Welcome to the traditional monthly net worth update - The July 2008 edition.

In terms of expenses, this month was a little higher than expected. We typically funnel all of our spending through our credit card (for the rewards points) and we ended up with a $2,500 bill for the month (paid in full of course) where we typically spend around $1500-$1700. I’m not quite sure where we went wrong, but looking over the statement, it seems as though we made a lot of trips to the grocery (and beer) store. Some of it may have to do with the fact that we’re entertaining more than usual this summer. Perhaps it’s due to the new house and everyone wants to come over to our house now instead of us going out to theirs. Also, higher gas prices haven’t helped.

In addition to regular spending expenses, we also had to pay the semi-annual property tax which worked out to be $1,500. Come to think of it, I should probably add property tax to my liabilities at some point.

Lets talk markets! After a large decline, the markets seem to be recovering a bit. The bright side is that financials seem to be on the come back which has helped stabilize my portfolio. Question, do you guys use technical analysis when making trades? Or do you believe that it’s voodoo magic? I personally use a combination of technical and fundamental analysis before making some trades and I’m wondering if technical analysis is a topic that you’d be interested in.

Enough rambling, here are the numbers:

Assets: $ 589,725 (-1.50%)

• Cash: $4,500 (+0.00%)
• Savings: $24,500 (-20.94%)
• Registered/Retirement Investment Account: $56,200 (-3.44%)
• Pension: $ 22,350 (+0.00%)
• Non-Registered Investment Account: $19,200 (-1.03%)
• Smith Manoeuvre Investment Account: $49,475 (-0.50%)
• Investment Property: $ 124,500 (+0.00%)
• Principle Residence: $275,000 (+0.00%) (purchase price)
• Vehicles: $14,000 (2 vehicles) (+0.00%)

Liabilities: $277,566 (-3.69%)

• Investment Property Mortgage: $93,100 (-0.21%)
• Principle Residence Mortgage (readvanceable): $125,881 (-7.79%)
• HELOC balance: $50,575 (+0.39%)
• Other Liabilities: $8,000 (-0.00%)

Total Net Worth: ~$ 312,169 (+0.54%)

Started 2008 with Net Worth: $279,300

Year to Date Gain/Loss: +11.77%

Looking at the numbers, you may have noticed that my assets have decreased a little.  This is mostly due to taking some of our cash savings ($10k) and putting it down on our mortgage.  We are getting fairly aggressive with our mortgage pay down as we have an open mortgage and the extra HELOC space gives us more capital to invest with if we wish.

Overall though, we managed to squeak out another net worth gain however the year to date net worth gain is a little off track.  Hopefully we can make up in the remainder of the year!

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You’ve asked for him and now he’s back. QCash, the 37 year old retired millionaire, goes through his history of net worth updates to show us how he progressed to where he is today.

A while back, I promised FT that I would pull out my net worth totals from 2000 (the year I got married) through 2007 and see what happened that allowed my net worth to balloon and let me experiment with hyper early retirement (a la Derek Foster’s suggestion).

Unfortunately, I cannot find my files from 2000 and 2001. I experienced a computer crash a year ago September and I thought I had recovered everything and could not find the file. Locating the hard copies requires a Herculean effort at tackling the garage loft and I have not been that motivated.

Net Worth Updates from 2002

2002 Net worth - $677,000

2003 Net worth - $787,000

2004 Net worth - $1,075,000

2005 Net worth - $1,468,000

2006 Net worth - $1,722,000

2007 Net worth - $1,782,000

The Details

The reason my numbers jump so rapidly is two-fold. One, I always list my real estate at the adjusted cost base on my net worth statement. So, for example, in 2003, I sold three rental properties and netted out 50K. Also, I had always listed my investment in my business at its real cost basis. So while this doesn’t fairly paint an accurate picture and shows large jumps, it is how I kept my accounts.

Also, up until our little girl was born in 2003, my wife continued to work and she always earned more than I did.

In 2004, I sold my business and the proceeds from that sale show up in 2004 and 2005 as the commercial property closed in 2004, while I did not receive all payments until 2005. Although I should probably adjust my net worth statement in 2004 to show the money owing as an account receivable, I was not assured of the cash payment until 2005, so I remained cautious.

Finally, almost all of the growth from 2005 to 2006 was from my investment portfolio. After 2004, we no longer had any debt and I was ploughing everything that was made back into my investment portfolio to gear up for my “retirement” at the end of 2006.

Is this typical? Of course not. However, purchasing real estate at a young age paid off huge for me. Living a pretty frugal lifestyle, while planning for a family and working hard on my business, allowed me to take chances. I was also lucky in finding a buyer for my business who wanted both the building and the operating company, allowing me to structure the deal to my maximum tax benefit.

So what next?

Well, I have to admit that I have suffered from a mild mid-life crisis that was satisfied with the purchase of a 2004 350Z Nissan Roadster. Or as my wife describes it - my birthday, fathers’ day, xmas gifts for the next 60 years. And as I describe it - cheaper than a mistress.

I have also used a HELOC to make the purchases to convert my growth funds to income funds without taking a huge capital gains hit. So far it is working out okay. Although I hate to be in debt to anyone, it is allowing me to build the “income portfolio” I want and melt down my capital gains against the interest charged. It will be a slow, multi-year process, but it has worked so far.

I have also started to get the bug again. I had read somewhere that entrepreneurs should take a year off after a successful business venture, to recharge and make sure you don’t overheat.

I have been exploring opportunities in the green energy field. In Ontario, the govt is offering the Renewable Energy Standard Offer Program (RESOP) for generation of wind, solar or biomass energy. After looking at wind (11.9 cents/kwh) and solar (42 cents/kwh), I am leaning towards establishing a biomass generation system (11.9 cents per kwh).

If FT is so inclined to let me, I will provide a follow up to that plan in the near future.

Stay tuned for more from QCash in the near future!

Photo credit: Willvision Photography

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To continue on with my buying and selling stocks for beginners series, lets get into the basics of how stock margin and margin accounts work.

When the application to open a discount brokerage account is initiated, there is a choice of whether to open a margin or cash account.  I typically open a margin account because, one, I understand how it works (for the most part), and second, it’s the same as a cash account except that you have the “option” of borrowing from the brokerage. The ability to borrow from the brokerage also opens the door to shorting a stock and buying/selling options if the investor chooses.

How does a margin account work?

Margin accounts are identical to cash only accounts except that they have the ability to go into a negative balance. Once the account goes into the negative range, the brokerage will charge you interest at their margin rates.

Some of the more trader friendly discount brokerages, like Interactive Brokers, have margin rates below prime which makes it an ideal choice for leveraged equity investing.

How does buying stock on margin work?

The term margin represents the investors equity in the trade. When we say that 50% of the stock is marginable, that basically represents that the investor needs at least 50% equity in the trade.

Not every stock on the market is available to be purchased on margin. For equities, the trader can typically margin up to 50% of the total value of the trade providing that the stock is above $2 and is a marginable security. Securities that are less than $2 in value have a higher margin requirement.

Some of the larger, higher volume stocks on the exchange are eligible for reduced margin (30%) which means that the investor can borrow up to 70%. Here’s a list of securities eligible for reduced margin as indicated by Interactive Brokers.

For Example:

• Share Price: $10 (assume eligible for reduced margin)
• Purchase Amount: $10 x 100 shares = $1000
• 30% margin = $300 minimum equity required and maintained, $700 borrowed.
• Interest rate = 5%

Case 1 - The Ideal Situation: After 1 year, shares rise to $12 and sold

• Value: $12 x 100 shares = $1200
• - purchase cost ($1000) - interest cost incurred ($35) = $165 profit
• 55% gain with margin/leverage, 20% gain without.

Case 2 - The Dreaded Margin Call: After 1 year, shares drop to $8

• Value: $8 x 100 shares = $800
• $800 - borrowed amount ($700) = $100 which is $200 less than the $300 (equity) required to be maintained. This will result in a margin call (see below) which will require $200 to be deposited into the account immediately. The choice is either to sell the security or deposit the minimum of $200.

Margin Calls

As you can see from Case 2, there was a margin call. Margin calls occur when margin is used and the investment value falls below the margin requirement. When this happens, there is one of two things that has to happen to get the account back to acceptable levels.

1. The investor can deposit cash into the account to eliminate the deficit.
2. If the cash does not arrive within the specified time indicated by the brokerage, then the brokerage has the right to liquidate securities until they get their money back.

Final Thoughts

Margin is simply a fancy word for leverage. However, borrowing with margin is different than using a loan or line of credit to invest with. First, the money is borrowed directly from the brokerage and second, if the investments purchased with margin decrease in value, the brokerage has the right to sell those securities without warning (margin call).

To avoid the dreaded margin call, one strategy is to borrow much less than the maximum borrowed amount permitted. That way, when the markets become volatile, there will be some buffer before the margin requirements come knocking, which will help avoid selling stocks low.

Final note, as you can see with the examples above, investing with leverage amplifies both winners and losers. Do you own due diligence before using leverage to invest.

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