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Ultra-High Net Worth Individual

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Abrupt? [Dec. 10th, 2008|09:47 am]
The internet is a fun place if you don't take it too seriously, so I have to laugh at this comment from an anonymous person:
I know this person in real life.

He lost all of his money in the market crash and is now homeless. That's why he abruptly stopped posting.

100% fact.
That's clearly not true. My record of not posting regularly was established long before the crash. But I do appreciate that you were thinking of me in this time of uncertainty.

It did get me thinking though, about how far away from being homeless I actually am. Hopefully I've built up enough of a safety net that I'm not anywhere near that point.

For starters, I don't currently have any debt. My margins are all paid off, and not because they were called; they were paid off before the crash. I did have a million dollar mortgage, until recently. I had an interest-only mortgage at roughly 6.5%, and with the tax deduction, the effective interest rate was closer to 4%. I also had a million dollars in bonds and bond-like investments at an after-tax rate of more than 4%, meaning it was to my advantage to have a mortgage. It probably still could be, but with the current instability and uncertainty, I'd rather just own my home outright.

Right now I live primarily off my job, but I do have significant investments and a fair bit of cash. If it really came down to it and all my investments became worthless, and I had no more savings and no job, I'd be forced to sell my house. But even then I wouldn't be homeless. I live in a very desirable area, so even if I took a loss on the sale, there would still be enough to buy a smaller house and live comfortably there for quite a while.

Anyway, don't look to me for any great insight into the current situation. All of my advisors are telling me just to wait it out, and get into treasuries with what money I have to invest.
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The power of money [May. 7th, 2007|09:54 pm]
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When I started this blog, I had originally intended to write more frequently than I have been. I suppose I don't have as many things to say as I originally thought I did. In retrospect, that isn't surprising.

Anyway, in my last entry, I responded to a commenter about me and this blog, and they recently replied to my response:
I did not intend to be 'mean' and ... I do not think that 'inferiority' prompted my comments, more like an innocence of one who has not had the experience.
I certainly didn't think you were being mean, nor had an inferiority complex. I only thought that you had some basic misunderstandings about me, and tried to clear those up.
Rereading all this later, I was puzzled mainly about this blog and posted my comments...isn't this the purpose of a blog...else it would be private.
Absolutely. Part of the reason I started this blog is because I couldn't find something similar, and I wanted people to be able to ask questions, and see the questions I was asking myself.
I am also aware that having money (more than those around you) ... tugs on conscience
I disagree, and perhaps I wasn't clear about this in my last entry. Having money doesn't need to create feelings of guilt. It doesn't "tug on my conscience", as you say.
The basic point of money is power
I think this is the fundamental difference between us. In my view, the basic point of money is exchange. The only power that money inherently offers is spending power.

Power comes from time, energy, and commitment. Power comes from ideas that have merit. Power comes from actions. Power comes from influence, from being able to effect change. While money might be able to assist in these things, it's merely a tool. Without these other things, money is useless, and people with vast fortunes can often be powerless. People without any money at all often have power to profoundly change the world. Money and power are orthogonal.
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I return [Aug. 15th, 2006|02:06 pm]
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A reader posted a fairly long comment, and I thought I'd try to respond to a couple questions or comments (not necessarily in order):
Upon reflection, this blog makes you seem as though your money is the focus of your life, which it may be, or else it is the focus of this blog.
I certainly hope it's not the focus of my life! But I hope I made clear in my first entry, this blog is not about me, but about what I have.
What I wonder after reading your blog is why you spend time writing a blog...might I ask if you are somewhat conflicted about having so much money? [...] But since you are likely a busy person, why spend time this way...I am curious.
Given that it's been nine weeks since my last entry, you might say that I don't spend time writing a blog. But it is a valid question; why have a blog at all?

I read a lot of blogs about the industry I'm in, and I find that a lot of the blogs aren't for the purpose of explaining things to the reader, but explaining them to the writer. Writing about what you're thinking about helps get your thoughts in order. That's really what the purpose of this blog is. I have two financial advisors and a tax advisor, and all of them have different styles, and depending on the situation, all three could be telling me different things. I don't have any education in economics or finances, but I'm trying to learn as quickly as possible, and I'm hoping this blog will help.

Am I conflicted about being rich? I'd have to say no. It does provide a different perspective sometimes though.
Basically you sound like an 'inverse' egoist, like you like to hide the fact of your money, at the same time that you relish the secret power it gives you.
That's a very interesting observation. It's true, I don't like people to know that I have a lot of money, but mainly it's because it's hard to predict how other people will react. As I said in my first entry, "Life is much simpler when people aren't thinking about your assets." But it's not that I "relish the secret power it gives"; believing that other people aren't thinking about it makes it easier for me to think of it simply as a resource.
I would think you might want to step back and think about money as a resource, which you have, and how it can be used, to buy free time, experiences, help others. I thought Warren Buffett's recent gift to Gates' foundation showed much intelligent reflection.
I agree completely.
Since I know nothing about you, I wonder why you work at all? I assume that you own a company that was successful and like this work...and probably like to work period.
I own the stock of a company that was successful, as I've said.

I tried to answer this question in an earlier entry. There are basically two reasons for it. The main one is that I like to feel productive, and a business environment provides that in a way I don't think I could get otherwise. The secondary reason is social; people expect an answer to the question, "What do you do?"
What I also wonder about is your wife with her modest Civic. This seems a bit much...there are other modest cars which could give more comfort and pleasure.
My wife bought her Civic before we were married, and basically had two requirements at the time: good gas mileage, and air conditioning. Both of us come from families that tend to drive cars into the ground before replacing them, and both of us have picked up on that habit. We'll be replacing both of our cars soon. I could keep my sports car, but there's not really a reason to. I don't need it for my "male ego". And yes, I'll be the one buying both of our new cars.
So, I advise you to: [...] Agree with your wife on a certain amount to live on and budget so that there are no constraints. She sounds like a reasonable person and does not need to have your wealth held over her head like a shadow.
I think I may have given a slightly skewed perception when I wrote about my wife. In a legal sense, almost everything is mine, but that doesn't really enter into our conscious when we're making decisions. She joins me for meetings with our financial planners; we agree together on how much we'd like to spend on, for example, cars or furniture; in practice that money gets spent on both of us. I really don't think either of us think that it's being "held over her head."
Get some hobbies and stop worrying so much about your wealth.
My wife already thinks I spend too much time on my hobbies. People who read this blog who think I should write more often would probably agree. (Sorry for the two month break. I'll try and get back on a more regular schedule now.)
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Comparing advisors and their plans [Jun. 6th, 2006|02:20 pm]
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In addition to a tax advisor, I also have two financial advisors who work for different large institutions. They compete directly with each other for my business. Until now the only thing that they've had to do is send monthly statements about how my stock is doing, since I'm only invested in one stock. (Remember, "Wealth is obtained in concentration and preserved in diversification.") But since I'm going to be buying a house, they've each made their sales pitch for how to go about doing it. There are two parts to this: cashing out, and generating income.

The first suggested a Variable Paid Forward initially, and perhaps a second one later. For income, his recommendation was to invest first in municipal bonds, then in exchange place funds, and eventually in hedge funds.

The second suggested selling either by selling a fixed number of shares on a regular schedule (basically the inverse of dollar-cost averaging), or by setting price targets. He then suggested investing in a mix of municipal bonds, preferred stocks, and common stocks with a high dividend yield.

Which selling strategy is better?Collapse )

What should I buy?Collapse )

Which advisor is better?Collapse )
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The tax cuts aren't meant for me [May. 13th, 2006|10:30 am]
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Whenever I hear a politician advocating tax increases, the tax is almost always only supposed to tax the rich, because, and I quote, "they need to pay their fair share." Then they decry tax cuts because they claim those tax cuts are weighted towards helping the richest people.

It puts me on the defensive.

Yes, I do have a tax advisor. His job is not to find bizarre deductions that may get me audited. Rather, it's to work with me and my investment advisor so that the three of us can plan what courses of action to take, and to estimate how much tax I'm going to have to pay. I still have to pay my fair share of tax, at the highest rates.

It isn't like there's some portion of my income that isn't taxed; in fact, I have income that's taxed that wouldn't normally be taxed, because I'm subject to the AMT. What makes people so upset is that my effective tax rate is significantly lower than 35%, though there is income that I do pay that rate on.

The reason that it's so low isn't because of tax shelters or anything that isn't available to every middle class family. It's because long-term capital gains and dividend income are taxed at a 15% rate. The more of this type of income I have, the closer my effective tax rate will get to 15%.

401(k)s and IRAs and the recent tax cuts are all supposed to help the middle class, by encouraging them to invest their money. The main lesson from The Millionaire Next Door is that you can accumulate a significant amount of money, regardless of what your job is, simply by spending less than you earn and saving and investing the rest.

Yes, the upper class benefits from the tax cuts, but it's because they're investing their money. If people would save their money instead of driving themselves deeper into debt, then they could benefit from the tax cuts too.

I realize that there's an argument that it's easier for rich people to save more, but that doesn't mean that the middle class can't save at all. It does take more determination, but people are doing it every day. Oprah recently had a series on getting out of debt and saving more. pfblogs.org is filled with people who are trying to live below their means and save and invest their money. Those are the people that the tax cuts are trying to help.
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Cashing out with Variable Paid Forwards [May. 8th, 2006|06:59 pm]
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One interesting tool made available to high net worth individuals is called a Variable Paid Forward, or VPF. Their intended use is to take cash out of your current investment that for some reason you may not want to sell right away.

The way they work is to use a collar options strategy to guarantee a future value of the investment. Since the value is guaranteed, the brokerage is comfortable loaning you the equivalent present value at a risk-free interest rate.

Stop me if I'm going too fast.Collapse )

You're limited by law to only borrowing up to 50% of your portfolio's value, which presents a small problem when you try to borrow against the entire thing. So the way to get around the limitation is to treat the VPF as a sale of stock with a future delivery date. The brokerage gives you the proceeds now, and you agree to give them the equivalent future value at a later date. Typically they give you the option of either settling with stock or cash, so you're not obligated to sell.

Because you don't know the future value of the shares, you don't know how many shares you'll have to deliver when the options expire, and because of that, it's not considered a taxable sale until you actually hand over the shares.

So you get a low interest rate and tax deferral, and still have some upside participation.
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Want me to invest in your hedge fund? [Apr. 26th, 2006|02:05 pm]
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One of the basic rules of investing is that risk and reward are linked; if you want a higher return then you must take on more risk. It's very interesting and important to note that the converse is not true; you can increase your risk without a corresponding higher return. The perfect example of this is gambling. A more investing-oriented example is long-term bonds. Long-term bonds don't generally have an interest rate much higher than short-term bonds, and as interest rates rise you could lose the value of the principal as well. They're higher risk than short-term bonds without a corresponding increase in return.

Another important thing to consider in choosing investments is overall return. A mutual fund may beat the market by 1% but if the management fees are 1.5% then you're actually worse off than if you had just bought SPY or the Vanguard 500 Index Fund. Also an actively managed fund will probably have a bigger tax burden than an index fund, since actively managed funds have more turnover.

Add in that I'm considered a whale, and that the primary tools for harpooning a whale are investments with unconventional practices and short track records promising above-average gains. Unconventional practices translate into higher fees. Short track records mean there's no way of accurately calculating risk.

Now ask me if I want to invest in your hedge fund.

That said, there are certain high-risk investments that I have a special place in my heart for, such as angel investing. Angel investing in general is probably riskier than most hedge funds and also probably has a lower average payout than most hedge funds. That said, there are reasons why angel investing is attractive, and not all of them are monetary. Most of the reasons I'm interested in angel investing are to receive contacts, and to be able to track industry trends from a very early stage. If I'm able to achieve those goals while breaking even financially I'll consider it one of the best investments I've made.
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Estate planning shenanigans [Apr. 20th, 2006|03:37 pm]
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sierra_nevada and I got into a small discussion about the inheritance tax. Here's an interesting estate planning technique that involves the transfer of a house to your children without any inheritance tax.

Imagine you're buying a vacation home that you'd like to pass on to your children. When you go to buy the house, you're not the one that actually buys it. Instead, your children are the purchasers of the house. There are various ways for them to get the loan necessary for this, including just loaning them the money yourself.

Now your children have the house and a loan which they need to repay. In order for them to pay off the loan, they need to charge you rent for use of the house. It is, after all, their house. After a number of years, the loan is paid off, and they own the home outright.

There are, of course, a lot of details that I'm leaving out, that a financial advisor and CPA can fill in better than I can. There may still be some taxes that need to be paid, but they can be paid by you and are at a lower rate than the inheritance tax.
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Hearsay over lunch [Apr. 19th, 2006|07:05 pm]
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I had lunch with midendian today, who says I seem "somewhat rich but not ultra rich," which I think was an attempt at a compliment. He also told me that one of his friends said that being a millionaire sounds tedious and boring, based on reading this blog. I don't know if I should be offended.

The state of being rich probably is tedious and boring. The only thing that having all that money provides just from its mere existence is a sense of security; I know that I'll never be unable to pay a bill, or struggle if I can't find work. Its existence also means that I need to know a lot of people I probably wouldn't otherwise know, such as an estate attorney, a financial advisor for high net worth individuals, and a very good CPA.

The really fun part about being rich is supposed to be spending it, which isn't something I particularly enjoy doing. My wife has, on several occasions, called me a cheap bastard. Other than the house we're planning on buying, there isn't anything that I've earmarked the money for that we couldn't pay for with our salaries, which admittedly are upper class. We don't lead a lifestyle of the rich and famous.

So perhaps being a millionaire isn't tedious and boring; perhaps it's just that I'm a tedious and boring millionaire.

Or perhaps I'm just writing about tedious and boring topics, in which case, please let me know what you'd like me to write about. I'm willing to write about pretty much anything, so feel free to leave a comment and let me know what would be more interesting.
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Public versus private transportation [Apr. 12th, 2006|08:30 am]
In Santa Clara county, the busses and commuter rail are operated by the Valley Transportation Authority. You can buy a monthly pass that will get you on almost any bus or train for roughly $60; a monthly pass that includes Express bus lines is $120. Other than that, there isn't anything additional that you pay that you wouldn't otherwise. Most of the revenue for VTA actually comes from various sales taxes. It turns out that most years, VTA turns a small profit, but some years runs at a fairly significant deficit.

Meanwhile, that shiny new Mercedes S-Class sedan with the AMG engine can be yours for as little as $1,888/month. By the time you include all of the expenses, including registration, insurance, gas, and maintenance, the Mercedes is easily forty times as expensive as the monthly VTA pass. But isn't the luxury worth it?

Now go to Delta. If I want to fly from San Francisco to New York next month, Delta says it can get me there for $348 if I fly into JFK and take the lowest fare coach seat available. Flying into La Guardia is going to cost me $604, and I'll have a layover in Atlanta. If I need to do this as part of my job, then I may not want to sit in the cheapest coach seats, but I will get certain discounts for being a frequent flyer, and even more discounts if I have a rewards credit card.

The cost of getting a chartered flight from San Francisco to New York is probably going to be roughly forty times as expensive as the Delta flight, depending on what type of plane you charter and how many people you split the costs with. A ten hour flight on a six person jet from Club 328 is probably going to cost about $60,000, or about $10,000 per person, roughly thirty times what the Delta flight costs. But again, isn't the luxury worth it?

Really, a chartered service like Club 328 is more like calling a taxi than having your own car. Your own private jet will cost you roughly four times what Club 328 will cost you, or on the order of a hundred times what the flight from Delta costs. Of course, it depends on what type of plane you buy and how often you use it. If you decide to get an elite Bombardier Global Express, the lease alone is roughly $250,000 per month. On top of that you have to pay for a crew, a hangar, landing fees which can run up to $10,000 at airports like Tokyo, fuel, and a variety of taxes depending on what the ownership structure is. You can figure that for a business traveler with 20 round-trip flights per year where each one has several stops, like staying in Hawaii for a few days on your way to Japan and then China, a Global Express is going to cost close to ten million dollars per year.

A car is one of the worst investments that you can make, when viewed strictly from a cost point of view. One of the easiest ways to save money is to start taking public transportation. However, a car provides a level of convenience and luxury that public transportation will never be able to match. The same is true with chartered and private jets; they're a pretty poor investment, but people who are constantly traveling and can afford it frequently decide to get one, simply for the convenience. I imagine most frequent travelers would pay as much as they can afford just so they can skip having to go through the TSA.
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