BawldGuy Audio Podcast

Arbitrage is both misunderstood and misused. Explaining arbitrage can produce far better results over the short and long run, especially when it comes to retirement income.

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Transcript:   Today, we’re going to talk about what the heck arbitrage is. We hear that on the financial news all the time, and it sound incredibly sophisticated. It’s really not. You borrow money at four percent, you make five percent on your investment. You’ve successfully arbitraged the way it’s supposed to be. Here’s the deal. If you’re wondering how to get started, and you don’t have enough to buy real estate, or maybe you’re not into real estate right now. You want some notes at a discount because you know those are high yield. You can borrow $100,000 at say 4 and a quarter, and you can go get 10 to 15 percent yield, cash on cash on those notes. Remember, cash on cash doesn’t mean that the entire return is going to fall in that range of 10 to 15 percent. It means if you add your payments up, divide by what you paid for the note, and it comes out 12 percent, your cash on cash for that note was 12 percent. Since you bought it at a discount though, you make the profit that adds on, when it pays off to your 10, 12, 15 percent. Let’s do an example. John and Suzy have a $200,000 condo, and they have a way to borrow $50,000 at 4 percent. They borrow it. Then they come to me, and they put their money into a note. Maybe they buy a note for $70,000. They get payments on that note that end up being somewhere in the vicinity of say $8,000 a year total. They put $50,000 in it. They’re making 16 percent, so they did really well. That note pays and pays. Meanwhile, they’re paying a principle and interest payment of far below $8,000 a year. That note payment is not only more than enough, even after tax probably to pay their new house payment at 4.25. When that note pays off, they don’t get 50, they get 50 plus that nice $20,000 discount that they paid, minus a little principal that they’ve received. They can choose if they want to, to let it roll, and just keep paying off that loan, which is probably what most people will do, or they can pay off that loan, and maybe they have the ability since then to acquire more cash and they’ll just keep doing it. The key to arbitrage is simple. The cost of your money must be less than the yield on your investment. If you can continually do that for decade after decade, that will be a huge source of income for you when you retire.

Inflation and real estate are misunderstood sometimes. ‘Course it depends on what side of real estate you’re on when inflation hits.

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Transcript:   People wonder what happens to real estate investments when inflation hits. The consensus isn’t on one or the other whether it’s going to be inflation or deflation. I don’t want to be the bearer of that news but there’s a school of thought, and I think this is the majority school of thought, that says inflation is waiting for us. They argue that the normally accepted formula for inflation has been altered so much that we don’t even know if we’re experiencing the amount of inflation they say we are. I’m one of those. I shop for groceries too and I’m telling you right now, food has been going up at a bigger rate than 2% a year. I don’t know about you but that’s what I see. It looks to me about 10%. Same thing with gas and diesel, right? Energy costs more than 2% a year more. I don’t know what it is; i don’t know what it’s going to be. I just know because I worship at the altar of fundamental principles. I don’t predict things; I don’t come across as I understand this is what’s going to happen or that. What I look at is if you print a whole bunch of money, the government, and you keep printing it and keep printing it and keep printing it, and you don’t see inflation yet, at some point it’s not that somebody magically has obviated the consequence of unending money printing. It’s that it hasn’t the street yet. Now there’s all kinds of reasons why all that money hasn’t hit the street yet and that’s a different conversation; that really isn’t apropos to my blog. What is apropos though is that if and when that inflation does hit, your real estate will be affected in this manner: Rents tend to track inflation; that’s a good thing. Not for your tenants, but for you. In the 1980s when we had runaway inflation, we had double digit inflation for many, many years in a row. We had interest rates for prime rate 18 to 20%. FHA was over 16. Conventional rates 16, 17, 18%. People were getting certificates of deposit for 13, 14% at the bank. I tell that to young people and they get excited. I have to remind them, wait a minute. Yeah, grandma got 14% at the bank for a CD and she got it for sometimes two or three years. The problem was that was interest. She paid ordinary income taxes on that interest and then the interest rate, the inflation rate at the time, was just under, equal, or maybe even more than that interest rate. She might have put a 100,000 in and made 14,000 a year but after inflation and after taxes she probably didn’t have her original hundred in terms of actual buying power. Everything’s relative. Going back to your real estate, though, if your rent was 1,000 dollars a month, if inflation hit, in the next six months that rent’s going to be able to be a lot more than a 1,000 dollars, maybe 1,030, maybe 1,100. I don’t know; it’s your market. It’s how high was the inflation, etc., etc. What was the supply and demand in your market? That’s going to have a large impact, too. What really happens is that inflation causes rents to rise. Now what happens with the value? Real estate values also, with some rare exceptions, they track inflation, too. If you buy real estate and you’re wondering what’s going to happen to your net worth, generally speaking the income produced by that real estate and the real estate value itself are going to go up as inflation shows its ugly head. Now is it going to track it exactly? No – or yes. Where are you? What kind of inflation is it? How did the government choose to combat it? It’s different each time.

Definitions of concepts — today’s concept is depreciation. What is it? Who gets to use it against their job income, and who doesn’t?

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Transcript:   Everybody wants to hear what depreciation is, because they hear tax shelter is what it really means. Well, they’re right, it does. What it really is, is the recapturing of the aging of a property. That’s over-simplified terribly. But properties get old, and things age, and so they lose their value, at least in concept. So all depreciation is, is the tax code gives the investor a certain number of years. In residential investments it’s 27-1/2. It’s 39 for commercial. And there’s different kinds of depreciation. The depreciation covers cash flow from the investment first. If that cash flow wasn’t enough to take up all the depreciation that you had, any leftover goes to the investor’s income that he makes at the job. That’s called ordinary income. There you just learned another one. Now, here’s the problem. If you make $100,000 or less, you can take up to $25,000 a year in leftover depreciation that’s covered cash flow and was left over. You can’t use any more than that. But if you make over $100,000 a year, and up to $150,000, they begin taking that $25,000 away in a ratio from 1:150. So if you make $125,000, and you have $25,000 of depreciation left over after cash flow, they’ll only let you apply $12,500. If you make $150,000, you’re now barred from using depreciation against your ordinary income. It just goes on the shelf. We’ll talk about that later. There’s another kind of depreciation. The first kind of would be called more or less straight line. I say vanilla. It’s called cost segregation. All that is, in a nutshell, is instead of taking a 27-1/2 year for residential, 39 for commercial in terms of years, and it’s just the same amount each year for those number of years, and you can’t depreciate land, only the building. What they do is, they give a life to every component of the building. So air conditioning, heating, electrical, roofing, you get the idea. They all have lives. It’s usually going to be 5, 7, I think some are 10, very few, and then you have maybe 15 for foundation, things like that. But check the code. That’s how they do that. Now, what about long-term and short-term capital gain. Short-term capital gain is under a year, and that means you’re going to pay ordinary income tax rates, just like you had a second job. So if you flip a house, get everything done in 6 or 8 months, you make a profit, that’s your second job, big guy. You’re going to get taxed that way. Now, if you make an investment and your intent, not accidentally, your intent was for it to be long term, and you hold it over a year, and you sell it, the tax code says you’re going to pay capital gains taxes, which are usually far more attractive and lower than ordinary income tax rates. Today, I think that’s enough to chew. Don’t you think?

Buying notes vs real estate is often the wrong context. But let’s talk about notes for a bit.

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Transcript:   One of the decisions, when investing in real estate or retirement, that people make, is when they learn about the existence of discounted notes secured by real estate. Then they really light up when they learn about being able to buy them at a discount. Buying a note at a discount means, even thought the interest rate on the note might be 4%, 5%, 6%, whatever it is, and it’s, say, a $100,000 note, if it’s 5%, the payments might generate $5,500 to $6,000 in principle and interest payments per year. So if you gave the holder of that note $100,000 for his $100,000 note, you would be getting a $6,000 cash on cash return, in simple terms, if the payments for the year totaled $6,500 a month. But what if you paid him $60,000, $50,000, $70,000? That means that that $6,000 a year, let’s say you paid $60,000. You’re making 10% cash on cash. Well, now you’re talking. Then you have to say, well, it’s secured by real estate. Well, I like that even more, because if I make a mistake trying to buy low and sell high in real estate, where I’m really thinking long term, I’m just trying to make a good buy and make a profit wherever I can, in real estate. If something goes wrong with your formula, your plan doesn’t go as you thought it would, well, you either hold it forever, or you lose the property, or any number of things, most of which don’t put a smile on your face. On the other hand, you bought this note. You paid $60,000 for it. You’re probably, in real life, my experience says you’re probably making $7,000 or $8,000 on that $60,000. Okay? That note all of a sudden stops paying. You say, “Well, I don’t like that.” Nobody does. But now you may have to foreclose. Well, what’s the property worth. You say, well, we had that bubble burst. You know, when they first bought this property, they paid $130,000 for it, and they borrowed $102,000 or $103,000, or whatever 80% was. They paid it down to the $100,000, and you bought the note. The problem was, that properties not worth $130,000 any more. It’s worth $100,000. You say, “Jeff, why on earth would any bozo pay for a note who’s security is only the same value as the note? A hundred and a hundred. Isn’t that what they call 100% loan to value?” I say, “Your math is right, but your context is wrong.” The person that lent the money, from whom you bought the note, they were 100% loan to value. You paid $60,000. You’re 60% loan to value. They put out $100,000. You didn’t. So now you say, I have to foreclose. Well, that means you have a $100,000 property. It costs you 8% or 10% to sell it. You get $90,000 or $92,000 out of it. You only have $60,000. You made a profit. Of course, that sounds good on paper, but let’s kind of go through that a step at a time. What are the chances you don’t have to put a little bit of lipstick on that pig to sell it? So let’s say you have to put 5 grand. Let’s say you’ve got to put 10 grand. Well, now you’ve got $70,000 in it. Then you say, well, but I lost $10,000 in payments, because it took me a long time before I foreclosed because I had too big of a heart, and then it took me a long time to foreclose. Well, there’s another $10,000, now you got $80,000 in it. What if you sold it for $95,000, because you want to sell it in 6 days, not 6 months. Now you net out maybe $83,000, $84,000. You still got more than you put into it. So see, that’s how the discount works. Now, is it more complicated than that? Oh, you bet, and a half. There’s all kinds of of due diligence and factors.

One of my favorite client couples, hands down. Here’s a 30 year old couple case study. Though the results are impressive, the process is surprisingly boring.

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Transcript:   Let’s do a case study today. A young couple just turned 30; they’re high earners. Between the two of them they make quite a bit of money, probably over a couple hundred thousand total. They save a lot of money; they don’t live up to their eyeballs. Several thousand a month after tax; probably five or six thousand. They have enough money to buy one small property in Texas. It’s going to cost them about 80-85,000. They’ve done that. We’re about two years into their plan. He thinks he’s going to work until his mid-60s. No matter how much I try to move him off of that rock he stays on it. He loves what he’s doing so I’ll believe him now. She’s not started having kids yet and they have said they’re going to have them. Your know happens when we have kids; we’ll let them find out for themselves. For now they have built themselves up to where, in a few months this summer, they will close their fourth small property. Now they have, give or take, 1,100,000 in property with a total of about 70%, 73 or 4 percent in debt. It’s all cash flowing and what they’re doing as part of their plan is they’re taking all the cash flow plus what they can comfortably afford – and they make that decision. Comfort zone is a big thing; you know that with me. They’re going to add a little bit from their family budget every month to the total of cash flow from all four duplexes, onto one of the loans. They’ll pay that loan off early, however long it takes. Then they’ll just go to the second duplex and they’ll do it until all four are free and clear. My guess, assuming kids and Murphy’s law and just life happening, getting those four paid off is going to take somewhere between eight and twelve years. Okay? Now, because of their youth, an EIUL – equity index universal life – it’s an insurance policy, and it’s geared towards income. It’s not geared for life insurance. Yes, there is life insurance but that’s secondary. I sent them to David Schaefer, my in-house expert on EIULs; he has forgotten more than I know about them if I studied them for five years. Bottom line is they’ll put 1 to 2,000 a month, again depending upon their family budget and their combined comfort zone. When they’re 65-66, somewhere in there, the numbers work out – and this is Dave – that they will begin receiving just a few happy meals, over 200,000 a year tax free for virtually the rest of their lives. That’s a stand alone source of income, has nothing to do with real estate. The premiums are indexed to inflation so they don’t get the results wiped out for some bad economic times. It’s structured to give them flexibility and it’s independent of everything else they’re doing. If everything goes to hell in a hand basket so to speak, they have over 200,000 tax free, which at that level of income you’re probably talking about 260 to 300,000 free tax income for most people. Now look at their four duplexes. They’re probably going to buy more because they save a lot of money. Well let’s just say that’s all they end up with. That means from the time that they’re no older than early to mid-40s, they’re going to have in the vicinity of 5 to 6,000 dollars a month coming in from four free and clear duplexes. They can do with that whatever they want: buy more, buy notes. Oh notes, yes. They’re having a hard time wrapping their heads around the concept of notes. But slowly but surely they’ve come around to the idea of it because at first they were concerned about the risk and...

The concept of Purposeful Planning is exceptionally powerful. Once the real estate investor understands its potential, the first thing they usually do is reassess their retirement goals.

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Transcript:   People hear me talk about purposeful planning, and I write about it all the time. It’s got a good ring to it. It sounds really nice. But it does mean exactly what it says. It’s the foundation of what I do for people. I tell them, you’ve got to have a plan, and you have to execute it on purpose. Now, that all sounds good, but then I turn around after saying that and tell them, flexibility’s got to be the number 1 factor in your plan. Like the bumper sticker says, mildly paraphrased, “Things happen.” One of the things I tell people is, they say what do you do Jeff? I get people, when they call me and I say, hi, this is Jeff. I take them from that point to retirement. One of the things we decide is, where exactly are you now? Because you can’t decide how to get to point B if you don’t understand not only what point A is, but where is it on the financial map. Because you can go to Hawaii, but you’re going to take a different route from Tokyo than you are from LA. You’re still ending up in Hawaii. So you’ve got to know point A and point B. Everybody gets hooked on Point B. Once you’ve established everything about point A, and that includes how much you make, how much you save, what future cash drains are going to come your way. That usually is spelled K-I-D-S. Then later on it’s college. I just got rid of my last, and the Bank of Dad is closed. But it costs money. You can save for it now. You can make part of your plan. You don’t know what’s going to happen. You just hope that you will have to pay for a nice college education for your kids. There’s all kinds of things that you have to plan for. So think about how you’re going to fund your first investments. What are you going to do? Are you going to buy locally? Probably not. It’s very rare that you’re luckily living in an area that makes sense to invest. My clients who live in San Diego where I live, and have since the 60s, they’re usually surprised when I tell them, “I’m not going to sell you anything here, and if you want to buy investments here, you have to talk to somebody else.” It’s horrible investing here. People in California don’t like it when I say that, but you have to go where the investing is good. There’s a lot of places. I prefer Texas, and I love Boise. But there’s a lot more places than that. Those are the two I favor, and I favor because I’ve done the work. I’ve put my own boots on the ground. I have found out all the factors that I needed to learn and made my decision. Purposeful planning sets out the arena. You know what game your playing, you know the rules, and you know the arena that everything’s happening in. Once you have that set out, then you’re just knocking dominoes down one at a time. Interest rates go down? Excellent, you can do something maybe before you had planned. Values rise a little bit and rents go up a little bit? Same thing. But you don’t plan for that. What you plan for is the flexibility to be able to respond to those things. Good, bad, and ugly. Purposeful planning is just that, and it’s serious as a heart attack. You have a plan that is based on a timeline that adopts a certain philosophy of investing. You’re trying to get to your retirement with X amount of income, which you can’t pinpoint exactly, but you can get in the range. You set out to see what you have to do along the way to make that happen. Add flexibility in it for seasoning, and the chances are highly likely that you’ll get ...

Are you over 60 but have a lot of money? Sounds good, doesn’t it? For the vast majority of Boomers in that position, anxiety over disappointing anticipated retirement is the rule, not the exception.

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Transcript:   Every now and then I hear from fellow boomers. They might be in their late 50s or early 60s. They’ve done well. They’ve managed to save money both in their own account personally and in their 401K or IRA, or many times both. Sometimes they’re Roth, sometimes not. But they want to know, because they’ve seen the writing on the wall, that if they keep going down the road they are, it’s just not going to work out very much for cash flow in retirement, and they’re ready to retire, or soon. A recent client had roughly $500,000 in 2 separate qualified retirement plans. One was an IRA and traditional, not Roth, and the other one was a previous employers 401K. Now, he had established a little business several years ago, because he’s a woodworker, and he only makes about $1,000 or $2,000 a month doing it. He’s not really making all that much money. It’s a hobby. But I told him, since he has that business, we could have John Park set him up with what’s known as a solo 401K. Now that was invented solely for small business owners, and he qualifies. The next step after setting that up was to roll those 2 plans assets, in this case he had converted them to cash, into the solo 401. Now the solo has more or less 2 parking spots. One’s traditional, and one’s Roth. The mechanics and the rules call for the taxpayer to roll over in the traditional side first. Now, he has to make a choice, and he hasn’t yet, whether he wants to roll that $500,000 from the traditional side of the 401 to the Roth side, because he knows if he does he’s going to pay a ton of taxes, because it’s going to cost him at least $100,000. It could cost him up to $200,000, which means his $500,000 turns into $300,000 or $400,000 overnight. I don’t care who you are, just the thought of that hurts. On the other hand, the silver lining, and it’s a huge silver lining, is everything he does for his retirement income from that point, not only remains tax free inside the solo, but when he takes it out in retirement, it’s tax free by definition. If you live in a high tax state like he does, he lives in California, if you have, say, $350,000, and you’re making, say, somewhere in the vicinity of $50,000 on that, and it’s tax free, if the $500,000 is making, say, $65,000 instead of $50,000, in California after state and fed, is that going to get down to around $50,000? I don’t know. Let’s say it doesn’t let’s say it gets down to $54,000. So he would have been better off not to pay the taxes. But he’s investing in discounted notes secured by real estate, and he’s buying them at a huge discount, usually 25 to 50 cent discounts on the dollar. When he does that, the first time his portfolio starts to turn over, and it will, we just don’t know when, because it’s absolutely 2 things, uncontrollable and random. When it does, that $50,000 of the $350,000, now goes up. Because he makes the discounted, built-in profit when they pay off, which means he’s investing more, which means the payments are going to be more, because it’s going to be about the same yield. It’s just the same yield on more money, because he made the profit, untaxed. Now he gets a raise. He’s not making $50,000. He’s making $60,000, $70,000, $80,000 tax free. The taxable side, if he hadn’t paid that $150,000 in taxes, sooner or later not going to be able to keep that. Because every time that taxable side makes a rate hit, and that income goes up,

Having constructed spreadsheets since Ford was in office, I realize what goes into them. But the importance of spreadsheets is something every real estate investor should seriously review.

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Transcript:   Spreadsheets are the bane of my existence, and yet most of my clients can’t get enough of them. They love making their own, and I’ve finally gotten so tired of my clients messing with mine, I only give them out in PDF form now. I don’t care that they’re dated. Here’s what happens. I vet my own spreadsheets like I’m sure you do, as an investor. You try to get the numbers right. We all do, because we don’t want garbage in, garbage out ruling our lives. I put my own boots on the ground. I go to whatever state the property’s in. We do rent surveys. I not only do a rent survey, I have my team do a separate independent survey another day. We don’t share information until it’s done. We get the numbers right. Often times the number’s right right down to the dollar. Sometimes it has to be an estimate. Who knows what repairs and maintenance is going to be? Well, I kind of know from experience. You know? Almost four decades, if a property’s 50 versus new, okay, we can all do that, only to the extent we know the new is going to have less. But what do we put though? In the end, what I find, is that brand new properties, very well-located, and again, my definition of well-located is not only subjective, but ironically empirical, and I mean by that is, I put my 80 plus year old mom to live there alone. That equals a good quality location. All right? We’re not arguing about what’s quality. I do all the numbers, give or take the expenses and the vacancy, everything out the door that is come out of your Levis to operate that building is about 40% of the gross income, the gross scheduled income, not that you got it all. Okay? That leaves about a 60% cash to you net, and we’ll call that the net operating income. Right? Then, out of that, you pay your loan payments. Now, that’s a spreadsheet, and I can defend that spreadsheet, and so could you, until the cows come home. The problem is, there’s this pesky guy, Murphy, and he knows where we live, and he’s going to visit all of us when it comes our turn in his barrel. When he does, that spreadsheet is going to be a joke. You might as well roll it up and light your barbecue with it for all it’s going to be worth. Let me explain what Murphy’s spreadsheet is. Instead of going through all of the numbers and hitting your boots on the ground and getting your clipboard out and out there among them and getting them right, just take that gross scheduled income, that GSI, and let’s say it’s 30,000, and I came up with an 18 or 19,000 NOI, get my numbers exactly right, just take that 30,000, divide by two and say the net operating income is $15,000. By the way, when you’re actually making prognostications for cash flow, use Murphy’s, don’t use mine. Don’t use yours. Just divide by two and be happy, because if it does worse than divided by two, you’ve got the wrong property or something really ominous happened in the economy.

Here’s a case study on notes with a real client.

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Transcript:   These clients that I have have been investing with me for years. They have a very impressive portfolio of real estate, all of which will be free and clear in the next 8 to 10 years. They’ve got EIULs going, which will come to fruition in about 22 years. Again, very impressive income coming from them. They’re just getting started in notes, although they have again an impressive amount of savings to start with, around 300,000. Now, they are accredited investors and we’ll talk about that later, but for this case study, whether they’re accredited or not really doesn’t have an impact. Now, their first investments in notes, which will happen this summer and fall, will be that 300,000, which will generate 39,000 pretty easily so I’m just going to round 1,000 a year to 40,000. They want to retire when they’re 50 and I may have talked about these clients before. We argue all the time. They say they’re going to do it by 48. I’ve done the numbers and it’s 50, but they think they can do it. I’m going to take 10 years because they’re not in the room. They have 40,000 a year they just turned 40, just this month. Now, 40,000 a year the first year, so that at the end of the first year, that $40,000 is taxed and let’s say that 40,000 turns into 30,000. That 30,000 buys a small little note in addition to the 300,000. Now they’re not making 40,000. They’re making 40-something a year in interest payments. They take that and they buy another note and they end up with not 30,000, 30-something after taxes, and that’s the note they buy the second year. This goes on and goes on. By the 10th year when I say they’re going to retire, when they’re 50, in the spring of ’23, ’24, they’re going to have a trustee note income pre-tax, of give or take, $80,000 to $110,000 a year based on no note ever paying off, which in my experience, and I’ve been buying notes since 1976, when Ford was in office, that hasn’t happened. I’ve never seen it. I’ve never once seen a note go the entire 30 years. What probably will have happened in the decade between when they spend the 30,000 and start buying the little note every year with the payments is that sometime down the road, and who knows? It’s random, notes here and there will begin paying off. They will make a very nice profit because they’re averaging, give or take, $0.50 to $0.70 on the dollar when they buy them. They’re only going to be paying long-term capital gains taxes on the profits, so they’re going to be making significant hits even though it’s in their own names, not part of an IRA or a 401(k). If normal life happens the way I’ve seen it the last almost 4 decades of note investing, really by the time they’re 50, they won’t be doing 80,000 to 110,000 or so. They’re probably going to be doing 100,000 to 140,000, maybe more, but that’s realistic. Then what happens is because they hit retirement at 50, with 80% of their residential investments being clear, I won’t talk about the other two now because it was for another strategy, they can actually refinance those and pull out, give or take, another $800,000 to $1 million tax-free, $1 million easy is my guesstimate. Where it is still cash flowing very well, clearly not as much as without debt, but very well. They’re not to worry about that, but that $1 million instantly once they’re able to turn them into notes, will be generating give or take another 10,000 to 12,000 a month, in addition to their 80,000 to 140,000. I’ll give a range, that they built up just buying more notes with their payments.

In my experience, the difference between success and failure in real estate and note investing comes from the lessons we learn when lookin’ at judgement versus principles.

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Transcript:   Ever since as a young man I switched from listing and selling homes to being an investment guy, I’ve been impressed with the big winners in real estate investment. I followed them. I watched them get really big and get bigger, and I watched them go broke. I watched what they did, where they did it, why they stopped going here and start going over there, and why they switched from this vehicle to that vehicle. They switched the way they bought things. All those, I watched them all. I came away with a false understanding, and that was that what separates the men from the boys, the professionals from the wannabes, is judgment, the ability to judge what’s going to happen in a market. Actually, pretending that they could tell you what’s coming next, which to an extent, people with a lot of experience can. I know. I’ve seen the movies, and I get too much credit many times for being smarter than I am, only because I’ve seen all the movies, and so I sound like I know more than I do. I’ve just seen it before. When you’ve seen that movie before, people say, oh, he knows more than the other guy. No, I’ve just seen it. But I don’t translate that into, I have the ability to see into the future. Because the mistake that I found, trying to pick the best investors for me to model when I was a young man, was that I thought it depended upon, like I said earlier, judgment. And it’s not. To the extent that it’s their judgment that makes the difference in everything. In my experience, and I’m speaking for myself only, my 2 biggest mentors, as far as how to do things on a grand scale in investment as a topic, are Graham and Buffet. Now Graham’s book, called The Intelligent Investor, is the only book I’ve ever recommended to anybody, and I don’t recommend it to most people, because it’s a whole bunch of writing at a very high level. Because that’s the way they wrote back in the 30s. He wrote it again back in the 60s or early 70s. I’ve been real estate-reading it lately. It’s the most chock full of dense wisdom you’ll ever get. But here’s the point here. It’s not judgment. Because judgment implies that the investor with the better judgment can pick stocks, can pick real estate, can pick this note or that note, can pick this company or that company. When the real geniuses will tell you it’s not that they’re that brilliant, although in my opinion guys like Buffet and Graham are, it’s that they understand the principles inside and out. Because the principles in investing are much like physics, the laws of physics. You can do all you want with wings and power and lift and drag, and you can put a 747 with 300 or 400 people in the air. But that plane’s coming down. Because gravity wins every time. Even if you go out of gravity into orbit, you mess that orbit up, you’re coming back down, because you can’t violate the laws of physics. Same with investments. It’s about following the principles. It’s not our judgment, because that implies we can do better than the market, and we can’t. We can appear to, because our competition thinks it’s about judgment. This is why people try to pick stocks and wonder why they lose. You can’t be a stock picker. You look at real estate, like you can’t be a real estate picker. You look at the region. Do I want to invest in this region? Well, there’s all kinds of principles that should be followed, and if that region doesn’t align with those principles to your satisfaction,