1. Safety. In general an investment paying 12% interest is not as safe
as one paying 6%, but it is doubtful if the 12% investment involves
twice the risk.
If the income offsets the additional risk or provides a reserve against
which to write off losses when they eventually come, then high yield
investments justify themselves, and they do when they are chosen with
intelligence, with information at hand on the investment and when they
are administered carefully, as we will see.
Along with this general theory that there is a good deal of merit to
investing in high yield opportunities, safety should be stressed. This
leads us to the second characteristic of the investments we are going to
examine.
2. Collateral or guarantees. A home owner may show you his bank account
and also prove that he owns his home free and clear, so that you
conclude that he is a good risk whose signature on a note is as good as
gold but it is far wiser for you to take a mortgage on his home. Or if
he has securities it is better to have him assign the securities to you
than just to take his promise to pay.
If a dealer sells you a customer’s conditional sales contract on an
automobile he sold on which the customer is obligated to pay in time
payments over a given number of months or years, it is well, if
possible, to have the dealer guarantee the contract in case the customer
defaults. Two people are obligated to pay, and certainly two are better
than one.
3. Provision for easy repayment. If someone borrows $2000 from you at an
attractive rate of interest and promises to repay it at the end of 12
months with 15% interest, the proposition on its face is a bad one. If
he needs the $2000 now, what assurance is there that he will have it to
repay at the end of 12 months? Such a sum is not small. Does he intend
to borrow from Peter to pay Paul at the end of a year? In New York City a
seemingly very substantial man did just this for years and got away
with it until he died. That was over two years ago and the creditors are
left holding the notes.
Periodic, small payments are a sensible requirement, and it must be
demonstrated that the debtor can make these payments out of his income
when all of his obligations are taken into consideration, and these
obligations must be known.
4. Responsibility for payment. Some individual or individuals, or a
corporation composed of very distinct individuals must be obligated to
pay in the type investment we are talking about. Unimproved land on the
edge of the city may be a fine investment. Some day it may double or
even triple in value, but what we are trying to emphasize is the type of
investment in which there is an obligation on the part of a person or
persons to pay a given amount at a given time or in time payments, and
you as the investor must look to this person or these persons to pay you
on the due date.
5 .Liquidity. The longer a contract runs the less liquid it is and
generally the less desirable. You cannot get your money out of it for a
long time, and then the business or the business climate may change. The
person who lent $10,000 in 1928 for five years in all probability had
difficulty in collecting in 1933. A demand note is certainly preferable
to a five year note. You may have need for the money sooner than you
thought when you made the investment, and if you are tied up for five
years you cannot get your funds back. Perhaps better opportunities will
present themselves. Stay as liquid as possible.
6. Spreading of the risk. If you have $10,000 to invest it is best not
to put it all in one place into a mortgage for instance. It is far
better to put it into five mortgages of $2,000 each. The $10,000
mortgage could be defaulted, but there is not so great a probability
that all five mortgages will be defaulted.
7. Part time administration. We are not writing for the purpose of
getting a person to quit his job in order to devote all of his time to
his investments. We are writing for the person who wants to invest in
his spare time and look after his investments in his spare time. The
investments described here may in some cases require more watching than
others he has made, but by definition they must require a minimum of
administration on the investor’s part. Payments must be made regularly,
and the skipped or late payment must be the exception.
8. Business functions performed by someone else. You as the investor
should not undertake to perform any business function. The only function
you should perform, once the investment is made, is to receive the
payments, and in the event that payments are not made, you should be
able to resort to a simple procedure at law to retrieve your money. If
you invest in a filling station you should not have to hire a manager
and then proceed to sell gas and oil yourself, under our definition of
the type investment discussed here. The filling station should be leased
to a major oil company for a fixed rental, and the oil company should
perform all of the business functions.
9. Investment not subject to litigation. When a debtor can’t or won’t
pay, the first thing he thinks of generally is some defense (and his
imagination is unlimited on this point) against paying you: you had
agreed to lend him more at the end of a year, and because you did not
lend more his business failed. Or the rate of interest you charged was
usurious and thus contrary to law; or you really owed him something
before you ever lent him the money, and this should be an offset against
what he owes you. These defenses are used almost every day.
If he signs a note, he should sign a waiver of judgment note (in states
which recognize such notes) and such a note will be described later.
Your investment should not be subject to litigation, and you must be
sure of this fact before you make it.
10. Tax advantage. The Internal Revenue Code and Regulations state what
the obligations of a tax payer are and what they are not. You are
obligated to pay every cent you owe, and you are not obligated to pay
what you do not owe.
Certain types of investment are more heavily taxed than others. There is
nothing the matter with investing in state and municipal government
bonds just because you do not pay any federal income tax on the
interest. This is the law, and it works to the advantage of the investor
in government bonds and incidentally makes it less difficult for the
state and municipal governments to finance their operations. Investments
with a tax benefit or tax shelter are more desirable in many cases for
the investor than those without such a benefit or shelter.
However the Forex can make you rich within months instead of years.