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August 11, 2011

Graham's Secret to Happiness

Security Analysis
source: Librarity

"I blame myself... for having slipped into an extravagant way of life which I hadn't the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions." - The Memoirs of the Dean of Wall Street


Market

"Financial Turmoil Evokes Comparison to 2008 Crisis" by Nelson D. Schwartz; New York Times

It [now vs. 2008] feels completely different. I don’t think there is a U.S. debt crisis right now, and European debt is not held as broadly as mortgage debt or derivative debt was back in 2008. The prospect of a 2008-like drop in the market is remote. - Larry Kantor, the head of research at Barclays Capital.

"Looking for the bottom" by Buttonwood; The Economist

How does one tell when the markets are cheap?... The best measure is the cyclically-adjusted p/e ratio which averages profits over a decade and pointed to market tops in 1929 and 2000, as well as the early 1980s. According to Professor Shiller, the ratio was 20.7 at the end of last week, whicn makes it around 19.5 after yesterday's fall. That is still above the long-term average of 16.4. The dividend yield is between 2 and 2.5%, on the FT's various measures; even adding 0.5-1% for buy-backs doesn't make that look cheap.

Portfolio:

"Target and the New Frugal " by Michael Shulan; Seeking Alpha

"Target, other retailers deliver solid sales gains" by Thomas Lee; Star Tribune


Life:

"Want to Remember Everything You'll Ever Learn? Surrender to This Algorithm" by Gary Wolf; Wired Magazine

"Is Frugality Dead?" by Robyn Griggs Lawrence; Mother Earth News

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February 18, 2011

In Defense of Frugal: The Happy Home

Fortune cookie: small house, big happy
source: Myra Matos

One bit of financial advice my father gave me when I was younger was, “Son, you can’t drive your house but you can sleep in your car.” I didn’t really get it at the time but I definitely do now. Essentially he was saying don’t spend too much on a home, you’ll be financially better off if you don’t. Without getting too much into my parents’ finances, on a teacher’s and painting contractor’s income, they have been able to save and invest where their capital will kick off enough income in retirement as they earned when they were working. They live modestly but do not need to. They could actually increase their lifestyle substantially if they wanted, but are satisfied making cookies with my daughters, their grandchildren, and going on the occasional vacation.

Originally, as I promised to do in “Are You A Millionaire?”, I was going to post about the second measure of wealth. I talked about the first in “Your Wealth Ratio”. But some conversations recently prompted me to find out if my father’s advice stood up to muster. I went back and skimmed some of Thomas Stanley’s books, including his most recent, Stop Acting Rich. One of the tidbits I found very interesting is that Stanley’s research revealed that most millionaires carry mortgages despite the ability to pay them off in full. I thought it’d be interesting to see, given recent years’ turmoil in the mortgage and real estate markets, if these numbers still held up.

Using the information in Stanley’s recent work and two of Stanley’s earlier works, The Millionaire Mind and The Millionaire Next Door, somewhere between 50% and 60% of the millionaires surveyed hold mortgages on homes purchased 23 years prior. Additionally, the current outstanding mortgage on homes belonging to deca-millionaires (those with $10 million in or more in net worth) is equal to 7% of the home’s current value while the typical millionaire (50% have less than $2 million) has a mortgage balance of just under a third of the home’s market value. Thus, I assumed a mortgage of 15% of the home’s value for milionaires between $3.5 to $10 million and overall of 30% for those under $3.5 million. I used the IRS Personal Wealth Statistics from 2004 (http://www.irs.gov/taxstats/article/0,,id=185880,00.html) The below chart shows that millionaires still have more than enough cash to pay off the mortgages whenever they want. (Please click the table or here for a larger view.)

In other words, according the IRS study and Stanley, millionaires on average hold nearly five times the value of their outstanding mortgage in cash and cash equivalent securities. They can pay off their mortgage at any time.

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February 09, 2011

In Defense of Frugal: Your Wealth Ratio

The Benz
source: topdeluxe

In this second installment of the “In Defense of Frugal” series or the IDF series I will tackle what I said was the first measure of wealth. In the first post, “Are You A Millionaire?”, I tried to illustrate how frugality lent itself to wealth getting. In other words I tried to show success in building wealth is in large part due to how efficient one is at converting earned dollars into wealth dollars. Further, I said someone who earns a modest income may be much better at income-to-wealth conversion than someone who makes a handsome income. In fact, as I mentioned in the previous post, folks of moderate income tend to become wealthier than high income earners over the long haul. Of course it doesn’t have to be that way. High income earners have an advantage in that they have more funds available to invest. But that’s on a “gross” level. They “net” less of their funds because the majority instead spend those funds on items of little or no lasting value.

The concept that moderate income earners may be better at income-to-wealth converting than high-income earners is hard for most of us to wrap our minds around. Considering the high-income earners are driving luxury autos, live in large homes and spend lavishly on clothing, entertainment and travel. Most of us think, if these folks can buy all that stuff, how are they not rich? Well, they aren’t rich because they buy all that stuff. It is true, you cannot have your cake and eat it too. They’ve traded their potential wealth (and independence) for trinkets. Here are the facts as culled together by Dr. Thomas Stanley and American Express Publishing /Harrison Group:


  • 87% of luxury motor vehicles are driven by non-millionaires. The most popular vehicles among high-income non-millionaires are Mercedes Benz and BMW. Most are leased. The most popular vehicle among millionaires is Toyota followed closely by Ford. Millionaires tend to purchase their cars.

  • 73% of homes valued at over $1,000,000 are occupied by non-millionaires. They are purchased with jumbo mortgages with very little equity in place. In fact, many are under water right now. Millionaires on the other hand live in much more modest homes. 90% of millionaires live in homes valued at less than $1,000,000 and 28% live in homes valued at less than $300,000. Millionaires understand buying a more expensive home is likely to decrease the odds of becoming financially independent.

  • Surveys conducted by Stanley and AmEx/Harrison showed similar results. Each survey focused on millionaires and high income earning non-millionaires on the subject of retailers frequented. Millionaires mentioned Target, Kohl’s, Costco and T.J. Maxx as most frequented. High income non-millionaires most cited stores were Banana Republic, Saks Fifth Ave, Neiman Marcus and Nordstrom.

I hear the boo birds chirping. Many of you reading this are probably saying, "What’s the point in having money if you can’t spend it on the finer things? Can’t I spend on the finer things and still get rich? After all, money is for spending, right?" I have to say I have a hard time arguing against this point. But over the years I’ve come to understand there is a time and a place for everything. Again, it is fine to spend. But not to the point that is sabotages your wealth building. This is where The Brick Wealth Ratio© comes in. It let's us know if our current lifestyle will allow us to become financially independent.

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About Brick Financial Management, LLC

Blogged by Brick Financial

160 Maplewood Ave, P.O. Box 263
Maplewood, NJ 07040
973-486-9860
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Brick Financial Management, LLC specializes in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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