Accredited Investor Talk

Table of content to all previous key articles

2012-01-19T05:46:00.000-08:00

Hello everyone.
Sorry for not keeping these articles coming. I have been busy raising a family and pursuing my other interest of composing original instrumental rock/jazz music on keyboards and drums. If interested, you can follow my fan page on facebook at www.facebook.com/olecrammusic. You can also follow me on YouTube with my channel www.youtube.com/olecrammusic or on Twitter www.twitter.com/olecrammusic. Having said that, I wanted to provide a summary here that provides links to all my past key articles for easy, quick reference. Thank you all for being loyal readers. My best wishes to you.
Ole Cram

This is a table of contents for all previous key articles. Provided for quick access.

Understanding accredited investors:
Understanding accredited investors
http://accreditedinvestortalk.blogspot.com/2008/03/undestanding-accredited-investors.html

What differentiates a successful accredited investor? What makes them successful?
http://accreditedinvestortalk.blogspot.com/2008/08/part-1-what-differentiates-successful.html

You may be an accredited investor and not know it
http://accreditedinvestortalk.blogspot.com/2008/03/you-may-be-accredited-investor-and-not.html

General articles:
Being laid off? Think about becoming an entrepreneur
http://accreditedinvestortalk.blogspot.com/2009/03/being-laid-off-think-about-becoming.html

The cost of borrowing from your tax deferred account
http://accreditedinvestortalk.blogspot.com/2009/02/cost-of-borrowing-from-your-tax.html

Understanding inflation and how it affects you
http://accreditedinvestortalk.blogspot.com/2009/01/part-1-understanding-inflation-and-how.html

Understanding debt and mortgage related:
Understanding debt (what it really costs you and how to get out of it)
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-credit-card-trap.html

Should you pay off your mortgage early?
http://accreditedinvestortalk.blogspot.com/2009/04/should-you-pay-off-your-home-mortgage.html

Fallacy of buying a home for the tax deduction
http://accreditedinvestortalk.blogspot.com/2008/09/fallacy-of-buying-home-for-tax.html

Investing in general:
Why do you need to earn a higher rate than the percentage of investment loss?
http://accreditedinvestortalk.blogspot.com/2009/03/why-do-you-need-to-earn-higher-rate.html

Don't let fear drive your investment decisions
http://accreditedinvestortalk.blogspot.com/2009/02/dont-let-fear-drive-your-investment.html

Understanding compounding interest
http://accreditedinvestortalk.blogspot.com/2008/12/part-1-compounding-interest.html

Psychology of trading - how pros count on emotional amateurs
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-strategies-for.html

Investing in stocks/options:
Stocks - Understanding the use of margins
http://accreditedinvestortalk.blogspot.com/2008/11/stocks-understanding-use-of-margins.html

Understanding stocks - how businesses generate funds from initial sale of stock
http://accreditedinvestortalk.blogspot.com/2008/11/understanding-stocks-atm-for-business.html

Understanding options
http://accreditedinvestortalk.blogspot.com/2008/10/options-understanding-puts-making-money.html

Stocks: Understanding stock shorting - making money when a stock price goes down
http://accreditedinvestortalk.blogspot.com/2008/09/stocks-understanding-stock-shorting.html

Investing in oil and gas drilling ventures:
Almost everything you need to know about oil and gas drilling investments
http://accreditedinvestortalk.blogspot.com/2008/09/almost-everything-you-need-to-know.html

An example of a combined Oil and Gas and Real Estate investment
http://accreditedinvestortalk.blogspot.com/2008/09/combined-oil-gas-and-real-estate.html

Thank you again for following my articles. I hope they have been of some benefit to you with your financial goals.Ole Cram

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This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3: Should you pay off your home mortgage early?

2009-04-26T01:18:00.000-07:00

Overview
This is the third in a series of articles on whether you should pay off your home loan early. In the first article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In the second article, I provided examples of paying cash for your home in only about 10 years with no loan. In this article, I will continue the previous article buy providing an alternative of keeping your funds invested longer before taking out cash to buy your home. A future article will continue this series providing various scenarios for paying extra on your existing mortgage to accelerate payoff of your mortgage debt.

Recap of using a $100,000 mortgage in these articles
For simplicity, I use a $100,000 mortgage in all of these articles. That way you can simply multiply all numbers in the articles by the multiplier that matches your home mortgage. If you have a $200,000 mortgage, then use a multiple of 2 (your $200,000 mortgage divided by $100,000 mortgage of my articles gives a multiple of 2). If you have a $500,000 mortgage, then the multiple would be 5, etc. Just divide your mortgage by $100,000 to get the multiple to use.

Choosing to buy your home with cash
Recall in the previous article that I showed how you could pay cash for your home after only about 10 years of investing. The benefit of doing so is that you never need to have a mortgage and your reward for waiting 10 years to buy the home is a home free of debt. From that point forward, you can continue investing to create wealth for retirement or other plans you may have.

However, using you full investment funds to pay cash for a home would lose the momentum of compounding interest that kicks in strongly at about that same time. In the previous article, I showed how investing instead of making a mortgage payment for 30 years would provide a balance around $500,000 to well over $1,000,000 that would be lost if all funds were withdrawn to buy the $100,000 house. Therefore, another alternative would be to wait until your investments reached a $200,000 balance before removing $100,000 to pay cash for the home. This way the other $100,000 balance would be large enough to continue compounding into a significant sum after 30 years. In fact, waiting for your investments to grow from $100,000 to $200,000 will not take near as long as the first $100,000 did. In the last article, I showed the time it took to reach $100,000 for the different investing scenarios. Here I will repeat those tables and add another line showing how long it will take to reach $200,000 under those same investing scenarios.

When would you have $200,000 to buy the house with $100,000 cash and keep $100,000 to compound?
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	13 years	11 years	11 years	10 years
$200k	21 years	18 years	16 years	15 years

If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	12 years	11 years	10 years	9 years
$200k	19 years	17 years	15 years	14 years

If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	11 years	10 years	9 years	9 years
$200k	18 years	16 years	14 years	13 years

If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	10 years	9 years	9 years	8 years
$200k	17 years	15 years	13 years	12 years

What would your 30 year investment balance be under these scenarios?
Here I will show three different 30 year ending balances for each monthly investment scenario. The $0 line assumes you never remove funds from the account to show what the ending balance would have been. The $100k line assumes $100,000 is removed immediately when the funds reach that amount and then the monthly investment is continued through the 30 years. The $200k line assumes $100,000 is removed only when the account balance reaches $200,000 and then the remaining $100,000 is compounded along with the addition of continued monthly investments.

Investing $536.82 per month (a 5% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	372,580	539,244	800,055	1,213,475
-$100k	168,743	227,454	313,878	436,837
-$200k	224,977	328,990	486,482	733,543

If $599.55 per month (a 6% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	416,117	602,257	893,545	1,355,276
-$100k	203,269	274,522	377,408	525,326
-$200k	259,403	376,798	556,195	833,816

If $665.30 per month (a 7% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	461,751	668,304	991,536	1,503,903
-$100k	241,701	325,522	447,221	624,312
-$200k	296,467	427,742	628,606	942,004

If $733.76 per month (a 8% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	509,266	737,073	1,093,566	1,658,656
-$100k	281,769	380,338	523,336	734,159
-$200k	336,099	482,944	705,701	1,053,182

Opportunity cost of both options
Opportunity cost is the difference between what would have been earned by investing without withdrawing funds to buy a house and either the $100k balance or $200k balance option ending balances shown above. For example, in the $599.55 monthly investment table above you see at 8% you would have had an account balance of $893,545. However, if you chose to withdraw $100,000 to buy the house immediately when $100,000 was in the account, your 30 year ending balance would only be $377,408. The difference of $516,137 ($893,545 - $377,408) is the lost opportunity, funds you lost by withdrawing the $100,000 immediately. You can think of this as the $100,000 house costing you $616,137 over 30 years since you paid $100,000 and lost another $516,137 in opportunity cost.

If you chose to wait until the account had $200,000 to withdraw $100,000 for purchase of the house, then you 30 year ending balance would be $556,195. The difference of $337,350 ($893,545 - $556,195) is a much less opportunity loss. However, the house still cost you $437,350 or your $100,000 paid and the $337,350 opportunity cost.

Both of these total costs of your house are much less than taking out a 30 year mortgage with the associated monthly payment where you end up paying several times your home price in interest. You also lose out on the monthly investment and associated compounded balance had you invested the monthly mortgage payment over 30 years instead, as seen in the examples above. If you think about it, purchasing a $100,000 home with a mortgage could cost you well over $1,000,000 and even closer to $2,000,000 with the combined opportunity loss from no investment and the loss from paid interest over 30 years to the bank. Most sophisticated accredited investors understand this fact and wait for this reason to pay cash for their home. They would much rather pur their money to work making more money than give it to a bank in interest payments.

Summary
You can see how having patience to put off purchases and being a debt-free investor can help you create large wealth over your lifetime. I plan to continue this series on paying down mortgages so stay tuned.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.

- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):

Part 2: Should you pay off your home mortgage early?

2009-04-11T02:02:00.000-07:00

Continuation from the last article
This is the second in a series of articles on whether you should pay off your home loan early. In the last article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In this article, I will cover specific examples to help illustrate some of these points. However, as I said before, you should consult a financial advisor who knows your situation before making a choice on either paying off your mortgage sooner or not.

The total 30 year cost of your mortgage
Assume you recently refinanced or bought a home with a 30 year fixed payment mortgage of $100,000. I used $100,000 for simplicity since the results shown are per $100,000 loan. If you have a $200,000 mortgage, simply multiply the numbers by two. If you have a $500,000 mortgage, simply multiply by five and so forth depending on what your mortgage amount is as compared to $100,000.

The total amount of money you give the lender over 30 years will be shown below at different mortgage rates. The monthly payment against the loan for each interest rate is also provided for reference. This payment does not include property taxes, insurance, etc. that may be included in the total monthly payment for a house beyond just paying against the mortgage debt.

At 5%, the monthly mortgage payment is $536.82
At 6%, the monthly mortgage payment is $599.55
At 7%, the monthly mortgage payment is $665.30
At 8%, the monthly mortgage payment is $733.76

The total amount paid over 30 years at different interest rates for a $100,000 mortgage are:

Year	5%	6%	7%	8%
30	193,254	215,835	239,505	264,150

What would you accumulate by investing the monthly payments instead?
Consider what would happen if you did not get a mortage and took what would have been paid monthly toward accumulating wealth through investments.

If $536.82 per month were invested instead of used to pay a 5% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	372,580	539,244	800,055	1,213,475

If $599.55 per month were invested instead of used to pay a 6% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	416,117	602,260	893,545	1,355,276

If $665.30 per month were invested instead of used to pay a 7% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	461,751	668,304	991,536	1,503,903

If $733.76 per month were invested instead of used to pay a 8% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	509,266	737,073	1,093,566	1,658,656

How can you have a much larger return from investing than if paying a mortgage for 30 years?
When first looking at the numbers above, it makes no sense that a 4% yearly return on your investment can grow a much larger investment balance than a 5% mortgage would cost over 30 years. In other words, how can a lower rate of return on your investment grow much faster than a higher rate mortgage over 30 years?

Keep in mind that the starting point differs for both. For a mortgage, it starts with a balance due of $100,000. Each month, only a very small amount of you payment goes toward reducing this balance with the bulk of the payment going toward interest. However, when investing, your entire monthly payment goes toward accumulating more money the next month. You also get the huge benefit of interest compounding as well. Each month interest is paid on the full payment you put in the previous month and on the total balance of the account to date. So, as your balance grows, so does the amount of interest that is paid to you each month. This is the power of compounding growth.

I wrote a four part series that goes into detail on how compounding is a key tool, if not the most important tool, most sophisticated and accredited investors use as part of the wealth building strategy.

When would you have $100,000 to buy the house with cash instead of with a mortgage?
Consider the fact that consistently investing what would have been paid on a mortgage into investments would allow you to accumulate a balance of $100,000 very soon. You could then buy the house with cash and still be able to continue investing each month. Here is when you would accumulate $100,000 balance.

If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 by:

4%	6%	8%	10%
13 years	11 years	11 years	10 years

If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 by:

4%	6%	8%	10%
12 years	11 years	10 years	9 years

If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 by:

4%	6%	8%	10%
11 years	10 years	9 years	9 years

If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 by:

4%	6%	8%	10%
10 years	9 years	9 years	8 years

Opportunity cost of having a mortgage instead of investing the payments
Opportunity cost is the difference between what would have been earned by investing instead of paying a mortgage. To see what the opportunity cost is over the 30 year period, simply look at the table that shows the total mortgage paid at the different interest rates against what the associated monthly mortgage payment would have grown to had it been invested at a specific rate for 30 years.

For example, consider the 5% mortgage which had a monthly payment of $536.82. The total you would pay for the mortgage is $193,254. However, you could have invested that monthly payment instead for 30 years and earned from $372,580 at a 4% yearly return to $1,213,475 at a 10% yearly return. The 30 year opportunity cost the difference which ranges from $372,580 - $193,254 = $179,326 to $1,213,475 - $193,254 = $1,020,221. The range shows the significant loss of earnings that would have been realized if the money had been invested instead of spent on the mortgage. Continue this for any of the interest rates and associated monthly payment shown above over the 30 year period. The opportunity loss ranges are even more dramatic.

Consider buying a house with cash from investments
As you read earlier, your investment account could have accumulated a total of $100,000 on average in about 10 years. If you had saved first to buy the house with cash, then from that point forward you could continue with the same saving plan to again build up your investment account for other purchases or investments. This opens doors for you to continue building your wealth without debt. You will have more options on how and when you want to retire with a paid off house and a growing investment portfolio that would grow to where the yearly returns eventually pay your day-to-day expenses in a short time.

Examples above don’t really consider rent verses owning a home
The above examples don’t take into consideration that you need to pay for some type of housing during the 30 year period of investing if you don’t buy a home with a mortgage. In that case, you would be paying a comparable amount on rent so it could not be invested. However, I wanted to keep it simple and just focus on the opportunity cost of investing verses having a mortgage. Ideally you would have started an investment plan early in your career by renting a cheap place while investing significant amounts monthly into your investment account to where a home could be bought with cash in a few short years.

The above example also do not consider the added benefit of tax deductions on the mortgage interest paid yearly, the capital gains that would be paid selling your investment to pay cash for the house, and other factors for the sake of simplicity. Again, I wanted to keep the focus on the benefits of investing verses getting a loan.

Summary
I don’t want to say that it is best to always pay cash for a home instead of getting a mortgage. I strongly advise working with a qualified financial planner early in your career to look at your long term financial goals. Then divide those goals into a workable plan of action to know what you need to do periodically over time toward reaching those long term goals. However, the information above does show that for some people, building wealth without debt can definitely have significant advantages, especially in today’s environment where credit is bringing down economies around the world. I wrote another series of articles in the past that tells how to get debt free that might also be of interest to you.

I hope these articles help you consider the bigger picture when evaluating a plan of action. Always play out the numbers over time. See what you will gain and what you will lose. Understand why the numbers are what they are. Learn how to use those differences to your advantage.

Next article in the series
The next article continues this series continues this discussion providing several scenarios for payying cash to buy your home. Other future articles in this series will explore scenarios for paying extra each month on your mortgage for faster payoff.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):

Should you pay off your home mortgage early?

2009-04-01T01:52:00.000-07:00

Overview
This is a question that many home owners ask themselves – “Should I apply additional funds toward paying off my home mortgage early or invest this money elsewhere?” There is no universal answer. You should consult a financial advisor who knows your situation before making this choice. However, my intent is to help you consider various factors involved with this decision. This topic will be covered over more than one article in order to provide the depth needed.

Do you have other debts?
If you have other debts, then it may make better sense to apply the extra funds toward paying those debts off first. I wrote a three part series that give insights into what credit card debts really cost you and strategies to remove all of your debts. You can read the first article in the series by clicking here.

Consider the opportunity cost of paying your mortgage off sooner
The opportunity cost of money simply means the difference between the rate off return you could earn by investing in something else verses using the funds to pay down your mortgage. Since money used to pay down your mortgage reduces the principle balance of the loan, you are saving the mortgage interest that would have been paid on the extra amount applied toward paying down the loan balance. In other words, if you have a 6% annual interest rate on your mortgage, then applying an extra $100 toward your loan payment would save paying 6% against that $100 or $6 over a year. Now assume you could have invested that $100 in a fund that paid 8% annually, then you could have earned 8% of $100 or $8 over a year. Since you could have earned $8 and only saved $6 by paying down your mortgage, the opportunity loss is the difference between the two or $2 annually ($8 you could have earned - $6 you saved on mortgage interest).

Consider the mortgage interest deduction
I wrote an article in the past about not buying a house simply for the mortgage deduction (click here to read the article). Bottom line is that you only deduct a portion of the total amount paid yearly on your mortgage according to your state and federal tax bracket. In the article I show how someone in a combined state and federal tax bracket of 40% and who paid $25,000 in mortgage interest would receive a $10,000 benefit ($25,000 x 40%). However, the difference of $15,000 ($25,000 paid on interest - the $10,000 benefit) was paid to the bank with no benefit to you. The lost opportunity cost must be considered for what the $15,000 could have received had it been invested in an investment vehicle that paid a higher rate of return than the interest rate on the mortgage. This becomes an even bigger issue for people with a lower combined state and federal tax bracket.

Assume someone has a combined state and federal tax rate of 30%. The benefit then would only be 30% of $25,000 mortgage interest paid, or a $7,500 benefit ($25,000 x 30%). The remaining $17,500 paid to interest ($25,000 - $7,500) must be considered for the associated opportunity loss.

Consider the benefit of reinvesting the tax benefit received
If you have accurately projected your tax exemptions to reduce taxes paid through the year by the $10,000 or $7,500 benefit (based on your tax rate), then the money saved on paying taxes could be invested for an added benefit.

For simplicity, lets just talk about someone in the 40% combined tax bracket that receives the $10,000 benefit yearly. This person increased his or her tax exemptions to reduce the taxes paid from income throughout the year to equal $10,000. If the person receives a monthly paycheck, then the take home pay is increased by $833.33 each month ($10,000 divided by 12 months). This person can now invest $833.33 each month in some investment and receive additional benefit from the associated return.

A secret of the sophisticated accredited investors
Think about this…You paid $25,000 total in mortgage interest over the year and received $10,000 back as a result of tax deductions. In this case, you paid a total of $2,083.33 each month on interest ($25,000 divided by 12 months) of which $833.33 was returned each month to you for investing. Sophisticated investors recognize this double use of the money as part of their investment strategy. However, they don’t do this just with their mortgage, but when structuring all of their investments. Look for ways of getting multiple benefits from the same dollar.

Next article
The next article will continue this discussion. Stay tuned.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):

Being laid off? Think about becoming an entrepreneur

2009-03-17T01:17:00.000-07:00

Overview
With millions of talented people being laid off during the current financial crisis, there is opportunity to turn tragedy into triumph by becoming an entrepreneur. I would recommend first trying hard to get another comparable job so the income stream is there to support day-to-day expenses. However, if you are not able to get a job, then perhaps entrepreneurialism might be your path forward. Even if you do have income from a job, it may make sense to start a business on your own while you have the income stream. Over time, your business may grow to take over as your primary and ongoing income source providing you with many more options with your career than currently might be possible.

What do you need to consider when going into business?
There are a lot of things you need to consider. However, don’t get so wrapped up in worrying about all of the minute details that you procrastinate actually getting started. The first thing I recommend is nailing down what business to start. Do this by creating two columns on a blank piece of paper labeled strengths and weaknesses. Write down all of the strengths and strong skills that you have personally, in business, relationships, etc. Then write down all of your main weaknesses in the same categories. Really study the list. Look for ways of overcoming your weaknesses to turn them into strengths. Perhaps you need to get some education that will build your abilities in certain weak areas. Perhaps one of your strengths could be paired with the weakness to help overcome it. Personally, I like to face my weaknesses and fears head on. I like to force myself to learn and grow in those areas to turn them into future strengths. That is my own challenge so I’m always growing and not allowing weaknesses to keep me stagnant. Continually overcoming weaknesses will give you knowledge and skills needed to face and overcome barriers that will come while growing a business.

Find a mentor/possible partner
Find someone that is strong in the area(s) you are weak in that can mentor and guide your development. This may actually be a way of finding someone else who would be a good fit for you in starting the business. Many times people who are opposites have made the best business pair since one was strong in an area the other was weak. They are able to recognize the strengths and weaknesses of each other to capitalize on who would be best suited for a particular task/client/etc. while building the business.

Ego can be your friend and enemy
We all know people who have very strong ego. Many times these people make very strong managers that take action and get things done. It is fine when ego is used constructively to drive action and get results. However, when ego is used to put others down and gets in the way, then it is a huge barrier to ever getting long term success. You must recognize what level of ego you and your partner(s) have, understand if it is constructive or destructive, take corrective action as needed to reshape the ego to be a positive driving force that motivates others to feel passionate about succeeding together.

Also, never be so proud that you don’t listen to and use the advice and help of others. Always known your weaknesses and recognize when someone can help, then accept that help. Life is too short to let pride get in the way of success.

You need a team to create long term success
Going completely on your own is a very hard way to start a business. Start meeting people as you take training classes, work with clients, go to church or other gatherings, etc. Get to know who has strengths that could be tapped to help you in business. Find a way of bartering for their help – perhaps you will provide a product or service to them in exchange for them doing the same for you.

The Small Business Administration and SCORE are invaluable resources
Don’t forget that the Small Business Administration (SBA) is an invaluable source of education and counseling to help you succeed. They also have a separate arm called SCORE, which is comprised of retired executives who now volunteer their time to consult with business owners and many other resources to help entrepreneurs succeed. In fact, the SCORE website www.score.org has set up a feature for you to select consultants for free geographically and by industry at http://www.score.org/ask_score.html. They also have online classes on various subjects. Anyway, SCORE is an amazing free resource that can help tremendously with starting, running, and growing a business.

Consider the finances required
Once you have a business, create a business plan that includes timelines of accomplishments and any project income and expenses at each milestone on the timeline. Always know where your finances stand. Know when you need to make cuts to get by enough to continue moving forward. Also recognize when the business is not going to succeed to cut your losses early and try another business. Again, don’t let pride keep you from moving on. However, always learn from everything you do to incorporate your knowledge into the next venture.

Don’t take things personally
Don’t take rejection personally. Don’t take failure personally. Recognize that these things always happen and are a requirement for success. Until you have failed or experienced rejection, you don’t really learn how to overcome them and move forward. Personally, I look forward to failure and rejection since those are my most challenging times that require me to be very resourceful in finding solutions to overcome. I feel the most personal growth and satisfaction after overcoming my hardest challenges. Welcome them as opportunities to grow and become an overcomer.

Share your success
Treat your employees well. Provide unexpected small bonuses such as a gift certificate to a nice restaurant or store when someone does something nice. Write a hand written note that says you are proud of their accomplishment on a task. Get a simple plaque made that they can put on their desk. Bring them into your office to tell them how much you appreciate their work on that task.

Consider doing similar things for people outside of your company who help you and your business. Give your supplier, banker, customer, etc. a nice surprise. Let them know they are appreciated and valued.

Doing these things will go a long way toward building fierce loyalty. People will remember you and your company will be their first choice when needed.

Understand you are in the business of people, not products or services
Remember, you are in the people business, not a business of selling products or services. Products or services won’t likely be bought until you have first built the relationship with a decision maker/customer. Think about yourself – would you rather buy something from a friend or complete stranger? Take that even further – would you be willing to pay more buying from a trusted friend or paying less from a complete stranger? In that case, you can see there is a financial value placed on the level of trust and friendship you can build with the customer, and with your employees.

Be a lifelong student of business
Take every opportunity to continue learning. As mentioned before, take classes and read books about areas you are weak in. Continue building on your strengths through ongoing education. Talk with successful people who can mentor you. Always be moving forward with your personal development and knowledge of every aspect of business.

Summary
As you know, there are many books, articles, etc. on starting a business. I could not possibly include everything that is needed to start a business in this article. My hope here was to at least get those who are currently being threatened by the negative job market to consider going into business for themselves. Doing so could be a way of creating job security in the long run. Sure there are up and down periods in business, but those events can be anticipated and planned for through proper investments that ensure continued survival of the business. If you do take the entrepreneurial plunge, I wish you the very best and say it will be hard, but very rewarding in the end. Expect many challenges, but make those opportunities to develop character and strengths as an overcomer.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
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Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

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This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

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Why do you need to earn a higher rate than the percentage of investment loss?

2009-03-09T01:05:00.000-07:00

Overview
One thing that confuses many investors is the fact that any percentage loss must be recovered by earning a higher rate of return than the percentage of loss (will illustrate this with examples later in this article). Accredited investors are aware of this difference and understand the relationship between percentage loss and percentage required to gain back the loss. This article will provide the math behind the relationship in a easy to read format. I’ll first look at the mathematical equation used to calculate the percentage loss of an investment. Then I’ll look at the mathematical equation to calculate the percentage gain required to make up a loss. By the end, you will be able to understand what percentage of a gain is required to make up for any loss in your investment. This knowledge is required to accurately manage your investments while implementing your long term investment plan.

We now consider the equation for calculating the percentage of loss.

Equation to calculate the percentage of loss:
Percentage loss = (Initial value – current value)/initial value

This is derived by thinking about this in the following way…
If you lose money, the loss is based on the initial value of the investment. You consider what the value was initially and what it is currently. The difference between the two is the amount of loss. That is where the equation shows (Initial value – current value). Then to get the percentage of loss, you need to divide this amount of loss by the initial value of the investment. The idea is the find out how big this loss is when compared to the initial value of the investment. That is where you see this difference between the initial and current value being divided by the initial value in the equation. The result of this division tells you what percent of the initial investment was lost. Now consider an example to help understand the equation better.

An example of a 25% loss:
For this example, lets assume Joe had a retirement account with $100,000. Now, some time later, the account is worth $75,000. I will walk through the percentage of loss equation to calculate the percentage of loss.

Percentage loss = ($100,000 - $75,000)/$100,000
Percentage loss = $25,000/$100,000
Percentage loss = 25%

So we calculate that a drop from $100,000 to $75,000 is a 25% loss.

You can’t get back your investment by earning the same percent that was lost
You may be tempted to think a 25% gain is needed to get back to $100,000. However, the problem is Joe now only has $75,000 to start with. The amount of gain required is against $75,000, not against $100,000. The 25% loss was against the initial $100,000 account value and any percentage gain must now be against the remaining $75,000. Before calculating the percentage gain required to get back to the initial $100,000, consider the associate equation…

Equation to calculate the percentage of gain required to make up a loss:
Percentage gain required = (Initial value – current value)/current value

Did you notice the very slight difference in the equation? The only change was dividing the loss by the current value of the investment instead of dividing by the initial value. This is required since you are starting with the current value that remains after experiencing the loss. You need to know what percent of additional funds are required against the current value to get back to the initial value. Now use the equation against the above example to find out what gain is required to make up for the 25% loss.

Calculating the percentage gain required to make up for the 25% loss:
Using the above equation for calculating the percentage gain required,

Percentage gain required = ($100,000 - $75,000)/$75,000
Percentage gain required = $25,000/$75,000
Percentage gain required = 33.3%

So, we need to earn 33.3% against the remaining $75,000 in order to get back to the initial $100,000. Now consider additional examples.

Example of a 50% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $50,000. Calculate the percentage loss first…

Percentage loss = ($100,000 - $50,000)/$100,000
Percentage loss = $50,000/$100,000
Percentage loss = 50%

Since the current value of the account is $50,000, what percentage gain is required to get back to the initial $100,000 value?

Percentage gain required = ($100,000 - $50,000)/$50,000
Percentage gain required = $50,000/$50,000
Percentage gain required = 100%

Joe now needs to earn 100% against his remaining $50,000 value to get back to the initial $100,000 value of the account.

Example of a 75% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $25,000. Calculate the percentage loss first…

Percentage loss = ($100,000 - $25,000)/$100,000
Percentage loss = $75,000/$100,000
Percentage loss = 75%

Since the current value of the account is $25,000, what percentage gain is required to get back to the initial $100,000 value?

Percentage gain required = ($100,000 - $25,000)/$50,000
Percentage gain required = $75,000/$25,000
Percentage gain required = 300%

Joe now needs to earn 300% against his remaining $25,000 value to get back to the initial $100,000 value of the account.

Recap of above examples:
If Joe has a 25% loss, he needs to invest in something that will provide a 33% gain against his remaining funds to get back the loss.

If Joe has a 50% loss, he will need a 100% gain against the remaining funds.

If Joe has a 75% loss, he will need a very high 300% gain.

Summary
As you can see, there is a very large difference between the percentage loss of an investment and the required percentage gain to get back to that initial value. The higher the loss, the dramatically higher the required gain will be to make up for the loss. As the amount of loss increases, the required gain to make up for the loss increases much more since the remaining funds get smaller to use for making back the much larger loss. Again, seasoned investors, such as active accredited investors, understand this relationship between percent loss and percent gain required to make up the loss. Understanding the relationship will allow you to consider which investment strategy to consider as you move forward toward your long term financial goal.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

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This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):

Don’t let fear drive your investment decisions

2009-02-22T23:37:00.000-08:00

Overview
Most investors know investment prices move up and down over time. However, many investors panic when things get tough and make investment decisions that are opposite of what should be done. With the current worldwide dramatic fall in prices of so many investments (stocks, real estate, etc.), emotions can be even more dramatic resulting in many people selling (and buying) at the wrong time.

Seasoned investors count on fear driven selling
In a previous post, I wrote how professional investors count on panic selling by unseasoned investors to determine good buy points (click here to read the article). Usually during very heavy sell volume days when prices drop dramatically for a stock, that is the point that the price starts to turn around as most sellers finish selling their shares. At this point the professional investors know they can get a rock bottom price when buying into the investment. However, in this market, there is no assurance the low price won’t get lower in the near future if these buyers also begin to sell through even lower prices.

Remember a loss is not real until you sell the investment
It is scary holding one or more investments where the price has dropped 40%, 50%, or more just in the past few months. If you have continued to hold your dropping investment through this downturn - whether it be stocks, real estate, or other investment – remember you have a paper loss until the investment is actually sold. As an example, if you have a rental property that was previously worth $250,000 and is currently worth only $150,000, it can be very tempting to sell the property for fear of even lower value in the future. If you don’t sell, then the perceived loss of $100,000 ($250,000 past value - $150,000 current value) is not realized. Only if you actually sell the property will there be a $100,000 loss in value.

Commenting on a recent article on CNN
This past week money.cnn.com ran a story on a young couple who have done a good job saving and investing money. The story can be found at: http://money.cnn.com/2009/02/18/retirement/makeover_savers.moneymag/index.htm. Financial advisors provided thoughts on whether the couple should make changes in their saving/investing strategy based on losses experienced with the recent downturn in stock and real estate values. One of the recommendations was to sell the rental property this couple has that has a $400 per month negative cash flow over rent. The sales recommendation is not necessarily based on fear, but was suggested to free up the $400 per month for use in other after tax investment accounts.

That recommendation really bothered me since this couple is in their late 30s and don’t plan retirement for 20 more years. In my mind, they have many years to wait for the real estate value to recoup the $100,000 drop, while collecting rent all the while to pay down the associated mortgage. After 20 years, the mortgage will be largely paid off and the monthly income from raising rent over those years should have erased the $400 negative. Since the property was bought in 2006, they would only have seven years left on the mortgage. Even if they do retire in 20 years as planned, holding onto the property seven more years to pay off the mortgage would provide a nice rental income to use for whatever purpose they needed during the rest of their lives. Hopefully, the value has grown over all of those years as well to increase the value of their estate as an added benefit for the heirs.

Assume they sold the property out of fear
For purposes of discussion, let’s assume this couple was getting very nervous about the perceived $100,000 drop in property value and sold out of fear of losing even more. In that case, they would miss out on the scenario I provided above where eventually the property could be debt free with a large cash flow going into the couple’s future retirement needs. If the couple had a mortgage on the property higher than the current $150,000 value, then the couple would owe taxes to the IRS on the difference between what the couple owes on the property and what the mortgage lender was able to get paid back from the sale. The IRS treats this difference as income to the owner. This all assumes new tax laws are not implemented as part of the stimulus package. Check with your tax advisor if you are in a similar situation before taking any action.

In this case, fear would prevent the couple from enjoying the benefits of owning the rental property as I outlined earlier. The couple could potentially owe a large tax to the IRS on the portion of the mortgage loan that was not paid off from the property sale. They would add shame and a sense of failure to their self image, likely keeping them from considering other potentially good investments in real estate for fear of losing large amounts of money again. The loss of self image and lack of confidence in their ability to chose investments could lead them toward investing only in safe assets like CDs or even savings accounts. Those investments will lose money over time as inflation eats away what money they do have saved. All of this because the couple sold, rather than rationally thought through that there isn’t really any loss unless the property is sold. Even though you should mainly focus on buying rental properties that have a positive cash flow from the beginning, in this case, the loss is only $400 per month against their combined income of $250,000 per year. That, to me, makes no sense to sell with the added costs that could result from selling the property vice the monthly loss of $400.

These consequences of fear selling apply to other investments as well
Personally, I sell stocks when I first see technical indicators showing a down term coming. However, if you have already ridden down the price drop without selling and are scared of losing more, sit back and take a breath. Look at the reasons you bought the stock – hopefully rising market share, increased net cash flow, etc. If those same indicators are still valid, then think twice about selling into a significant loss if the stock should have a good chance of making up the loss over the next 5 or 10 years. You need to consider each stock on its own merits. Of course, there are many stocks where the fundamentals have changed dramatically for the worse where they no longer have any prospects of increasing income or market share, etc. In that case, you may need to sell now to prevent even further loss. All I ask is that you don’t sell out of fear. Look at all the information you can get on the company. Look at how much debt they have on the books and how likely they are to pay off those debts to remain profitable. Look at the industry the company is in. Is the industry one that is being hit and continues to be hit seriously? Make your decision based on facts, not on emotions of the moment.

Summary
Don’t play into the hands of seasoned investors who count on the inexperienced investor selling at the worst possible time, handing these seasoned investors potentially great bargains. Many of these seasoned investors make this part of their investment strategy to wait for the panic sale periods in the market before making purchases. Imagine if you were patient enough to wait for these periods of uncertainly to build a portfolio of investments at very good prices. Now imagine how much money you would have when the markets then recover and grow beyond where they were before the market fell. You would have bargain priced investments with strong growth over time. It is like looking for fire sales at the store before making your purchases. It builds your self esteem and reinforces your confidence as an investor. Learn to control your emotions and invest based on facts to increase your long term prospects for success as an investor.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below:

The cost of borrowing from your tax deferred account

2009-02-17T01:01:00.000-08:00

Overview
If you have a sizeable balance in your tax deferred 401, 403, IRA, Keogh, or other tax free account, it can be tempting to borrow against the account for hardship, medical, education, or the purchase of a home. There are times when a loan makes good financial sense. However, most of the time it is best to leave your funds in the account to take advantage of the tax free compounding (click here to read a previous series that covers compounding in detail). This article will go over the “cost” involved with borrowing against one of these accounts.

Revisiting the effect of compounding
If you read the previous series on compounding interest, you understand the enormous benefit compounding brings to multiplying your final account balance after many years. Most advisors recommend you invest in a combination of stocks and bonds to spread the risk and still participate in the higher historical return stocks provide.

Costs of borrowing funds
When you borrow from your account, the borrowed funds are usually paid back at the lowest rate – usually the bond rate (approximately 4%). In that case, you lose out on the significant long term gains that would have been achieved from a higher compounding rate closer to the historical stock gains of 8%. However, another “penalty” that many people are not aware of is that funds used to pay back the loan are after tax money. You can’t deduct the money used to pay off the loan. Therefore, you are using money that has already been taxed to pay back the loan. The money you paid in taxes could have also benefited from compounding interest over time. So, you lose two ways – the higher compounding the funds could have received if left in the account and the compounding of the taxed dollars spent to pay back the loan. There is also the potential for a third penalty if the borrower decides to lower the ongoing regular investment into the account in order to afford the new loan payments. In this case, there is additional loss of compounding growth against the reduced contributions over time. Lets look at an example to help illustrate the issues involved with borrowing.

Simplified example of borrowing from a tax deferred account
Assumptions: 1) Joe has $75,000 in his account earning a long term average annual return of 6% and is contributing $1,000 monthly; 2) He borrows $25,000 (for whatever reason) from his tax deferred account; 3) The current bond rate is 4% and that the loan will be paid back over 15 years at this 4% rate with a monthly payment of $184.92; 4) Joe pays a combined State and Federal tax of 30%.

Had Joe had continued his investment plan of $1,000 monthly and not taken out a loan, he would have a ending balance of $474,876 in 15 years. By removing $25,000 as a loan, the remaining $50,000 balance with the $1,000 monthly contributions would grow to $413,523 after 15 years or $61,353 less ($474,876 - $413,523). However, the $25,000 would add back a 4% compounding return into the account over the 15 years of $8,286 as the loan is paid back. This lessens the difference to $53,027 ($61,353 - $8,286).

Adding real life complexity to the example
That was a very simplified example since the 4% loan payments would actually be added back into the same investment split that the new contributions are distributed across - bonds, stocks, etc. So, if the account is earning a 6% average return from the current investment split, then each payment would compound at this 6% rate through the remaining years. This would lessen the $53,027 difference. Another complexity is the 4% loan is paid back with after tax dollars. Since the combined tax rate is 30%, then it takes $1.30 of before tax funds for every $1.00 paid toward the loan. Since the monthly payment on the 4% $25,000 loan is $184.92, then approximately $55 is paid each month in taxes (185 dollars x 30 cents taxes on each dollar equates to $55 in taxes). If there was no loan, then this $55 could have been invested monthly into the tax deferred account at the average 6% rate to earn $15,995 after 15 years. This is an added loss on top of the $53,027 difference calculated earlier.

Summary
You need to see a qualified financial advisor to look at your particular situation. Information provided above are hypothetical and not meant to be financial advice for any specific situation. However, as you can see, there are many variables that could affect the calculations. But, in all cases you end up with less in your tax deferred account over the long term by borrowing funds that by not borrowing. Again, there are situations where loans may make sense, but you need to be aware of the long term consequences of missing out on compounding over time for the funds borrowed from the tax deferred account. A financial advisor is usually going to be much cheaper than the amount of money you may lose over time by borrowing.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
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Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted: Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3: Understanding Inflation – The dollar to gold price relationship

2009-02-09T00:19:00.000-08:00

Overview
This is a series of articles intended to help you understand how inflation can erode your long term investments and how you should counter those effects in your investment strategy. The first article provided a definition of inflation and showed the effect it has on reducing the value of a dollar over time. Last week’s article discussed the importance of investing in assets that grow faster over time than the rate of inflation. This article will discuss the relationship between the value of the dollar and prices of high demand commodities such as gold during times of inflation.

Valuing the dollar
Normally the dollar is worth more or worth less based on the demand for U.S. goods, services, and assets/products. If foreign investors buy lots U.S. items such as real estate, treasury bonds, stocks, or other, then they must first convert their currency into dollars in order to pay for the purchase. When there are many foreign investors converting to dollars, then the demand for dollars is high and the value of the dollar rises. When demand is down, then the dollar is worth less.

A crude analogy to illustrated to change in value of the dollar
Assume there is a small town of 5,000 people in the middle to high income bracket that all live in apartments due to lack of available land for building homes. Then assume one home is finally built in the town and it is in very high demand. Would it be unreasonable for the asking price on the home to be at least 2 or 3 times as much as for a similar home in a large town that has plenty of housing? Could the price even go as high as 10 times as much or more? Well this is a crude example of how the value of the dollar also goes up when there are fewer dollars available to meet a rising demand by foreign investors wanting to purchase our treasuries, stocks, real estate, etc. Similarly, when there are many more dollars available than demand, then the value of the dollar declines – it is easy to find dollars to convert from their currency. In those times, foreign investors are not seeking to buy as many our things so there is less demand for dollars to convert with.

The current world-wide demand for dollars
With the world-wide financial crisis hitting most foreign countries harder than the U.S., investors in those countries want to buy U.S. issued securities such as treasuries that are backed by the full faith of the U.S. government. Since we have the largest economy in the world, foreign investors feel U.S. securities are the safest available, at least they perceive them more safe than investing in their own country. That is why the dollar has soared in value recently with so many foreign investors seeking these perceived safer investments that must be purchased with U.S. dollars.

Relating gold to the dollar to inflation
Currently, there is also a demand for gold since most investors around the world view it almost as a standard currency that is valued by everyone. That gives it a large base of investors that keep the price high, especially in times of high uncertainty such as the world is currently experiencing.

In terms of the dollar, you need to realize part of the price of gold rising can be attributed to times when the value of the dollar decreases. In those normal times, it is not so much that gold has risen in price, but that it takes more dollars to buy the same amount of gold. As an example, assume you can buy gold for $1,000 per oz. Later, the value of the dollar decreases by 10% to only be worth 90 cent when compared to what it was worth when purchasing $1,000 oz worth of gold. In this case, you would need to have $1,111 to buy the same oz of gold under the current lower valued dollar. This is derived by taking the $1,000 originally paid divided by 90cents for each lower value dollar meaning you will pay $1,111 using these lower value dollars for the same ounce of gold. So, it isn’t that gold has risen, but instead, gold has stayed the same and the value of each dollar to buy that gold has gone down. This is a time of inflation when the value of the dollar goes down, which is why prices paid for many things seem like they are going up

Relating gold to the dollar to deflation
This also works in the opposite. If over time the value of the dollar had instead increased by 10%, then each new dollar would be worth $1.10 of the older dollars. In that case, we take the original dollar paid $1,000 oz of gold and divide by the new $1.10 value dollar to only pay $909 per ounce of the same gold. In this case it looks like deflation since the price has decreased over time. This would also be true of many other items when the dollar increases in value as we are currently seeing.

Amplifying my point about the price of gold during inflation and deflation
An interesting observation I’ve made recently is in times of very high uncertainty, as we have around the world today, there is the added demand for gold that is also causing the price to increase on top of whatever the value of the dollar does. If the value of the dollar increases, as it has recently due to the high demand for our treasuries, gold has still increased due to high demand by investors around the world. So you can’t always only count on the straight mathematical price model I used above to calculate the price of gold during inflation and deflation.

Summary
Notice that many commodities follow a similar pattern during inflation and deflation where their prices move in the opposite direction of the value of the dollar, under normal market conditions. As the dollar rises, it takes less dollars to buy the same commodity like oil (affecting the price you pay per gallon for gas at the pump), silver, gold, etc. As dollars fall, it takes more dollars to buy the same items. Just a general rule to think about when investing – keep a close eye on the value of the dollar and world demand trends for the dollar (rising demand or decreasing demand).

Accredited sophisticated investors are very mindful of such trends before making investment decisions. Don’t let them take advantage of your fear when you sell or buy at the wrong time when they are doing the opposite. Continue educating yourself about the investments being considered and all factors that affect those investments.

I hope this article helps you to not just look at the price of gold or other commodities by itself. Consider the valuation of the dollar, world demand trends for both the dollar and the commodity being considered, etc. Look for patterns and relationships. Understand those well before moving forward. Be an educated investor and you will be way ahead of the ordinary investor who wants to “get in before it is too late” or “get out since it is going to crash”. Those are opportunistic times for the educated investor to do the opposite of the crowd.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
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Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

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This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 2: Understanding Inflation – choosing the right investments during inflation

2009-02-01T00:13:00.000-08:00

Overview
This is a series of articles intended to help you understand how inflation can erode your long term investments and how you should counter those effects in your investment strategy. In last week’s article, I provided a definition of inflation and showed the effect it has on reducing the value of a dollar over time. This week I want to show the importance of investing in assets that grow faster over time than the rate of inflation. Sophisticated investors know they must increase the value of their portfolio at a higher rate than inflation in order to grow their wealth. Any growth rate lower than inflation (such as the interest rate paid on most savings accounts) would still erode the value of the investment portfolio over time. Lets look closer at this balance of growth against inflation.

Overcoming the effect of inflation
As stated above, there are two opposite forces that affect what your long term investment portfolio will end up accumulating: inflation and rate of growth. Any long term investment strategy must consider the effect of both and incorporate a plan for accumulating assets that will increase in value faster than the rate of inflation. To do this, many investors seek assets that have limited quantity such as rare high grade coins, rare art, gold, desirable real estate. Over time, the scarcity of the asset will make them harder to buy so the price usually goes up. In addition, accredited investors have access to other investments that have high risk of loss, but demand high rates of return such as participation in a private placement, special hedge/leveraged funds, providing seed capital for a new or young business/product/service, etc. These investments each carry different levels of risk and expected returns. All of these factors need to be incorporated into a long term investment strategy/plan.

You must have an investment strategy/plan
An investment strategy must have set investing rules and boundaries you will maintain no matter what. Consistently applying a strategy over time will take out emotional decisions that usually go against what needs to be done during times of uncertainty. Your strategy should incorporate your end goal, how long you plan to invest, and what you are going to invest in to get there. You can make improvements in your plan, but only change one thing at a time - don’t make another change until enough time has past to confirm if the change worked or should be reversed. Continuing this refinement process will go a long way toward getting you to your end goal and help refine your investing skills.

Research historical returns on your prospective investment
Keep in mind a general estimate of inflation is about 3% to 4% per year. You want to make sure your entire portfolio gets at least 4% over time just to keep up the same real overall value. Ideally, your return should consistently be higher than the historical rate of inflation to increase your buying power by the time you retire. Maximizing contributions into tax free accounts is one of the best ways to increase compounding of your long term investments by deferring taxes on the gains.

We are currently in a very scary down market. Seems like everything has dropped considerably including “blue chip” stocks, real estate, minerals such as oil and gas, etc. However, if this down turn is like so many others in the past, then these assets will again come into favor with increasing prices along historical averages. Research the historical average of assets you want to learn about investing in. Within those assets, learn what makes some more desirable than others (for example, different locations of real estate have dramatically different historical returns). Chose those assets that provide the historical returns you need to reach your goal as part of your strategy. Diversify enough to decrease the risk of loss to your portfolio, but not too much as to dilute any gains made by each asset. Periodically shift funds from one asset to another to rebalance your portfolio.

Putting it together
In a previous article on compounding interest, I showed how a $1,000 investment in a tax free compounding interest account after 40 years can provide an additional 122% return at 4% interest rate ($2,224 account total minus the $1,000 invested, then divide that difference of $1,224 by $1,000 to get 122%), 394% at 8% ($4,940 balance - $1,000, then divide by $1,000), and 5,759% at 16% ($576,923 balance - $1,000, then divide by $1,000).

In last week’s article, I showed how inflation does the opposite by reducing the buying power of $1,000 over 40 years to only $201 for a consistent 4% rate of inflation. This is a 80% reduction ($1,000 - $201, then divide by $1,000) in buying power. In other words, $201 is only 20% of the value the initial $1,000 after 40 years. In reverse, to maintain a $1,000 buying power after 40 years you would have needed to initially invest $5,000 the first year ($5,000 x 20% after 40 years leaves $1,000). Starting with five times the initial $1,000 investment defeats the purpose of keeping that initial $1,000 investment at the same buying power after 40 years. Therefore, we need to invest the $1,000 at a compounding rate that negates the devaluing rate from inflation. Since we need the initial $1,000 invested to act like $5,0000, we must invest at an annual rate that generates 400% return after 40 years ($5,000 - $1,000 invested means we need to generate the equivalent of $4,000 additional dollars in the beginning over the 40 years or 400%). From the previous paragraph, we need an annual tax free compounding interest rate of 8%. Interestingly enough, this is the historical growth rate you hear that the stock market has grown. That is why many financial advisors recommend investing in a stock index (S&P 5000) to keep up with inflation. Of course, these days that seems like bad advice with the significant drop stocks have taken in only a few months. But, if you believe history will repeat itself again, then you should still include stocks in your investment strategy to assure gains keep up with inflation. As mentioned earlier, there are many other investments that historically have met or beat the historical rate of inflation such as choice real estate, private placements,

Summary
A small increase in inflation (from 2 to 4% or 4 to 8%) can cause significant impact on your future ability to buy anything with the same dollar. Your investment strategy/plan must include investing in assets that increase with inflation can give you the edge needed to help maintain your lifestyle and why sophisticated accredited investors work hard to identify and acquire such assets in their portfolio as part of their long term investment strategy.

Next article in this series
Next week's article covers the relationship between the price of gold and value of the dollar during times of inflation and deflation.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://ino.directtrack.com/42/3400/195/

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Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors. This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 1: Understanding Inflation and how it affects you

2009-01-25T03:09:00.000-08:00

Overview
You hear a lot about inflation (rising prices) and deflation (decreasing prices) these days. Most people feel we are currently in a period of deflation, but worry that the huge stimulus plan and associated funds from the government will force the country into a period of very high inflation. What does this mean to you and how will it affect your investment strategy?

What is inflation?
In general, when prices of most things in the economy continue to rise over time, that is considered inflation (read what Wikipedia says about inflation). What this means over time is that the value of a single dollar will buy less now than it did at some time in the past. Small to moderate Inflation is usually good for an economy since companies usually pay higher wages (give employees raises periodically) which means more money to spend. Other people who are self employed can make more money every year by raising prices. As long as income continues to rise as inflation rises, then the economy is able to expand and people are still able to buy the things they need and want.

However, when inflation rises too fast, then wages/income may not be able to keep up. In that situation, people are not able to keep up with buying the same things they used to. The standard of living goes down and the economy gets out of balance. Something has to give. Usually the government steps in and raises interest rates to take money out of the economy in an attempt to bring high inflation down to the small to moderate level desired.

What does inflation mean to you?
Simply, it means that you can’t buy as much today as you could years ago with the same dollar. In my own case, I can remember as a kid paying 10c for a candy bar and paying 45c for a movie ticket. When candy went to 25c, I thought that was crazy and had a hard time paying that much in my mind. Now candy bars are well over $1 and movie tickets are around $10! I went from being able to go to the movie and get five candy bars (not that I EVER would have done such a terrible thing as a little sweet tooth boy…ha) to today spending nearly $20 total for those things. You also know stories of how your parents paid some ridiculously low price of say $10,000 for their house and you are paying hundreds of thousands of dollars for a similar home. Gold used to be less than $50 an ounce in the early 70s and now is nearly $1,000 per ounce. I could go on and on, but you get the point.

Look at what inflation does over time to the dollar
Lets look at how inflation devalues the dollar over time. In the table below, you can look at different rates of inflation and what a $1,000 today will be worth at each 5 year period going into the future.

Year	2%	4%	8%	16%
00	1,000	1,000	1,000	1,000
05	905	818	669	447
10	819	670	448	200
15	741	548	300	89
20	670	449	201	40
25	606	367	134	18
30	549	301	90	8
35	496	246	60	4
40	449	201	40	2

Understanding the numbers
In the previous four part series I just completed on understanding compounding interest, I purposely chose interest rates of 2, 4, 8, and 16 percent since each is double the rate of the previous number, yet the resulting compounding effect is much more than double those of the lower rate. In this series of articles on inflation, the same is true in the opposite as inflation compounds its effect by devaluing the dollar over time much more than twice the effect of the lower inflation rate. You can see that $1,000 today will be worth only $449 at 2% inflation, $201 at 4%, $40 at 8%, and only $2 at 16%. Just for fun, at 32% $1,000 today will only be worth $0.002, not even a penny. It would take $5,000 today to be worth 1 cent in 40 years!!!! Hopefully we will never have 40 years of high inflation.

Think about countries you do hear about that have had very high rates of inflation. In that situation, you MUST have some equivalent means of increasing your income at the same or higher rate than inflation or there would be no hope of maintaining your standard of living. Also, that assumes everyone and all things increase at the same rate of inflation to keep the economy in balance. That is extremely, if not impossible to do over a long period of time.

Summary
You can see that a small increase in inflation (from 2 to 4% or 4 to 8%) can cause significant impact on your future ability to buy anything with the same dollar. In next week's article, I will show the same thing in a different way by looking at how investing in an asset that increases with inflation can give you the edge needed to help maintain your lifestyle and why sophisticated accredited investors work hard to identify and acquire such assets in their portfolio as part of their long term investment strategy.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://ino.directtrack.com/42/3400/195/

- - - - - - - - - -
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 4: Compounding interest – Strategies toward wealth

2009-01-11T17:08:00.000-08:00

Overview
This is the fourth article of a series covering compounding interest. This series is meant to help investors understand the importance of having money work for you through the power of compounding. The first article provided an overview of compounding by considering the analogy of growth in memory chip transistors since the early 80s. The second article provided visualization of compounding over 40 years against a single initial $1,000 investment. The third article provided visualization of compounding over 40 years against consistent investment of $1,000 yearly split over 12 months. In this article, we will cover several strategies toward wealth leveraging the power of compounding interest in a tax free account.

Disclaimer
The same assumptions in the disclaimer of the second article will be used here as well.

Recap of the previous two articles
In the second article, I showed how a single $1,000 investment at age 25 could grow significantly over 40 years to $2,224 at 2%, $4,940 at 4%, $24,273 at 8%, and $576,923 at 16% interest. My goal was to show that even one small investment can grow significantly over time as the interest earned starts earning more interest which then earns even more interest. The compounding effect becomes more pronounced as the rate of interest goes up since there is more money generated from interest each year which then continues growing at a faster rate. That is the power of compounding. Eventually your money earns more money which then earns even more money. In this case, all you did was provide the small initial contribution. Your money then went to work for you to provide the rest.

In the third article last week, I showed the importance of consistently contributing funds into your tax free account. Using the example of investing a total of $1,000 each year, split over 12 months, you can see the significant difference in the 40 year compounding period to $61,203 at 2%, $98,497 at 4%, $290,917 at 8%, and $3,599,519 at 16% interest. To see the effect of interest earned upon previous interest earned, lets take out all of the contributions the investor put in. Over 40 years, $40,000 was invested ($1,000 per year). Now remove $40,000 from each total to get $21,203 ($61,203 - $40,000) for 2%, $58,497 for 4%, 240,017 for 8%, and $3,559,519 for 16% interest. All of these totals were due to compounding of interest at the different rates.

Lets look closer at the effect of compounding
To further show the power of compounding, lets take a closer look at the difference between the different interest totals. As stated in a previous article, you would expect the 4% interest total to be twice as large as 2% total. In fact, the 4% interest compounding total of $58,497 is almost three times more than the 2% interest compounding total of $21,203. The effect is seen even more as we compare the 8% interest total of $240,017 to the 4% interest total of $58,497, a little over four times as much. The 16% interest total of $3,559,519 is nearly fifteen times the 8% interest total of $240, 017. So, even though the difference between each interest is twice the next level, the resulting compounding interest earned goes from nearly three times the amount (between 2% and 4% totals) to almost fifteen times the amount (between the 16% and 8% totals). If I carried this further to 32% (twice 16%), the resulting interest compounding would be staggering. This is why the best sophisticated accredited investors strive to, and many do, consistently earn strong compounding rates on their total investment portfolio.

The yearly COLA strategy to increase your contributions
Looking at the importance of having interest earn interest upon interest, it makes sense to try and get as much money into your tax free account as possible in the early years. It would be great if a 25 year old employee would have enough free cash for investing at the full IRS contribution limit ($16,500 for 2009). Starting out at the age of 25 with such a strong start contributing $16,500 yearly would produce significant ending balances after a 40 year career of $1.4M at 2%, $3.2M at 4%, $15.9M at 8%, and $376M at 16%. However, not many new employees have the ability to start out investing so much of their salary. Therefore, I suggest starting out small and working their way up through the yearly half Cost of Living Adjustment (COLA) strategy.

Every year most employees get some amount of yearly salary increase due to inflation (a.k.a. COLA in some professions). I realize these unusual economic times mean many will not, but I will assume those times will get better soon to where the usual increases will return.

COLA strategy variation #1 – half of the COLA into investments
With this strategy, the employee would increase their tax free account contributions by half of this increase each year. As an example, if the employee receives a 2% salary increase, then he or she would increase contributions into the tax free account by 1% (1/2 of the 2% pay raise). This way contributions are increased without the employee missing the money. As a bonus, the employee also gets the remaining money as an increase. In actuality, the employee would see more than a 1% increase since the 1% contribution into the account comes before taxes.

COLA strategy variation #2 – full COLA into investments
Since funds invested in a tax free account are usually before tax, you could put the full COLA into your tax free account and still get an increase in salary. If the employee put the full 2% into the account, he or she would still get a take-home salary increase since the COLA increase is not taxed when being put into the account. The employee should strive to continue this strategy until the yearly IRS contribution limit has been reached. At that point, continue contributing at the IRS limit as it changes each year. That hard work is then done since the employee would be at maximum contributions and have a strong habit of saving/investing money.

Lets look at an example:
If the employee was in a 30% tax bracket and making $50,000 per year, the 2% COLA raise would be $1,000 (2% of $50,000). If the raise is not put into the account, then the employee would pay 30% of the $1,000 in taxes, or $300. By putting the full $1,000 into the tax free account, the employee saves the $300 in taxes and therefore will increase the yearly take-home salary by this amount. The end result is the employee has increased contributions each year in the account while also still enjoying an increase in take-home pay.

The “Automatic Pilot” strategy to wealth
Rather than contributing a set amount into your tax free account yearly, have the contributions put in auto-pilot. As mentioned above, most people get a raise each year. It would be easy to forget to increase your tax free account contributions if they were set at a specific dollar amount. Instead, contribute a percentage of your salary into the account. That way, as your salary increases, so does your contributions. In this case, if you get a 2% raise and contribute 10% of your salary into the tax free account, then your contributions would go up by 10% of the 2% salary increase. Just be careful not to let your contributions grow to exceed the yearly IRS contribution limit.

Summary
As we have seen over the course of this series on compounding interest, compounding is a key strategy to generating wealth. The more you can get your money to work for you, the sooner you can reach our financial goals. I hope these articles on compounding have provided insights through the various examples that may not have been that obvious before. This is why so many financial advisors highly recommend that the one of the first investment goals of any investor should be to maximize their tax free accounts. You may think a $2,500 yearly contribution into an IRA account may not grow into much. As you can see in these articles, it can grow into a significant amount, even if you don’t invest in anything else. Having a strong habit of investing into these accounts provides a strong foundation toward becoming a truly successful investor. Hopefully, your account balance will grow large enough for you to become accredited and have access to other investments that are not available to the ordinary investor. The key is being a disciplined and consistent investor with strategies and goals that define a plan of action toward wealth.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
TWO INVESTOR LEARNING RESOURCES:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://ino.directtrack.com/42/3400/195/

- - - - - - - - - -
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3: Compounding interest – Compounding of contributions

2009-01-11T02:42:00.000-08:00

Overview
This series is meant to help new investors understand the importance of having money work for you through the power of compounding. This is something most sophisticated accredited investors are keenly aware of and use as a key component of their investment strategy. This is the third article of the series. The first article gave an overview of compounding by considering the analogy of growth in memory chip transistors since the early 80s. The second article provided visualization of compounding over 40 years against a single $1,000 investment. This third article will provide visualization of compounding over 40 years against consistent investment.

Disclaimer
The same assumptions in the disclaimer provided in last week’s article will be used in this article as well.

Example of consistent contributions into a compounding investment
Assume, at age 25, a new employee starts contributing into a tax free account provided by his employer. In this case, the account begins with a zero balance, no initial contribution. This will allow us to focus solely on the effect of compounding interest against a consistent investment plan. In this example, the employee gets paid once a month. Also, this person will invest a total of $1,000 each year split over 12 months, or $83.33 monthly ( this is $1,000 divided by 12 months).

Lets now look at the effect of compounding interest over time against a monthly $83.33 investment at different interest rates. In the table below, I will show what the account balance will be at the end of each 5 year period for the different interest rates shown:

Year	2%	4%	8%	16%
00	0	0	0	0
05	5,254	5,525	6,123	7,586
10	11,060	12,271	15,246	24,381
15	17,476	20,508	28,837	61,561
20	24,566	30,565	49,085	143,870
25	32,402	42,844	79,252	326,087
30	41,060	57,837	124,197	729,480
35	50,629	76,144	191,157	1,622,514
40	61,203	98,497	290,917	3,599,519

You may not think it is worth saving only $83.33 monthly or about $2.75 daily into a retirement account. However, this example clearly shows that this $1,000 yearly investment into a tax free compounding account can grow into a very large amount over 40 years without doing anything else by letting that money work for you. Historically, most advisors say you can count on an 8% return from being invested in the stock market. Using 8%, your yearly $1,000 total investment would grow into $290,917 after 40 years. You can contribute any multiple of $1,000 and simply multiply the $290,917 40 year total by that multiple. So, if you contribute $2,000 annually over 40 years, it would grow to $581,834 (this is $290,917 x 2). Similarly, if you contribute a total of $5,000 each year, then it would grow into $1,454,585 ($290,917 x 5).

Understanding the effect of compounding against consistent investment
Now, look at the fact that each interest rate evaluated above is twice the previous interest rate: 4% is twice 2%, 8% is twice 4%, and 16% is twice 8%. I did this to illustrate the difference between compounding as interest rates double.

Notice the differences between the interest rates at each 5 year period described below in relation to the yearly $1,000 total contribution:

At year 5, the total contribution by the investor is $5,000. The account balance difference between all interest rates shown is not that much ranging from $5,254 to $7,586. However, the 16% interest balance is approximately 50% larger than the total contribution.

At year 10, the total contribution by the investor is $10,000. The account balance difference between all interest rates shown is more pronounced ranging from $11,060 to $24,381. The 16% interest balance is well over twice the total contribution.

At year 15, the total contribution by the investor is $15,000. The account balance difference between all interest rates shown is much more pronounced ranging from $17,476 to $61,561. The 8% interest balance is nearly twice the total contribution while the 16% balance is over four times the total contribution.

At year 20, the total contribution by the investor is $20,000. The account balance difference between all interest rates shown is very pronounced ranging from $24,566 to $143,870. The 8% interest balance is well over twice the total contribution while the 16% balance is over seven times the total contribution.

At year 25, the total contribution by the investor is $25,000. The account balance difference between all interest rates shown is extreme ranging from $32,402 to $326,087. The 8% interest balance is over three times the total contribution while the 16% balance is over thirteen times the total contribution.

At year 30, the total contribution by the investor is $30,000. The account balance difference between all interest rates shown is more extreme ranging from $41,060 to $729,480. The 4% interest balance is now nearly twice the total contribution. The 8% interest balance is over four times the total contribution while the 16% balance is over twenty four times the total contribution.

At year 35, the total contribution by the investor is $35,000. The account balance difference between all interest rates shown is even more extreme ranging from $50,629 to $1,622,514. The 4% interest balance is now over twice the total contribution. The 8% interest balance is over five times the total contribution while the 16% balance is over forty six times the total contribution.

At year 40, the total contribution by the investor is $40,000. The account balance difference between all interest rates shown is even more extreme ranging from $61,203 to $3,599,519. The 4% interest balance is well over two times the total contribution. The 8% interest balance is over seven times the total contribution while the 16% balance is nearly ninety times the total contribution.

Further understanding the power of compounding for consistent investment
Remember, all examples above relate to the same yearly $1,000 total contribution. Also, the interest rate was doubled from one column to the next. However, the effect of compounding after 40 years are drastically different. Intuitively, you might think that 16% interest would return twice as much as 8% over time or that 8% would return twice as much as 4%. In fact, we see that there is a HUGE difference in the returns between each double of interest rate over time. Initially we saw there was not that much difference after five years, but the power of compounding started kicking in over time to where you were earning interest upon interest already earned upon interest that money had earned. So, as your money gains new money from interest, that increased balance also started earning interest to where it then earned more interest, etc. That is what I meant by having money work for you. Let your money earn money for you. In this case, you didn’t need to do any more than provide the same yearly $1,000 total contribution.

Summary
Again, compounding is how to make money work for you as the ideal employee that never tires, never complains, always works, continues to get better, becomes self sufficient over time, and can end up paying you through your retirement years. Next week's article will provide strategies for investing in tax free accounts.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion. MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.
Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
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Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 2: Compounding interest – Visualizing the compounding effect

2009-01-04T14:07:00.000-08:00

Overview
Last week I began a series on compounding investments (click here for the article). I tried to provide an analogy that most of us are familiar with – the compounding of transistors in each new generation of memory chips. In the mid 80s, you could get a 4,000 transistor memory chip (known as a 4k chip). Today you can get over 4,000,000,000 transistors on a chip known as a 4 gig chip. Chips tend to double in the number of transistor between advancements at an exponential rate over time to where a 4k to 8k memory chip advancement only increased the number of transistors by 4,000 and today a 4 gig to 8 gig memory chip increases the number of transistors by 4,000,000,000, a million times more increase. This is the power of compounding over time.

As mentioned last week, visualize the transistors being dollars compounding over time. Eventually, you can make much more money from the compounding of your funds than from the amount you regularly contribute into the investment. However, the earlier you start a regular contributions into a compounding investment, the larger the compounding effect will be when you are ready to retire. Lets look closer at various examples of compounding to illustrate this point.

Disclaimer
All examples will assume investment in a tax free retirement account of some kind whether it is a IRA, , 401k, 403b, etc. These examples also assume interest is paid at the end of each month on the balance in the account. The amount shown on each line is balance at the end of each time frame (balance at the end of 5 years, 10 years, etc.). These assumptions allow us to focus on understanding the compounding affect alone with no other variables. In reality, other factors such as inflation and taxes when the funds are withdrawn will reduce the value of money over time and taxes when the funds are withdrawn will also reduce what you have for spending. Also, for simplicity, I assume the starting age of a new employee to be 25 years of age with retirement being planned at 65 years of age, which will show the effect of compounding over 40 years.

Example for a single initial $1,000 contribution
Assume a new employee at age 25 contributes $1,000 into a tax free account and never contributes any other funds. Lets now look at the effect of compounding interest over time at different interest rates. In the table below, I will show what the account balance will be at the end of each 5 year period for the different interest rates shown:

Year	2%	4%	8%	16%
00	1,000	1,000	1,000	1,000
05	1,105	1,221	1,490	2,214
10	1,221	1,491	2,220	4,901
15	1,350	1,821	3,307	10,850
20	1,491	2,224	4,927	24,019
25	1,648	2,714	7,340	53,174
30	1,821	3,314	10,936	117,717
35	2,013	4.046	16,293	260,602
40	2,224	4,940	24,273	576,923

You may not think it is worth saving only $1,000 into an account without starting a ongoing contribution plan. However, this example clearly shows that $1,000 can grow into a much larger amount over 40 years without doing anything else by letting that money work for you (see last week’s article on having money be your best employee). Historically, most advisors say you can count on an 8% return from being invested in the stock market. Using 8%, your single $1,000 deposit would grow into $24,723 after 40 years. This says, for every $1,000 you deposit, each of those $1,000 will grow into $24,723. So, if you contribute $2,000 initially at age 25, then at age 65 it would grow to $49,446 (this is $24,723 x 2 since you contributed 2 x $1,000 or $2,000 initially). Similarly, if you had contributed $5,000 initially, then it would grow into $123,615 ($24,723 x 5).

Understanding the effect of compounding
Now, look at the fact that each interest rate evaluated above is twice the previous interest rate: 4% is twice 2%, 8% is twice 4%, and 16% is twice 8%. I did this to illustrate the difference between compounding as interest rates double.

Notice the differences between the interest rates at each 5 year period described below in relation to the initial $1,000 contribution:

At year 5, the account balance difference between all interest rates shown is not that much other than the fact that the 16% interest account has already doubled.

At year 10, the 8% balance has doubled and the 16% balance has almost increased five times over the initial $1,000 amount.

At year 15, the 8% balance has more than tripled while the 16% balance is now almost 11 times more than the initial $1,000.

At year 20, the 4% balance has finally doubled while the 8% balance is now almost 5 times more and the 16% account is 24 times more.

At year 25, the 8% balance has increased to seven times and the 16% account has increased to 53 times the initial contribution.

At year 30, the 4% balance has tripled, the 8% balance is now nearly 11 times more, and the 16% balance is now almost 118 times more than the initial contribution.

At year 35, the 2% balance has finally doubled. The 4% balance is now four times more, the 8% balance is now 16 times more, and the 16% balance is now nearly 261 times more than the initial contribution.

At year 40, the 2% balance is still just a little over double. The 4% balance is now nearly five times more, the 8% balance is over 24 times more, and the 16% balance is a tremendous 577 times more than the initial contribution.

Further understanding the power of compounding
Remember, all examples above started out with the same $1,000 initial contribution. Also, the interest rate was doubled from one column to the next. However, the effect of compounding after 40 years are drastically different. Intuitively, you might think that 16% interest would return twice as much as 8% over time or that 8% would return twice as much as 4%. In fact, we see that there is a HUGE difference in the returns between each double of interest rate over time. Initially we saw there was not that much difference after five years, but the power of compounding started kicking in over time to where you were earning interest upon interest already earned upon interest that money had earned. So, as your money gains new money from interest, that increased balance also started earning interest to where it then earned more interest, etc. That is what I meant by having money work for you. Let your money earn money for you. In this case, you didn’t need to do any more than provide the initial $1,000 contribution. You could have walked away and not done another thing (assuming you are able to get in an investment that consistently returns the rates I’ve illustrated each year without further management by you). Your money does all of the work.

Portfolio management for consistent returns over time
Many people leave their funds in CDs which are now paying very low returns. However, these funds are very secure. Higher rates of return usually mean you are investing in a higher risk investment where your funds are at more at risk of loss. Many accredited investors finds ways of diversifying risk over several investments that each vary in the level of risk and therefore in associated rates of return to try and generate a fairly consistent overall portfolio rate of return that performs in both good and bad times. This is called portfolio management. Some accredited investors become very proficient at this to the point of being able to generate high average returns over long periods of time. Consistently earning the higher returns provides the large multiplication factors you see above that the higher interest rates provide.

Summary
Again, compounding is how to make money work for you as the ideal employee that never tires, never complains, always works, continues to get better, becomes self sufficient over time, and can end up paying you through your retirement years. Read the next article in the series "Part 3: Compounding interest – Compounding of contributions" to learn how a consistent monthly contribution to a tax free investment account can grow into significant amounts over 40 years of consistent investment.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion. MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.
Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

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Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 1: Compounding interest – understanding the basics by looking at the evolution of computer memory

2008-12-28T02:15:00.000-08:00

Overview
What qualities would you look for in an ideal employee? Dependability, always works hard 24 hours per day seven days a week, no time off, only needs initial guidance toward becoming self sufficient, gets better over time, eventually pays you to be your employee. All of these qualities are found by making your money work for you as the ideal employee by using compounding interest. Compounding is a key investor tool that most accredited investors know well and use to their advantage whenever possible to increase wealth. This article will begin a series on compounding. To view the next article in this series on compounding, click on: "Visualizing the compounding effect."

When compounding is your enemy
In my last article series, I wrote about credit card debt and how they are designed to maximize compounding interest paid by the debtor to the credit card companies. The article describes how making minimum payments on a $2,000 purchase can end up costing you $8,183.46 over 26 years of payments at 19.99% interest with $6,183.46 of that being interest paid to the credit card company. I guarantee the credit card companies fully understand the strength of compounding interest and how it adds to their profits. Now lets learn how compounding interest can work for you and not against you as it does with credit cards and other loans.

A simple analogy for understanding compounding
Lets first look at a simple example you may all have heard – computer memory. When I started college in 1980, I can remember 4k memory cards were the thing. That means the memory card had 4,000 transistors to retain memory. Then they came out with 8k memory. When 16k memory came out, we thought that was amazing. We thought no one would need more than that in a desktop computer - remember the TRS-80 computer, also known as the “trash 80?” The computer companies didn’t stop, and went on to create an astounding 32k, then 64k - remember the Commodore 64?, 128k, 256k, 512k, 1 meg, 2 meg, 4 meg, 8 meg, 16 meg, 32 meg, 64 meg, 128 meg, 256 meg, 512 meg, 1 gig, 2 gig, and now you can buy a 4 gigabyte memory card for less than $100. A 4 gig memory card has 4 billion transistors! So, in the course of less than 30 years, we have increased memory on computer chips from 4,000 transistors to over 4 billion. That is an 18 fold increase. What if these were dollars instead of memory transistors? Would you like to have those types of returns on your investment over 30 years?

Disclaimer
In actuality, the actual number of transistors does not come out in even thousands. The industry has used rounding to the nearest thousands, millions, and now billions as a way to more easily label the memory size. I will carry on with the rounded numbers for simplicity.

Visualizing compounding over time
Look closely at the above memory growth pattern. Did you notice that while the memory chip size doubled between chips, the number of transistors grew exponentially over the 30 years? From 4k to 8k, the transistors increased by 4,000. From 8k to 16k, the transistors increased by 8,000. From 16k to 32k, the transistors increased by 16,000. Therefore, when you look at the transistor increases between chips you see the following pattern:

Old chip	New chip	# Increase in Transistors
4k	8k	4,000
8k	16k	8,000
16k	32k	16,000
32k	64k	32,000
64k	128k	64,000
128k	256k	128,000
256k	512k	256,000
512k	1 meg	512,000
1 meg	2 meg	1,000,000
2 meg	4 meg	2,000,000
4 meg	8 meg	4,000,000
8 meg	16 meg	8,000,000
16 meg	32 meg	16,000,000
32 meg	64 meg	32,000,000
64 meg	128 meg	64,000,000
128 meg	256 meg	128,000,000
256 meg	512 meg	256,000,000
512 meg	1 gig	512,000,000
1 gig	2 gig	1,000,000,000
2 gig	4 gig	2,000,000,000
4 gig	8 gig	4,000,000,000

Notice that doubling the number of memory transistors between the first two chips of 4k to 8k only increased the number of transistors by 4,000. However, doubling between 4 gig and 8 gig increased the number of transistors by 4,000,000,000. Both sets of chips were simply doubled from the previous version, but the number of transistors increased between the “double” was dramatically different after nearly 30 years of technological advances in the ability to shrink the size of each transistor. Had you stopped at any of the first five doubles, you would have never reached the tremendous compounding effect reached in the 30th year. This is very much true of compounding interest and compounding investments. The “interest” or compounding rate differs for each type of investment over time, but they all can work for you over time through the incredible power of compounding to increase your wealth.

Summary
Compounding is how to make money work for you as the ideal employee that never tires, never complains, always works, continues to get better, becomes self sufficient over time, and can end up paying you through your retirement years. View the next article in this series on compounding: "Visualizing the compounding effect."

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion. MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked.
To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
- - - - - - - - - -
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

No article this week - enjoy this holiday time

2008-12-22T21:56:00.001-08:00

Valued readers - there will be no article posted this week due to celebration of the holiday season. Enjoy the remaining days of 2008. Sincerely,
Ole Cram

Understanding debt: Strategies for eliminating all your personal debt

2008-12-15T00:59:00.000-08:00

Overview
In last week’s article, I discussed two strategies for reducing/eliminating credit card debt. These strategies involved turning credit card debt into a fixed payment loan and accelerating credit card debt payoff by paying an additional $5 each month over what was paid the previous month until that credit card debt is paid off. In this article I intend to look at ways of combining both strategies, along with additional strategies, to eliminate all your debt.

Before continuing, I wanted to reiterate that debt is not always a bad thing. As stated in the first article on “Understanding debt: The Credit Card Trap”, accredited investors have learned to use debt as one tool in their wealth building tool bag. The most successful accredited investors strive to learn everything they can about how debt works – how it can work for them and against them. Accredited investors understand when to use debt appropriately when considering various investments. They understand how compounding interest earned on investments is one of the best means of creating wealth and compounding interest paid on debt is usually one of the biggest enemies of creating wealth.

Most people don’t use debt as a means toward generating wealth, but instead get stuck in a trap of increasing debt. With unproductive debt, these people don’t have much chance of creating true net wealth. It is for this reason that I wanted to share my personal strategies toward eliminating debt. Once debt is eliminated, then you can consider using debt for short term needs and for wealth building purposes. Alternatively, you can consider building wealth without using debt – live debt free. Now before exploring debt elimination strategies, lets look at the various types of debt many consumers hold.

Typical debt held by consumers
Many consumers hold credit card debt, a car loan, furniture or electronics debt, department store debt, and home loans. Some debts are fixed with a set number of equal monthly payments (i.e. car and home loan), some have varying monthly payments (i.e. credit cards), some will delay requiring any initial payments for some period of time (i.e. furniture and electronics loans). The interest rate charged for these different types of loans can vary significantly with home and car loans usually being low while credit cards, furniture and electronics, and department store debts are usually very high. With all of these differences, it can be confusing knowing where to begin eliminating debt. I have a simple test that can help.

Conventional methodology for prioritizing debt for elimination
Many financial advisors like to prioritize debt elimination based solely on ranking those debts with the highest interest rate to be paid first. The rank continues from debts with the highest interest rate down to debts with the lowest interest rate to be paid last. This is a good strategy, but personally I like to consider something I’ve made up (it may have been made up elsewhere but this is what I use) called the net debt payment to debt ratio.

Net debt payment to debt ratio
A quick way to prioritize which debt to eliminate first is by comparing the ratio of net debt payment to debt balance for each. This is a simple ratio to help determine those debts where the current monthly payment has the highest impact toward paying off debt. We’ll now look at how to determine this ratio for all of your debts.

For each of your debts, look at a recent bill to see what amount of the last payment went toward paying off the debt. I’ll call this the net debt payment since much of your monthly payment may go toward things other than paying down the debt. Now create a table in Excel or other spreadsheet software with five columns – Name of debt, current balance owed, Net debt payment, Net debt payment to debt ratio, # monthly payments remaining (if applicable), monthly interest rate (divide yearly by 12 months). Put a calculation in the Net debt payment to debt ratio column that divides the net payment column value by the total debt for each item. Set the format of that column to be a percentage. Once completed for all debts, then look for those debts with the highest ratio. Those are your top candidates for elimination. However, you should consider other factors in helping determine your prioritized list.

Other factors to consider when prioritizing debt for elimination
You also need to consider the interest rate being charged since debts with high interest rates are taking a lot money each month just to pay interest and not toward paying down the debt. Look at the number of payments left as well. Irregardless of what interest rate is being paid, if you only have a few months of payments left, it makes sense to focus on paying those debts off first so the associated monthly payment can be added to the next debt’s monthly payment.

Take your prioritization spreadsheet a step further by adding weights
This part takes some knowledge of calculations within Excel. If you are not comfortable doing that, ask someone you know who is. If that fails, then do these calculations by hand on paper for each of your debts.

Add weights against each of the three measures described so far – 1) the net debt payment to debt ration, 2) the monthly interest rate, 3) and the number of payments remaining. For each of these three measures, you need to determine which one is the most important, second important, and least important. Then within each measure, you need to determine what values are most important to least important. The easiest way to do this is to rank each of these factors, say from 1 to 10 where 1 is good and 10 is bad. Then multiply the results together to get an overall value for each debt. This overall value can then be compared between each debt to prioritize those debts that should be eliminated first. Based on 1 being good and 10 being bad for each measure, the overall weights would then mean to first eliminate those with the lowest resulting overall number and work your way to those with the highest overall number for elimination last. This is a bit too complex for this article, however, I may expound on specific measures and values in a future article. For now, I wanted to present the idea for your consideration to open your mind beyond only looking at debts with the highest interest rate for first elimination. For the rest of this article, lets assume we have decided to use the highest interest rate methodology for debt elimination. That typically means credit cards and some other debts like furniture, jewelry, electronics, and department store debts are the highest interest debts. We would then focus on reducing those debts first.

Remember from the previous two articles that many of these types of debts are designed to extend the debt out as long as possible. This is done by lowering the minimum payment each month so less is paid toward debt and more toward interest. These debts can take well over 25 years to pay off if you only make the minimum payment each month. As stated earlier, in last week’s article I provided two strategies to greatly accelerate payoff of these types of debts by using two strategies – 1.) continue paying the same payment monthly for each card which turns them into fixed payment loans or 2.) accelerate payments by adding an additional $5 each month over what was paid in the previous month. You can actually combine both of these strategies to eliminate all of your credit card and other high interest debts.

Using a combination of both strategies to pay off all your credit card debts
It would be nice if you could afford to use the accelerated payment strategy #2 on all of your high interest debts. However, you may not be able to afford this strategy on all of your high interest credit card and other debts at the same time. But, you should be able use strategy 1 of continuing to make the same payment each month on all cards while implementing the accelerated payment strategy #2 on one card to get it paid off sooner. Once you get this card paid off, then there is a third strategy to start in combination with the other two.

Strategy #3: Apply paid off debt payments to the next priority debt
Once you pay off a high interest debt, then apply the same monthly payment that was going toward the paid off debt toward your next priority debt. All the while when the first debt was being paid off using the accelerated strategy #2, this next debt was also being paid off sooner, but not as fast, using strategy #1. By the time the first debt is paid off, this second priority debt will have been reduced as well. Now, with the addition of all payments from the first debt to this second debt, the associated debt balance will be eliminated much quicker. In addition, strategy #2 should now be applied to this debt since it is now your first priority for pay off.

Example
Let’s reflect a second on what is going on here with an example. Assume our first priority debt is a 19.99% credit card with a $2,000 balance. We will use strategy #2 accelerated payments on this debt. Assume the second priority debt is another 19.99% credit card with a $2,000 balance. We will use the fixed payment strategy #1 on this second priority debt.

In last week’s article, we discussed what the monthly payments would be under and resulting acceleration of pay off using either strategy #1 or strategy #2. From this discussion, we know our monthly payment for the second priority debt (and all other credit card debts) using strategy #1 is $40 each month. For our first priority debt using strategy #2, the monthly payment will initially be $40 while it accelerates up to $160 per month after 25 months (just over 2 years). When this first debt is paid off, then the associated $160 strategy #2 payment will be added to the ongoing $40 strategy #2 payment currently being made on the second debt for a new combined $200 monthly payment. Next month the payment will be $205 since this second priority debt now becomes our first priority debt for payoff. Continue applying strategy #2 accelerated payoff on this debt until it is paid, then apply the strategy to the next debt to assume 1st priority position.

Continuing our debt elimination plan using the combination of strategies
As you pay off your first priority debt using strategy #2 acceleration, then combine all previous strategy 1 payments onto the next priority debt. Continue this process until all of your high interest debts are paid. By the time you get to your third or fourth debt being eliminated, you will have a significant monthly payment being applied to the next priority debt. Always applying strategy #2 dramatically accelerates the process of eliminating all of your debts by simply adding $5 more each month toward paying off debt. As mentioned last week, this only increases your monthly payments by $60 each year over the previous year’s payments. After five years of paying down debts, this would be an additional $300 being applied that month ($60 x 5 years). After 10 years, it is an additional $600 being applied that month. These payments are being fully applied toward debt reduction and not toward interest. This is in addition to the increasing reduction of debt being created using strategy #1 on all remaining debts. You can eventually get to paying off your car and home much quicker than planned.

Managing your credit card use
All of these strategies assume you are not increasing the debt on your credit cards during the debt elimination process. Pay for items with cash, or be sure to add an additional payment each month to cover any new purchases made so no new debt carries over into the next month.

Once you have all credit cards paid off, then use them as accredited investors do. They use these cards for short term purchases to take advantage of investment opportunities as they present themselves. Then be sure to pay off the card fully each month or as soon as possible when cash becomes available from whatever the short term investment opportunity was. Don’t let yourself slip back into the habit of accessing your credit without having a plan. In fact, I would create a plan that explains when your card will be used, how long you will carry the debt, and how you will pay it off. Take it further by having a plan for each type of debt. An example would be the opportunity to buy some investment (perhaps a quality artwork at auction) and then a plan on how you will liquidate another investment to pay off the debt and when you will carry out this payoff.

Summary
Remember, you need to be in control of your debts and have a keen understanding of how to use it to your benefit before becoming an astute accredited investor.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion. MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
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Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors. This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding debt: Two strategies for eliminating credit card debt

2008-12-07T22:40:00.000-08:00

Overview
In last week’s article, I described the trap set by credit card issuers to create a great source of long term income by keeping card users in debt for many years. This type of debt is designed to entice card users to only pay a very low monthly payment for easy access to borrowed funds. If the card user only pays the low minimum monthly payment, they could end up paying more than 25 years on the associated debt before paying off the card. That assumes no further debt is added onto the card balance. Each month most of the payment is interest income to the card issuer and very little goes toward reducing the debt. That is the trap set by card issuers. This article will describe two strategies for reducing and eliminating this debt. Before presenting the strategies, we need to revisit last week’s description on what credit card debt really costs.

Disclaimer
Throughout this article, I quote numbers that come from a crude credit card payment calculator I created using Microsoft Excel. The numbers may not be exactly accurate, but they are close enough to illustrate my points being made.

Revisiting last week’s discussion on the long term cost of a credit card purchase
I showed how a $2,000 TV purchased on credit could cost you a total of $8,183.46 by paying only the minimum payment for 26 years, giving the card issuer $6,183.46 in interest. That also assumes you don’t make any more purchases on your credit card to add to the debt, and it assumes the interest rate stays at 19.99% over the 26 years. I also showed how a fixed payment loan for the same interest rate and $2,000 in debt only costs the borrower $2,636.54 in interest over a 10 year loan. Both forms of loans start with about the same monthly payment of $40. The main difference between the two is the credit card monthly payment goes down each month since it is tied to a percent of the remaining balance while the fixed payment loan always stays the same each month. Therefore, the credit card debt is interest focused while the fixed payment loan is debt reduction focused. Over time, more of the fixed payment goes to paying off debt while the credit card monthly payment is designed to always continue paying the least amount toward reducing the debt. One thing credit card users may not be aware of is that they can turn a credit card debt into a fixed payment debt.

One debt reduction strategy: Make a credit card debt act like a fixed payment loan
One debt reduction strategy I like to teach is to continue making the same payment each month on your credit cards (assuming no new debts have been added onto the card). Don’t pay the decreasing minimum monthly payment each month. Instead, continue paying the same amount you paid last month. What this does is turn your debt into a fixed payment loan. As you continue making the same payment, more and more of the monthly payment will go toward paying off debt and less toward interest. Assuming the interest rate on your card does not change, then your credit card debt would be paid around the same time as an equivalent fixed payment loan, 10 years in the case of the examples provided in last week’s article. You will then be rid of all your credit card debts if this strategy is used on each one with no additional debts added on.

Another debt reduction strategy: A small incremental increase in monthly payments dramatically reduces debt
Another twist on the previous strategy is to increase your monthly payments by an additional $5 each month over what you paid the previous month. This means skipping one meal out per month to get the additional $5. If your payment is $40 this month, next month make a $45 payment. The month after that, make a $50 payment. After continuing this for a year, your payment would grow to $100 each month which is the consistent $40 monthly payment plus an additional $60 (12 months x $5 extra each month or $60). Consider that all of this additional $60 is going toward paying down the debt and none of it toward interest since interest is covered within the consistent $40 portion of the payment.

This debt reduction strategy dramatically accelerates payoff of the balance and also dramatically reduces the amount of total interest being sent to the credit card company. If this strategy were used for the same $2,000 credit card debt, the total loan would be paid off in only 26 months (2 years and 2 months) with only a total of $584.41 being paid in interest and total payments totaling $2,584.41 for the $2,000 TV (see last week’s article). This compares to total payments of $8,183.46 when paying only minimum credit card payments for 26 years or total payments of $4,636.54 for a 10 year fixed loan. You can see the dramatic difference a small incremental amount each month can make for the total cost of the TV and the time to pay off the associated debt.

Next week’s continuation
In next week's article, I will show how to combine both strategies to accelerate paying all your credit cards off. I’ll also show how to move beyond paying off your credit cards to paying off all your debts using these strategies and one more strategy. Come back next week.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features...
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and more visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
- - - - - - - - - -

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding debt: The Credit Card Trap

2008-12-01T00:23:00.000-08:00

Overview
Accredited investors understand how to use debt in their favor to achieve wealth. They have a keen understanding of how compounding of interest can work for them (with investments) and against them (with debt). These investors understand that credit card debt can be one of the worst types of debt if not paid off quickly. This type of debt is designed to extract the most amount of money over the longest period of time possible from the card owner. An astute investor would only use this type of debt for short term opportunities with the intent of paying off the card as soon as possible (likely in a month or two) to prevent overpaying for the item the funds were borrowed for. Lets now look at an example to illustrate how bad credit cards are for long term debt.

Long term cost of credit card debt
Assume you went to an electronics store and saw the price tag of $2,000 on a very nice large TV that would go perfectly with your high def entertainment center. What would you do to get that TV today if you didn’t have the money? Would you tell the clerk “I will make monthly payments to you totaling $8,183.46 over 26 years if you let me have that TV today?” Would that be a good option? Is a $2,000 TV worth $8,183.46 in long term debt? Consider also that you are making a monthly payment on this debt for 26 years that takes away cash that you could have been using for other purposes all that time while paying the credit card company over four times what the TV initially cost. You lose out in two ways: 1.) the loss of monthly cash flow due to the monthly minimum credit card payment that initially starts at $40 per month payment and decreases over the 26 years, and 2.) the loss of $6,183.46 ($8,183.46 total paid - $2,000 actual cost of the TV) that could have been invested to make money rather than be paid to the credit card company.

Disclaimer
Throughout this article, I am going to quote numbers that come from a crude credit card payment calculator I created using Microsoft Excel. The numbers may not be exactly accurate, but they are close enough to illustrate my points being made.

Credit cards are very profitable
Ever wonder why you get so many “you have been approved for” letters in the mail about some new credit card? Also, many of the same companies send out letters repeatedly to you. How can they afford to do this to so many people repeatedly? They can afford it because credit cards are VERY profitable for people who make their payments faithfully. In fact, people of questionable credit are even sought by come companies since they can charge higher interest rates due to the higher risk. If these people make their payments at the higher interest rate to try and build or repair their credit history, then the company really has a profitable situation. Faithful payers for very high interest loans are the ultimate money machine for these companies.

How credit card debt works
Most of us are used to a fixed rate loan where you borrow a set amount at some interest rate to be paid back over a period of time resulting in a flat monthly payment. Each month, more of the principle is paid off while the interest charged on this decrease also decreases. Eventually toward the end of the loan, most of the payment goes toward the principle and very little goes toward interest. In my own terminology, I call this a principle focused loan since the purpose of the loan is to increase the amount paid toward principle as the loan matures. This type of loan is in the interest of the borrower since the goal is to get the loan paid as fast as possible without giving too much toward interest.

On the other hand, the purpose of credit card debt is to keep from paying toward the principle and increase the amount of money paid toward interest. Every month the credit card company changes the minimum payment due to be a set percentage of the remaining debt balance, usually 2 to 3 percent of the balance due. As the balance is paid off, the minimum payment decreases. Therefore, since the payment due continually decreases as the balance decreases, it takes many years before the payment would get you to zero. All the while, most of the payment each month goes toward interest and very little toward the principle (pay down of the debt). I call this an interest focused loan. This type of loan is in the interest of the lender or credit card company since the goal is to continue receiving the largest amount of interest payments from the borrower for as long as possible. It is not in the best interest of the credit card company to get these loans paid off since their income from interest would then stop.

Example to illustrate the perpetual interest payment structure of credit card debt
Continuing the $2,000 TV purchase example earlier, assume the credit card has an annual 19.99% interest rate and a minimum payment percentage of 2% and a absolute minimum payment of $20.

In your first month, the minimum payment would be 2% of $2,000 or $40 with $33.32 of that going to interest (monthly portion of annual 19.99% interest rate on the $2,000 balance due). By the beginning of the fifth year, your monthly minimum payment would be $32.83 with $27.35 going toward interest and a balance due of $1,641.58. Over that five year period, you would only have paid $358.42 toward debt while paying $1,786.74 of total interest. Your total payments would be $2,145.16, which is already more than the $2,000 TV and you still owe another $1,641.58 before the debt is paid off. After the 10th year, your monthly minimum payment would be $25.80 with $21.49 going toward interest and a balance due of $1,290.02. Over that ten year period, you would only have paid $709.98 toward debt while paying $3,539.29 of total interest. Your total payments made over the five years would be $4,249.27, which is over twice the $2,000 TV price. In addition, you still owe $1,290.02, which means you have not even paid off half of the $2,000 initially borrowed for the TV at the end of 10 years. The bank has made $3,539.29 in interest from you and will still get at least another $1,290.02 should you pay the balance in full. They know you are unlikely to pay the balance due so they can look forward to getting much more money from you for an additional 16 years!

Compare with a fixed rate loan
Now consider a fixed rate loan for the $2,000 at the same 19.99% annual interest rate over a 10 year period. In this case, the monthly payment would be a set $38.64 for the full 10 years. Lets now make comparison’s with the above credit card example. After the fifth year, the monthly $38.64 payment would send $24.30 to interest and $14.34 to principle. Total interest paid would be $1,776.95 as compared with $1,786.74 using credit card minimum payments. However, the remaining balance due on this fixed rate loan is $1,458.68 verses $1,641.58 for credit card debt. The difference becomes much more pronounced after 10 years. At that time, the loan is paid off. Total interest paid is $2,636.54 with this loan verses $3,539.29 using credit card minimum payments. In addition, you still owe $1,290.02 on the credit card where the fixed rate loan is paid off. The bank made a total of $2,636.54 from you on the fixed rate loan, but will make $6,183.46 in interest from you using minimum payments on the credit card.

Don’t blame the credit card issuer
Remember, it is your choice to make the minimum payment or to pay off the balance due. If you continue making minimum payments, then don’t blame the credit card company for “ripping you off”. They are in the business of making money in a free enterprise capitalistic economy. As long as people continue making minimum payments, this is a valid way to generate income for these companies.

Next week’s continuation
In next week's article I describe two strategies to accelerate paying off your credit card debts. In two weeks I'll talk about applying these two strategies and another strategy to elilminate all of your debts.

- - - - - - - - - -

An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:
Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Trade Triangles: Created by a former professional floor trader and engineered by a technical prodigy. Trade Triangles are easy to read buy and sell signals on customizable charts. By using these buy/sell signals, traders enter trends which puts the odds in their favor that a movement will continue.

Alerts: MarketClub can quickly alert you of major market occurrences that directly affect your portfolio. You customize your parameters and we will send you a message when symbols in your portfolio have hit a new price breakout, net change, triangle issued, 1,3,4 or 52 week high or low and strong or weak DMA.

To learn more about these features and MORE visit: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8Just say "maybe." You have an invitation to take a 30-Day Risk Free Trial. If for some reason MarketClub doesn't fit your trading style, we will refund the full amount no questions asked. To give your trading an edge add MarketClub to your toolbox. http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

- - - - - - - - - -
Your feedback is wanted: Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Stocks: Understanding the use of margins

2008-11-23T18:43:00.000-08:00

Overview
Buying stock on margin is a way of leveraging your available investment cash to buy more stock than cash alone would buy. The hope is that the stock price will continue going up so the investor gains from appreciation of additional stocks purchased on margin than the lessor amount would have bought with cash alone. This can be great when the stock price goes up. However, when the price goes down, margined stock will work very quickly against you. We’ll cover more about buying stock on margin, along with the pros and cons.

Buying stock on margin
For qualified investors, many brokers offer the option of buying stock “on margin” by borrowing funds from the broker to pay for part of the purchase. Not all stocks are marginable and those that are maginable vary in the amount of margin authorized. Typically these stocks have a 50% margin requirement, which means you only need 50% of the stock price in cash to buy a share of stock. Another way of thinking about this is to say you can buy twice the number of stock shares than cash alone could buy. Some highly risky stocks have a higher margin requirement, meaning a higher percentage of cash is required to purchase a share of stock. In any case, a monthly interest will be charged for all borrowed funds until these funds are paid back.

Consider an example of buying stock on margin
For all examples, the cost of trading stock will be ignored. For this example, Joe investor has $1,000 cash available to buy stock in XYZ corporation. Shares of XYZ stock are trading at $10 per share. In this case, Joe can buy 100 shares of XYZ stock for his $1,000 ($10 per share x 100 shares = $1,000). Now assume that XYZ stock is a marginable stock with a 50% margin requirement. This means each $10 share of stock can be purchased with $5 in cash and the other $5 borrowed from the broker ($5 cash + $5 borrowed = $10 purchase price of a share). Now Joe only needs $500 for the same 100 shares since he borrows the other $500 from the broker to make up the full $1,000 needed to purchase the 100 shares. Alternatively, Joe could use his full $1,000 cash to buy twice the number of shares on margin. In this case, 200 shares at $10 requires $2,000 for the purchase. Joe uses $1,000 of his cash and borrows the other $1,000 for the margin purchase. In both cases, Joe has used leverage to control twice the number of shares that cash alone would purchase.

Why use margin?
As we’ve seen, buying stock on margin allows you to use less cash to purchase stock. If an investor determines there is a strong possibility the stock price will go up, the investor can chose to buy twice the number of shares (for 50% marginable stock) for the same amount of money. The investor then benefits from price increases on twice the number of shares. However, there is now a higher risk of loss if the share price should go in the opposite direction.

An example of margin leverage working in the investor’s favor
Continuing the previous example, Joe purchases 200 shares of XYZ stock (a 50% margin requirement stock) for $1,000 cash. The stock goes from $10 to $15 per share, a 50% price increase. Joe now has $5 profit in 200 shares of stock for a total profit of $1,000. Joe has a $1,000 gain on his original $1,000 cash, a 100% increase. Joe has doubled his money from a 50% increase in stock price. Leveraging with margin has allowed him to have twice the percentage of return than the stock price increased by.

Alternatively, if Joe had used his $1,000 cash to buy only 100 shares without margin, then he would have a $5 profit on 100 shares for a total profit of $500. He then has a $500 gain on his original $1,000 cash, a 50% increase. His investments have increased the same percentage as the stock price increased.

What can go wrong?
The danger in using margin is you now have a much higher risk exposure to loss than using cash. If the stock price drops with stocks purchased on margin, your loss will increase at a much faster rate. At some point, the broker will issue a “margin call” when the value of the stock goes down enough to require you to put additional money into your account to bring the percentage of cash back to 50%, or whatever margin level your stock is at. Lets look at an example.

An example of margin leverage working against the investor
Continuing the previous example, Joe bought 200 shares of XYZ stock with 50% margin for $1,000. Remember that Joe used $1,000 cash and borrowed $1,000 on margin for the $2,000 purchase of 200 shares at $10. Therefore, he is at 50% margin. Now assume the price goes from $10 per share to $8 per share. In this case, the total value of the stock is now $8 x 200 or $1,600. Joe still owes $1,000 against this $1,600 total value so he would only get $600 cash by selling all of the stock today. This means his margin level or ratio of cash to the total value is now at a 37.5% ($600 cash remaining divided by $1,600 current value = 37.5%). Typically a broker will ask for more cash when the ratio gets to 30% to bring the ratio back to 50%.

Notice that the $1,000 owed does not change, but the portion of cash remaining decreases as the price decreases. Now consider what happens if the price quickly drops by 50% from $10 to $5 per share. The total value of the 200 shares is $5 x 200 or $1,000, which is the same as the $1,000 still owed. Now there is no cash left since the sale of all 200 shares would go directly toward paying off the $1,000 debt (assuming interest owed is ignored). Joe has just wiped out all of his investment cash. He will be asked to put in another $1,000 to bring the margin level back to 50% ($1,000 cash and $1,000 debt) or be forced to sell some or all of the stock until enough of the debt is paid back to bring the ratio back to 50% (perhaps sell 100 shares at $5 to pay off $500 of the $1,000 debt).

Consider an even more severe case where the price drops quickly to zero (perhaps the company goes bankrupt and all stock shares are wiped out by bankruptcy). In this case, the investor lost all of the initial $1,000 investment funds and now owes $1,000 borrowed on margin for a total $2,000 loss. Had Joe purchased only 100 shares with cash, he would only be out the $1,000. Using margin two buy twice the stock also caused him to have double the loss.
In any case, you can see that rapid drops in price can really work against the investor who uses margin.

Strategies
Personally, I only use margin for a few situations:
1. I might use margin when all my technical analysis of the recent stock buying and selling patterns (trends, volume, stochastics, MACD, and other indicators) indicate a strong probability of price increase in the very near future. I’ll buy twice the stock for the same investment funds to hopefully catch the increase and then either sell enough stock to pay off the margin and keep the rest or I’ll sell out before the stock drops again.
2. I might use margin against a stock already in my portfolio (borrow money against a stock I have) to purchase another stock or option. Again, I want to do this on short term moves to quickly pay off the debt.
3. I need to have enough cash or assets in my account to short a stock. Brokers usually require assets in an account before letting you short stock. See a previous article on shorting stock.
4. When I need a short term loan for other personal uses. Say I need $1,000 for car repairs. If there is marginable stock in my account, I could borrow the $1,000 against these stocks to pay for the repair. Then I’ll pay the debt off as soon as possible.

Summary
The use of margin is another tool that can help an investor manage his or her investment portfolio. However, recently we’ve seen articles about top managers of companies being forced to sell their shares of stocks due to margin calls (Wall Street Journal aticle on top managers losing shares to margin, New York Times article on Chesapeake CEO being forced to sell all of his shares of the company, and many others).

Using margin smartly can help increase returns, but the investor must be very careful since it can also magnify losses very quickly.

Copyright 2008 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
An Investor Resource: MarketClub gives you the tools you need to build a successful portfolio. Researching and planning trades can take hours, and let's face it, traders don't have hours to waste. What you need is a tool to give you an edge on the markets and to help you make educated decisions based on the technicals and not your emotion.MarketClub puts all of your research tools in one easy to use package that together gives you the edge you need to build and manage your investments.

Unique features:

Smart Scan: Scans more than 230,000 symbols to identify trending patterns that fit the exact parameters of what you're interested trading. Quickly look through stocks, futures, etf's and mutual funds for volume, price and exchange criteria that you choose.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Psychology of trading – how pros count on emotional amateurs

2008-11-16T02:00:00.000-08:00

Overview:
Emotions are very hard to keep in check when trading investments including stocks, commodities, and real estate. It takes most professional investors years of investment experience before they learn to trade using a system vice using purely emotions. Taking the emotional element out allows the trader to use repetition of entry and exit point criteria for more consistency in results. Trading on emotions, as most amateur investors do, usually provides no consistency of entry and exit points resulting most of the time in more losses than wins over time. This article will explore how many pros count on these emotional traders when making buy and sell decisions. I’ll be using examples that focus on stock investing, but you could just as well have this article talk about investing in anything.

Greed and fear are part of our culture:
Think about when you were a kid. When you saw your friend with a newer bike or neater toy, you wanted one too. That was greed and envy at work – wanting more than you have. Also think about when you had something really nice like a new cool bike that you knew others wanted. Most likely you had a chain to lock the bike up when parked. When at home, you kept it in the house or garage. That was fear at work – the fear of loss. All our lives, we have been conditioned by advertisement and other influences to want more than we have and to fear losing what we do have. When trading investments, these emotions usually work against you, but do play right into the hands of professional traders.

Greed and fear work against trading investments:
When looking for stocks to invest in, amateurs will many times look at stocks that are rising fast and think the stock has to continue going up. Greed kicks in and they buy into the stock when the price has already risen significantly thinking something along the lines of “the price doubled in the past week so I just need to get in to double my money and then I’ll get out”. You know the rest of the story. Right after buying the stock, the price drops quickly. At this point, fear kicks in. The investor may feel he or she needs to keep holding onto the stock until it comes back to the purchase price to get out at break even. Some of these investors will let greed kick in again and buy more shares of the stock at the lower price. As the stock continues to drop, the investor gets more nervous. Many of these investors are 100% invested, meaning they put all of their money into stocks (or whatever they are investing in) at all time. Therefore, when the price drops even further, they begin to panic. Many times the stock eventually drops so far that these fearful investors give up hope in the stock and sell in a panic to prevent further loss.

What happens next? Again, I bet you know – the stock rises quickly. Now the investor is in a quandary. They lost so much money on the stock that their greed kicks in to make up the loss buy buying back into the stock “just long enough to get back to break even”. Some times this works, but many times it does not as the stock again may take another dramatic fall in price even further than when the investor bought in the second time. Again the investor eventually panic sells at another large loss. This cycle may repeat itself several times or even with other stocks as the investor looks for another fast rising stock to get in and make up the loss from the first stock with.

Doing this over time almost always ends up with the investor losing all of his or her available investment funds unless they are lucky enough to have a wife that eventually says “you will stop now! No more!”!!! Thank God for conservative wives to save us for utter ruin!!! Ha! Sorry, just had to get a little of my own past experiences during my amateur trading years into this article!

Pros count on the panic both ways – buying and selling:
If you watch these “high flying” stocks for a while, you will see they trade in wide price ranges. Also, you will notice that the volume of trades is usually highest at the point when the price changes direction (either up or down) from the direction it was going previously. Those high volume price change days are key trading days of greed (must buy since it is surely going higher) and panic (must sell to cut my losses). On those days, the pros are doing the opposite of what the amateurs are doing. When the price does dramatic drops that force the amateurs to panic sell, the pros are buying which usually drives the price back up again. As it rises, the pros are selling all along to get out before the amateurs buy in bulk. When the price gets high enough, the pros start selling in much large numbers that overwhelm whatever purchases the amateurs are doing. Therefore, the price start dropping. The amateurs panic as the price drops and sell all the way down.

Another tactic used by many pro traders is to short sell the stock when prices are high to drive it down (see a previous article where I cover short selling in detail). When the price gets low enough, these short sellers must buy back the stock. Therefore they are motivated to cause those high volume dramatic drop in price days when amateurs panic and sell out their shares. The short sellers are able to find stocks to buy back at these low panic prices to close out their short position. It is important that you understand this is only one of many tactics used by professional traders to help influence the price of stocks that works against emotional traders.

Professional traders use a system to determine buy and sell points:
Their system may include emotions as a guide, but most use data, facts, trends, trading patters, and other measurable information to trigger buy and sell points for investments. Personally, I like to first look at stochastic trends and the MACD to look for these key days of panic selling and greed buying to determine when I will either get in or out of a stock. I’ll also look at many other data to confirm my initial look at the stock. All of this information goes into my particular trading system to let me know when I should buy or sell a stock (or whatever investment I’m using a system on). Most professionals are also using a system that tells them when to buy or sell a stock. It is important to understand as an amateur that you are entering a market where there are many professionals that are also buying and selling using a system. It is important for you to educate yourself on all of the available decision supporting data to come up with a system of your own that works for you. Don’t forget to consider systems that make you money when the stock goes down, not just when it goes up. Making money both when the stock goes down and when it goes up will help your long term success as a trader.

Consistency of trading rules gives the best probability of success:
Consistently applying your system over time by taking out the emotions will give you the best long term success in most markets. However, in todays extremely volatile market where prices can change by very large percentages on a daily basis, it is very hard to apply a consistent system. It may make the most sense in those situations to wait out the market until it stabilizes before starting up your system again. This is so hard for many people since they get greedy and feel they must enter the market at the lowest price to get the largest potential gain when the market recovers on an upward trend again. Continually trying to buy into the lowest price in todays market conditions has repeatedly shown that we have not yet reached the low price. You end up getting in at a high price and getting out at another low price, repeating your larger and larger losses long the way. It is then tempting to continue trying for fear of not being able to make up those losses if you miss out on getting into a recovering market too late after prices have already increased. That is why the consistent use of a system without emotions in normal market conditions is so important to prevent rash buy and sell decisions.

So much more to learn:
This article was only meant to be a very top level overview of how psychology plays in the trading of investments. I will cover various specifics in future articles that I hope continue educating you on being a successful investor based on my own experiences and hard lessons. I certainly don’t claim to have reached the completely unemotional state, far from it. After all I am human, but always learning and applying those lessons in continually improving my system as markets change.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding stocks: When the business ATM stops working

2008-11-09T00:13:00.000-08:00

Overview:
In last week’s article I wrote about how a corporation can raise funds by issuing stocks for sale to investors – sort of like an ATM without the requirement to have funds in the account first. This article continues that discussion by addressing the question of what happens when the ATM breaks – the company can’t raise funds from the sale of stock?

Lets look at what is currently happening to General Motors
If you do a stock symbol lookup for General Motors on any of the financial websites, you will find many preferred stocks as well as the common stock “GM”. Many of the very large DOW listed companies have issued preferred and common stocks over the years to pay for things like new factories and/or tools to produce new products. Selling preferred stock gives the needed funds without diluting existing common shares. GM is no exception. When its stock was trading at over $50 per share five years ago, it could have sold 10 million new shares of stock at $50 per share to gain nearly $500 million in funding for some new project. Today, the stock is less than $5 per share. They would have to sell 100 million shares of stock to generate the same $500 million. However, since they are on the brink of bankruptcy, there are very few investors who would buy those shares in a public offering. Therefore, GM is no longer able to raise much needed funds through offering of stock to prevent filing for bankruptcy. This is why they are now asking the government to provide a bailout of some kind for enough funds to stay in business. In a sense, their ATM is now broken.

Magnify GMs situation with many fallen stocks of today
You can find many GMs out there today. Many stock prices have been driven down severely during the recent stock market drop to fractions of their previous highs. As a result, these companies are not able to sell stocks to raise funds. Many companies are scrambling to redefine their business model. Some are using layoffs, selling off assets, receiving “bailouts”, finding big pocket investors, rethinking their products/services, going bankrupt, or taking other tough actions.

Summary
I find this a very interesting time and am keenly interested in how this all plays out. It seems to me that we are in the middle of another shift in business and economic fundamentals. Businesses and governments around the world are trying to define the new economic and business models that will work globally as they work to come out of the current crisis. Eventually new models will be defined and institutionalized. Changes will be made by businesses, governments, and people. Change means opportunity for those who can see the direction things are moving and are able to get ahead of the curve. Never be afraid of change, use it to your advantage and be a leader who arrives before others even start their change.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding stocks: an ATM for business funds

2008-11-02T01:38:00.000-07:00

Overview of stocks:
Stocks are issued by a corporation to spread ownership of that corporation proportionally to those who own the shares. Usually a corporation will issue shares of stock to investors who purchase the stocks at a set price, usually during a public offering. In this way, a corporation with strong revenues/earnings or prospects of strong revenues/earnings can generate working capital by selling shares of stock. Thus the simple analogy of selling stocks acting similar to an ATM machine for businesses to get access to working capital funds.

Two types of stocks – common and preferred.
Corporations can offer two types of stocks to investors – common and preferred. Both have their pros and cons. Generally, common stock owners have voting rights on Corporate matters while preferred stocks do not, however, preferred stocks usually pay a defined high dividend and are first to get paid before common shares. There are variations to these two types of stocks including convertible preferred which can be traded for a certain number of common shares at a set price on a future date

What are additional pros and cons of each stock type?
Here are some general comparisons between common and preferred stocks:

- Common stock holders share a percentage ownership of the corporation and therefore a share of the corporation’s earnings. For this reason, the price of a stock usually increases as earnings grow. As a quick example, if there are 1 million common shares issued by the corporation and it earns $1 million in earnings, then each share of stock represents ownership of $1 in earnings. If the same corporation later earns $5 million in earnings, then each share of stock represents $5 in earnings. For this reason, you would expect to pay more for the stock when it represents $5 in earnings than when it used to represent only $1 in earnings.

- Common stock tend to increase and decrease in value as the underlying corporation’s earnings increase or decrease for the reasons explained above. For this reason, they are more risky that preferred stock. However, they can also experience much more increase in price for corporations that have strong earnings growth over time.

- Preferred stock is not as susceptible to variation in corporate earnings since they are guaranteed a set dividend payment first before common share holders can receive a dividend. For this reason, there is less risk for preferred stock owners and the stock price does not tend to fluctuate as much unless the corporation is losing money and in danger of paying the preferred dividend. Also, if the preferred stock has a future option to transfer into common shares, then those preferred stock prices do tend to more closely follow the price changes in the underlying common stock price while continuing to pay the set preferred dividend until converted to common stock.

- If the corporation sells more shares of common stock to the public, then this is considered a dilution of the existing stock owner’s percentage of ownership in the corporation. As an example, if the consider the same situation described above where the corporation has $1 million in earnings, if there are now another additional 1 million shares of stock issued (sold to the public), then there will be a total of 2 million shares representing a proportional ownership in the same $1 million earnings. In that case, each share of stock represents only 50 cents ($1 million in earnings divided by 2 million shares of common stock). In that case, the price of each common stock usually goes down when new shares are issued to the public in large quantities.

- Continuing the above thought, there are situations where issuing new common shares to the public actually increases the price of existing common stock. If the corporation is going to use the resulting funds from the sale of the new stock to further expand business and do other proactive things that will result in increased business and growth, then the fact that the corporation is able to generate these new funds quickly from the sale of stock and use those funds for growth can cause investors to want to buy more stock. The increased demand then can result in an increase in stock price, even though there could be a significant increase in the number of shares that dilutes ownership. Consider the situation mentioned earlier where the corporation first earned $1 million and later grew to earning $5 million for the same 1 million in common stocks. Assume the corporation sells another 1 million shares of stock at $10 each resulting in a total of $10 million in new funds to use for investment in growth (new plants, new products or services, perhaps purchase of a competitor, etc.). The result could mean the corporation grows from $1 million in earnings to $100 million in earnings over the same time period it would have only earned $5 million in earnings without the $10 million in new funds for investment in growth. If investors see this huge potential for new growth, they may want to pay more for these stocks, even with the large increase in new common stock shares being issued.

- Preferred stock owners usually have no vote in corporate matters since they don’t have any ownership in the corporation, only rights to a set dividend. For this reason, many corporations desire to sell preferred stock instead of common stock. The existing common stock owners do not have their percentage of ownership diluted while the corporation has access to the resulting funds from the sale of preferred stock to use for business needs. However, they are then on the hook to pay a high dividend to these preferred stock owners. Many corporations therefore issue these stocks with the right to buy them back in the future. In that case, they no longer need to pay the dividends.

Issuing stocks can be very expensive to the corporation.
There are many laws and regulations that must be followed very closely by corporations when they issue (sell) stocks to the public. For this reason, most of these corporations use firms that specialize in issuing stocks. These firms will take care of the legal aspects as well as marketing the stock to perspective investors. Also, these investors usually have to be accredited investors since the Securities and Exchange Commission (S.E.C.) assumes only accredited investors can understand the risks involved and have access to enough excess risk capital to use for investing in these types of offerings.

Summary:
Offering stock for sale to the public is a great way for a corporation to quickly get access to working capital funds to pay off debts, buy out competitors, invest for growth perhaps in developing and/or deploying new products or services, or to use for other business needs. As mentioned before, this can seem like a ATM for cash since it looks like the corporation simply prints stock certificates on paper and sells it to the public for cash. For companies with a strong future outlook, that is not too far from the truth. Sharing ownership in strong and growing companies is the root of capitalism and free enterprise at its best.

Next article in the series:
Next week, the next article will cover what happens when corporations are not able to sell stocks to raise funds - their ATM is broken.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Options: Understanding leaps – controlling the level of risk toward buying (or selling) a stock

2008-10-25T01:17:00.000-07:00

Continuing the series on options:
This is another in a series on understanding options. Previously I wrote about put options and call options (click on each to read the previous articles). I also wrote an article last week on using puts to limit losses when owning a stock that is going down. This article describes leap options, also known as leaps. Leaps allow you to buy a stock at a fraction of the cost and still benefit from the same rise (using a call option leap) or fall (using a put option leap) in price.

What is a leap?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock (click on the links above to learn more about call and put options). A leap is nothing more than a call or put option that has an exercise date many months or years into the future. It is a way to participate in a stock’s price move without paying full price to own the stock outright.

Critical things to know as an investor in leaps:
1) Leaps are exercised in the same way as call and put options since they are call and put options with a long timeframe before their exercise date. Therefore, each leap controls 100 shares of the underlying stock.

2) Leaps cost the most since the odds of reaching the exercise price over a long timeframe are greater, especially if the current stock price has a lot of variance.

3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.

Understanding the leverage associated with leaps:
If you are interested in owning shares of stock in a company, but either don’t have the funds to buy 100 shares or don’t want to risk those funds, leaps are a great investment vehicle to consider. Leaps let you participate in stock price changes over a long period of time without the risk of paying funds to buy 100 shares of the stock.

An example showing how a call leap option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1, 2008 the price of xyz corporation stock is trading at $50 per share. I decide to purchase a January 2010 call option with a $75 strike price that expires the third week of that month. This call is trading at $10 which means I pay $1,000 ($10 price x 100 shares of underlying stocks) to buy the call option.

By January 15, 2010, the price of xyz stock rises to $125 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $75 each for a total cost of $7,500 ($75 x 100). I can then sell these 100 shares of xyz stock on the market for $12,500 ($125 price x 100 shares of stock) and have just pocketed a $5,000 profit ($12,500 - $7,500 purchase cost). However, I paid $1,000 for the call option so my net is $5,000 - $1,000 = $4,000. This is a 400% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.

The leveraging comes from only paying $1,000 to get a $4,000 profit, which equates to a 400% return on investment. The alternative would have been to pay $5,000 on October 1, 2008 to buy 100 shares of stock and then selling them for $12,500 on January 15, 2010 for a profit of $7,500, which equates to only a 150% return on investment. If the stock has risen much more over the long period of time, then the return against the $1,000 purchase price of the leap would be even more dramatic since every $10 increase in the price of the stock equates to another 100% return on my investment in the option ($10 per stock x 100 shares is $1,000 increase in those stock verses the $1,000 investment in the leap).

What is the potential loss with a leap?
The main benefit of using a call option leaps to make money on stocks with rising prices instead of buying the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($1,000 in the above example). If the stock price never went higher than $75, then the call would expire worthless and the investor would loose the $1,000 investment. If I had bought the stock instead, my full $5,000 investment would have been at risk verses only $1,000 to buy the leap. Similarly, the use of a put option leap limits your investment loss only to the purchase of the leap.

The other benefit was the ability to participate in the increasing price of 100 shares of a $50 stock by only paying $10 per share through the leap to get the associated increase in value. I paid 1/5th of the stock price to control the same 100 shares of stocks over a long period of time.

Summary:
The use of a leap (call or put) is another way of making money when the stock price is going up or down over a long period of time without having to put the full amount of funds at risk that would be required to actually purchase and hold the stock. However, the price of leaps tend to be much higher than shorter term options due to the potential of a stock to reach the strike price over the longer period of time. Don’t invest too much on leaps in any one company. Diversify and use leaps as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Options: Using put options to insure stock from loss

2008-10-18T23:57:00.000-07:00

Refresh understanding of a put option:
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. A previous article described what a put option is. As a summary, a put option forces someone to buy stock at a set price from the buyer of the put option if that option is exercised. The desire of a put holder who chooses to exercise the option is that the price has dropped. In this case, the put holder buys stock at the current lower market price and sells it at the higher put option price to the seller of the put. Read the previous article for more details.

Holding a stock can be very scary these days.
With all of the tremendous volatility in stock prices recently, it is no longer safe to hold stock of big strong companies long term. Who ever thought GM and other large corporate stocks would return to prices not seen since the 50’s and 60’s. That means fifty years of appreciation has evaporated in only a matter of weeks.

How can I insure my stock from large losses due to big price drops?
If you own the stock of a company where you are worried about the price dropping, put options can act like an insurance policy protecting you from loss. Since the put forces the seller of the put to buy stock at a set price, you can buy a put option that has an exercise price at or near the current market price for the stock. If the current market price drops through your put option exercise price, then it makes sense to exercise the put option forcing the put seller to buy your stock at the exercise price. Alternatively, you can sell the put option at a profit to someone else before the exercise date, allowing you to continue holding your stock. Either way, the put becomes more valuable as the stock price drops, which compensates you for the associated loss in price on the stock you continue to own.

An example showing how a put option protects you from the drop in price of your stock
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I own 100 shares of xyz corporation stock that has been going down in price lately. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November put option with a $45 strike price that expires the third week of November. This put is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the put option.

By November 15th, the price of xyz stock drops to $30 and I tell my broker to exercise the option. I then force the put seller to buy my 100 shares at $45 each for a total of $4,500 ($45 x 100). Since the stock was at $50 per share on October 1st and were sold for $45 per share on November 15th, I have limited my loss to only $5 per share ($50 October 1st price - $45 received per share = a $5 loss per share). My total loss for the 100 shares is $500 ($5 per share x 100 shares). Had I not purchased the $45 November put option, my loss would be a much higher $20 per share ($50 October 1st price - $30 November 15th price = a $20 per share loss). In that case, my loss would be $2,000 ($20 per share x 100 shares). Again, using the put option, I have limited my total loss to $500 instead of what would have been a $2,000 loss. If the stock price had dropped lower than $30 by November 15th, then the put option would have protected me from a much larger loss.

Why doesn’t every stock owner always buy put options for protection?
Put options cost money. The closer the exercise prices to current market prices, the more it will cost to buy the put option since the probability of the option “going into the money” is high. If you were to continually buy put options close to market prices, then the cost of all the put options you buy will themselves cumulatively act like a loss against your stock’s value. However, in uncertain times or before earnings or other news announcements where there is a strong possibility of bad news coming out on your stock, it may make very good sense to buy a put option. Another strategy could be to buy a way out of the money put option with a strike price far below current market prices. These type of put options will be very cheap, but you will have a much higher vulnerability to loss for the difference between current market prices and the much lower put option strike price. That strategy would be good for protection against a dramatic drop in stock price.

Summary:
The use of put options is one strategy used by seasoned, sophisticated, and some accredited investors to protect their portfolio of stocks against large price drops in uncertain situations. If you own stocks and worry about price drops, consider purchasing put options as a form of insurance protecting you from large losses.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Options: Understanding Calls - making money when a stock price goes up

2008-10-12T22:02:00.000-07:00

Options: Understanding Calls - making money when a stock price goes up

Setting up for future option strategy articles:
Last week I described put options. This article describes call options. I must establish what these two options are before discussing various strategies used by sophisticated investors to control and sometimes eliminate most risk from the movement in the price of a stock. Now, lets get into understanding what call options are.

What is a call option?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. There are put and call options (I covered put options in last week’s article). When exercised, call options force the seller of a call to sell stock at a set price. As the buyer of a call, you hope the stock price goes higher than the call exercise price. If it does, then you can buy the stock at the call exercise price and sell at a higher market price or keep the stock.

A call (or put) option controls 100 shares of the underlying stock:
Critical things to know as an investor in options:
1) One call option controls 100 shares of the underlying stock. Therefore, when one call option is exercised by the call buyer, the call option seller must sell 100 shares of the underlying stock at a set price (an example below will help explain this).
2) Calls (and puts) are priced on a per share basis or 1/100th of the actual cost to buy or sell a call. So, if you see a call trading for $5, it will actually cost $500 to purchase that call option ($5 call option x 100 shares = $500 total cost). These two things can throw new option investors off until they get used to the leveraging inherent with trading options.
3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.

How can you make money with call options when the stock price goes up?
As mentioned above, a call option can be exercised to force the seller of the call to sell the underlying stock at a set price for the buyer of the call option if he/she chooses to exercise the option. The desire is to force the call seller to sell 100 shares of a stock to you at a lower price than the current market price you would have had to pay to buy the 100 shares of stock.

An example showing how a call option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November call option with a $55 strike price that expires the third week of November. This call is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the call option.

By November 15th, the price of xyz stock rises to $70 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $55 each for a total cost of $5,500 ($55 x 100). I can then sell these 100 shares of xyz stock on the market for $7,000 ($70 price x 100 shares of stock) and have just pocketed a $1,500 profit ($7,000 - $5,500 purchase cost). However, I paid $200 for the call option so my net is $1,500 - $200 = $1,300. This is a 650% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.

Another example showing the tremendous leveraging potential in options:
An alternative to exercising the stock purchase would be to sell the call option before it expires to another investor at a profit. If xyz stock is trading at $70 per share on my $55 call option, then there is a $15 profit potential for each of the underlying 100 shares of xyz stock. Keeping in mind the price quoted for a call option is in reference to a single share of stock, then the call should be trading closer to $15 and possibly more if the stock price is continuing to rise. That means I could sell the $2 call for $15 and pocket the difference. In that case, I will have paid $200 to buy the call ($2 call price x 100) and sold the same call now worth $15 for $1,500 ($15 call price x 100) for the same profit of $1,300 ($1,500 - $200). Again, this would be a 650% return on the $200 investment to initially buy the call. In reality, there would be a broker fee to buy the call and again to sell the call. However, you don’t have the extra fees of buying and selling the underlying 100 shares of stocks that would be incurred if the call option was exercised as in the previous example.

What is the potential loss with call options:
The main benefit of using call options to make money on stocks with dropping prices instead of shorting the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($200 in the above examples). If the stock price never went higher than $55, then the call would expire worthless and the investor would loose the $200 investment.

Summary:
The use of call options is another way of making money when the stock price is going up. They are especially good to consider when a stock has been unfairly beaten down in price and set to rebound. However, the price of such call option can be much higher since many investors likely expect the price to return back up and pay a premium for the option. You need to be careful since stock prices can change very quickly in the opposite direction causing your call to expire worthless. Don’t invest too much on calls in any one company. Diversify and use calls as one investment tool among many as part of your investment strategy.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Options: Understanding Puts - making money when a stock price goes down

2008-10-05T01:16:00.000-07:00

Stock prices are dropping these days:
You would have to live in a remote village somewhere to not know about the dropping stock market. You hear about how there was over a trillion dollars of value lost from the 778 pont on day drop in the dow this past week. The media focuses on how much money was lost. What they don’t tell you is that many other investors made tons of money that day when prices dropped by using put options and by shorting stocks (see a previous article explaining shorting of stocks).

What is a put option?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. There are put and call options (I plan to cover call options in a future article). When exercised, put options force the seller of a put to buy stock at a set price.

Using leverage - a put (or call) option controls 100 shares of the underlying stock:
Critical things to know as an investor in options:
1) One put option controls 100 shares of the underlying stock. Therefore, when one put option is exercised by the put buyer, the put seller must buy 100 shares of the underlying stock (an example below will help explain this).
2) Puts (and calls) are priced on a per share basis or 1/100th of the actual cost to buy or sell a put. So, if you see a put trading for $5, it will actually cost $500 to purchase that put option ($5 put option x 100 shares = $500 total cost). These two things can throw new option investors off until they get used to the leveraging inherent with trading options.
3) Put (and call) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your option’s value on or before expiration day.

How can you make money when the stock price goes down?
As mentioned above, a put option can be exercised to force the seller of the put to buy the underlying stock at a set price from the buyer of the put option if he/she chooses to exercise the option. The desire is to force the put seller to buy 100 shares of a stock from you at a higher price than the current market price you pay to buy the 100 shares to sell.

An example showing how a put option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.

I do research to find the stock of a company – xyz corporation - with a high probability of going down in price. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November put option with a $45 strike price that expires the third week of November. This put is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the put option.

By November 15th, the price of xyz stock drops to $30 and I tell my broker to exercise the option. I then buy 100 shares of xyz stock on the market for $3,000 ($30 price x 100 shares of stock) and force the put seller to buy these 100 shares at $45 each for a total of $4,500 ($45 x 100). I have just pocketed $4,500 income - $3,000 cost of the stocks = $1,500 from this transaction. However, I paid $200 for the put so my net is $1,500 - $200 = $1,300. This is a 650% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the put option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.

Another example showing the tremendous leveraging potential in options:
An alternative to exercising the stock purchase would be to sell the put option before it expires to another investor at a profit. If xyz stock is trading at $30 per share on my $45 put option, then there is a $15 profit potential for each of the underlying 100 shares of xyz stock. Keeping in mind the price quoted for a put option is in reference to a single share of stock, then the put should be trading closer to $15 and possibly more if the stock price is continuing to drop. That means I could sell the $2 put for $15 and pocket the difference. In that case, I will have paid $200 to buy the put ($2 put price x 100) and sold the same put now worth $15 for $1,500 ($15 put price x 100) for the same profit of $1,300 ($1,500 - $200). Again, this would be a 650% return on the $200 investment to initially buy the put. In reality, there would be a broker fee to buy the put and again to sell the put. However, you don’t have the extra fees of buying and selling the underlying 100 shares of stocks that would be incurred if the put option was exercised as in the previous example.

What is the potential loss with put options:
The main benefit of using put options to make money on stocks with dropping prices instead of shorting the stock is that your maximum loss of investment is limited to the total purchase paid to buy the put ($200 in the above examples). If the stock price never went lower than $45, then the put would expire worthless and the investor would loose the $200 investment. In the case of shorting a stock, the investor has no limit on the potential loss of the stock price should dramatically increase before the stock can be purchased back to close out the short (again – refer to my previous article on shorting stocks).

Summary:
The use of put options is making many investor very rich in today’s falling stock market. However, you need to be careful since stock prices can change very quickly in the opposite direction causing your put to expire worthless. Don’t invest too much on puts in any one company. Diversify and use puts as one investment tool among many as part of your investment strategy.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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A combined Oil & Gas and Real Estate Investment – The best of both worlds

2008-09-28T23:54:00.000-07:00

Intro:
I get emails and phone calls resulting from reading this Accredited Investor Talk blog. One discussion I had this week was with an oil and gas (O&G) investor who combines these investments with real estate. I thought his strategy would be of interest to both the oil and gas investors and real estate investors who follow this blog.

Concept:
Most of my previous articles on oil and gas investments assume someone else owns the associated land where these wells are drilled, but the partnership funding the drilling projects secures the rights to a lease for drilling on the land. In the case of the investor I talked with, he first buys land near Texas cities with strong suburb growth that are also strong prospects for oil or gas. Once the land is purchased, he drills and puts the associated wells online to generate cash flow from the land. Later, when the value of the land grows from nearby homes being developed in the suburb, this investor starts also developing the land with homes to sell.

My thoughts on a plan for this type of investment:
- Create a detailed business plan and investment strategy before even starting this project: One of the first steps before starting this project must be a detailed business plan and associated investment strategy. The business plan needs to detail what the entry and exit strategies are for the various phases of this project (the O&G phases and real estate phases). It needs to detail all the key stakeholders in the project, their roles and responsibilities, and how they will be compensated. The plan should document the various probabilities of success (and failure) for each phase of the project which links to the level of risk involved. The plan should also discuss what the investment strategy is for this project which should relate to the probabilities and risk levels involved. There are infinite strategies that could be used throughout the project. Will other investors be brought in for various phases of the project or will all funds come from the initial investors only? Having a clear strategy identified and documented in the business plan for each phase of the project helps keep the focus and helps articulate the project to others. I’ve written a past article on an O&G investor’s investment strategy that provides an example of one O&G investment strategy.

- Buying the right land: This investment should include land with a strong probability of containing productive oil and gas deposits. One way to raise the odds of buying potentially productive land is to buy near other productive wells. The logs from these wells should be reviewed to see potential O&G deposits underground in this land. However, purchasing land near current producing O&G wells usually means the price of this land will be high. This must be considered in any revenue model used to support a business plan for this combined real estate and O&G drilling venture. If you over pay for the land, then the revenue from the wells won’t provide enough returns to make the project profitable enough to counter the high risks involved.

- Finding a good developer for the O&G drilling projects: My personal thoughts are a project of this size and cost should use the services of a very capable oil developer to ensure the highest probability of success with hopefully drilling many profitable O&G wells. Unless the investor has a very strong background with the associated experience to develop these wells, due diligence should be conducted to select the best developer for this project. The business plan should state whether outside investors will be used to fund these wells or if funds will come from the initial project’s investors. A good developer will be able to raise outside investor funding for these projects, if that is what the business plan calls for. As a side note, I have written a complete series of articles that covers all the steps needed to drill O&G wells.

- Managing the cash flow: The project needs to clearly document how cash generated from the O&G wells will be used. Will they be used to: 1) pay down debts including purchase of the land, 2) pay back investors, 3) fund additional O&G wells, 4) initiate development of the real estate, 5) paying ongoing expenses, etc. These wells will not provide income forever as the associated limited supply of oil and gas is pumped out. Therefore, a clear strategy must be defined on where the resulting revenues will be directed - leveraged/or not, reinvested, or otherwise spent. Once the revenues start coming in from he real estate development side of the project, this too must be defined and planned. In all situations, the resulting tax issues must be known and dealt with in the cash flow strategy.

- Finding a good developer of the real estate projects: Again, unless the creators of this project have the necessary experience developing successful real estate projects, a successful real estate developer should be used. This may cost more, but their ability to develop successful projects should reduce the risks involved.

- Define what real estate revenue strategy will be used: Will the land be sub-divided and sold off as homes/commercial sites are developed? This would provide large funds to the investors while also giving them an exit strategy as the real estate is sold off. Alternatively, will apartments and/or commercial buildings be built and leased or rented for ongoing revenues to the investors? This would generate ongoing income to the investors while also hopefully providing capital gains as these property values increase. Perhaps a hybrid strategy will be used that considers selling off some of the land while keeping other portions for ongoing rental revenues. That solution provides both large upfront revenues from sales and ongoing revenues from the remaining rental properties.

- Exit strategy: An exit strategy must be defined on how the investors will be able to sell out their interest in the project. Will the project be taken public (if it is large enough) where investors could sell out their shares on the market? Will other investors have the right to buy out an investor’s interest in some other way? An exit strategy needs to be defined and agreed to by all associated investors before the project is started. There should also be agreement between involved investors on what happens in special situations such as the death of an investor, divorce, law suit, etc. All of these things could severely impact the project without an agreed upon plan for each situation that ensures the remaining investors are able to continue moving forward with the project. To cover all of these issues, I highly recommend using a lawyer to draw up documents before investors put in a cent.

Summary:
This is an interesting way of getting the best from real estate and O&G investments, including all of the unique tax benefits provided to O&G investors and other tax benefits provided to real estate investors. However, there are many issues that must be understood and addressed before starting such a project. I don’t pretend to have all of those issues covered in this short article. Any project of this size should employ the best talented people available to ensure success in all phases. If that happens, any included investor would be very richly rewarded.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

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Stocks: Understanding stock shorting – making money when a stock price goes down

2008-09-21T00:00:00.000-07:00

Stock shorting is big in the news these days:
There are many news articles being printed these days about stock shorting. Also, Congress and others are looking at stock shorting and considering various new regulations on this investment tool. Many sophisticated and accredited investors use this means of investing to make a lot of money when the price of stocks move down. I hope to help better explain what stock shorting is, how it works, how it can work against you, and what the benefits and issues are with it.

What is stock shorting?
Most investors are familiar with investing “long” by holding a stock while it hopefully increases in value over time. The goal is for the stock price to continue increasing so there will eventually be a good profit (capital gains) when the stock is sold. However, sophisticated investors make money when the price of a stock goes down. This type of investing can be done by shorting the stock.

How can you make money when the stock price goes down?
As mentioned above - in the case of “going long” a stock, the investor purchases a stock and sells it on a future date hopefully at a higher price. The difference between the purchase and sales price (if sold at a higher price) is then the profit. In the case of “shorting a stock”, the investor borrows stock from someone else and immediately sells it on the market. Eventually the investor buys back the stock from the market - hopefully at a lower price than when it was previously sold by the investor - to give it back to whoever lent the original stock to sell. This is the opposite of going long. The investor first sells the stock at a high price and later buys back the stock at a lower price. The investor keeps the difference.

An ideal example showing how shorting works:
For this example, I’ll assume my broker does not charge to buy or sell stocks so those costs will not be included. Also, I am not going to talk about the broker’s margin requirement. This is a simplified example (as will be the other examples in this article).

On Monday September 15, 2008 I tell my broker to short 100 shares of Morgan Stanley stock (symbol MS). The broker finds 100 shares from someone to let me borrow and then sells them on the market. Assume all the stock shares sold at $34.00 for a total income to me of $34 x 100 = $3,400. Further assume I am a genius investor and happen to know the bottom of the price would be Thursday September 18 at $11.92 and tell my broker to buy back the 100 shares of MS. If I was lucky enough to get all 100 shares for $11.92 then I spent $11.92 x 100 shares or $1,192. The shares are given back to whoever lent me the original 100 shares and I pocket the difference of what I sold the stock for ($3,400) and what I paid to get them back ($1.192). In this case, I would make a profit of $2,208 ($3,400 - $1.192 = $2,208) in only four days without even owning the stock. Furthermore, I didn’t need money to buy the stock since the money was received when I initially sold the borrowed shares.

Where shorting can work against you:
First consider how you lose money when going long a stock. When going long, you lose if the price of the stock goes down. The stock was first bought at a higher price than when you eventually sell the stock with the difference being your loss. In the case of shorting a stock, you lose money if the price of the stock goes up. The stock was first sold at a lower price than when you eventually buy the stock back with the difference being your loss.

An example of how shorting can work against you:
Lets assume the opposite situation for MS than the above example. On Thursday September 19 I think MS is going to continue going lower and tell my broker to short 100 shares. Assuming the broker finds 100 available shares and sells them at the low $11.92 per share, I receive $1,192 at that time ($11.92 x 100 = $1,192). However, instead of continuing lower, the news announcement comes out that the government is working on creating an entity that will take all of the bad assets off of the financial institution books. The stock starts climbing very rapidly. On Friday I panic and tell my broker to buy back the 100 shares. At the time I am forced to buy the shares at a high price of $33.25 since many other short sellers are also quickly buying back shares of stocks to “cover their short”. I then pay $3,325 for these 100 shares ($33.25 x 100 = $3,325). The net result is that I lose the difference or $2,133 in less than 24 hours!

What is a naked short?
You hear a lot about naked shorts these days. In this case, the investor does not first make sure there are 100 shares of stocks available to sell or to buy back and sells the stock anyway. This can be hard to understand, so I refer you to a article on Wikipedia that goes into more detail.

Why is shorting allowed?
Shorting can be beneficial to a stock by helping curtail over-buying of a stock to the point of ridiculous prices above what the underlying company should be valued at. By shorting stocks that have run up in price, these investors can help bring the price back down to more reasonable levels. Therefore, shorting does play a beneficial role of helping to regulate the price of stocks that may otherwise reach very high levels and fall precipitously when the buyers dry up. The “long” investors would then be hurt very quickly as the price drops. By allowing shorting of the stock, hopefully it does not reach such a high level where the risk of dramatic fall is high. If the shorts bring the price too low, then eventually the “long” buyers start coming in to bring the price back up to a reasonable level. The cycle then repeats if the price again goes up too high to where the short sellers get the upper hand to bring the price back down.

How the current freeze on shorting financial stocks might hurt investors:
Currently there is a freeze on shorting many of the financial stocks due to the major financial crisis in our country. This is good in one way since it stops the runaway shorting of a stock where the price goes down and more shorts join in. As they join in the price drops even more attracting additional short sellers. The result is a compounding of shorts that overpower any attempts by the “long” investors to bring the prices back up. Also, many of these financial companies are good. The price drops are not in line with the actual strength of the underlying company, but are the result of these compounding shorts. So, the freeze allows this short upon short upon short to stop, hopefully letting the stock have a chance to rise back in a range reasonable for financial strength of the underlying company.

The danger here is that the price of these stocks could go the other way and be much higher than what is reasonable for the underlying company. Without short sellers to help regulate and bring the prices back down to reasonable levels, these stocks could be in for a dramatic fall at some future point when the “long” investors have all bought what they want. At that time, they start to sell in panic if the price drops. They want to get out at the high and not be caught in a rapidly declining price again. So, we will have to see if the prices of these stocks stop at reasonable levels on their own as they recover from this period of extremely heavy shorting or if they will get too high and be in for another round of rapid decline, even without short sellers. When the ban on shorting is eventually lifted, the short sellers will hit companies where the prices of the stocks have gone way too high. The drops could start a panic sale again as “longs” get out.

Summary:
Stock shorting is a legitimate means of investing and plays an important role in helping keep stock prices regulated. Many times, it helps prevent “bubbles” where prices go way to high and fall precipitously as the “long” investors panic out. Stock shorting is not well understood, but is definitely a tool used by some accredited investors, sophisticated investors, and other seasoned investors.

Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.

- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Almost everything you need to know about oil and gas drilling investments

2008-09-14T23:53:00.000-07:00

Recap of past oil and gas investing related articles.
I though it might be good to recap on the various articles I’ve posted this year related to investing in oil and gas. Below is a list of the various topic areas discussed with links to the associated articles of interest.

Defining an accredited investor:
Accredited investor
You may be accredited and not know it

Tax advantage related:
Tax free income
Reducing up to 40% of AMT income
100% deduction against all income types
Eliminate/reduce 1031 capital gain tax burden

Learn about the oil and gas business:
Why do oil companies need investors?
Who makes money from selling a barrel of oil?
What to watch for when investing in oil and gas
Understanding oil and gas speculators – Why do we need them?

Steps involved in a typical oil and gas drilling venture:
Part 1: Finding the best drilling location
Part 2: Structuring and funding the partnership
Part 3: Preparing and drilling the well
Part 4: Putting the well into production

Examples of actual oil and gas investments:
A single well oil/gas project
A multi-well oil/gas project
Funding the purchase of a oil/gas drilling rig

Choosing a specific oil/gas project to invest in:
Part 1: Know your investment strategy/goals
Part 2: Many ways to invest in oil and gas
Part 3: Choosing a developer and project

Mitigating rising fuel and energy costs for business/owners:
Investing to mitigate the risk of these rising costs

Generating debt free wealth/income:
Using a good oil and gas investment strategy

Real estate vs. oil and gas investments:
Part 1: Time and liability exposure
Part 2: Wealth from cash vs. debt
Part 3: Regulation and liability
Part 4: Considering tax issues
Part 5: Comparison summary and final thoughts

Additional non-oil and gas related articles of possible interest:
The fallacy of buying a home for the interest deduction
Part 1: What differentiates a successful accredited investor
Part 2: What differentiates a successful accredited investor
Part 3: What differentiates a successful accredited investor

A Plug for our sister "Oil and Gas Investor Network" social site:
For those of you who are not aware, we have a sister site for oil and gas investors on Ning. It is the “Oil and Gas Investor Network” Site at http://oilandgasinvestornetwork.ning.com/. This site was originally started to support members of our LinkedIn.com group “Network for Oil and Gas Investors” at http://www.linkedin.com/groups?gid=87188.

Summary:
So there you have it, all of the articles published to date on this blog site. I hope this recap provides a single source of valuable links you can use many times in the future as you either consider investing in oil and gas or continue on your oil and gas investing journey.

Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on how we can help you be a better oil and gas investor or with other oil and gas related questions/topics you have that we can answer in future articles. Happy investing to you all.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

The fallacy of buying a home for the tax deduction

2008-09-07T15:34:00.000-07:00

“You need a tax deduction”
Many income earners hear that phrase a lot. It makes good financial sense to find ways of reducing our taxes while still paying our fair share to maintain this wonderful country we are blessed to live in. Some advisors recommend buying a home for the tax deduction of interest on the loan. However, they should have a full understanding of the client’s financial status to make this statement only if it truly fits within his/her financial plan. Unfortunately, many other people hear this advice and feel it is a global statement for everyone.

Understanding the deduction of interest on a home loan:
The ability to deduct the interest paid on a home loan is one of the few deductions used by the ordinary wage earner. A few years back, they were able to deduct interest on credit cards and other expenses. No longer. Therefore, they try to buy the largest home affordable in order to have the most interest to deduct yearly. Once the original loan gets paid down to where most of the monthly payment toes toward principle rather than toward interest, they may get a new refinance loan or a 2nd on their home to have cash for “investing” and higher yearly interest to deduct. They stay in debt on their home to the maximum level possible for this tax deduction.

What does it really cost to deduct the interest on a home?
What these people may not realize is that they are paying out over twice the money than the benefits they are receiving from the deduction of interest. The following example will help illustrate this further.

Very simplified example:
Joe earns a yearly salary that puts him in a 40% combined state and federal tax bracket. Joe buys a house with a total of $25,000 interest the first year. This provides a $25,000 x 40% or $10,000 tax benefit. However, note that Joe spent a total of $25,000 to get this $10,000 benefit, or 1 ½ times more than the benefit.

If Joe was in a lower total bracket of 25%, then the benefit would only be $25,000 x 25% or a $6,250 benefit. In this case it cost Joe $25,000 for a $6,250 benefit or four times as much.

These examples are very simplified and don’t take into account all of the tax issues associated with a real situation. However, they do illustrate the point that Joe is spending much more money than he receives from reduced taxes. In addition, over a 30 year loan, the extra money spent is significant.

Must look at each person’s situation to determine what makes sense.
For some people, renting may actually make more sense financially than owning. For others, owning a home is the best option. However, care must be taken to buy a home that fits within an appropriate financial plan for that person. Don’t try to buy the largest home or get the largest mortgage just to have a big interest deduction. There are many other deductible investments you can make that will reduce taxes while providing income. In this way, the money spent actually generates increased income rather than extra expense. Also, consider the benefits of having your home paid off with the funds that once went toward the mortgage payment now available for investing in additional income generating investments. There are investments such as oil and gas drilling ventures that provide a 100% deduction of all invested funds against all income types while not counting in alternative minimum tax (AMT) income. Other tax advantaged investments include government bonds. In these ways, the investor can reduce taxes while increasing income without adding debt.

Summary:
The main point here is not to buy the largest house or maintain the largest mortgage for the tax deduction alone. Be sure to carefully consider your long term financial plan to determine what level of investment in a home best fits within that strategy. Work with a financial planner as needed during this process.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3 - What differentiates a successful accredited investor? What makes them successful?

2008-09-01T00:14:00.000-07:00

Continuation of previous article:
This the third article in the series describing my thoughts on what makes many accredited investors successful. How do they think and work? What differentiates them from those who have not achieved their goals? In the previous articles - Part 1 covered the first three elements that make them successful: having a dream that forces action, having desire to overcome challenges along the way, and having an end goal for reaching your dream while Part 2 covered the next three: understand change is hard, don’t let fear win, have a plan, and executing the plan. This article covers the final elements: constantly learn, continually improve, never give up, and giving back to others.

Constantly learn:
Successful people are always learning about things. They take advantage of spare time by reading or listening to tapes covering subjects of interest. They love to learn from other successful people how they overcame their fears and eventually succeeded in reaching their initial goals. These people never feel they have fully arrived at the end point. New challenges present themselves. New dreams are beyond their current ability to achieve without learning and moving forward through the required changes.

Continually improve:
When executing your plan, there most certainly will be new changes required as you find out about things not foreseen initially. Look at your plan and make adjustments as needed to keep moving forward with the new information incorporated into the plan. Keep improving the plan and associated actions over time as you get closer to the end goal.

Never give up:
Look at the Olympics - many of the Olympians at one point or another wanted to give up. Think about Great Britton during the World War when Winston Churchill told them never give up – what would have happened had they given up?

There is a difference between giving up out of fear and giving up because your dream was unrealistic (you want to be the first trillionaire). If you give up completely, then that is most likely due to fear. If your dream is unrealistic, then you should down-scope the end goal to something more achievable, but still beyond your current abilities. Remap your plan of action and work toward this readjusted goal. Once achieved, then look for another goal that again is achievable, but beyond your abilities. This process of continually achieving and creating new goals is what many successful accredited investors do over their lifetime. That has lead many to achieve things they would have never dreamed possible when initially starting on their journey of change. By continually growing and moving forward, each smaller achievement built upon another until their current success was achieved.

Give back:
Successful people give back. They want to help others achieve their dreams, if these people are sincere in their desire and show action toward working on the associated changes. They want to help their community and those less fortunate. They want to help the underprivileged learn to become self sufficient by providing tools (education, supplies, scholarships, etc.) these people can use to build a life of success. If you have not seen the recent movie “The Pursuit of Happyness”, I highly recommend it. That is a true story of an overcomer. Watch the bonus material to see how this once homeless man taking care of his son became an extremely successful Wall Street trader eventually owning his own firm. He now travels to Africa and helps many people there.

Summary:
These are my personal thoughts on what differentiates most successful accredited investors. These could also be true for anyone who dreams and works toward achieving their dreams. Be a dreamer and don’t give into fear. Learn from your fears and face them head on. Constantly facing and overcoming your fears will give you new confidence and belief in your ability to make things happen. Understand that you will always face some failures in life. We all do. The difference is how you react to those failures. Will you let them stop you or will you let them teach you? The choice is yours.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 2 - What differentiates a successful accredited investor? What makes them successful?

2008-08-24T20:22:00.000-07:00

Continuation of previous article:
This the second article in the series describing my thoughts on what makes many accredited investors successful. How do they think and work? What differentiates them from those who have not achieved their goals? The previous article - Part 1 - covered the first three elements that make them successful: Having a dream that forces action, having desire to overcome challenges along the way, and having an end goal for reaching your dream. This article covers understanding that change is hard, not letting fear stop you, having a plan to reach your goal, and executing that plan.

Understand change is hard:
Most times change involve an initial period of very hard work trying to keep track of everything, making sure you don’t forget something as you work on the change. Without a strong desire to make the change, most people give up. Not the successful accredited investor. Most know they can’t keep doing the same thing they are currently doing. Their desire to do something different forces action toward change, whether they have fully visualized their end goal or not.

Think of the forces needed to initially get a large object to start moving on a flat surface (think of a very long train on tracks). It takes continued action to keep pushing this object faster until you reach the desired speed. Once at that speed, then much less energy/action is needed to keep the object moving at that constant speed. This is also true of change. When you initially start on a path of change, there are many forces/actions required to get the “large object” to start moving faster while also controlling the direction the object moves – toward your goal.

Don’t let fear win:
Fear of change is the biggest killer of dreams. All our lives we have experienced negative events that make us not want to repeat them again. We fear getting into a similar situation again where the possibility of experiencing the associated pain and anguish is high. Think of when you were rejected by someone during a sales pitch, presentation, proposal, love, etc. The first time you experience the associated rejection, it can be very painful. In general, people therefore react in two ways (from my experience): type 1 - they internalize and fear the event and do everything to avoid being in a similar situation again, or type 2 - they overcome their fear of the event by learning from it and figuring out how to change the outcome should a similar situation comes again. Again, your desire for change must be strong enough to move you from being a type 1 to a type 2 as an overcomer who learns and continues moving forward toward the end goal.

Personal story:
I have a fear of heights. However, I make it a point to do those things that make me uncomfortable. When we visit a city, I make it a ponit to go to the top of the highest sky scraper and walk around the top looking down. One of the scariest was walking around the top of the Stratosphere in Las Vegas. But I didn’t stop there. The Stratosphere is a very tall tower with rides on top. I saw the roller coaster called High Roller that goes around the outside of the observation area several times. I made it a point to ride that coaster no matter how scared I was. Boy was I in for a surprise. The ride is amazing since you don’t see anything under you but the city hundreds of feel down below. It feels like you are barely being held to the tower and could easily detach and fly down to your doom! THAT WAS SCARY! But, I did it. I felt proud for making myself face this fear and tackle it head on. I left Vegas that day feeling a bit more confident about my abilities to take on a challenge and win! You should also do the same for your fears. Face them a little at a time. Keep moving forward toward your goals as you overcome these large obstacles.

Have a plan:
As I mentioned before, you need to fully visualize the end goal and all the changes that will be needed to get you there. Create a list of all the changes needed. Don’t limit yourself at this point. Just write everything down you can think of. Once you have a complete list, then you can start figuring out which changes are realistic and which are not. You can then start grouping and categorizing the changes. Understand the sequencing of the changes – what order must they be done in. Prioritize the changes in order of importance. Continue reviewing these changes until you have a final list that is in chronological order so you know what to do first, next, and next after that. You can then guess how long each change will take, along with what you need to make that change. Place dates on the calendar for when you will start and achieve each change. Complete the calendar until you have a date when the final end goal will be achieved. At that point, you will know all the changes, when they need to be started, what things you need to execute each change, when the change will be completed, how they relate to each other (the order they need to be done), etc. This is your plan for success toward the dream.

Execute the plan:
Believe it or not, many people actually get this far, but never execute their plan. This is the critical point of no return. Either you truly overcome your fear of change or you don’t. Executing the plan can only be done by actually facing your fears and making the required changes. Doing nothing ensures status quo and no achievement of the dream outside of winning the lottery or some other unlikely change of chance.

Stay tuned for next week's continuation:
Next week, the next article will continue this series by covering the need to constantly learn, continually improve, never give up, and the importance of giving back.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 1 - What differentiates a successful accredited investor? What makes them successful?

2008-08-17T02:33:00.000-07:00

Overview:
This will be a little different from my usual articles. Rather than talk about a specific investment or investment technique, I felt it would be beneficial to talk about what makes many accredited investors successful. How do they think and work? What differentiates them from those who have not achieved their goals?

The information provided will be largely biased toward my own experiences and not necessarily representative of all accredited investors. With this in mind, I share my thoughts on what traits you need to be a successful accredited investor. I plan to complete this series in several parts with this article being part 1. Read the blog next week for part 2.

Common elements of a successful accredited investor:
In my view, elements of a successful accredited investor usually include the following:
- Have a dream: They want something that motivates change

- Have desire: They have a strong desire to reach the dream

- Have an end goal: They can visualize what life will be like when the dream is achieved

- Understand change is hard: They know change is hard

- Don’t let fear win: They don’t let fear stop them from moving forward

- Have a plan: They create a specific plan of action for changes needed to achieve their end goal

- Execute the plan: They work their plan

- Constantly learn: They love learning about new things, skills, how others overcome, etc.

- Continually improve: They refine/improve their plan of action while moving closer to the end goal

- Never give up: They don’t give up, but may readjust their end goal to be more realistic

- Give back: They want to give back by helping others succeed

I will cover each of these in more detail in this series of articles on the successful accredited investor.

Have a dream:
Deliberate success begins with a dream, not being satisfied with status quo. You need to see something beyond your reach that requires stretching yourself beyond your known current abilities and means. The dream must be strong enough to create desire to take action.

Have desire:
Your dream must create a strong enough desire to take action toward making a change. Most people have a very hard time making change. They may not be happy where they are in life, but they understand it and know what to expect. Even in misery, the person involved can find some strange level of comfort. The misery is familiar to them. They have learned to live within the associated environment and, to some extent know what to do, what to expect.

Have an end goal:
Visualize and understand what the end goal is. Where do you want to be and what do you want to be doing once the dream has been achieved? How will achieving the dream change your life? What does it look and feel like? Think about all the things that need to change in order to get you to that end goal.

Next article in the series:
Next week, the next article will cover understanding change is hard, overcoming fear, creating a plan of action toward the end goal, and executing that plan.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding Oil and Gas Speculators – Why Do We Need Them?

2008-08-11T00:38:00.000-07:00

Oil and gas speculation is in the news:
Lately we have been reading about Congress and their desire to regulate speculation in the oil and gas market. What is this speculation? Who are the
speculators and how do they work?

What is an oil/gas speculator?
A “speculator”, in this sense, is an investor in the futures market who buys or sells futures contracts on oil or gas. In general, an investor will buy a futures contract (called going long) if he or she feels the price is going up. Alternatively, if the price is assumed to be going down, the investor will sell a futures contract (going short).

What is a futures contract?
There is an article on the Telegraph’s website (a Brittish newspaper) that does a good job describing the futures market. Also, the Chicago Board of Trade (www.cbot.com) website has a good brochure that describes the futures process mostly about agricultural products, but the principles are pretty much true for oil and gas futures contracts as well.

Bottom line – a futures contract is a legally binding contract between a buyer and seller to deliver a standardized quantity of the underlying product at a specified price on a specific future date. What this does is allow a seller and a buyer to agree on a set price to transact the trade of a item in the future, oil or gas in the case of this article, while shifting the risk of price changes onto the investor who buys the contract as a futures contract. The buyer could be a airline company who uses lots of gasoline and must be able to predict what the cost will be on a future date when they need to purchase enough quantity to fly their planes. The seller could be a refiner that produces jet fuel from crude oil for airlines and agrees to the future date and price. The seller is also able to project what future revenues will be from the sale of fuel on a future date. In fact, the seller may actually contract to sell fuel that is not yet in inventory. In this case, the refiner may also have a future contract with a crude oil supplier for deliver of oil on a future date at a future agreed price. In this case, there is a chain of contracts, all vulnerable to dramatic changes in actual market price for oil (or similarly for gas).

How are prices determined?
Both parties, the airline and the refiner, will negotiate the future price based on estimates of what the price of fuel will be trading at on that date using the best available data today. This estimate may be close or way off, either higher or lower. World events can occur during the time of the contract to dramatically change the price. If prices increase dramatically over the agreed price, the seller loses potential profits that would have been made at the higher market price. If prices go down dramatically, then the buyer could end up spending much more for the fuel than a competing airline who buys at the lower market price. Therefore, without a means to mitigate the risk of price changes, both parties may hesitate before entering a contract and both will not be able to accurately project future revenues and costs.

What is the role of a speculator?
This is where a speculator can help. The futures speculator takes on this risk of price changes during the time of the contract. The buyer and seller can feel confident to enter their best estimate for prices on a future date knowing they can then pass the contract to a futures trader, “speculator”, to take on the risk. The speculator that feels the price will increase to the contracted price buys the contract, which is known as “going long”. The speculator that feels prices will not reach the agreed price will sell the contract before it expires, known as “going short”. In fact, short sellers can make money as the price decreases by forcing someone to buy back the contract at a lower price than they sold at it. This is beyond the purpose of this article, but is one strategy that speculators use.

Strategies speculators use:
There are many strategies speculators use to hedge their long or short bet on the future price of oil or gas. Some involve buying or selling more than one contract and different strike prices (the agreed contracted price the underlying oil or gas will be sold at in the future). Some involve buying both a long and short position at different prices. Some involve buying or selling multiple contracts at the same strike price. Then there are options that can be traded on these futures contracts, which again is a topic for another article.

Futures markets support strong business:
The futures market provides buyers and sellers with a world-wide trading platform using standardized contracts that are easily traded and understood by futures traders. Buyers and sellers can feel confident to enter these future contracts knowing the risk is easily passed to future traders. This is a critical tool for business to accurately project future revenues, costs, and earnings in a volatile market. Businesses can move forward transacting business in unpredictable market conditions. Without the futures market, businesses would not be able to accurately project their costs and revenues. They may be forced to be overly conservative and hold off investments for future growth, which could lead to less jobs or even loss of jobs. It could mean missed business opportunities due to being too conservative on investments for future growth.

Prices are not determined by the speculator, but by market conditions:
Speculators are also guessing what the future price will be when the contract expiration date comes. They are subject to world events that can dramatically change the current trading price of oil and gas for past futures contracts that end each day. Buying and selling futures contracts does not change the price, the demand and supply of oil and gas each day does. I don’t disagree there may be some large groups who could manipulate the supply or demand for oil or gas each day (OPEC, emerging country growth – China & India, etc.).

Summary:
These are my personal thoughts on the wonderful benefits provided by the futures market and associated futures traders, also known as speculators. I don’t claim to be an authority on such markets, but these are my personal observations.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding An Existing Multi-well Oil Drilling Investment Opportunity

2008-08-04T01:15:00.000-07:00

Overview of the project:
We are currently invested as lease a owner in a multi-well oil drilling project that will be drilled in Texas. This is a five well project that is being purchased by a foreign investor and slated for drilling to start very soon thereafter. Each of the five wells will be similar to the single well project written of in the previous article posted last week. This article will provide highlights of what a multi-well project looks like to provide readers with insights when considering investing in similar oil and gas drilling ventures. It is written for educational purposes only and is not a solicitation to invest or a prospectus. Some hypothetical situations have been added for purposes of helping the investor conduct his/her own systematic “what if” analytical approach when considering these types of investments.

This five well project involves re-entry into vertically drilled wells by Exxon in the mid-80s by using horizontal drilling upwards of a mile through the known pay zones to minimize the risk of failure while maximizing the potential flow of gas and oil (payout to investor). These wells were abandoned at that time since oil was too cheap to continue producing from the well.

An overview of horizontal drilling (repeat from last week’s single well article):
Horizontal drilling is a fairly new process for drilling where the drill bit can actually be steered sideways toward the highest concentrations of oil and gas. The drill operator usually has tools allowing logging while drilling (LWD) the hole. This means the operator can see what the formations in the ground are around the drill bit to know what the move toward or away from. This provides much better odds for a successful well than simply drilling vertical wells and logging the well after it is drilled to see whether the well will be a success or not. Also, another benefit of horizontal drilling is that the wells tend to produce strong for the first five years or so and then continue producing at a slower rate over the next 15 years or so. Over the life of this well, the investor may gain significant multiples of total return on their initial investment.

Understanding how the investment is structured:
- Investors ownership: This five well project is being sold to a single investor. The investor has a 75% working interest (WI) and 54% net revenue interest (NRI) in the well. This means the investor owns 3/4 of the well for tax purposes, and receive 54% of the revenues generated by the well since other percentages go to the land owner, lease owner, oil producer, and others involved outside of the investor.

- Cost of investment: This is an $11.2M investment.

- Projected return on investment: Conservative revenue models project a 56% annual internal rate of return (IRR) for ten years. This is much less than the projection from the single well described in last week’s article. The main reason is that this 56% return is over ten years where the projections in last week’s article was only covering the first year’s return. Another reason is that the 56% projection assumes three of the five wells are drilled the first year and one of those wells does not produce. It also assumes the last two wells are drilled the second year and one of those wells is bad. Therefore, the conservative projection assumes that two of the five wells are dry holes (non-producing wells). There are other differences you should look for between investments such as the Working Interest and Net Revenue Interest differing from project to project.

- Tax savings benefit: The projected return does not consider any added returns from tax savings due to write offs which could add an additional 25 – 50% to the first year return based on your tax bracket. As a reminder, all invested funds in domestic independent oil and gas drilling ventures are deductible against all income types with the intangible drilling costs (IDC) being fully deductible the first year and the remaining tangible costs being deducted over seven years. This project has a high percentage of IDC so a large portion of the total investment can be written off the first year against all other income. I don’t have the actual IDC percentage for this project. For purposes of this example I will assume 70% of the project is IDC (fairly typical for many projects). In this case, 70% of the $11.2M can be deducted the first year saving $7.8M in taxes. The remaining 30% tangible costs are deducted over seven years.

- Yearly tax free income benefit: In addition to the tax deductions, 15 – 23% of each year’s income is tax free for these types of domestic oil and gas drilling ventures. A projected first year income of $7.6M at $130 per barrel oil with a total 300 barrels of oil equivalent (BOE) daily production means the investor would receive a minimum of 15% tax free, or $1.1M. If you are in a 35% tax bracket, that is a savings of $385,000 in taxes that is additional income.

Putting it all together for expected 1st year return:
At $130 per barrel for oil and 300 BOE daily production, this project is projected to create $7.6M income + $7.8M tax savings (70% of invested funds from IDC 1st year deduction) + $385,000 income tax savings (1st 15% of the year's income is tax free) for a total of $15.8M the first year on a $11.2M investment. This is a projected 141% total return on the investment. As stated earlier, this return assumes 2 of the five wells are bad. Also, in general, horizontal wells provide stronger returns initially and over a longer period of time than vertically drilled wells. Therefore, this project could generate many multiples of the original invested funds over the life of the well.

Lets look at hypothetical high projection scenarios:
Recently another major oil drilling corporation has had several similar wells in the area come in at 500 to 700 BOE daily production.

For fun, let’s make assumptions that assume ideal situations concerning production from the associated wells. Again, these are hypothetical and idea situations provided to help the investor think about doing their own ‘what if” analysis of investments. As an investor, it is good to know your upper, as well as your lower boundaries of expectation before making an investment.

Scenario 1: Let’s assume each of the three wells come in at 500 BOE, that would be a total of 1,500 BOE daily (remember we also assume two of the five wells are dry holes). That would be five times the 300 BOE production shown earlier for this project. This would translate into a first year income of $38M at $130 per barrel oil instead of the $7.6M calculated for the original total 300 BOE projected daily production for the first year. That would be a 339% return ($38M/$11.2M) on investment in the first year of production from all three wells.

Scenario 2: Now lets assume all five wells are good and each producing 500 BOE daily. Total production from the five wells would be 2,500 BOE daily, 8.33 times the 300 BOE production. This translates into a first year income of $63.3M at $130 per barrel oil. That would be a 565% ($63.3M/$11.2M) return on investment in the first year of production from all five wells.

Again, these examples do not count the additional savings from taxes. Keep in mind that production will start dropping off each year for the wells so the income shown is not going to last through the life of the wells. However, if either of these first full year of production scenarios comes in, you can see why investing in oil and gas drilling ventures can be very profitable for investors in the right projects. The remaining years would be icing on the cake.

Low time required for an outstanding return:
As an investor, most of your time will be spent investigating the initial investment to consider participating in a oil/gas drilling venture and funding your share of ownership in the partnership. Once invested, you can sit back and watch the monthly payment checks come in. A good return for very low overall time commitment.

Disclaimer:
Again, information provided in this article covers projections on a multi-well horizontal drilling project. These are not to be considered actual returns. There are many factors that can cause the returns to vary from projections, including the possibility the well may not turn out to be producible (a dry hole - oil industry jargon). Each investor should always do his/her own due diligence before considering participating in any investment. This article is provided for educational purposes.

Summary:
I hope this example of a multi-well oil drilling investment helps you understand some of the things I have discussed in previous articles to this blog. This is why the oil and gas can be very profitable for investors who know what they are doing and make calculated investments in this industry. I never suggest anyone invest more than they are willing to lose so seek advice of a professional if you are considering investing in oil and gas for the first time.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding An Existing Oil Drilling Investment Opportunity

2008-07-27T03:10:00.000-07:00

Overview of the project:
We are currently invested in a single well being drilled in Texas. We are about to participate in a new five well project that will be open for funding by investors very soon. Each of the five wells will be drilled similar to this single well. This article will provide some highlights of this single well project to help readers understand what they will hear about when considering an investment in oil/gas drilling. It is written for educational purposes only and is not a solicitation to invest or a prospectus.

This single well project is a re-entry into a vertical well drilled by Exxon in the mid-80s. The well was capped at that time since oil was too cheap to continue producing from the well. This investment pays for a rig to go back into the vertically drilled hole to then drill horizontally upwards of a mile through the pay zone (layer of earth where the oil and gas are known to exist from the well’s previous log report.

An overview of horizontal drilling:
Horizontal drilling is a fairly new process for drilling where the drill bit can actually be steered sideways toward the highest concentrations of oil and gas. The drill operator usually has tools allowing logging while drilling (LWD) the hole. This means the operator can see what the formations in the ground are around the drill bit to know what the move toward or away from. This provides much better odds for a successful well than simply drilling vertical wells and logging the well after it is drilled to see whether the well will be a success or not. Also, another benefit of horizontal drilling is that the wells tend to produce strong for the first five years or so and then continue producing at a slower rate over the next 15 years or so. Over the life of this well, the investor may gain significant multiples of total return on their initial investment.

Understanding how the investment is structured:
- Investors ownership: Investors have 33% working interest (WI) and 25% net revenue interest (NRI) in the well. This means they own 1/3 of the well for tax purposes, but receive 25% of the revenues generated by the well since other percentages to the land owner, lease owner, oil producer, and others involved outside of investors.

- Cost of investment: Each unit of investment costs $100,000. This provides 2.75% WI and 2.0873% NRI in the well for the investor.

- Projected return on investment: This project was initially formed when oil was selling for around $80 per barrel. Projected earnings for the investor’s $100,000 at that time was $119,808 at 200 barrels of oil equivalent (BOE) per day for $80 per barrel oil. With oil now trading about $125 per barrel, this equates to around $187,200 income or a 187% return in the first year of production. This does not count the additional tax savings granted by congress for independent producers of domestic oil and gas.

- Tax savings benefit: There is an expected additional average tax savings of $32,000. All invested funds in domestic independent oil and gas drilling ventures are deductible against all income types with the intangible drilling costs (IDC) being fully deductible the first year and the remaining tangible costs being deducted over seven years. For this project, IDC are about 80% of the project so $80,000 of the $100,000 invested is fully deductible in the first year by the investor.

- Yearly tax free income benefit: In addition to the tax deductions, 15 – 23% of each year’s income is tax free for these types of domestic oil and gas drilling ventures. With a projected first year income of $187,200 at $125 per barrel oil, the investor would receive a minimum of 15% tax free, or $28,080. If you are in a 35% tax bracket, that is a savings of $9,828 in taxes. This is additional income to you.

Putting it all together for expected 1st year return:
At $125 per barrel for oil and 200 BOE daily production, this project is projected to create $187,200 income + $32,000 tax savings (80% of invested funds from IDC 1st year deduction) + $9,828 income tax savings (1st 15% of the year's income is tax free) for a total of $229,028 the first year for a $100,000 investment. This is a projected 229% total return on the investment. As stated earlier, in general, horizontal wells provide stronger returns initially and over longer periods of time than vertically drilled wells. Therefore, this project could generate many multiples of the original $100,000 invested funds over the life of the well.

New information since the original project was put together:
Recently another major oil drilling corporation has had several similar wells in the area come in at 500 to 700 BOE daily production. If this project comes in at 500 BOE daily, the first year income would be $468,000 at $125 per barrel oil instead of the $187,200 calculated for the original 200 BOE projected daily production. That would be a 468% return on investment in the first year. Again, this does not count the additional savings from taxes. We are keeping our fingers crossed that the well comes in around this range.

Low time required for an outstanding return:
As an investor, most of your time will be spent investigating the initial investment to consider participating in a oil/gas drilling venture and funding your share of ownership in the partnership. Once invested, you can sit back and watch the monthly payment checks come in. A good return for very low overall time commitment.

Disclaimer:
Information provided in this article covers projections on a single well horizontal project. These are not to be considered actual returns. There are many factors that can cause the returns to vary from projections, including the possibility the well may not turn out to be producible (a dry hole - oil industry jargon). Each investor should always do his/her own due diligence before considering participating in any investment. This article is provided for educational purposes.

Summary:
I hope this example of a real existing oil drilling investment helps you understand some of the things I have discussed in previous articles to this blog. This is why the oil and gas can be very profitable for investors who know what they are doing and make calculated investments in this industry. I never suggest anyone invest more than they are willing to lose so seek advice of a professional if you are considering investing in oil and gas for the first time.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Understanding An Existing Oil Rig Purchase Investment Opportunity

2008-07-21T01:42:00.001-07:00

What is an oil rig?
A drilling rig is used to drill the hole to reach oil and/or natural gas. Rigs come in many shapes and sizes.
- A shallow land based well may only require a mobile rig that is mounted on the back of a special vehicle. The vehicle positions itself over the drill site and begins drilling.

- A deep land based well requires a much larger platform drilling rig. These rigs must have a strong enough motor to turn the drill bit and associated pipes through thousands of feet of ground. The pressure at those depths are tremendous. Some rigs have motors strong enough to drill sideways (horizontal drilling), along with all of the associated equipment.

- Off-shore/Ocean drilling can be conducted by special ships or by platforms of various sizes. There are also many other new tools available supporting drilling off-shore.

What are the benefits of investing in a rig?
A properly structured rig investment means continued and rising income for the associated investors. With oil and gas receiving record prices, the demand for drilling rigs is tremendous. This means they can demand increasing daily drilling rates from oil producers having their funded oil/gas drilling projects drilled. Rigs can demand from tens to hundreds of thousands of dollars each day to drill one hole. Depending on the depth of the hole, it can take a week or over a month to drill the hole. Rigs are employed almost every day of the year - 24 hours per day - seven days a week. Daily drilling rates are rising all the time due to high demand. The associated investors who own the rig receive a portion of this rising daily drilling fee back as rising income, usually paid monthly or quarterly. The investment is usually secured against the value of the rig so the rig could be sold to pay back the investors if needed making the investment very secure in today’s high demand environment (rising values for rigs).

Example of how a real existing rig investment is structured:
Currently, an oil producer we have a history of investing with has an offering for investors to purchase 1/3 interest in an oil rig. Highlights of the deal are:
- This is a land based rig used to drill deep wells and horizontal wells.

- Investors can invest from $30k upwards to the entire 1/3 purchase amount.

- This investment is secured with a lien against the rig. The rig is worth more than the value secured by the lien so investors are very likely to receive all invested funds back should the rig be sold in the unlikely event the investment does not work out.

- At the end of the third year, the 2/3 owner of the rig has the right to exercise several options: 1) purchase back the investor’s 1/3 ownership share, 2) sell his 2/3 ownership interest to a 3rd party or the existing investors, or 3) may opt to continue with the revenue sharing plan. Any one of the three is quite beneficial to the investors. Investors will either receive funds back and move on or will continue to receive ongoing revenues.

- Investors will receive a portion of the daily drilling rig fees in quarterly payments according to the amount invested. For this investment, investors expect a projected annual 18.4% internal rate of return on their investment. However, this is only based on the rig being used 320 days per year with a constant daily rate. In reality, as stated earlier, daily rates are rising and the rig will likely be used nearly all 365 days per year. Therefore, the actual returns should be higher.

Low time required for a good return:
As an investor, most of your time will be spent investigating the investment and funding your share of ownership in the partnership. Once invested, you can sit back and watch the expected increasing quarterly payment checks come in. A good return for very low time commitment.

Summary:
I hope this example of a real existing oil rig investment opportunity helps you understand some of the things I have discussed in previous articles to this blog. I plan to cover a real oil/gas drilling venture in my blog next week.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

2008-07-13T00:33:00.000-07:00

Third and final article in the series:
This is the third article in this series about how to make the choice on a specific oil/gas well drilling project to invest in. Click here to read the first article.

Focusing specifically on an investment in drilling for oil and gas:
In the previous article, we covered many ways of investing in oil and gas. From this point forward, we will address those investors who have decided to invest in domestic drilling ventures for oil and gas.

Choosing a specific oil developer to invest with:
After you have clearly defined your investment strategy (see the first article in this series), you need to look for oil producers that offer the type of investments that fit your strategy. However, there are many inexperienced and questionable oil producers out there trying to get your money.

Once you decide to invest in oil and gas, where do you go to find viable projects?
Your best bet would be to find someone who is currently a successful oil and gas investor and find out what they are doing. Ask everyone you know if they know such a person. After you exhaust those sources, ask professionals who deal with high net people such as financial advisers, the local Chamber of Commerce, accountants, lawyers, etc. The most risky place to look for these investments is over the Internet, magazine or newspaper ads, and investment chat rooms.

Be cautious before investing with a oil producer.
You must be very cautious and check these producers out. A previous article provided provides information to conduct due diligence on oil producers to narrow your search to reputable candidates. Part of your elimination process should be understanding the various oil and gas investments they have to offer and matching those against your investment strategy.

How much should you invest?
When you finally chose the best project and associated oil producer, then consider how much you want to invest. Another past article covers a strategy for systematically creating debt free wealth through oil and gas investing. Spread your available investing capital across several projects to mitigate the risk of any one project being bad. This also ensures you have capital to invest when a true opportunity presents itself. If you are always fully invested, then you may be tempted to borrow funds for investing. Don’t start on that path with oil and gas investments. There are too many risks and you could end up in lots of debt with little cash flow to cover the payments.

Continually learn.
Eventually you need to start with one investment in oil and gas drilling. Don’t research so much that you never take this first step. Know that you will make mistakes and there will be dry holes (a term used to describe a drilled hole that will not produce oil or gas). You will lose money. However, if you never risk your money then you will never have the chance to participate in the very productive wells that can return 20 or more times your money over the life of the well. The rewards can be significant for productive wells, especially at today’s high prices.

Do your homework.
Don’t pass on the opportunity to participate in oil and gas well investments based on negative things you may hear about those companies that give the industry a bad name. Research the companies you want to invest in. Understand whether they are using the latest technologies. Continually learn as much as you can about the oil and gas industry. Find one or more successful oil or gas investor who will mentor and guide you. Learn from them to not repeat the mistakes they may have made. Find out what makes them successful. What is their investment strategy? They may get you into deals you would otherwise not be made aware of. In any case, make a decision and move forward systematically with your investment in oil and gas. Be sure to follow your investment strategy to help make good decisions and avoid those “investments” that do not get you closer to your investing goals that follow your strategy.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 2: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

2008-07-07T00:28:00.000-07:00

Second article in the series:
This is the second article in this series about how to make the choice on a specific oil/gas well drilling project to invest in. Click here to read the first article.

Understand there are many ways to invest in oil and gas:
There are so many different types of investments out there today. A few include:

-- Simply purchasing stocks in oil and gas related companies. Your investment loss is limited to the amount you invest so the risk is manageable. You do need to watch these stocks over time to make sure the underlying company isn’t doing things that may cause it to go into bankruptcy or other problems. Also, the stocks tend to fluctuate with whether oil and gas are in or out of favor at the time.

-- Purchasing an oil Exchange Traded Fund (ETF). You can invest in a fund that buys and sells oil or gas. This way you are not dependent on the underlying company, but only on what direction the price of oil and gas moves. Therefore, these ETF will also fluctuate with whether oil and gas are in or out of favor at the time. However, you only have the risk of price movement from the oil and gas and not from a company as you do with stocks.

-- Trade commodities futures contracts. Here you buy contracts on oil or gas in the futures market. You can put very little money down in order to control a significant amount of oil and gas. If the price moves only a little, you stand to either gain or lose many multiples of that movement. Since the risk of loss is much more than your investment, these are extremely risky investments. Professionals know tricks to control these risks, but most individual investors do not. As a result, these investor have to watch these prices, at a very minimum, once per day to consider readjusting their positions. Again, if the price moves in the opposite direction the investor bets, then the losses can be very large, very quickly. Many times the price of oil and gas moves very big overnight in foreign markets and opens in U.S. markets sharply higher or lower. You will not have control to sell your position (in many cases) and may wake up to a significant loss. You must be very careful when playing the futures market. There are many professionals in the market who trade them all day, every day. They can drive the price against you very quickly.

-- Purchase of land where oil or gas may be drilled. The hope is that oil or gas will be drilled and productive on the land to provide a portion of the revenues back to you as the land owner. However, if you buy land in an area that is known to have productive wells, then the price of the land may already be inflated to a point the revenues may not be that significant after paying payments on the land. Be careful.

-- Purchase of a lease that covers the right to drill on a specific piece of land. In this case, since you are not the land owner, you don’t have to worry about covering payments on the land. You can receive a portion of the revenues from the wells, but will also share revenues with the land owner, the developer, others involved in drilling and servicing of the well, and with investors in the wells that are drilled on the leased land. For a small fee to lease the land, the revenues from productive wells can be significant, while the risk is only the funds you pay for the lease. The lease purchaser should secure land that is known to be productive or has a high probability of being productive. The lease should provide the rights to conduct seismic and other studies of the land to verify the potential for good wells. Also, leases usually cover the right to drill several wells on the land, which reduces the risk to the investor/owner of the lease since hopefully not all wells will be dry (bad or non productive). Smart leases are low risk and have the potential for huge returns. For these reasons, most leases are only offered to large institutional investors and not to individual investors. Many large oil companies like Exxon will own these leases while, in some cases, letting small oil producers with their associated individual investors fund the drilling of each well.

-- Participation in drilling one or more oil and gas wells. As a participant, you are usually a general partner with all the associated tax advantages granted by congress for domestic wells to reduce our dependence on importing foreign oil. However, the oil producer and investors in the well take the risk of the well either being productive or dry. However, with all the associated tax advantages (tax free income, writeoff of invested funds against all income types, reduction of up to 40% of your alternative minimum tax income, etc.), and with most of the revenues generated form a well going to these investors, the overall returns can be very significant for good productive wells. However, due to the high risks that go with the potentially high rewards, investors should only consider investing in wells with a high probability of returning all invested funds in 6 to 18 months. That makes the risk to reward ratio reasonable against the risk assumed with drilling oil and gas wells. The probabilities for a productive well can be increased by using the latest seismic technologies, conducting thorough research on other wells in the same area, using reputable oil producers and well operators, etc. Most of the articles posted on this blog are centered around these investors in specific oil and gas projects. Visit the blog site for additional articles.

-- Participate in funding the transportation of oil and gas. Some companies offer partnerships to fund placement of a pipeline to oil and gas wells for transporting the oil or gas to a buyer. As an investor, you usually receive a percentage of revenues resulting from the oil or gas flowing through your funded pipeline.

-- Participation on a off-shore oil platform. These types of investments usually involve tens or hundreds of millions of dollars. Due the the significant funds required, these investments are almost always only offered to very high net investors and/or institutional investors. Once a platform is placed, there can be many wells drilled from one platform. The result is increasing revenues from multiple wells without the additional significant investment of a new platform each time a well is drilled. The revenues generated from a platform can be significant if many productive wells are drilled from it.

Next article in this series:
The next article in this series will continue thoughts on what an investor needs to do when considering investing in an oil/gas drilling venture.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 1: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

2008-06-30T01:58:00.000-07:00

Know your investment strategy/goals:
Most investors do not have a lot of spare time to spend managing their investments. However, every investor should take time periodically to initially define and periodically reevaluate their investment goals, where they are currently toward reaching those goals, and what strategy they have to get there. This strategy needs to consider the investment risk tolerance of the investor, the timeframe needed to reach the goals, what assets the investor currently has and in what form, and many other factors.

What are your goals? What timeframe do you need to reach those goals? What is your risk tolerance? What assets do you have and in what form (home, stocks, cash, bonds, etc.)? How much cash do you have to invest? What percentage of your cash is available for higher risk investments? What amount of time do you have to watch/manage your investments? How are you investing (self, with others, corporation, partnership, trust, fund, etc.)? What purpose do you have for investing (retirement – when?, tax advantages, freedom, etc.)? What freedom do you have to invest the funds - Do you need permission? - From who and why?

Only after you have given serious thought and effort toward clearly defining your investment strategy and goals, then consider if investing in oil and gas drilling ventures is and appropriate investment for you. Don’t jump in because you think it is a quick means to wealth with the current high price of oil and gas. High prices alone do not mean lots of wealth for investors. There are many things that can go wrong with a oil and gas drilling venture where you will lose all of your investment. Only use risk capital that you are willing to lose after first building a successful investment base that continually generates the risk capital you need to consider oil and gas drilling ventures, again, only if it fits your strategy.

Typical investment strategy/goals associated with oil and gas drilling investments:
Investment goals you should have when considering investment in oil and gas drilling ventures should include:
- Rapid return on invested funds (look for projects with expected 6 – 18 month return on investment)
- Very low time commitment requirement
- Tax deductions against both ordinary income and capital gains
- Reduction of alternative minimum tax (AMT) and investment income that does not put you into an AMT situation
- An income stream with significant tax free components
- Limited loss to only invested funds
- Very low to no liability risk
- Investment in something that most everyone uses regularly with rising prices (increasing returns for the investor)

Many of these goals are due to the unique tax advantages provided by Congress for direct investment in domestic oil and gas drilling ventures (tax free income, deduction of each invested dollar against all income types and capital gains, up to 40% reduction of alternative minimum tax income –AMT, etc.). You can read more about the various benefits of oil and gas investments in past articles at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html.

Take your time finding the right oil/gas drilling venture to invest in:
You do not want to risk your money without taking the time to evaluate several oil developers and projects they are offering. I’ve noticed investors in a field they are not familiar with will try and get their information only from the oil developer selling interests in a project. The developer tells them everything they want to hear to make the project seem absolutely a “sure thing”. They then give all kinds of “proof” that you will believe if you don’t know the business. In this case, the investor then tends to throw lots of money into the project without much hesitation. They give more thought and research into buying their HDTV than in researching the right oil developer and project that fits his/her investment strategy.

When buying a TV, Car, or house, we spend hours, even days researching on the Internet, talking with people who have recently bought, reading reviews, etc., before ever making the final decision to buy. By the time we purchase, we have done enough research to make an educated decision. Why then can’t a new investor in oil and gas do the same level of research before investing? If you don’t know the business, then learn all you can about oil and gas investments first. There is a danger her of over analyzing as well where you never make the decision to invest because you never feel like you’ve learned enough. There is a fine balance that you need to find for yourself. Having a clearly defined investment strategy and associated set of goals is absolutely critical in helping you understand where oil and gas drilling ventures may or may not fit. You will be able to consider each drilling project to know how it does or does not fit within your plans. All of these play together in helping you come to a decision either to invest or not in a specific oil/gas project.

Next article in this series:
The next article in this series will continue thoughts on what an investor needs to do when considering investing in an oil/gas drilling venture.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Debt Free Wealth Generation From A Good Oil and Gas Investment Strategy

2008-06-22T02:34:00.000-07:00

Only use risk capital when investing in oil and gas drilling ventures.
When considering investing in oil and gas drilling ventures, only risk capital should be used. As with any investment, if you are not comfortable risking the loss of money, then you are investing too much. This level of comfort differs for each investor. You need to decide what your comfort level is. Once decided, follow an investment strategy that maximizes your returns while minimizing your losses.

A basic strategy for oil and gas drilling investments:
· Don’t invest in only one or two wells. Reduce your risk by spreading the available funds over several wells.
· Invest approximately the same total funds in each oil and gas drilling project. Using the same amount of funding keeps you disciplined and consistent. You wont be as susceptible to an oil producer trying to more in one project since it is a “sure thing”.
· Only consider investing in wells that are projected to return your investment in 6 to 18 months.
· Develop a reinvestment plan into additional wells. Decide what percentage of oil/gas revenues from your wells to should be reinvested in additional wells. This way your income continues to rise from consistently adding new wells at the same time your older wells start dropping in production.

Consider an example of diversifying over several wells:
Let’s look at an example showing how diversification provides the best combination of risk verses return. In this example you have $100,000 total to invest. You invest approximately the same portion of this money across four wells. It is may be impossible to invest exactly the same in each well since the cost to participate may differ from well-to-well.

When the wells are complete and in production, we see the various monthly returns for each and further see that well #2 turned out to be a dry hole or non-producing well. The return on investment with the other three wells varies from a high of 200% to 67% with an overall combined return of 93% across all four wells.

Had you invested the full $100,000 in well #1, the total return would have been maximized. However, you would have risked losing all of your funds had it turned out to be a dry hole like well #2. Alternatively, had you only invested in two wells with the dry hole well #2 being one and either well #3 or #4 being the other, your combined returns would have been much less than the current diversified 93% across the four wells. Therefore, investing everything in one or two wells hoping for a 200% ROI Well #1 is not worth the risk, and misses out on the strong diversified 93% ROI.

A long term strategy for oil and gas drilling investments:
Every well runs dry at some point in the future with some wells only lasting a short time while others last for many years. It is important that you continually add to your portfolio of oil and gas wells to replenish lost income from the older wells as they slow down. As stated earlier, a portion of the income from your wells should be reinvested into additional wells. Beyond trying to maintain the same level of combined income, you should consider reinvesting even more so your resulting yearly income is always increasing. Over the long run, continued diversification will minimize your risk of loss while providing consistently increasing income. Another reason to continue reinvesting in additional wells is to take advantage of the tax write-offs against the income from these wells.

Consider an example of reinvesting oil/gas income into additional wells:
In the previous example we received a combined 93% ROI over four wells. This means we will receive $93,000 income from those wells in the first year. If we reinvest a little over half of that into two additional wells at $25,000 each, then the resulting income would be significantly higher while lowering our risk over more wells. This assumes the first wells continue to provide a strong payout after the first year.

Scale up your investments as income grows:
Continuing this strategy provides you with increasing income that is debt free. You are using income to buy additional income. This is a very powerful way of having your money work for you to increase your wealth. Eventually, as your income increases, you will be able to participate in larger projects while increasing your percentage ownership in the associated partnerships. You could scale up your average investment per well from $25,000 in this case to $50,000, then $75,000, etc. This may mean purchasing additional percentage ownership in these projects or participation in larger projects that require more funds per percent ownership. Also keep in mind that ongoing investment in additional wells provides associated tax write-offs against the growing income stream.

Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 5: Oil and gas investments vs. real estate investments

2008-06-15T02:09:00.000-07:00

Fifth article in a series on comparing oil and gas investments to real estate investments:
This is the fifth and final in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.

Summary of comparisons between real estate and oil and gas investments:

Time commitment:

Up front time before investing - Both require considerable time up front to chose the right investment that fits within your investing strategy/goals.

Ongoing time after investment is made – Most oil and gas investments only require time to deposit checks periodically and to extract info from the K-1 tax form yearly. Real estate, on the other hand, requires time for continuous monitoring of - market conditions; monthly expenses for repairs, rent ads, upgrades; regulation/code compliance; liability exposure/insurance; currency of property tax payments; unplanned events/expenses; crime/violence issues/vandalism; and others. Some of these can be passed to a property manager at a cost, but even they will need your permission and time to deal with many of these issues.

Simplicity:

Once an investment is made in a oil and gas venture, the investor sits back and waits for income and K-1 forms.

Real estate investments require monitoring many issues on an ongoing basis.

Income hedge against inflation:

Income from producing oil/gas wells will go up as the price of oil/gas goes up until the well starts to lose production over time. The investor should have continued diversifying through tiered investment in additional wells to maximize ongoing revenues over time.

Income from income property will follow market conditions. When markets are tight, income rises fastest. In down markets, there is more competition and income tends to flatten or even decline. Diversification over different types of income properties can help alleviate this issue. Good real estate investors will plan their portfolio to balance each other under different market conditions.

Tax related benefits:

Direct invested funds in most domestic oil and gas drilling ventures are 100% deductible dollar per dollar against all income types (passive, active, portfolio, capital gain, and up to 40% of AMT income). Typically 70-90% can be deducted the 1st year for intangible drilling costs with the remaining intangible costs deducted over seven years. In addition, the first 15-23% of yearly income is tax free due to the depletion allowance (similar to how depreciation works for real property).

For real estate, expenses are deductible. An income related tax benefit to the investor is the depreciation allowance on buildings usually over 27 years.

Liability exposure:

Oil and gas drilling ventures have the highest liability exposure during the drilling of a well. However, this liability is usually contractually the responsibility of the driller to cover with insurance. Therefore, the investor in a partnership have very little to no exposure. The only other period of liability is during transportation of the oil/gas, which again is usually the responsibility of the transporting company to cover.

Real estate investors have full liability exposure at all times to fire, earthquake, tornado, and other mother nature events; vandalism; theft; crime events when someone is injured or killed; other injury or death due to issues with your property; and other exposures. Owners must maintain good insurance that specifically covers all events that could happen including the ones mentioned here. There are ways of structuring the real estate investor’s portfolio to limit liability exposure through asset protection methods. However, there is usually still some potential for financial exposure that, at a minimum, could involve legal fees to defend.

Use of debt/leverage:

Oil and gas investors usually use risk capital for investing and do not borrow funds for this purpose. Therefore, they tend to build cash flow very quickly from good wells that provides funds to continue investing in additional wells. When done right over time with the right investment strategy, this can result in significant increasing cash flow through reinvestment while maintaining no debt exposure.

Real estate investments usually involve some level of debt for leverage. One of the benefits of real estate has been the use of leverage (“other people’s money”) to multiply the returns on the investors invested funds. When done right over time, real estate investors are able to greatly increase their wealth. However, there is usually some level of exposure to issues related to debt. Investors may have a strategy to eventually sell some of their portfolio of properties to pay off all debts on the remaining properties. This would result in a debt free cash flow income that hopefully increases over time as rents increase.

Final thoughts:
As we end this series comparing oil and gas drilling investments to real estate investments, I wish to reiterate that the intention of these articles is not to say real estate investing is inferior to oil and gas drilling investing. In fact, they complement each other very well as components of a total investment portfolio for high net individuals, investment trusts, institutional investors, investment partnerships, corporate investors, and other investment related entities. Each of these needs to consider their respective investing strategy/goals to determine what percentage of risk capital to put into real estate and/or oil and gas investments. What you don’t want to do is blindly go into any investment without a plan, strategy, and goal to guide the daily decisions that will lead you to those associated targets. Taking the first step is always the hardest. Methodically taking each additional step forward will hopefully lead you on the right path toward continued success.

Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank you.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 4: Oil and gas investments vs. real estate investments

2008-06-08T02:09:00.000-07:00

Fourth article in a series on comparing oil and gas investments to real estate investments:
This is the fourth in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.

Comparing tax advantages/issues:
For real estate investments, usually only expenses and losses are deductible during each year the property is owned. When purchasing a property, expenses generally total 5 to 10% of the price.

For well executed real estate purchases, income from the property (and/or potential future capital gain) will more than cover these expenses. If not, then the losses are deductible, but the owner must carry these losses until the property becomes profitable or is passed to another party. Sophisticated real estate investors have developed other tax advantages. This article refers to the average real estate investor/investment.

One other tax advantage for real estate is the ability to depreciate the property (building/structure) over time, usually about 27 years. The land is not depreciated in most cases. The assumption is that the government says the building will only last that long at which time it will have a value of zero dollars. In reality, buildings usually last much longer than this. In locations where land is very valuable, the depreciation is against a small portion of the overall property value.

For direct participation in domestic oil and gas drilling ventures, you can write off the full amount of invested funds against all income types (active, passive, portfolio, capital gains, etc.). The intangible drilling costs (IDC) of a well can be written off immediately in the first year of the investment and can range between 70-90% of the invested funds. The remaining portion of the investment covers tangible costs and is written off over seven years. A past article covers this in more detail.

Other advantages of these oil and gas ventures are:

First 15 to 23% of yearly income is tax free due to a depletion allowance. This acts much in the same way as depreciation of buildings does for real estate. The Depletion allowance assumes the well will be dry after 7 years like real estate assumes a building is worthless after 27 years (see related article).

Income from a domestic oil or gas well will not count toward alternative minimum tax (AMT) income like it will for real estate (see related article). Income from property may put you into a AMT situation.

You can reduce up to 40% of your AMT dollar per each invested dollar invested in a domestic oil/gas drilling investment (see same past article as previous bullet above). In general, real estate does not provide this benefit.

You can reduce and possibly eventually eliminate capital gains taxes on 1031 exchanged assets by selling them outside of a 1031 exchange and investing the proceeds in domestic oil and gas drilling investments. Use the high first year intangible drilling cost write-off (70-90%) to eliminate taxes on that portion. Use the seven year write-off tangible costs to eliminate taxes on the remaining portion (the other 30 -10%) (see related article). Most real estate require paying taxes when selling outside of a 1031 exchange.

Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Part 3: Oil and gas investments vs. real estate investments

2008-06-02T00:29:00.000-07:00

Third article in a series on comparing oil and gas investments to real estate investments:
This is the third in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.

Regulation and additional liability issues:
For oil and gas investments, the investor has very little to no liability exposure (see article 1 of this series) and no regulation issues other than SEC regulations for accredited investors. The oil developer is responsible for the liability and all regulation requirements to drill and put a oil/gas well into production. The investor has no time commitment required other than funding the investment. However, for real estate, you read more and more these days about new regulations being added to income property owners at the city, county, state, and federal levels.

Some cities now require rental dwelling (apartment, house, etc.) owners to be licensed. The intent is to teach owners about code requirements, how to get rid of bad tenants, how to reduce crime, how to find quality renters, etc. With a license, the city can control the quality of property owners, reduce crime, and increase the quality of rental units for current renters. This licensing requirement is growing as many cities experience success in raising the quality of tenants and rental properties while reducing crime. Another desired benefit is increased tax revenues as property values rise (hopefully) due to more desirable housing/properties.

There are many other regulations either being considered or currently in effect on income property owners. Laws are being considered to require designated smoking areas within apartment complexes. Owners are being held personally liable for crimes committed on their properties with claims the owner didn’t do enough to prevent the crime.

Additional real estate insurance issues (see the first article in the series as well):
If proven guilty of not properly safeguarding the property, you may have insurance issues if the insurance company also feels you didn’t do enough to prevent the crime. They may not pay damages in that case. Outside of crime issues, the insurance coverage you have on a property may not cover natural disasters such as earthquakes. Many property owners don’t realize they need to purchase separate insurance for earthquakes and these policies don’t usually cover the full replacement cost of the structure. The owner usually has a large deductible that will need paid to rebuild. Also, the insurance may not have kept up with increased property values so will pay out much less than the new increased cost to replace the structure.

Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.