November 8, 2018

Thoughts from the Desk of Bob Repass…

NoteExpo 2018 was a tremendous success if I do say so myself! Once again we had almost 500 attendees who enjoyed two full days of Content, Connections and Community!

But now what? You have just spent two days connecting with new folks and reconnecting with old friends. You listened to speakers motivate and inspire you, as well as forecast what they think the note business will look like in 2019.

Do you have an action plan to follow up on all the notes you took, business cards you gathered and emails you said you would send?

I have learned over the years after attending many conferences, that follow up is not something most of us are good at. I want to encourage all of you that attended NoteExpo 2018 to stop and create a follow up plan today. Bullet point out your top 3, 5 or 10 takeaways from the event and take action.

A new addition to the conference this year was the NoteExpo App. Not only did the app have the agenda but it had all the information on speakers, sponsors and vendors as well as the ability to connect with other attendees. This should help make following up easier.

Believe me I know how hard it is to follow up. At NoteExpo I spoke to a lot of folks and I encouraged people to email me after the event to circle back on what we discussed. There was no way as the host of the event I could keep up with all the conversations I had. I feel your pain. I know it’s not easy.

But it is Important! So take the time to do it. I kicked off the event by telling the audience that I think there are three things that make a conference great. First, provide an agenda full of great content that educates, motivates and inspires. Second, create an environment that is conducive for networking and connecting with others. Finally, ensure that an atmosphere of community is prevalent so you are immersed for two days with like-minded note investors and entrepreneurs.

My challenge to you is to have at least one follow-up item in each of the three categories. If one of the speakers recommended a great book that helped them achieve success, read that book! If you connected with a vendor whose product or service would enhance your note business, call or email them and get engaged. If you sat around a lunch table with 8 other investors and you talked about potentially finding a way to do business together, follow up and make it happen!

Follow-up is not just about NoteExpo 2018, it is important after any event or meeting you attend. One of my favorite authors John Maxwell said “Diligent follow-up and follow-through will set you apart from the crowd and communicate excellence.”

I hope to see you next year at NoteExpo 2019!

Bob Repass
Managing Director

Stay up to Speed with Eddie

Game Changer Right in Front of Your Nose

by Eddie Speed

We all have lots of ideas. Some are good, some not so good, and some are total flops. But some ideas have the potential to be great. The great ideas are so big they change not only the way you do business; they change the way everybody does business. They don’t just benefit yourself – they benefit the whole industry. Great ideas create a rising tide that floats all ships, not just your own. These really great ideas are “game changers.”

Sometimes, once the biggest and best ideas are fully implemented, people look at them and say, “How come nobody ever thought of that before?”

Here’s an example of a game changer idea: Ever hear of Malcolm McLean? It’s not a household name, but here’s a hint. He owned a trucking company, and was frustrated by how long it took to transfer cargo from one truck to another. Now that his idea is fully implemented, it would be impossible to go back to how it was without it. You know what his game changing idea was? He’s invented the shipping container! It made loading cargo much faster, safer, and more secure. Today, his invention is used all over the world as the most efficient way to transport things on ships, then loaded onto trains, then loaded onto trucks. It makes so much sense that it really is hard to imagine nobody ever thought of it before he did.

Not every idea I’ve had would qualify as a game changer. To be honest, I could probably count my game changer ideas on one hand. To count my ideas that weren’t so good you’d need a calculator.

So where do game changer ideas come from? I can only speak for myself, and the funny thing is, they never come from my head. They come from right in front of my nose.

Here’s my formula for coming up with a game changer idea: Stare at a problem long enough, and eventually an opportunity stares back.

Here’s a game changer idea that has affected the entire note business that came about from that exact formula, but I can’t take credit for this one. My father-in-law was Gene Shoemake, the guy who took me under his wing and taught me the ropes of the note business.

He and his partner, Ed Langton, were on the leading edge of brokering seller financed notes to institutional capital (or what I call “Big Money”). But they had to overcome a big hurdle. Their biggest buyer was Finance America, and their computer system wouldn’t allow them to purchase notes with a maximum term longer than 15 years. Since most notes are 20 to 30 years that meant that only a small portion of their notes could be sold to Finance America, which was very limiting.

And then, Eureka! They created the PARTIAL. They realized they could sell the first 15 years of the note to Finance America, and the rest they kept for themselves or sold to someone else.

Dividing the note into two parts might seem obvious today, but nobody had ever thought of it before then. It was a true game changer. It’s kind of like being the first person to realize when you’re cooking a brisket that’s too big to fit in your pan, you just cut a chunk of it off so it fits and save the rest for later.

When they got their calculators out they discovered those payments on the back end had much less value anyway, which meant they could charge almost the full value of the note for the first 15 years. But still, the added years were residual income that would be great for the future. Those chunks of brisket can add up!

I’ll never forget my father-in-law’s wealth building advice: “Son, the way to make a lot of money is buy long – sell short.” That was good advice when I started back in 1980, and it’s still good advice today.

Along the way, we discovered another game changing idea for partials. By cutting the note in two, it cuts the risk in two. A partial that buys or sells only part of the payments over the funding amount will greatly lower the investment-to-value risk for the investor. By lowering the risk, it opened the door to a much wider field of real estate options; such as undeveloped land (what I call “dirt”), commercial properties, and homes for buyers with less than perfect credit. Partials on these types of notes were so successful that my company utilized this option on over 20,000 deals.

Partials were the springboard to yet another game changing idea for notes. I told you I stare at a problem until an opportunity stares back. Well this idea took me 20 years of staring until the opportunity finally stared back. Remember, I started in 1980 and this idea hit me around 2000. I was teaching an investment class with Quincy Long, an expert on Individual Retirement Accounts. As he described the flexible investment aspects of the Roth IRA . . . . Kaboom! The biggest game changer ever was combining discounted notes with the special trick of partials so a person could invest money in notes from their self-directed retirement account! Since then, I’ve taught thousands and thousands of people how to buy a note with money from their Roth IRA, then sell off the first few years as a partial to cover most (or all) of their initial investment and put that money back in their account. Then they can look forward to the security of having years of extra money coming to their mailbox on the back end. In other words, buy long – sell short.

After seeing thousands of people use this technique to build wealth, it seemed obvious – but I was the first guy to crack the code.

Have you got a problem in your business? Keep staring at it until an opportunity stares back. Just like the invention of the partial, most opportunities are cleverly disguised as problems.


A Panicky Reaction

By: Jeff Watson

In my column last month, I crawled out on a limb and gave my thoughts as to what I think will happen in our economy over the next couple of years. I don’t know how long it will take to play the couple innings of baseball from the middle of the 7th to the middle of the 9th, meaning I don’t know how long we have until the end of this particular economic cycle (maybe 18-24 months?), but I am going to crawl a little farther out on the limb and hopefully not embarrass myself with a hard landing.

I believe as we see the next economic slowdown begin due to rising interest rates and the impact it will have in various sectors of our economy, there will be a panicky reaction (overreaction), and the Fed will aggressively lower interest rates and attempt to restart the fire of the economy by throwing more cheap money at the problem. I think between now and mid-2019, the Fed will probably over-raise rates instead of allowing for a more gradual balancing of the economy as the rates move back to a more normal level. I believe they will act too quickly in raising rates and then react too quickly again by cheapening rates and supplying money too much.

It is this next round of Fed-fueled consumption that has me concerned. Someday soon, the debt bubble and crisis will come due, and that debt will have to be paid. The debt of $22+ trillion dollars, the massive amount of unfunded pension liabilities, future projected costs for Social Security and Medicare – these are bills that will come due sooner or later in one form or another. I suspect it will come after more than 50% of baby boomers hit retirement age. The most likely strategy I see to weather that storm and profit from it is to be debt free, have a well-diversified portfolio of assets, and watch those assets carefully. By “assets” I mean items that are producing cash flow and/or are appreciating in value.

During this process, I think we are going to see an insatiable hunger of the tax man, and things we thought were tax protected may lose some of their tax-protected status (i.e. estate taxes may come back at much lower levels, Roth IRA inheritances may be restricted, Section 121 gains on the sale of primary residences may be reduced, and the Tax Reform Act of 2017 may be unwound). Even if this entire fleet of horrors comes true, a well-diversified, debt-free investor will fare far better than anyone else.

Capital Markets Update

Stock Buybacks are Rising at Historical Levels

By: Ryan Parson

With debate raging as to whether the nine-year bull market is coming to an end or merely taking a rest, the reality is that stock valuations are high.  According to research-firm FactSet, as of August 3, 2018, the forward 12-month P/E ratio for the S&P 500 is 16.5. This P/E ratio is above the 5-year average of and above the 10-year average of 4.  “More than 80% of firms in the S&P 500 have reported results and may resume repurchasing stock on a discretionary basis after being on hiatus for the past month,” said David Kostin, chief U.S. equity strategist at Goldman Sachs.

Layer on top of that the geopolitical tensions with Russia, China and North Korea, rising inflation and rising interest rates, it’s no wonder that investors might not be too keen on buying stocks right now.

But there is one group buying stock at a very healthy clip: companies themselves – and they’re buying their own shares through stock buybacks.  Is the increased activity of stock buybacks a good indicator for the markets? Or the predictor of something else?

Buybacks Used to Be Illegal

Most investors probably don’t realize this, but stock buybacks were illegal until the early 1980s.  Up until that time, the Securities and Exchange Commission considered stock buybacks to be a form of stock market manipulation.  And in case you forgot, the SEC’s stated mission has been pretty clear since it was founded in 1934:

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Nonetheless, in 1982, the SEC passed a rule creating a legal process for buybacks and companies started doing so in droves.  This is one way the regulatory body has evolved with the constantly changing and ever more complex investment marketplace.

Buybacks Are Big and Getting Bigger

Market research firm, Birinyi Associates, has kept track of $9.9 trillion in stock buyback announcements since 1984.  And since 2008, over $6 trillion in buybacks have been announced.

But 2018 is shaping up to be even bigger. In fact, analysts at Goldman Sachs project that buybacks will hit $1 trillion this year, up 46% from 2017’s levels and dramatically above 2007’s all-time high water mark of almost $700 billion.

Further, according to an analyst with S&P Dow Jones Indices, “second-quarter repurchases are up 57% from the same period a year earlier, with notable activity in the tech sector where buybacks surged 130% year-over-year.”

Are Buybacks Good or Bad?

Interestingly, there is a ton of debate and a lot of solid research about whether buybacks are good or bad, but rather than try to answer that question, maybe I should just lay out the arguments.

Advocates of buybacks note that with companies investing in their own business and with money going back into the “markets,” then this causes consumer confidence to rise, consumer consumption to rise, and then stock prices to rise.  Since buybacks reduce the number of shares outstanding, this will give each remaining shareholder a bigger share of future company profits, making stock prices rise.  That’s the theory anyway.

According to JP Morgan, since 2000, stocks with higher buyback yields (i.e., spending on buybacks divided by market capitalization) outperformed their rivals by 1.5% during market corrections and by 2% during recessions.

Critics of buybacks on the other hand suggest that buybacks simply result in corporations giving money to their shareholders instead of investing in something more productive and broadly beneficial to their long­-term success.

And there is additional research that counters JP Morgan’s conclusions with conflicting data.  For the past 7 years, financial consultancy firm Fortuna has tracked post-buyback stock prices and created a “buyback ROI.”  According to their research, over the five years through 2017, the 353 companies that spent significantly on buybacks under-performed the market on average.  Their median ROI was 13.8%annually, including dividends, while the S&P 500’s return was 15.8%.

Because of the New Tax Bill?

Since the enactment of the Tax Cuts and Jobs Act of 2017, companies are quickly buying back their own shares.  In fact, share buybacks in 2018 have averaged $4.8 billion per day, double the pace from the same period last year – but that number is increasing exponentially with more company’s announcing buybacks. And economists predict that a company’s ability to bring back cash that was overseas and pay lower taxes will continue to fuel stock buyback announcements to record levels.

There are estimates that the S&P 500 companies have close to $2 trillion in overseas cash, with more than 60% of overseas cash held by technology companies (next are health care and then industrial companies).

For example, tech giant Cisco, which reported that it held more $70 billion cash overseas prior to the tax cut, announced earlier this year that it would bring some of that money back and use $25 billion toward a stock buyback program.  Others announcing large stock buybacks include Boeing ($14b), Merck ($10b) and Oracle ($10b).

And Then There is Apple…

Let’s not forget Apple’s announcement to return another $100 billion to shareholders via buybacks.  In fact, Apple already spent $23.5 billion in buybacks in the first quarter of 2018, which is the biggest quarterly buyback in U.S. history.  But consider this:

  • Apple’s $23.5 billion buyback over the first 3 months of 2018 is greater than the market value of 275 companies in the S&P 500.
  • For the first 6 months of the year, Apple bought back about $43.5 billion of its shares.  That’s more than the market cap of Ford Motor Company

Final Thoughts…

With stocks generally trading above their historical averages, investors would be well served to continue to focus on a company’s fundamentals.

Like all financial decisions, the more we research and the further out we plan, the more successful the journey.  Continue to surround yourself by other successful investors and industry experts to constantly be educating yourself on market conditions and strategies that are best for you.  Even if your portfolio contains little or no traditional investments, these macro market conditions are impacting all investor portfolios, including alternative assets.

Investors may be finding themselves with even more un-deployed investment capital inside of their portfolio as a result of these buybacks occurring.  Therefore, investors need to be even more proactive to identify a re-deployment strategy, which may include consideration of alternative investments, to ease the yield-drag created from corporate buy-backs.

Perhaps more than ever, as investors we have to be more creative to insulate our wealth from these types of historic market conditions.  Being creative requires enhanced education and strategic partnerships with other investors that share your feelings.

In The Spotlight

Looking Back at NoteExpo 2018

The note industry’s conference of the year NoteExpo was held November 2nd & 3rd in Dallas and by all accounts it was another successful event! NoteExpo kicked off with the presentation of the Industry’s Lifetime Achievement award. This year’s recipient Manny Harris started in the note business in 1961! 87 years old now, Mr. Harris is still actively involved day-to-day with his 3 sons in the business.

Next up were back-to-back keynote address, the first “Is Your Dream Worth Fighting For?” was delivered by Real Estate Investor and Entrepreneur Pat Precourt. Money expert and entrepreneurial thought leader Loral Langemeier followed that by telling the audience about a hot new market opportunity “Huge Profits Using Real Estate in the Cannibas Industry.”

Four Panel Discussion were also held covering topics such as investing with your Self-Directed IRA Accounts, Capital Market Trends and Forecasts, Default Management and an update on the regulatory relief efforts of the Seller Finance Coalition.

Day Two was highlighted by the first ever NOTE Talks featuring 8 industry leaders sharing their inspiring stories. Titles of the 12 minute talks were Creating a Freedom Lifestyle – The Entrepreneur’s Journey; The 5 Multipliers for an Abundant Business & Life; Your Money, Your Freedom, Your Life; Game Changer Ideas Seem to Never Start in My Head, Rather Right in Front of My Nose; How to Feel 22 Again!; Rogue Map – Live Life Unleashed; The Tire Kicker: How to Beat the Mind Game & Seize the Results You Want Most; and It’s All a Balancing Act.

To keep up with the latest news on what will be happening next year at NoteExpo 2019, be sure to follow NoteExpo on Facebook, Twitter and Instagram!

Quote of the Month

“What will differentiate the winners from the losers won’t be technology or capital but leadership and a willingness to learn.” – John Chambers

This Month’s Poll Question

Did you attend NoteExpo 2018?

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Susan DeLaGarza