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How to Start an Auto Repossession Business

If you’re sick and tired of your job, now may be the best time to start an auto repossession business.  That’s because when foreclosures, loan defaults and bankruptcies are up, the repo business thrives.  When people can’t make their car payments, banks and dealerships pay good money to repossess their cars.

If you’ve thought about starting an auto repossession business, here’s what you should know, first…

Repo Business Fact #1 -  You Might Not Need Formal Training

While it’d be foolish to start a repo business without investing in training materials, most states don’t require you log training hours before you get your repo license.

In most states, auto repossession companies are regulated by the same agency that oversees private investigators and/or debt collectors.  The best way to find out your state’s repossession laws is to contact your state’s Secretary of State division or invest in a comprehensive repossession course.

Repo Business Fact #2 – You Might Not Need A Tow-Truck

That’s because most finance companies keep copies of the key codes to every car and truck they issue loans for.  All you have to do is find a locksmith to cut a key from the codes.  Although, that’s usually not necessary because a lot of banks keep spare keys on hand, already!

What that means to you is, you can team up with another person to follow you repo sites, and one of you can drive off in the car you’re repossessing.  While it’s not always that simple, it’s easier than investing in a tow-truck when you’re just starting out.

Repo Business Fact #3 – You Can Do It Part-Time

Because many auto repossession agents work at night, you can keep your day job (if you want,) and repossess cars at night.  Then, once you establish a good reputation in the business and you get more clients, you can gradually devote more hours to your new business.

Many new entrepreneurs get overwhelmed when they first think about starting a new business.  But, that’s not necessary, because if you keep your costs low and you build your business gradually, you can reinvest your profits as your repo business grows.  There’s no need to do everything at once – that’s a recipe for exhaustion.

Asset Allocation and Diversification

Asset allocation refers to how much money you have invested in each of the major asset classes such as stocks, bonds and cash. Studies have shown that asset allocation is one of the most important investment decisions an investor can make, accounting for as much as 90% of return. Asset allocation is the process of determining the percentage of your investment portfolio that each asset class should occupy, based on your risk tolerance.

Each asset class provides you with a different level of risk and different levels of potential return. Owning just one asset class, such as stocks, would be risky because the value of your entire portfolio would depend entirely on the performance of that asset class. The overall purpose of asset allocation is to reduce volatility so that thriving investments in one asset class potentially outweigh losing investments in other asset classes.

To determine your asset allocation you first need to determine your risk tolerance. Two important factors that affect your risk tolerance are your time horizon and your personal response to risk. Your time horizon is the amount of time you have before you will need the money you are investing. In general, if you have a long time horizon (10+ years) you can invest with a higher risk tolerance (aggressive). A moderate time horizon (5 – 10 years) can tolerate moderate risk and short time horizons (1 – 5 years) should use a low (conservative) risk tolerance. However, the second factor, your personal response to risk, must also be taken under consideration. If you avoid risk in everyday life or worry easily, you need to be more conservative. You don’t want to get ulcers or lay awake at night worrying about your aggressive investments even if you have a long time horizon. If you enjoy risk and don’t worry easily, then you may want to lean toward the aggressive allocation, if you time horizon allows it.

A very basic model for asset allocation is as follows with the first number in stocks, the second in bonds and the last number in cash equivalents: Conservative 10%, 20%, 70% Moderate 50%, 20%, 30% Aggressive 75%, 15%, 10%.

There are many, many asset allocation models out there but they all follow the basic premise of having a higher percentage in stocks (or stock mutual funds) as you move from conservative to aggressive with the bonds/cash moving in the opposite direction.

Don’t overestimate your tolerance for risk in good times. If you are invested too aggressively when the market is rising, you are more likely to abandon your investment program when the market is falling. The most ideal asset allocation is that mix of assets that you can stick with in good times and in bad.

You also need to diversify within the major asset classes. As an extreme example, a portfolio with one stock, one bond and cash could have proper asset allocation but is not diversified at all. Most investors should invest no more than 5% in an individual stock or bond.

Diversification refers to owning various investments within each asset class. Don’t own all or your stocks or mutual funds in one industry (such as technology). Don’t own all municipal bonds or municipal bond funds. Stocks and stock funds (also called equities or equity funds) are divided by their market capitalization, their investment style, sector and geographic location.

Market capitalization (market cap) is equal to the number of shares the company has issued to the public multiplied by the value of a single share. So the terms large cap, mid cap and small cap basically refer to large companies, mid size companies and small companies.

Investment style refers to whether a mutual fund invests in growth stocks or value stocks or a “blend” of both. Growth funds invest in companies that are rapidly growing businesses. Value funds invest in companies of established, slower-growing businesses. Those funds that invest in a mix of growth and value stocks are called blend funds.

Sector refers to the specific industry a company is in or a fund invests in. Examples are energy, financial services, utilities, health care, technology.

Geographic location refers to investing in companies from a certain part of the world. Many funds are just focused on the US while others may focus on only foreign stocks or just stocks from a particular region such as Latin America, Asia, China, etc.

If we put these different types of assets on a risk continuum it would look as follows with the highest risk first and the lowest risk last: Commodities, Small cap stock, Foreign stocks, High yield bonds, Mid cap stocks, Large cap stocks, Real Estate Investment Trusts (REIT), Intermediate term bonds, Short term bonds.

So now if you put everything together that we have learned about asset allocation and diversification we can come up with a portfolio that has both asset allocation and diversification for the greatest potential growth while limiting risk to a level that suits your financial situation and personality. The first number is for conservative, the second for moderate and the last number for aggressive. Large cap stock 10%, 40%, 35% Mid cap stock 15%, 10%, 17% Small cap stock 7%, 3%, 17% Foreign stocks 14%, 25%, 22% Bonds 43%, 22%, 9%, Cash equivalents 11%, 0%, 0%.

Again, there are many, many asset allocation models out there and this is just an example of how it works. As before, the percent in stocks grows as you move from conservative to aggressive and the percent in bonds moves in the opposite direction.

Below is an example of how you could have asset allocation and diversification with just seven funds. The first number is for if you are are to mid career, the second number for late career and the last number for in retirement. Blue Chip US Stock Fund FSMKX Fidelity Spartan 500 Index 40%, 30%, 20%. Blue Chip Foreign Stock Fund VGTSX Vanguard Total International 30%, 25%, 15%. Small Company Fund PRNHX T. Rowe Price New Horizons 5%, 2.5%, 2.5%. Value Fund VIVAX Vanguard Value Index 5%, 2.5%, 2.5%. High Quality Bond Fund VBMFX Vanguard Total Bond Market Index 10%, 20%, 30%. Inflation-Protected Bond Fund VIPSX Vanguard Inflation Prot Sec 5%, 10%, 10%. Money-Market Fund FDRXX Fidelity Cash Reserves 5%, 10%, 20%.

Morningstar.com is an excellent resource to use for studying your portfolio. Morningstar developed the equity style box where they put the diversification info in a square box with nine boxes for a graphical representation of where the market cap and investing style falls large to mid to small down the side and value, blend, growth across the top.

If you aren’t interested in trying to figure out which funds to purchase and aren’t interested in rebalancing your portfolio once a year, you may be better off putting all of your investments into a target-date fund. These funds invest based on the time horizon you have and re-adjust as you get older and you get closer to retirement. The funds have a year in their name, such as 2025, 2030, 2035, etc. Pick the fund with the year closest to the year you plan to retire.

You do have control over the quality of the investments you own, the diversification of your portfolio and how long you hold your investments. Right now, many investors are discouraged, some are angry or upset, and others are just plain confused. The best way to survive any crisis is to have a well-thought-out strategy and not let emotions drive your investment decisions. Time is your greatest friend. Emotions are your greatest enemy. Focus on the things you can control. Base your investment decisions on investment principles, not predictions. The three most important investment principles are focusing on quality investments, diversifying your portfolio and holding your investments for the long term. Don’t abandon those principles.

Information – The Most Important Thing in Investing

I always tell my finance students and my assistants that the most important thing in investment is information. Even the more modern theories and studies of markets and investment have focused on that, for example, in efficient market hypotheses (EMH) and post earnings announcement drift (PEAD). In that regard, the EMH’s, in all of their forms, say that stock or investment asset prices should reflect all of the available information about the investment, including estimates and anticipation of future events. PEAD shows that prices react slowly to information, even long after a surprise announcement, because people are slow to assimilate the information, which may be part of the general principle that people are slow to recognize or accept change.

In one of the forms of the EMH, it says that investment asset prices reflect all of (depending on the definition) information, including estimates and forecasts of the future. In that regard, one cannot expect to make any kind of exceptional returns. In reality, not all of the information that can be available is available to the general public or, as PEAD seems to indicate, even when it is available, not everyone assimilates it properly. Thus, the way that a person can make better returns is to get and assimilate more information and more quickly than others.

In my second career on Wall Street, I was a merger arbitrageur, investing in the stocks of companies being taken over by other companies. At the time, many people believed that that business was run on inside information. The truth is that it was run on information that was simply not in the public domain, analysis that was beyond the reach of the general public, and hard work. As a simple example of hard work, when a bank merger was announced, I would go to the Federal Reserve Board publications and use Hirschman-Herfindal antitrust analysis to compare overlapping bank branches of the two banks, so I would know any potential anti-trust issues. Then, I would wait to see if the banks admitted that they had these problems and had a plan to resolve them. I also hired an antitrust lawyer to review all of the proposed mergers or takeovers for potential antitrust problems. I also hired lawyers who specialized in other areas, like securities and takeover law and FCC law. Those expert opinions gave me information that was not available to the general public and their cost was beyond the reach of the man-on-the-street. In addition, I would attend any hearings, in courts, in Congress, or at regulatory agencies, to get first hand information, including the tone, face and body language of participants. Moreover, by analyzing every merger that came along, I became an expert in all aspects of takeovers, and investment bankers and heads of major corporations would come to me for advice. In some cases, my knowledge and opinions even helped to change laws and regulations.

One must, also, be careful of information. There is the concept of disinformation, which can be useful, if you are the disseminator of it. However, many people take some things as real information that are not real information. For example, when I created an internationally recognized country inn, in the 1990′s, I put profiles about the inn in various tourist guides for the area, and people would tell me what the tourist guide said about the inn. They mistook my own self-serving press, which I actually paid to have printed, as opinions of the travel guides. Often, too, I would find press releases, which I had written, turn up, unedited, in newspapers and magazines. Most people believe what they read in the news and question nothing. I question everything. If, for example, someone says something is the best, I want to know who the person is, what their qualifications are and their opinion of second, third and last best, and I want to know why.

In general securities trading, there are professionals who know the real information, and there is a lot of public information on the well-followed stocks. Some of that “information” comes from brokers, other sales people, and securities analysts. Most people take those things as good information or tips. However, even securities analysts are in the sales department of securities companies, and their recommendations generate riskless brokerage commissions for the company. My first job on Wall Street was as an analyst, and even though, coming from a physics background and having an MBA, in finance, from one of the top business schools, in the world, I demonstrated creative ability to analyze economics, industries, and securities, the head of the department did not like me because he though that I was not a good enough sales personality. Indeed, my ability to analyze did not matter to him, at all. Not only do some securities analysts not analyze stocks, they also tend to “hug the benchmark” and keep their estimates and opinions in line with the industry average, for fear of losing their jobs, if one of their opinions were both atypical and wrong. Thus, most of the things that you will hear from brokers, salesmen, and analysts is just self-serving bravado meant to drum up sales commissions.

Those facts, coupled with the fact that there is so much information about many stocks, in the public awareness, has created another opportunity to mine information: under-followed and small-capitalization stocks. As a result, some investment analysts and advisors have looked for and analyzed stocks that are not in the public awareness and are not followed by the major securities firms. Indeed, even those techniques have been exposed to the general public, having been found as so-called “anomalies” by academic researchers in finance (they are always the slowest to catch on).

Another technique heralded by David Dreman is called “contrarian investment strategy” (see our recent article about that on Articles Base). The theory, there, is that, in part, due to the lack of real analysis by analysts, and, partly, due to overreaction, in general, stocks that have already been beaten down deserve another look and can offer another form of real opportunity. Such stock will tend to have low PE ratios and offer the prospect for PE arbitrage. Again, it is simply a strategy of looking for value in places where other people are not focusing their attention, and there results an information deficiency.

Although the news industry has always had its lazy people who just reprint other people’s press releases, the industry has become even more unreliable, over the last decade or so. Because of competition from many other sources, open round the clock, often, we have observed, reporters are in such a rush to beat their competition with breaking news that they do not thoroughly or carefully check and verify the information. Indeed, part of that is due to manipulation, but the press should be on guard about that, in the first place. In 2001, I returned, briefly, to the arbitrage business. The reason my stay was so brief was that there was so much misinformation in the business press and on business television. Sometimes, I made money because I knew something from the press was not true, and I would just trade against those who bid up or knocked down stocks based on the misinformation. Other times, it cost me, dearly, because I had a position, and someone fed the press misinformation, which they, in turn, told to the world without checking their facts. It is my observation that short sellers regularly try to get members of the press to print stories

That is the reason the current focus at our company is on art. Art markets have always been more inefficient than securities markets (you can download reports from the In County Analysis page of our website about art markets, and we have written other things in blogs about art investment). The information is more difficult to come by, and that makes it more valuable. Although price information can, for example, be found from art auction records, auctions are infrequent, not all day, daily, as with securities and commodities, and auction sales do not account for all art sales: most are done by art brokers and dealers. Even the art, itself, is more difficult to acquire, and it is one of a kind, not just one share out of several million, like stocks or bonds. In that regard, even information about the location or availability of a piece of art can be valuable, as can be direct relationships with artists.

So, the next time you hear a “hot tip” from your broker, listen to a pitch about easy returns that seem too good to be true, or even read something in the press, do not just believe it, question it. Real information is a valuable thing, and it is seldom cheap or easy to come by. And it is the most important thing in investment!

© 2009 Craig L Mattoli, Red Hill Capital Corp., Delaware, USA