Penny stocks. Don’t even go there!

By Josh  August 23, 2018

There comes a time in every new investor’s life when they become disenchanted by the “boring” returns of blue-chip stocks and government bonds. Sure, those are known for modest growth potential and steady dividend payments (income), but they are boring! They are what your grandpa invests in! I want to do something cool, and get rich quick!!

Enter Penny Stocks.

Penny stocks have an air of mystery about them. As the name implies, these are companies whose share prices trade in the pennies or fractions of pennies, compared to one share of Apple which is now $215 per share or Amazon which is $1900+. That’s a pretty high barrier to entry for a novice investor. The problem is, buying just a few shares of a no-name company doesn’t get you anywhere, so the novice will still throw a good chunk of change at a penny stock and wind up with thousands of shares of these companies.

I had a couple modest successes with penny stocks, and some utter failures! One company that you might remember seeing on TV commercials and sponsoring your favorite sports team (they literally had ads on hockey rinks, baseball stadiums, and agreements with several NFL teams) was “SpongeTech”. This was an innovative idea, where you would buy a normal-looking sponge for your household or automotive cleaning needs, but the soapy stuff was already inside the sponge! As they say – just add water! Well the idea may have seemed real, but the company wasn’t. I initially bought shares around 4.3c each, about 12 thousand shares for $500. Then the price dropped to around 3.5 cents a share, so I doubled down. Now I’m holding about 25 thousand shares of this “company” with a cool product, and with major endorsement deals all around pro sports. I was going to ride this rocketship “to the moon” (which is something all Penny stocks are supposedly going to do…)

The stock eventually took off. 3-4 cents suddenly became 7 cents. Then 12. Around 15cents per share I started selling some of my shares, to recoup my initial investment. But this thing just kept going and going, so I threw all of my money back into SPNG and was hoping to swing for the fences. I was going to place a limit sell order for 25c per share on a big lot of my holdings, and one day during my lunch hour it breezed past 25 and was at 27 cents per share! I had a public hearing that afternoon, so I wasn’t able to keep tabs on the action, but I had an excitement inside me to see if we would hit 30 cents per share by the time the hearing was over.

And that’s when my first major penny stock went bust. I entered my meeting at 27 cents per share (and holding about $15k in stock of a worthless company), and I left the meeting with about $4k in stock, in said worthless company. My heart sank, I had a lump in my throat, all of the cliche things that mean someone is having a bad day, happened to me that afternoon. I was freaking out! I *lost* $11,000 in one 2-hour meeting. And the stock would continue to bounce around, trailing ever lower as time went on. It turns out the CEO was a fraud, constantly offering up more shares, diluting existing shareholders so he could continue to fund his lavish lifestyle. SPNG eventually got de-listed and traded on Over The Counter (OTC) exchanges as SPNGQ (trust me when I say a Q in the stock ticker is bad, unless you’re invested in QQQ – the ETF that tracks the Nasdaq 100).

Meanwhile, given my early success with SpongeTech, I was constantly looking for another possible big winner. I grew up in Indiana, so when I found an Indiana-based company, I probably gave them more credence than I should have, because Hoosiers are known for being trustworthy, hard-working, honest folks. Environmental Enzymes Solutions (EESO) sold “green” cleaning products before that was a cool idea. They sold these chemical concoctions in gallon jugs, not anything that would look cool on store shelves, so they were going more for commercial and industrial cleaning companies.

What piqued my interest on EESO was a press release that said a South Korean company had offered to buy the company for 10 cents per share. Well, at the time I read that article, EESO was trading for 2 cents per share! I loaded up my proverbial truck and waited for word that the company would accept the South Korean offer. This was an easy opportunity to earn 5x my original investment!!! But as time went on, the share price dipped, so I bought more. Then it fell some more, and I bought some more. Eventually I could buy about 40,000 shares for a dollar, and I owned nearly ten million shares. Well the company was continually diluting and selling more shares. The buyout offer, if it was ever real at all, was for BEFORE the dilution started, so there was never any chance of receiving 5x my initial buy-in.

My EESO experience taught me two great lessons: Do your homework, and Beware of the Pump & Dump. Pump & Dump is slang for a news article or press release being sent out to pump up the share price with some exciting news about the company or stock, meanwhile earlier investors (who bought cheaply or just want to sell their stock) wait for the inevitable run-up from this press release, then dump their shares into the open market.

I bought some other penny stocks that were biopharma companies waiting on the coveted FDA approvals of Phase 3 clinical trial results (that would never come), in which case the share price would go up between 10x and 50x. Others were upstart (not startup) bank stocks, which was a pretty dumb moved while 465 banks were closed by the FDIC between 2008-2012.

All-in-all, it was a good education on the way individual stock trading works, but it was an expensive lesson for me at the time. Most of this happened in early 2009, when the stock market was just reversing and heading back up at the start of the current bull market. If I had bought undervalued REAL companies at that time, many of my investments would be up 10x or more, assuming I held them to present day. I pretty quickly got out of my fascination with turning a fast profit, and I actually got out of all individual stock investments a year later.

It wasn’t until I took Bridget Casey’s Six Figure Stock Portfolio course in 2017 that I bought another individual stock, as I attempted to earn some extra side income in the form of stock dividends. I’m an Index Fund investor for 99% of my invested funds, and will probably remain that way for a looooong time. But seriously, if you have any interest in investing in individual companies, or just want to understand investing better, hit up Bridget’s course and save yourself the THOUSANDS of dollars I spent on my penny stock investing fiasco. It will pay for itself hundreds of times over, in the long run. Even for index fund investors like myself, you will better understand asset allocations and having a plan as your portfolio grows.

Additional passive income sources

By Josh July 26, 2018

Despite making more money at my (new) day job than I’ve ever made before in my career, I am constantly looking for other ways to add to my banking and investment accounts. This post will cover two that are easy and relatively lucrative!

Bank Account Bonuses

Every once in a while, I receive fliers in the mail that are basically advertisements for banks trying to get me to open up a new checking or savings account with them. Until the past couple years, I would toss those straight into the trash, because I already had a free checking account, had been with my then-bank for 10+ years, and didn’t want to cause any extra work for myself in keeping track of multiple bank accounts across various banking institutions, credit unions, etc.

But as part of my growing travel-hacking knowledge base, I became familiar with Doctor of Credit, which also maintains a list of bank account bonuses that are available at any given time. This list opened up a world of *free* income to me, as long as I could read the fine print and comply with all of the listed requirements.

So what type of requirements does a bank spell out in order to get the bonus? Sometimes you have to set up Direct Deposit and receive a couple deposits from your employer or a certain amount of deposits such as $500. Other bonuses require a minimum number of debit card purchases/swipes, and I’ve been known to make 5 minor transactions in quick succession to meet the minimum requirement (pack of gum, 1 gallon of gas, a bottled beverage, etc). One bonus I am currently working on achieving requires either a direct deposit OR $2,500 minimum balance, 1 debit card purchase, 1 bill-pay of a recurring bill, AND a mobile check deposit. I will receive a $250 bonus for doing each of those 4 things!  The one I received most recently was for setting up a Business Checking Account, for my Uber business, duh! 😉 This offer required a $1,500 minimum daily balance for 60 days, and a combination of 5 debit card transactions and/or ACH deposit/payments. I did 5+ of both, just to be sure! Free $300 in my account just the other day, which is basically a 20% return in 60 days for the $1,500 I parked there for a couple months.

So why do banks offer these bonuses? First, they think most people aren’t going to follow-through with all of the requirements, so they won’t have to honor the bonus. Second, they get you used to using the account for debit purchases, direct deposits and bill-pay, so they think inertia will work against the consumer and they will stay-put. Thirdly, many checking and savings accounts have monthly fees, but there are *almost always* a way to have the monthly fees waived, which usually requires a minimum balance of $1,500 in a checking account or up to $15,000 in a savings account, to remain fee-free. But I think that if I can figure out how to switch my behaviors TO this new account, I can just as easily switch FROM the account.

If you decide to proceed with going after these bank account bonuses, the best thing I can tell you is to read the terms and conditions carefully, keep a copy of those terms, and make sure you meet them within the specified amount of time. The next best thing I can tell you is that these bonuses ARE TAXABLE INCOME and will be reported to the IRS on a 1099-INT form. But I have earned $1,350 so far this year from bank account sign-up bonuses, and that’s almost 2 whole mortgage payments ($680/month) for me, so this is not an insignificant sum in my budget. And finally, beware that many of the accounts have language that the account must remain open and with a positive balance for 6 or 9 months, or the bonus will be clawed-back upon closure.

Tradelines

This next topic is a lot scarier to many people, and I spent a lot of time trying to wrap my head around it before ultimately giving it a try last December. I want to caution you, dear reader, that this is something I tried, did successfully for about 5 months, then stopped participating because I had one of my oldest credit accounts shut down without warning.

Tradelines are basically any contract you have with a banking institution for a consumer line of credit. AKA a credit card. You have a contract in place to borrow up to a certain limit, with payback terms, including interest payments per the agreed-upon terms. These tradelines are reported to the credit bureaus, and they are what make up your credit report.

So how does one make money with Tradelines? You basically “rent” access to them! There are companies out there who need a supply of tradelines to sell as inventory to borrowers with poor credit who need a temporary bump in their credit score to apply for a home or car loan of their own. The process is to add the person as an “Authorized User” on your long-standing, excellent credit account, thereby having your credit card tradeline report to the borrower’s credit report for a few months. The borrower NEVER gets any information about you, and they never receive an Authorized User card – the card (if issued at all) will be sent to you.

It generally only took me about a minute to log into my online accounts with a given credit card, click “add authorized user”, type in their personal information (first/last name, address, email address, sometimes SSN) and they would begin to receive a credit score boost within a month. At the end of 2-3 months, I would usually need to make a phone call (2-10 minutes depending on how much hold-time) to remove the authorized user. The telephone agent will ask if you can get the card back from the user (which you can do, because you’re still holding onto the card in the first place), and you tell them yes. Then you destroy the card! And you get paid anywhere from $50-75 for cards that have been open 2-5 years, and can earn quite a bit more for older cards and/or higher credit limit cards.

So why did I stop? As I mentioned before, I had one of my oldest credit cards shut down by Discover. I opened the card in 2012, because I liked the idea of 5% cashback on rotating quarterly categories. Discover actually had one of the easiest processes to add AND remove Authorized Users, so I thought things were going along really well… that is, until I tried to remove my 4th and add my 5th Authorized Users on the same day. I think that must’ve raised red flags at Discover, because my online request was denied and I had to make a phone call. “No problem,” I thought… “Discover has excellent, US-based phone agents.” I was able to talk to an agent and get the request approved. But then, a month or so later, without any digital or mailed communication, my DiscoverMore Card was shut down.

In all, I “rented” out my good credit (score over 800 on all of my recent credit card applications and using all of the free tracking apps) on 17 occasions. This earned me a total of  $1,125 in 5 months, and I probably only spent a total of 2 hours online to add, and on the phone to remove, the authorized users. But after my Discover shutdown, I didn’t want to risk having the same thing happen with Chase (my beloved travel hacking cards issuer), so I stopped participating in the program.

The Wealthy Accountant has a good write-up about Tradelines, with more details than I have provided. Check out his post if you want to learn more.

Peer-to-Peer lending results

By Josh July 25, 2018

Peer-to-Peer lending sites have been around for quite a while now, so you’ve probably heard of them or even considered checking them out. If you’re not aware of Prosper or Lending Club, or the concept of Peer-to-Peer (P2P) lending sites, WomenWhoMoney has a great write-up on the pros and cons of P2P.

I initially read about P2P lending from Financial Samurai and Budgets Are Sexy, and I took the bait in April 2015. My main goal was to diversify my investments so that not everything I have would be correlated to the stock market. I took a look at both Prosper and Lending Club, but it seemed like Lending Club was the larger of the two sites and offered more loans for investors such as myself.

Every loan offered on the site would be for amounts up to $35,000 (later increased to $40,000) and individual investors would make a claim on $25 or $50 of each loan, to spread the risk of every loan across multiple investors. In that same vein, investors will spread their investable cash across dozens or hundreds of loans to spread their exposure to the risk of any individual investor defaulting.

In all, I invested in 366 loans, and all of my loans were $25 initial value. I also bought a few loans on the secondary market to test out that feature and see how those loans would perform. My total contributions were about $7,500 of my own cash, and I initially had the account set up to automatically reinvest the proceeds of my monthly payments into new loans.

After a few months, I decided to start screening loans by myself instead of using the Lending Club preset conditions. My personal parameters included annual salary of at least $50,000 and credit score of at least 750. I also tried to fund loans that were for “Green Loans” but they were often very rare on the platform back in 2015 and early 2016 when I was funding new loans.

My initial results were pretty good. Excellent, even. In my first six months of investing on Lending Club, my returns were nearly 10.9%. But then little cracks started appearing. After a few months, I had several loans that were beginning to become delinquent. Sometimes the borrower would catch up and pay a minor late fee, but a few slipped to 31-120 days late. Around the 1-year mark, I had my first two loan defaults. My returns slipped to 8%, but I had more winners than losers, which was the whole purpose behind investing in a few hundred loans.

At some point, Lending Club made major news for a scandal that rocked the company to its core. The CEO resigned. The news stories talked about a scam going on within the company where fake loans were being offered to investors by insiders, in order to prop up loan returns and rates. Fortunately all of that has been corrected, but I can’t help but feel like I was sold a lie and my returns have tanked in the intervening couple years.

So where am I now? After 39 months of investing with Lending Club, many of my initial loans have been paid off. In fact, of the 366 total loans I funded, 182 have been fully paid off, which is nearly 50%. Unfortunately, those are offset by 75 loans that have been “charged off” with no expectation of ever seeing another dime from those debtors. Of the remaining loans, 103 are current, 2 are in their grace period (up to 15 days after due date), 2 are 16-30 days late, and 2 are 30-120 days late so there’s a good chance those 2 will be charged off as well.Screenshot_20180728-085108~2

I started off with over 10% returns, which was awesome because it’s comparable to stock market returns, albeit with the risk of complete loss of principal from any given loan. Those shrank to 8% by the end of year one. As of today, I’m down to an annualized return of 1.55% return, which is pitiful! My online savings account with Marcus by Goldman Sachs pays 1.80% and there’s no chance of losing any of my starting principal! For this reason, I am withdrawing all of my loan proceeds (principal payback and accrued interest) and investing that money in my taxable brokerage at Vanguard (VTSAX, of course).

Overall, I’m glad I took a chance at diversifying my investment income, but I’m disappointed by the results. P2P lending has turned me off of other crowdfunding options such as crowdfunded real estate. Those site may work for some people, but I’m afraid of what happens when the next real estate slowdown causes pain for those investments.

Thanks to Liz from Chief Money Officer for the feature on her Weekend Roundup!

Soured on Precious Metals

By Josh Originally drafted July 11, 2016. Published March 10, 2018.

In an attempt to become a diversified investor, I began purchasing precious metals in mid-2012. Earlier, in 2011, Silver had touched $50 to match the all-time high experienced in the 1980s, and Gold had broken out to new highs above $1900. By the time I started investing, Silver had retreated 30% to around $35/ounce, and I was not looking to get into Gold near its all-time highs.

So began a series of novice investor mistakes, especially in the realm of precious metals investing. The first place I started was eBay, since it is so familiar to most of us and easy to bid on an auction or click “buy it now” and have your order on its way to your door. I began buying premium silver products and graded silver coins, both with massive premiums above the “spot” price. Spot price is basically like a stock’s price, there is a Bid and an Ask price at any given point in time. As silver continued to slide, from around $35 when I started buying, all the way down into the $13.xx range in early 2016, I chased the price down, down, down by buying more, more, more silver.

I also eventually got into the Gold game by buying expensive fractional gold rounds and coins 1/10 or ¼ of an ounce at a time. Fractional pieces come with their own premiums attached, because it is expensive to mint such small coins/rounds when calculated on a per-ounce basis. For example, it takes 1000% more time, dies, equipment to pump out 100 ounces of 1/10th ounce fractional gold pieces as it does 100 one-ounce gold coins. Due to the extra expense of the premiums and the falling gold price for the past 3 years, I found myself down about 25% on my gold purchases. In June 2016 I sold all of my gold coins and rounds, as I had decided to close out my investment in Gold.

But back to Silver, I have occasionally made some money in Silver, even with the falling spot price. Usually around payday, I would stop in at local antique shops, coin shops and jewelry stores to see what silver coins they had for sale. I once bought a Spanish Ocho Reale (pirates called these “Pieces of 8”) for $20 and sold it on eBay for $60. I also paid $20 for a 20 gram silver coin from the Monnaie de Paris and sold it to a buyer in China for $64. But for the most part, I lost money each and every time I bought silver because the spot price continued its helter-skelter decline from $50 in 2011 to less than $14 at one point in 2016. I was able to accumulate over 800 ounces of silver by making small irregular purchases over the course of about 4 years, but my silver only held about 2/3 of the value of what I had paid, even with the “dollar-cost averaging” that I thought I was employing.

Luckily for me, silver prices bounced a bit, crossing $20 in 2016 before retreating back into the $16-17 range for quite a while now. In 2016 I sold off some pieces that I had bought at lower prices, and then in 2017 I sold off approximately 60% of my silver to put that money to better use in my taxable Vanguard brokerage account. I will no longer be blindly purchasing precious metals for investment’s sake.

So here’s my case against holding physical precious metals:

  • Cost of storage (bank safety deposit box, private facility storage, or a safe inside your home)
  • Unlike many other investments, there are no dividends
  • Not very liquid, especially for premium pieces. You might be able to unload at spot price or a little below, but you won’t get true market value without selling each piece individually on a site like eBay, and then you will pay listing fees and PayPal fees to the tune of around 13%
  • Very volatile, especially silver. Sometimes can swing in price by 3-4x the amount that is typical in the broad market index funds. This amount now seems tame, in comparison to cryptocurrencies and their wild roller-coaster price changes.

Despite all of this, I am still thankful for my journey into silver coins, bars and rounds. I was able to satisfy my “spending” urge, while buying something that actually retained some/most of its value. Instead of buying a new video game or another piece of electronics equipment that was out of date within 6 months, I bought items that have been appreciated for sometimes more than 100 years. This helped me get into the habit of saving instead of spending, although I really wish I had put this money into a Roth IRA back in those years because I would have more than doubled my money instead of taking the loss that I have experienced.

I also spent a lot of time in those years cataloguing my purchases into spreadsheets as well as a YouTube channel. If you’re extremely bored or want to see what I was so obsessed about, check out my old Jover Silver channel where I still have 20 videos posted. Look at the shiny goodness! No wonder I couldn’t resist.