day, however, is not today.

    We left the castle after feeding peacocks, and my son also rescued a baby dove that seemed to have fallen out of a tree. We did manage to catch a trolley back towards our neighborhood, and by the time we got home again, the clouds rolled in and the temperature fell to a lovely low 60s. We put on sweaters, ate dinner and then hung around in the gardens here at the convent where we live, and drank some of the Ginja. My wife believes it tastes modestly superior to cough syrup. My son took three sips, politely extolled the flavor, but decided it was too strong. I don't care what it tastes like. I'll eat or drink anything if you tell me it's a traditional comestible peculiar to any culture that I happen to find attractive.

    It was a good day, and tomorrow will be even better. That's when we start our language classes - just the three of us with one teacher, two hours a day, every day of the week until my son starts school. My wife and I will continue with Portuguese classes until we can carry on a basic conversation in Portuguese. Monday is also a day when I'm going to sit down with my son to review investments. I believe it is best to invest once a month every month, and neither more nor less often than that. That being said, I'm not doctrinaire about it, either. If I have only one rule, it's that I go where I see opportunity, and that my timing more or less precisely equals the timing at which I find opportunities. This is something a ten year old buy can understand as well. Today, MLPs are cheap. They may get cheaper yet, but a 10% yield from a company that produces stable cash flow for shareholders with a toll booth like business model - you don't wait around when you find a great deal like that. So, we'll invest last week's dividends into shares of KMI, KYN and KED.

    The convent is beautiful at night time, with the breeze blowing and the sparrows chasing one another raucously around the city. I decided to snap one more photo and use it as a model for another painting.

    (click to enlarge)night

    Aug 16 5:50 PM | Link | 1 Comment
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