Undervalued Investment Weekly
The Undervalued Reports Company’s weekly newsletter
Towson, MD
October 25, 2003
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Welcome to the first issue of the Undervalued Weekly. My name is Chris Mallon, and I’d like to introduce myself. I’m the editor, main writer, and publisher of the Undervalued Weekly. I’m an independent investor and so-called Internet entrepreneur. I own and operate the Undervalued Reports Company, through which I publish this newsletter.
I’m in the early stages of developing this newsletter, but I’ve tried to design it for people interested in personal finance, money and economics. After all, I love money and finance, so why not share my love with others? I hope I can give you a glimpse into why I love finance so much. Considering most people find money and finance slightly more interesting than watching paint dry, I’ll do my best to keep it interesting.
But what about your editor? Who am I, and what’s this all about?
Let’s see, I’ll start with some background on myself. I live in and operate out of the magnificent offices of the Undervalued Report Company in Towson, MD. (In other words, I’m publishing out of my home office.) I hold a Master’s Degree in Finance from Loyola College, and a Bachelor’s in Finance from Towson University.
I have a lovely wife, whose patience is tested at regular intervals. She’s more than accommodating of me, though, and I love her for it. And well I should, considering she bore my pride and joy, the beautiful Josephine Marie. Josephine is 6 months old as of this writing, and she’s growing up fast. She’s the light of my life (to use a cliché) and she’s got some personality. I’ve a feeling we’re in for a fun time with her.
I think that’s enough about my personal life. The Undervalued Weekly is a way of sharing my love of finance with others. I’ve found that a lot of financial newsletters and websites are geared to those who already speak the language of finance. You know, dorks like me. I hope to use a more plain-English style to present important financial topics you may not find elsewhere. You’ll find some fairly unique opinions here, as I have a very outside-the-mainstream view of things.
You see, my main goal in life is to retire young. When I tell my family and friends this, they smile and tell me, “Good luck.” Few people believe it’s possible. Others think it’s selfish. After all, how will I put my kids through college, or have money to do things for my wife as we grow older?
I’ll be able to do all these things, because I don’t look at retirement the way most people do. I’ll always work in some capacity or other, but not for someone else. I’ll be retiring from the Rat Race, and building wealth for myself and my family. I see my retirement as the time when I’ll have assets generating enough income to finance my lifestyle. The Undervalued Weekly will be my way of sharing this journey with you, and hopefully encourage you to strive for more in your financial life.
I may not always be right, but I’m pretty sure I’ll make you think. Getting ahead takes outside-the-box thinking, which is the only way I know. The key to wealth and success is to do things a little different from the average person. The way most people go about life, getting a job, working some number of years, then retiring, is a way to security, but not a way to wealth. After all, if “normal” were the key to wealth, then why aren’t more “normal” people rich?
I’ll help you get outside the box.
The Undervalued Weekly will have feature articles on investments, financial analysis, personal finance, and other related topics. I’ll recommend books, link to articles I find important, post good quotes, and maybe some other fun things. The format of the newsletter is ever-changing, and if you have recommendations e-mail me at chrismallon@dynamicinvestors.net.
This week’s feature article is about buying a home in today’s environment. I’ll give you some ideas on how to buy a home today without paying through the nose. Plus I’ll show you why it’s better to have a higher interest rate, and lower home price than the other way around.
Remember this as you read: I see life as an opportunity to build something great, but it’s up to me to build it. You, too, have the opportunity to build a great financial foundation that can last well beyond your years, through many generations. Hopefully, Undervalued Weekly will help you build that foundation.
So sit back, pour yourself a warm (or cold) drink, and peruse this first issue of Undervalued Weekly. As always, if you have something you want to discuss, or need a question answered, I’m always available at chrismallon@dynamicinvestors.net.
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Book Recommendation
This week’s book recommendation is by Jim Rogers, and it’s called Adventure Capitalist. Rogers was George Soros’ partner in the Quantum Fund, and retired a millionaire at age 37. Since that time, he’s kept busy by traveling around the world, first on a motorcycle, then in a souped-up Mercedes. Adventure Capitalist chronicles Jim’s second trip around the world, on which he visited 116 countries and covered more than 245,000 kilometers.
But this book is more than just a story about an around the world trip. Rogers, being a life-long investor, gives his readers information on emerging trends and opportunities around the world, from the ground level. This book is a fascinating read, full of useful information, with a love story and tragedy to boot. This one will go down as one of my all-time favorites.
Get the book here:
http://www.amazon.com/exec/obidos/ASIN/0375509127/dynamicinvest-20
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Buying a Home in Today’s Environment
(The first half of this article is a modification of the Wednesday, October 22 blog entry)
If there's one thing American investors love, it's an over-inflated market. Which is why they keep buying houses and new ones keep coming onto the market. According to the latest data, housing starts rose an annualized 3.4% in September, matching a 17-year high. Whoo-ha! Go, baby go.
I wonder if the people buying these houses, for ever-rising prices, are the same people who couldn't get enough Amazon.com stock at $100 or Lucent shares for $75? Having been burned in the stock market, I guess they decided to re-invest what was left in their homes. Are we in a housing bubble? I don't know, but I suspect that we are, at least in some areas of the country.
Don't misunderstand me, now. I own a home, and I think home ownership is one of the great freedoms we enjoy in this country. I get nervous about the people who are pulling all the equity out of their homes with new mortgages. I suspect that most of these people are spending the equity, not investing it. What they're left with is a larger mortgage, and a bunch of worthless Chinese made goods.
The current low-interest rate environment is a once-in-a-lifetime chance to lock in a cheap 30-year mortgage on your home. If you refinance the balance of your current mortgage, you've won. If you refinance, and max out on your equity, you're probably hurting yourself. You might say that by refinancing the equity in your home, you're just cashing in on your home's rise in value. Well, not exactly.
What you're really doing is collateralizing the portion of the house that you own to get a cash loan, with the intention of paying back the loan at a later date. You've really transferred ownership of the equity in your house to your lender, not cashed it out. If you want to cash out your equity, you have to sell your house, plain and simple.
For those who are buying new homes, the low interest environment is a double-edged sword. On the one hand, you can get a tremendous rate on a 30-year mortgage, the likes of which you see once in a lifetime. On the other hand, because we live in a world where the monthly payment is all that matters, lower interest rate mean higher home prices. The monthly payment stays the same, but now you've got a much higher mortgage balance, which could turn around to bite you in the future.
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The dangers of refinancing the equity out of your home are readily apparent, but why shouldn't you buy a home in the current environment?
I'm not saying you shouldn't. What I'm saying is you have to be careful. Most real estate professionals understand that the monthly payment matters, not the price of the house, when selling a house. Therefore, the lower interest rates fall, the more money can be charged for a house. If you're a home buyer, with a set amount of money for a downpayment, the price of the house will determine how much equity you start with. And, it determines whether you get a conventional mortgage, with 20% down, or some other form with less downpayment. That equity percentage will determine whether you'll be paying for the great rip-off known as Private Mortgage Insurance (PMI). Trust me, it's just another monthly payout that goes down a giant rat-hole. There's no value in PMI, and you don't want to pay it.
For the sake of argument, let's assume that you won't be paying any PMI. Now, let's compare two neighbors, with identical houses, who have the same monthly payments on thirty year mortgages. The first neighbor has a $100,000 mortgage at 10% interest, the second has a $146,000 mortgage at 6%. You may think this is extreme, but I can tell you that this is what has happened in my neighborhood over the last 5-7 years. The type of house I'm living in retailed for under $100,000 in 1999, and retails now in the $130,000's.
Back to our example. Both of our neighbors are paying about $875 per month on their mortgage. Now let’s suppose that both of them decide to pay extra on their mortgages, upping their payments to $1,100 per month. Both neighbors are reducing their principal balances by $225 more per month, and here’s where the first neighbor has the advantage. The balance on the $100,000 mortgage goes down much quicker than the $146,000 mortgage, such that while the first neighbor is paying more in interest every month than the second neighbor, by sometime in the seventh year, neighbor one is actually paying less in total interest. Neighbor one will pay his house off in a little over 14 years, while neighbor two will take about 18 years to pay off.
In this example, we don’t even take into account the possibility that neighbor one could refinance the balance on his mortgage when interest rates decline. This would lower his required payment, and allow him to pay off his house even faster. In the meantime, the “market value” of his house has risen to about what neighbor two paid ($146,000). When neighbor one decides to sell his house, he’ll walk away with a lot more cash.
Obviously, this is a simplified example, but one that has been occurring over and over again in the last few years. I know that it’s expensive right now to buy a house, no matter where you go. What do you do in this situation? I recommend looking for, and buying, a home that needs some work. You should look for houses that are selling at about 80% of the average market value in a neighborhood. These houses will generally need only cosmetic work, and maybe a few minor repairs, but you’ll save on the price of the house and have extra equity right off the bat. Stay away from houses that need plumbing or electrical work, unless you know someone that will fix it for free. Those fixes cost big bucks, and will eat up much of the savings on the price of the house.
Buy the house, make the cosmetic changes, then have it re-appraised. You’ll be surprised at how much the “value” of the house has gone up. (I put value in quotes because the only real way to judge the value of a house is to sell it. An appraisal is simply an estimate of value.) This will also help you get rid of the PMI, if you didn’t have the 20% downpayment, because once the balance of your mortgage falls below 80% of your appraised value, you can petition to get rid of the PMI. Houses can be investments, and like any investment it takes a work to find good value. But it can be done.
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Quotes of the Week
“I haven’t failed; I have just found 10,000 ways that didn’t work.”
-Thomas Edison
"Is our current situation such that 'the harder we work, the behinder we get?'”
-Donald Rumsfeld commenting on the War on Terrorism in an internal memo
The Fab Five
This weeks stock picks are all about the dividend. I looked for five stocks with dividend yields over 5%, and enough free cash flow to pay it. I passed on the REITs and investment trusts to focus on operating companies. I also wanted some size to the company, so they had to have a market capitalization greater than $500 million.
Keep in mind that the Fab Five is not a recommendation to buy or sell these stocks. Definitely do your due diligence before buying any security.
Here’s this week’s Fab Five:
Symbol Company Yield Price (COB 10/25/03)
CG Carolina Group 7.5% 24.47
SBC SBC Communications 5.1% 22.94
MO Altria 6.0% 45.60
OGE OGE Energy 6.0% 22.12
TUP Tupperware 5.9% 14.90
Until next week my friends, happy investing.
I am, and continue to be,
Christopher M. Mallon
www.dynamicinvestors.net
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