Stock Funds – 8 Ways to Improve Your Portfolio with ETFs

Exchange-traded funds (ETFs) were first introduced to institutional investors in 1993. Since then, they have become increasingly acceptable to both consultants and investors because of their ability to provide greater control over portfolio construction and the diversification process at a lower cost. You need to think about making them the main building block for the foundation of your personal investment portfolio.

1. Best diversification: Most people do not have the time or skills to keep track of each class of stock or asset. Inevitably this means that a person will reach for the area in which he is most comfortable, which can lead to investing in a limited number of stocks or bonds in the same business or industry sector. Think of a telecommunications engineer working at Lucent who bought stocks such as AT&T, Global Crossing or Worldcom. Using an ETF to buy a major position in the market as a whole or in a particular sector provides instant diversification, which reduces portfolio risk.

2. Improved performance: Research and experience have shown that the most actively managed mutual funds do not usually meet their benchmark. With fewer tools, limited access to institutional research, and a lack of a disciplined buying / selling strategy most individual investors go even worse. Without worrying about selecting individual winners or losers in the sector, an investor can invest in a basket of broad ETFs for major holdings and may be able to improve overall portfolio performance. For example, the Consumer Staples Select Sector SPDR was down 15% by October 23, 2008, and the S&P 500 was down more than 38%.

3. More transparency: More than 60% of Americans invest through mutual funds. But most investors don’t really know what they own. With the exception of a quarterly report showing holdings as of closing on the last day of the quarter, mutual fund investors don’t really know what’s in their portfolio. The ETF is completely transparent. The investor knows exactly what it consists of throughout the trading day. And ETF prices are available throughout the day compared to a mutual fund that trades at the closing price of the previous business day.

4. No style drift: Although mutual funds claim to have a certain slope, such as stocks with large capitalization or small capitalization or growth over price, the portfolio manager usually deviates from the main strategy outlined in the prospectus, seeking to increase returns. An active fund manager may add other stocks or bonds that may increase yields or reduce risk but are not part of the sector, market capitalization, or core portfolio style. Inevitably, this can lead to the investor holding multiple mutual funds with overlapping exposure to a particular company or sector.

5. Easier rebalancing: Financial media often praise the benefits of portfolio rebalancing. However, this is sometimes easier said than done. Because most mutual funds contain a combination of cash and securities and may include a mixture of large capitalization, small capitalization, or even value and growth stocks, it is difficult to obtain an accurate breakdown of the mixture to properly balance the target asset allocation. Because each ETF is typically an index of a particular asset class, industry sector, or market capitalization, it is much easier to implement an asset allocation strategy. Let’s say you want a 50/50 portfolio between the cash and the overall US stock market index. If the price of the S&P 500 (represented by the SPDR S&P 500 ETF ‘SPY’) fell by 10%, you could transfer 10% of the cash to return to the target distribution.

6. More efficient tax: Unlike a mutual fund, which has a built-in capital gain created as a result of previous trading activities, an ETF does not have such returns that force an investor to recognize income. When an ETF is acquired, it sets the cost basis for investing in that particular transaction for the investor. And given the fact that most ETFs follow a low-turnover, buy-and-hold approach, many ETFs will be highly effective in taxation if individual shareholders understand profit or loss. only if they are actually selling their own ETFs.

7. Lower transaction costs: Operating an ETF is much cheaper than a mutual fund. Mutual funds have shareholder service costs that are not required for ETFs. In addition, ETFs eliminate the need for research and portfolio management because most ETFs follow a passive index approach. The ETF displays a benchmark, and there is no need for additional costs for portfolio analysts. This is why the average ETF has internal costs ranging from 0.18% to 0.58%, while the average actively managed mutual fund bears about 1.5% of annual costs plus trading costs.

To compare the total cost of owning an ETF with any mutual fund, the Financial Industry Regulatory Authority (FINRA) makes the Fund & ETF Analyzer tool available on its website. The calculator automatically provides commission and expense data for all fund classes and ETFs. The calculator can be found at:

8. Flexibility of trade and implementation of complex investment strategies: ETFs trade like other stocks and bonds. Thus, it means that the investor has the opportunity to use them to use a number of risk management and trading strategies, including hedging techniques such as “stop loss” and “shorting”, options not available “only long” mutual funds.

Another advantage is the ability to use “reverse ETFs” that can provide some protection against falling market or sector value. (The reverse ETF responds against the return of the baseline. So if you want to minimize the impact of a decline in the S&P 500, for example, you can invest part of the portfolio in the “reverse”, which will go up when the index falls.)

Or an investor can tilt their portfolio to “overweight” a particular industry or sector by buying more ETF index for that area. By purchasing an index, an investor can get the opportunity to take advantage of expected changes in that industry or area without the inherent risks associated with a particular stock.

Some investors marry their individual stocks or mutual funds and are reluctant to sell and incur losses and miss the possibility of an expected rebound. Another effective option for an investor to consider is to sell a security that is lost when buying an ETF that represents the industry or sector of the security being sold. This way, the investor can book losses, get a tax deduction and still rank in the region, but with a broader index.

Investors, scientists and financial advisers sometimes question the buy-and-hold strategy. Some investors are looking for a more proactive tactical approach to management that can be done with ETFs. Although ETFs are passively created indices, an investor can actively trade them. There are many trading strategies available for “trend management”. If the index moves above or below its 50-day moving average or 200-day moving average, it could be a signal to trade or exit the ETF. To minimize the trading costs that will be incurred when trading an ETF, an investor can use an ETF wrapping program that covers all trading costs. Typically, such arrangements are still less expensive than buying or selling multiple individual shares in a separately managed account or using an actively managed mutual fund.

Double your Nest Egg with Gold Miners

Diversify or perish. I think this is a quote from HG Wells.

Okay, okay, I know it’s actually “adapting or dying”. But if H. G. Wells was guided by investment rather than words, I would bet he would have corrected that quote to my version.

In fact, you’ve probably heard of this golden nugget of investment wisdom. This is something that every investor should be familiar with, because it is the key to successful investing.

Simple and easy: never put all your investment eggs in one basket. If the market falls out from under that basket, your egg will crack and spill your savings on the floor.

This is simple advice, I know. We can say that diversification is a smart route, but what exactly should be diversified?

I have one answer to this question today: metal companies.

Every investor should have a little contact with miners – especially small-cap miners, if you like to capture the fast jumps that most Wall Street tends to miss.

It just gives you access to above-average stock price volatility. Especially today.

Now many of you may say, “But isn’t it risky?”

It can be absolutely. Any sector in which there is constant volatility (such as crypto-assets) can be a bit risky, but much of that risk is managed by having a plan. This protects you from abrupt movements or holding back investments longer than necessary.

You just need the right strategy. And if you don’t have it, I’d say you should start looking for it now because the focus of the mining industry is when the commodity market recovers.

According to a PwC report released last year, 2016 saw a turning point in the mining industry. The 40 largest mining companies earned total net profits of $ 20 billion, well above the $ 28 billion loss in 2015. Meanwhile, their score rose in 2017. .

In fact, the market capitalization of these 40 companies grew by 45% in 2016 to $ 714 billion.

And the good news for the miners continues.

Take, for example, gold. Miners are particularly sensitive to rising gold prices right now. As gold continues to grow (and will), gold reserves will grow.

It’s time to go long in this area.

In fact, since the beginning of December, the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) has been moving away from the support line for about $ 30. Now it has grown by about 14.8%, this is a good rally that could break through if it breaks current levels.

All of this means that if you want to diversify more, a miner is a great bet.

Will Tesla Still Be Around In 5 Years?

In February Elon Musk launched a Tesla electric sports car into space on the powerful new Falcon Heavy rocket, and Tesla also reported its fourth quarter earnings, which narrowly beat analyst estimates. The company’s revenue rose to $3.288 billion, from $2.284 billion a year ago. Both of these events demonstrate Tesla’s potential and sheer audacity. Yet, these headline grabbing events don’t change the fact that the company is hemorrhaging red ink, losing $1.9 billion for full year 2017, and those loses will increase even further in 2018. Additionally, during their earnings conference call, company officials tried to tamp down expectations for 2018, citing battery supply constraints and production delays at their new state-of-the-art Gigafactory. The Tesla Gigafactory, still partially under construction, is located near the unincorporated community of Clark, Nevada, in northern Storey County, about 17 miles east of Reno. Construction on the facility is expected to be completed by 2020.

According to David Trainer the CEO of New Constructs, an equity research firm, Tesla has been plagued by production problems from the very beginning, from its first car, the Roadster to the current Model 3. The Roadster actually used an AC motor originally designed in 1882 by Nikola Tesla himself. Additionally, Trainer wrote in a recent article that the Model 3 production problems also led to the delay of the debut of Tesla’s first commercial vehicle, the new electric semi-truck. Further, Trainer points out that while Tesla promises the moon and even Mars, the company continues to struggle with basic manufacturing and production. Tesla’s main vehicle manufacturing facility is in Fremont, California. Moreover, Tesla’s troublesome production delays aren’t occurring in a vacuum. There is increasing competition in the electric vehicles (EV) arena. The Chevy Bolt outsold all Tesla models combined last October, and Chevy delivered over 23,000 Bolts in 2017. Tesla clearly needs to fix its production issues, or some on its long waiting list of EV customers may abandon it for more easily accessible options. Tesla quickly racked up 373,000 pre-orders for the Model 3, charging $1,000 just to get on the waiting list.

Nevertheless, Tesla, based in Palo Alto, California, does have strong enthusiasts, and also is now listed, as of 2017, on Statista’s Top 10 Most Valuable Brands within the automotive sector worldwide. Tesla made it into the ranking for the first time last year, and the Tesla brand alone is valued at $5.88 billion. By comparison, Toyota was ranked as the world’s most valuable car brand in 2017, with a brand value of $23.5 billion. Tesla also produced its 300,000th vehicle in February 2018. Plus Tesla’s new heavy-duty electric truck is truly a potential game changer. The electric trucks made their “first production cargo trip,” transporting battery packs from Tesla’s Gigafactory in Nevada to the company’s car-assembly factory in Fremont on Wednesday, March 7th. Tesla is currently considered to be a niche, luxury car maker, and not a commercial truck producer. Nevertheless, when Tesla first unveiled its sleek electric semi-truck in November, and announced that they were entering the $719 billion freight shipping industry, the news immediately generated enthusiasm for the electric truck, which will have a range of 500 miles per charge, and can accelerate from 0-60 mph in five seconds. Although full production isn’t expected to begin until 2019, companies are already placing orders for the electric big rig. Walmart, Meijer, a Michigan-based supermarket chain, J.B. Hunt Transport Services, Pepsi, and Anheuser-Busch have all placed orders for the Tesla Semi, putting down a $5,000 deposit for each truck, according to CNN Money. The electric truck will most likely be used for short hauls, but the Tesla Semi is likely to make some waves in the industry, CNN Money’s auto guru Peter Valdes-Dapena pointed out. Moreover, some extreme enthusiasts say Tesla is the next Apple Inc. However, Apple is not plagued by the constant production headaches that Tesla can’t seem to overcome. One of Tesla’s key production concerns is limited battery availability. Panasonic currently produces the batteries for Tesla automobiles. But the battery currently being produced is an older technology and there are likely no other automobile volume buyers for this technology except Tesla. And for that reason Panasonic likely does not want to expand production capacity of that battery, especially since Tesla plans to switch to a new battery sometime in the second half of 2018, according to a Seeking Alpha article. Moreover, these problematic capacity issues and production delays have caused Tesla’s operating expenses to skyrocket.

And speaking of rising costs, Tesla plans to award CEO Elon Musk an estimated $2.6 billion in long-term compensation. Since the company has yet to turn a profit, this massive increase in compensation has raised some eyebrows, and generated negative feedback from some investors. If the company was currently profitable, this wouldn’t be a cause of concern. Tesla also stated that its ultimate goal was to reach a market capitalization value of $650 billion, the company’s current market cap is $56.6 billion. Talk about swinging for the fences, this is an extremely ambitious goal. To put things into perspective, Toyota’s market cap is currently $185.7 billion, and they earn $15 per share. However, Tesla currently loses -$11.83 per share, and failing to meet production targets with its new Model 3 has sharply increased its spending. And indeed Tesla’s freewheeling spending is somewhat alarming to some of its investors. Tesla’s aggressive spending has been previously challenged by Tesla stockholders. When Tesla agreed to acquire SolarCity Corp, the largest installer of rooftop solar systems in the US, for $2.6 billion in August 2016, stockholders filed a lawsuit. SolarCity was co-founded by two of Musk’s cousins, and the plaintiffs alleged that the Tesla board of directors, of which Musk is the chairman, breached their fiduciary duties in approving the acquisition. Tesla’s current rate of spending is so aggressive that the company is predicted to run out of cash by Monday August 6, 2018, according to However, with large looming debt repayments due and Capex commitments, Tesla will most likely revisit the capital markets sometime in the first Half of 2018, to replenish its cash reserves through a bond offering.

Tesla clearly believes that aggressive spending is a necessary means to reach their ultimate goal.

“Yes. It’s also like for any given complex manufactured item, in order to go past the total capacity, you really need to move the whole supply chain in cadence… There have to be investments in new lines or it’s going to require overtime, which negatively affects gross margin,” said Musk, in their earnings conference call. Also, according to Seeking Alpha, Tesla has aggressively discounted its Model S and Model X vehicles to maintain the sales levels. And because of these discounts, they are racking up higher losses. But Tesla’s diminishing cash position makes steeper discounting an untenable option. And further complications include the rise in interest rates and commodity prices, cobalt prices have shot up from $10 a pound to above $37. In addition to these cost increases, the recent resignation of their chief accounting officer and controller, Eric Branderiz undoubtedly made a few investors nervous. He isn’t the only high-profile departure, a month earlier John McNeill, who was head of the sales and service group, resigned from the company. Bloomberg reported that Branderiz, who was hired in October 2016, had a base salary of $300,000 per year. But potentially his most attractive benefit was a $5 million stock equity award, to be fully vested only after four years of service. This clearly suggests that Branderiz, regardless of his reasons, left a great deal of money on the table with his early departure. These developments definitely make the situation more complicated for a company that is aggressively piling up debt.

According to David Trainer of New Constructs, Tesla hypes itself as being long-term focused, but it appears that the company spends more time and effort on publicity stunts, such as sending a Roadster to Mars, than on achieving its own production targets. He added that if Tesla can’t hit simple production targets, it’s hard to take them seriously about anything. Further, Trainer sees Tesla as a distant challenger to the leading car companies such as Ford and Toyota. And while Tesla may have the competitive advantage with its high quality electric vehicles in the EV market today, Tesla will start to face increasing competition from the more established auto makers. Moreover, competition will likely increase dramatically in the EV market over the next two decades, according The Economist magazine. The magazine reported that while today the EV market only accounts for a small niche of vehicle sales, about 1.5% of the new-car market in America and 1% of cars sold worldwide, the EV market will explode to between 10% and 15% of the market by 2025. And this is just the beginning, the indications are that in all probability the European Union will outlaw all petroleum and diesel fueled cars by 2035, and the western European car market will become completely electric. Further, Britain, France and China have all recently announced that all internal-combustion engines will banned from their roads by 2040.

The worldwide car market will change by startling leaps and bounds over the next two decades. Nevertheless, a number of car makers such as Honda, Toyota, Hyundai, GM, Mercedes-Benz and Volkswagen are hedging their bets with hydrogen fuel-cells, instead of going all-in on cars powered only by a lithium-ion battery. Mercedes will soon introduce a plug-in hybrid SUV that combines a battery pack with a fuel-cell generator. So the next step in hybrid technology is an electric vehicle capable of generating its own electricity with a fuel-cell. Yet, Elon Musk stated in 2015 that fuel cells for use in cars will never be commercially viable because of the inefficiency of producing, transporting and storing hydrogen.

Regarding Tesla’s stock itself, the company launched its IPO on June 29, 2010, trading on the NASDAQ, under the ticker symbol: TSLA. It was originally offered at a price of $17 per share. So a $1,700 purchase (100 shares) at the IPO price would have grown to just under $35,000 today. Moreover, the stock performed outstandingly in 2017, rocketing up from a low of $178.19 in November of 2016, up to a new all-time high of $389.61 in September of 2017. Since then, the stock has been stuck in a sideways consolidation, bouncing up and down between $292.63 and $360.50. Any sustained selloff could push the stock down to its 200-Week moving average, this key support level is currently around $251.

The 200-Week moving average proved to be an optimal place to purchase shares on two previous occasions. Conversely, given the abnormally high amount short interest in TSLA, a breakout above $389.61 could easily send the stock soaring over $500 in short order. TSLA would be propelled higher, aided by a short squeeze that would send short sellers scurrying to buy shares to cover their short positions. A short sell is a bet against a stock, and short sellers profit when the price of a stock drops. TSLA is clearly a stock that short sellers love to hate. Currently the short interest in TSLA is equal to roughly 30 percent of the shares available for trading (the float). By comparison, the short interest for Ferrari NV (NYSE ticker symbol: RACE), which Investor’s Business Daily ranks as the best stock in the Auto Manufacturers Group, is only 3.5 percent. And the short interest in RACE has remained low, even after the stock shot up 80 percent to $131.20. Perhaps the short sellers are not as enthusiastic about shorting the stock of a company that actually makes a $3.50 per share profit, and pays a.69 cent per share dividend. It should also be noted that in January at the Detroit auto show, Ferrari CEO Sergio Marchionne said that Ferrari NV will make a new battery-powered supercar to challenge Tesla Inc. at the high end of the electric car market. Marchionne also said that the time is right for a shift in the industry, and that by 2025 fewer than half the cars sold will be combustion-powered, as gas and diesel give way to hybrid, electric and fuel cell drivetrains. He also predicted that car makers will have less than a decade to reinvent themselves to survive in the world of new technologies.

Tesla is clearly on the cutting edge of coming changes in the auto industry. But that wave of change only looks like a little ripple now. Being the first mover in an industry is no guarantee of eventual profitability, or even of survival as a going concern. Tesla is one of the most ambitious and dynamic companies to come along in the past decade. The question is will Tesla run out of borrowed money before it gets a chance to actually ride that wave of change? Only time will tell.

A Complete Guide For Restaurant Real Estate Investments

Restaurants are a favorite commercial property for many investors because:

  1. Tenants often sign a very long term, e.g. 20 years absolute triple net (NNN) leases. This means, besides the rent, tenants also pay for property taxes, insurance and all maintenance expenses. The only thing the investor has to pay is the mortgage, which in turn offers very predictable cash flow. There are either no or few landlord responsibilities because the tenant is responsible for maintenance. This allows the investor more time to do important thing in life, e.g. retire. All you do is take the rent check to the bank. This is one of the key benefits in investing in a restaurant or single-tenant property.
  2. Whether rich or poor, people need to eat. Americans are eating out more often as they are too busy to cook and cleanup the pots & pans afterwards which often is the worst part! According to the National Restaurant Association, the nation’s restaurant industry currently involves 937,000 restaurants and is expected to reach $537 billion in sales in 2007, compared to just $322 billion in 1997 and $200 billion in 1987 (in current dollars). In 2006, for every dollar Americans spend on foods, 48 cents were spent in restaurants. As long as there is civilization on earth, there will be restaurants and the investor will feel comfortable that the property is always in high demand.
  3. You know your tenants will take very good care of your property because it’s in their best interest to do so. Few customers, if any, want to go to a restaurant that has a filthy bathroom and/or trash in the parking lot.

However, restaurants are not created equal, from an investment viewpoint.

Franchised versus Independent

One often hears that 9 out of 10 new restaurants will fail in the first year; however, this is just an urban myth as there are no conclusive studies on this. There is only a study by Associate Professor of Hospitality, Dr. H.G. Parsa of Ohio State University who tracked new restaurants located in the city Columbus, Ohio during the period from 1996 to 1999 (Note: you should not draw the conclusion that the results are the same everywhere else in the US or during any other time periods.) Dr. Parsa observed that seafood restaurants were the safest ventures and that Mexican restaurants experience the highest rate of failure in Columbus, OH. His study also found 26% of new restaurants closed in the first year in Columbus, OH during 1996 to 1999. Besides economic failure, the reasons for restaurants closing include divorce, poor health, and unwillingness to commit immense time toward operation of the business. Based on this study, it may be safe to predict that the longer the restaurant has been in business, the more likely it will be operating the following year so that the landlord will continue to receive the rent.

For franchised restaurants, a franchisee has to have a certain minimal amount of non-borrowed cash/capital, e.g. $300,000 for McDonald’s, to qualify. The franchisee has to pay a one-time franchisee fee about $30,000 to $50,000. In addition, the franchisee has contribute royalty and advertising fees equal to about 4% and 3% of sales revenue, respectively. In turn, the franchisee receives training on how to set up and operate a proven and successful business without worrying about the marketing part. As a result, a franchised restaurant gets customers as soon as the open sign is put up. Should the franchisee fail to run the business at the location, the franchise may replace the current franchisee with a new one. The king of franchised hamburger restaurants is the fast-food chain McDonald’s with over 32000 locations in 118 countries (about 14,000 in the US) as of 2010. It has $34.2B in sales in 2011 with an average of $2.4M in revenue per US location. McDonald’s currently captures over 50% market share of the $64 billion US hamburger restaurant market. Its sales are up 26% in the last 5 years. Distant behind is Wendy’s (average sales of $1.5M) with $8.5B in sales and 5904 stores. Burger King ranks third (average sales of $1.2M) with $8.4B in sale, 7264 stores and 13% of the hamburger restaurant market share (among all restaurant chains, Subway is ranked number two with $11.4B in sales, 23,850 stores, and Starbucks number 3 with $9.8B in sales and 11,158 stores). McDonald’s success apparently is not the result of how delicious its Big Mac tastes but something else more complex. Per a survey of 28,000 online subscribers of Consumer Report magazine, McDonald’s hamburgers rank last among 18 national and regional fast food chains. It received a score of 5.6 on a scale of 1 to 10 with 10 being the best, behind Jack In the Box (6.3), Burger King (6.3), Wendy’s (6.6), Sonic Drive In (6.6), Carl’s Jr (6.9), Back Yard Burgers (7.6), Five Guys Burgers (7.9), and In-N-Out Burgers (7.9).

Fast-food chains tend to detect new trends faster. For example, they are open as early as 5AM as Americans are increasingly buying their breakfasts earlier. They are also selling more cafe; latte; fruit smoothies to compete with Starbucks and Jumba Juice. You also see more salads on the menu. This gives customers more reasons to stop by at fast-food restaurants and make them more appealing to different customers.

With independent restaurants, it often takes a while to for customers to come around and try the food. These establishments are especially tough in the first 12 months of opening, especially with owners of minimal or no proven track record. So in general, “mom and pop” restaurants are risky investment due to initial weak revenue. If you choose to invest in a non-brand name restaurant, make sure the return is proportional to the risks that you will be taking.

Sometimes it is not easy for you to tell if a restaurant is a brand name or non-brand name. Some restaurant chains only operate, or are popular in a certain region. For example, WhatABurger restaurant chain with over 700 locations in 10 states is a very popular fast-food restaurant chain in Texas and Georgia. However, it is still unknown on the West Coast as of 2012. Brand name chains tend to have a website listing all the locations plus other information. So if you can find a restaurant website from Google or Yahoo you can quickly discern if an unfamiliar name is a brand name or not. You can also obtain basic consumer information about almost any chain restaurants in the US on Wikipedia.

The Ten Fastest-Growing Chains in 2011 with Sales Over $200 Million

According to Technomic, the following is the 10 fastest growing restaurant chains in terms of revenue change from 2010 to 2011:

  1. Five Guys Burgers and Fries with $921M in sales and 32.8% change.
  2. Chipotle Mexican Grill with $2.261B in sales and 23.4% change.
  3. Jimmy John’s Gourmet Sandwich Shop with $895M in sales and 21.8% change.
  4. Yard House with $262M in sales and 21.5% change.
  5. Firehouse Subs with $285M in sales and 21.1% change.
  6. BJ’s Restaurant & Brewhouse with $621M in sales and 20.9% change.
  7. Buffalo Wild Wings Grill & Bar with $2.045B in sales and 20.1% change.
  8. Raising Cane’s Chicken Fingers with $206M in sales and 18.2% change.
  9. Noodles & Company with $300M in sales and 14.9% change from.
  10. Wingstop with $382M in sales and 22.1% change.

Lease & Rent Guaranty

The tenants often sign a long term absolute triple net (NNN) lease. This means, besides the base rent, they also pay for all operating expenses: property taxes, insurance and maintenance expenses. For investors, the risk of maintenance expenses uncertainty is eliminated and their cash flow is predictable. The tenants may also guarantee the rent with their own or corporate assets. Therefore, in case they have to close down the business, they will continue paying rent for the life of the lease. Below are a few things that you need to know about the lease guaranty:

  1. In general, the stronger the guaranty the lower the return of your investment. The guaranty by McDonald’s Corporation with a strong “A” S&P corporate rating of a public company is much better than a small corporation owned by a franchisee with a few restaurants. Consequently, a restaurant with a McDonald’s corporate lease normally offers low 4.5-5% cap (return of investment in the 1st year of ownership) while McDonald’s with a franchisee guaranty (over 75% of McDonalds restaurants are owned by franchisees) may offer 5-6% cap. So figure out the amount of risks you are willing to take as you won’t get both low risks and high returns in an investment.
  2. Sometimes a multi-location franchise will form a parent company to own all the restaurants. Each restaurant in turn is owned by a single-entity Limited Liabilities Company (LLC) to shield the parent company from liabilities. So the rent guaranty by the single-entity LLC does not mean much since it does not have much assets.
  3. A good, long guaranty does not make a lemon a good car. Similarly, a strong guaranty does not make a lousy restaurant a good investment. It only means the tenant will make every effort to pay you the rent. So don’t judge a property primarily on the guaranty.
  4. The guaranty is good until the corporation that guarantees it declares bankruptcy. At that time, the corporation reorganizes its operations by closing locations with low revenue and keeping the good locations, (i.e. ones with strong sales). So it’s more critical for you to choose a property at a good location. If it happens to have a weak guaranty, (e.g. from a small, private company), you will get double benefits: on time rent payment and high return.
  5. If you happen to invest in a “mom & pop” restaurant, make sure all the principals, e.g. both mom and pop, guarantee the lease with their assets. The guaranty should be reviewed by an attorney to make sure you are well protected.

Location, Location, Location

A lousy restaurant may do well at a good location while those with a good menu may fail at a bad location. A good location will generate strong revenue for the operator and is primarily important to you as an investor. It should have these characteristics:

  1. High traffic volume: this will draw more customers to the restaurant and as a result high revenue. So a restaurant at the entrance to a regional mall or Disney World, a major shopping mall, or colleges is always desirable.
  2. Good visibility & signage: high traffic volume must be accompanied by good visibility from the street. This will minimize advertising expenses and is a constant reminder for diners to come in.
  3. Ease of ingress and egress: a restaurant located on a one-way service road running parallel to a freeway will get a lot of traffic and has great visibility but is not at a great location. It’s hard for potential customers to get back if they miss the entrance. In addition, it’s not possible to make a left turn. On the other hand, the restaurant just off freeway exit is more convenient for customers.
  4. Excellent demographics: a restaurant should do well in an area with a large, growing population and high incomes as it has more people with money to spend. Its business should generate more and more income to pay for increasing higher rents.
  5. Lots of parking spaces: most chained restaurants have their own parking lot to accommodate customers at peak hours. If customer cannot find a parking space within a few minutes, there is a good chance they will skip it and/or won’t come back as often. A typical fast food restaurant will need about 10 to 20 parking spaces per 1000 square feet of space. Fast food restaurants, e.g. McDonald’s will need more parking spaces than sit down restaurants, e.g. Olive Garden.
  6. High sales revenue: the annual gross revenue alone does not tell you much since larger–in term of square footage–restaurant tends to have higher revenue. So the rent to revenue ratio is a better gauge of success. Please refer to rent to revenue ratio in the due diligence section for further discussion.
  7. High barriers to entry: this simply means that it’s not easy to replicate this location nearby for various reasons: the area simply does not have any more developable land, or the master plan does not allow any more construction of commercial properties, or it’s more expensive to build a similar property due to high cost of land and construction materials. For these reasons, the tenant is likely to renew the lease if the business is profitable.

Financing Considerations

In general, the interest rate is a bit higher than average for restaurants due to the fact that they are single-tenant properties. To the lenders, there is a perceived risk because if the restaurant is closed down, you could potentially lose 100% of your income from that restaurant. Lenders also prefer national brand name restaurants. In addition, some lenders will not loan to out-of-state investors especially if the restaurants are located in smaller cities. So it may be a good idea for you to invest in a franchised restaurant in major metro areas, e.g. Atlanta, Dallas. In 2009 it’s quite a challenge to get financing for sit-down restaurant acquisitions, especially for mom and pop and regional restaurants due to the tight credit market. However, things seem to have improved a bit in 2010. If you want to get the best rate and terms for the loan, you should stick to national franchised restaurants in major metros.

When the cap rate is higher than the interest rate of the loan, e.g. cap rate is 7.5% while interest rate is 6.5%, then you should consider borrowing as much as possible. You will get 7.5% return on your down payment plus 1% return for the money you borrow. Hence your total return (cash on cash) will be higher than the cap rate. Additionally, since the inflation in the near future is expected to be higher due to rising costs of fuel, the money which you borrow to finance your purchase will be worth less. So it’s even more beneficial to maximize leverage now.

Due Diligence Investigation

You may want to consider these factors before deciding to go forward with the purchase:

  1. Tenant’s financial information: The restaurant business is labor intensive. The average employee generates only about $55,000 in revenue annually. The cost of goods, e.g. foods and supplies should be around 30-35% of revenue; labor and operating expenses 45-50%; rent about 7-12%. So do review the profits and loss (P&L) statements, if available, with your accountant. In the P&L statement, you may see the acronym EBITDAR. It stands for Earnings Before Income Taxes, Depreciation (of equipment), Amortization (of capital improvement), and Rent. If you don’t see royalty fees in P&L of a franchised restaurant or advertising expenses in the P&L of an independent restaurant, you may want to understand the reason why. Of course, we will want to make sure that the restaurant is profitable after paying the rent. Ideally, you would like to see net profits equal to 10-20% of the gross revenue. In the last few years the economy has taken a beating. As a result, restaurants have experienced a decrease in gross revenue of around 3-4%. This seems to have impacted most, if not all, restaurants everywhere. In addition, it may take a new restaurant several years to reach potential revenue target. So don’t expect new locations to be profitable right away even for chained restaurants.
  2. Tenant’s credit history: if the tenant is a private corporation, you may be able to obtain the tenant’s credit history from Dun & Bradstreet (D&B). D&B provides Paydex score, the business equivalent of FICO, i.e. personal credit history score. This score ranges from 1 to 100, with higher scores indicating better payment performance. A Paydex score of 75 is equivalent to FICO score of 700. So if your tenant has a Paydex score of 80, you are likely to receive the rent checks promptly.
  3. Rent to revenue ratio: this is the ratio of base rent over the annual gross sales of the store. It is a quick way to determine if the restaurant is profitable, i.e. the lower the ratio, the better the location. As a rule of thumb you will want to keep this ratio less than 10% which indicates that the location has strong revenue. If the ratio is less than 7%, the operator will very likely make a lot of money after paying the rent. The rent guaranty is probably not important in this case. However, the rent to revenue ratio is not a precise way to determine if the tenant is making a profit or not. It does not take into account the property taxes expense as part of the rent. Property taxes–computed as a percentage of assessed value–vary from states to states. For example, in California it’s about 1.25% of the assessed value, 3% in Texas, and as high as 10% in Illinois. And so a restaurant with rent to income ratio of 8% could be profitable in one state and yet be losing money in another.
  4. Parking spaces: restaurants tend to need a higher number of parking spaces because most diners tend to stop by within a small time window. You will need at least 8 parking spaces per 1000 Square Feet (SF) of restaurant space. Fast food restaurants may need about 15 to 18 spaces per 1000 SF.
  5. Termination Clause: some of the long term leases give the tenant an option to terminate the lease should there be a fire destroying a certain percentage of the property. Of course, this is not desirable to you if that percentage is too low, e.g. 10%. So make sure you read the lease. You also want to make sure the insurance policy also covers rental income loss for 12-24 months in case the property is damaged by fire or natural disasters.
  6. Price per SF: you should pay about $200 to $500 per SF. In California you have to pay a premium, e.g. $1000 per SF for Starbucks restaurants which are normally sold at very high price per SF. If you pay more than $500 per SF for the restaurant, make sure you have justification for doing so.
  7. Rent per SF: ideally you should invest in a property in which the rent per SF is low, e.g. $2 to $3 per SF per month. This gives you room to raise the rent in the future. Besides, the low rent ensures the tenant’s business is profitable, so he will be around to keep paying the rent. Starbucks tend to pay a premium rent $2 to 4 per SF monthly since they are often located at a premium location with lots of traffic and high visibility. If you plan to invest in a restaurant in which the tenant pays more than $4 per SF monthly, make sure you could justify your decision because it’s hard to make a profit in the restaurant business when the tenant is paying higher rent. Some restaurants may have a percentage clause. This means besides the minimum base rent, the operator also pays you a percentage of his revenue when it reaches a certain threshold.
  8. Rent increase: A restaurant landlord will normally receive either a 2% annual rent increase or a 10% increase every 5 years. As an investor you should prefer 2% annual rent increase because 5 years is a long time to wait for a raise. You will also receive more rent with 2% annual increase than 10% increase every 5 years. Besides, as the rent increases every year so does the value of your investment. The value of restaurant is often based on the rent it generates. If the rent is increased while the market cap remains the same, your investment will appreciate in value. So there is no key advantage for investing in a restaurant in a certain area, e.g. California. It’s more important to choose a restaurant at a great location.
  9. Lease term: in general investors favor long term, e.g. 20 year lease so they don’t have to worry about finding new tenants. During a period with low inflation, e.g. 1% to 2%, this is fine. However, when the inflation is high, e.g. 4%, this means you will technically get less rent if the rent increase is only 2%. So don’t rule out properties with a few years left of the lease as there may be strong upside potential. When the lease expires without options, the tenant may have to pay much higher market rent.
  10. Risks versus Investment Returns: as an investor, you like properties that offer very high return, e.g. 8% to 9% cap rate. And so you may be attracted to a brand new franchised restaurant offered for sale by a developer. In this case, the developer builds the restaurants completely with Furniture, Fixtures and Equipment (FFEs) for the franchisee based on the franchise specifications. The franchisee signs a 20 years absolute NNN lease paying very generous rent per SF, e.g. $4 to $5 per SF monthly. The new franchisee is willing to do so because he does not need to come up with any cash to open a business. Investors are excited about the high return; however, this may be a very risky investment. The one who is guaranteed to make money is the developer. The franchisee may not be willing to hold on during tough times as he does not have any equity in the property. Should the franchisee’s business fails, you may not be able to find a tenant willing to pay such high rent, and you may end up with a vacant restaurant.
  11. Track records of the operator: the restaurant being run by an operator with 1 or 2 recently-open restaurants will probably be a riskier investment. On the other hand, an operator with 20 years in the business and 30 locations may be more likely to be around next year to pay you the rent.
  12. Trade fixtures: some restaurants are sold with trade fixtures so make sure you document in writing what is included in the sale.
  13. Fast-food versus Sit-down: while fast-food restaurants, e.g. McDonalds do well during the downturn, sit-down family restaurants tend to be more sensitive to the recession due to higher prices and high expenses. These restaurants may experience double-digit drop in year-to-year revenue. As a result, many sit-down restaurants were shut down during the recession. If you consider investing in a sit-down restaurant, you should choose one in an area with high income and large population.

Sale & Lease Back

Sometimes the restaurant operator may sell the real estate part and then lease back the property for a long time, e.g. 20 years. A typical investor would wonder if the operator is in financial trouble so that he has to sell the property to pay for his debts. It may or may not be the case; however, this is a quick and easy way for the restaurant operator to get cash out of the equities for good reason: business expansion. Of course, the operator could refinance the property with cash out but that may not be the best option because:

  1. He cannot maximize the cash out as lenders often lend only 65% of the property value in a refinance situation.
  2. The loan will show as long term debt in the balance sheet which is often not viewed in a positive light.
  3. The interest rates may not be as favorable if the restaurant operator does not have a strong balance sheet.
  4. He may not be able to find any lenders due to the tight credit market.

You will often see 2 different cash out strategies when you look at the rent paid by the restaurant operator:

  1. Conservative market rent: the operator wants to make sure he pays a low rent so his restaurant business has a good chance of being profitable. He also offers conservative cap rate to investors, e.g. 7% cap. As a result, his cash out amount is small to moderate. This may be a low risk investment for an investor because the tenant is more likely to be able to afford the rent.
  2. Significantly higher than market rent: the operator wants to maximize his cash out by pricing the property much higher than its market value, e.g. $2M for a $1M property. Investors are sometimes offered high cap rate, e.g. 10%. The operator may pay $5 of rent per square foot in an area where the rent for comparable properties is $3 per square foot. As a result, the restaurant business at this location may suffer a loss due to higher rents. However, the operator gets as much money as possible. This property could be very risky for you. If the tenant’s business does not make it and he declares bankruptcy, you will have to offer lower rent to another tenant to lease your building.

Ground Lease

Occasionally you see a restaurant on ground lease for sale. The term ground lease may be confusing as it could mean

  1. You buy the building and lease the land owned by another investor on a long-term, e.g. 50 years, ground lease.
  2. You buy the land in which the tenant owns the building. This is the most likely scenario. The tenant builds the restaurant with its own money and then typically signs a 20 years NNN lease to lease the lot. If the tenant does not renew the lease then the building is reverted to the landowner. The cap rate is often 1% lower, e.g. 6 to 7.25 percent, compared to restaurants in which you buy both land and building.

Since the tenant has to invest a substantial amount of money (whether its own or borrowed funds) for the construction of the building, it has to be double sure that this is the right location for its business. In addition, should the tenant fail to make the rent payment or fail to renew the lease, the building with substantial value will revert to you as the landowner. So the tenant will lose a lot more, both business and building, if it does not fulfill its obligation. And thus it thinks twice about not sending in the rent checks. In that sense, this is a bit safer investment than a restaurant which you own both the land and improvements. Besides the lower cap rate, the major drawbacks for ground lease are

  1. There are no tax write-offs as the IRS does not allow you to depreciate its land value. So your tax liabilities are higher. The tenants, on the other hand, can depreciate 100% the value of the buildings and equipments to offset the profits from the business.
  2. If the property is damaged by fire or natural disasters, e.g. tornados, some leases may allow the tenants to collect insurance proceeds and terminate the lease without rebuilding the properties in the last few years of the lease. Unfortunately, this author is not aware of any insurance companies that would sell fire insurance to you since you don’t own the building. So the risk is substantial as you may end up owning a very expensive vacant lot with no income and a huge property taxes bill.
  3. Some of the leases allow the tenants not having to make any structure, e.g. roof, repairs in the last few years of the lease. This may require investors to spend money on deferred maintenance expenses and thus will have negative impact on the cash flow of the property.

Top 5 blockchain projects in the telecommunications sector

  1. DENT:

DENT is a blockchain-based platform that works to create a global marketplace that allows everyone to buy and sell mobile data packages. DENT’s mission is tokenization, the release and democratization of mobile data and bandwidth. The company has developed a marketplace and mobile application that allows you to buy and sell mobile data packages using blockchain technology.

The platform runs on a blockchain based on Ethereum and creates a transparent and simple data pricing landscape.

How does it work?

The work of the DENT platform is quite simple. All users who are registered in the DENT network, just need to exchange existing mobile data packages for more suitable and more economical for them. This platform will allow end users to easily interact with the telecommunications industries and thus lead to improved transparency and use of mobile data.


The DENT network operates successfully around the world through partnerships with several areas of telecommunications.

In the United States, the company works with AT&T and Verizon, in Mexico with Telcel, Nextel and Movistar, in Brazil with Oi and Vivo, in Bangladesh with Airtel, Robi, Grameenphone and Banglalink, in South Africa with Vodacom, MTN, and CellC, in Morocco. with Orange, Moroc Telecom and Inwi, in Spain with Vodafone, Orange and Yoigo, in Singapore with M1, Starhub and Singtel, in Sri Lanka with Airtel, Etisalat, Mobitel, Hutchison and Dialog, with Claro in Puerto Rico and Claro Costa , Tigo in Guatemala and Du in the UAE.

Road map

Launched in 2017, the DENT network has successfully managed to become the best blockchain-based telecommunications project with 3.5 million users worldwide. In the 3rd and 4th quarters of 2018, the company seeks to expand its partnerships with more countries and operators, as well as get on the list of more cryptocurrencies.

In 2019, the company focuses on launching a worldwide voice and SMS service, video calling, retail data bonuses, and gaining 15 million users in 70 countries by the end of the 2nd quarter of 2019.

Token value information

Total bid: 100,000,000,000 DENT

Current stock: 17,241,387,101 DENT

Market capitalization: 44,036,974 US dollars

ICO cost: $ 0.000639

Current price: $ 0.0025 USD

  1. QLINK (QLC):

Now known as the QLC Chain, Qlink is the first public blockchain for a decentralized network. QLC Chain is a system where users can buy a connection from their colleagues. That is, renting someone’s Wi-Fi access, selling unused data to other users, and receiving a cellular signal from a base station in someone’s home.

In a broader sense, the project is working to create a “Network as a Service” infrastructure that will implement smart contracts to facilitate PPP and other network functions and features.

The QLC Chain network is trying to solve the problems of excessive network capabilities, lack of network access, centralized operations, etc. by decentralizing the telecommunications market and connectivity.

How does it work?

With the QLC Chain platform, anyone from anywhere in the world will be able to operate a small base station from their home, providing cellular services in the area. Each time a user connects to another user’s base station, a small percentage of their payment will be transferred to the base station operator.

The platform also accepts advertisers who can pay for the inclusion of their content in the Qlink network.


The QLC Chain team has partnered with more than 40 telecom operators around the world to provide decentralized mobile data services to 6 million of its customers. The network also has a partnership with NEO, as it is built on the NEO blockchain. Other network partners include Binance, Ontology, Block Array, Centro and intop.

Road map

Launched in December 2017, the QLC chain was aimed at developing a standard Wi-Fi exchange protocol and E2P SMS application. At the end of the 2nd quarter of 2018, access to data and distribution of content in the public chain were developed and deployed.

Towards the end of the 4th quarter of 2018 the network will launch a public QLC chain in the core network and integrate with IPFS.

Token value information

Total supply: 600,000,000 QLC

Current stock: 240,000,000 QLC

Market capitalization: $ 12,239,064

ICO cost: $ 0.352 USD

Current price: $ 0.050


Telcoin is the first cryptocurrency to work to improve the interaction between mobile telecommunications and blockchain technology. It is built on the Ethereum blockchain and can be used for payments anywhere, given that the mobile phone number is known.

Telcoin is a cryptocurrency that will be distributed exclusively by GSMA mobile network operators.

How does it work?

Telcoin will be distributed by mobile network operators, who will further sell it to their customers. This will facilitate efficient money transfers, access to cryptocurrency and crypto-card payments.

The work of the platform begins with end users, who with their crypto-wallet, fully integrated with the Telcoin API, will gain access to wallets with multiple signatures with three private keys. Telcoin will keep records of users’ mobile phone numbers, their public key and one encrypted private key.

Telcoin provides a cheaper and faster way to send and receive money, and even people who do not have a bank account can easily use Telcoin.

Partnership and road map

The Telcoin network was launched in 2017 and operated in the first quarter of 2018, identifying its potential partners around the world. In the second quarter, the company partnered with telecom operators in Europe, South Africa and Japan. In the same quarter, it also initiated applications for any necessary permits in India, Pakistan, the UK, Indonesia and other key markets.

In the 4th quarter of 2018, Telcoin will appear in Japan, and in the first quarter of 2019 will serve remittances in Europe, East Asia, Africa and Southeast Asia.

Token value information

Total supply: 100,000,000,000 TEL

Current stock: 32,034,497,783 TEL

Market capitalization: $ 20,304,392

ICO price: $ 0.0071 USD

Current price: $ 0.00063 USD


BubbleTone is a blockchain-based telecommunications project that is working to eliminate roaming. The platform connects mobile network operators and end users worldwide in the marketplace using a blockchain. The project gives traveling users the freedom to become legitimate local customers of any foreign terrestrial operator in any country they travel to, without having to replace their SIM cards.

With BubbleTone users will be able to call and use data-based services worldwide at local rates with a direct connection to local operators. As for the operators, this platform provides an opportunity to reach the global level without the need for any complex network integration.

How does it work?

BubbbleTone aims to eliminate the problem of international roaming, which incurs unnecessary costs for both operators and users. With the BubbleTone blockchain, travelers can easily become verified local customers of the country they are traveling to, without the need to replace a SIM card.

The platform also has its own mobile application, which is primarily its marketplace that connects subscribers and LAN operators around the world.

The network is powered by UMT (Universal Mobile Token), which will be used in smart contracts to execute transactions. This token can also be used to replenish the balance of users to pay for the communication services they choose.


BubbleTone is currently collaborating with Crypto Vallley, REVESystems, CountryCom, Multi Digital Services, ShoCard and IDEMIA. In addition, the company works with telecommunications providers in more than 80 countries to provide unimpeded travel for users.

Road map

The initial version of the network’s smart contracts was ready in the first quarter of 2018. The second quarter saw the launch of a Web-API to integrate mobile operators and service providers in more than 80 countries. By the end of the third quarter of 2018, the company plans to obtain the approval of the International Telecommunication Union with the subsequent expansion of the list of mobile operators and service providers with which they cooperate, until the 4th quarter of 2018. In the first quarter of 2019, the company will sign agreements with all operators and launch the first prototype of the global SIM chip for embedding in mobile devices.


BLOCKSIMS is a decentralized payment gateway that works to solve problems related to traditional telecommunications using blockchain technology. The platform aims to completely eliminate the fees charged by data and voice service providers, and provides users with rewards and invoices created through digital advertising.

The platform is working to ensure the smooth dissemination of information through the development of new revenue channels, which eliminates intermediaries in the telecommunications process.

The BLOCKSIM platform uses the Ethereum blockchain to provide a level of transparency while encouraging users to accept and use the platform.

How does it work?

BLOCKSIM cooperates with leading telecommunications industries around the world and makes international SIM cards available through its SIM token. This will give BLOCKSIM users unlimited voice and data services worldwide, and users will receive a promotion of up to $ 100.

Each SIM token holder will have a LOCKED SIM card that will be valid for life, including unlimited and free data and voice services.

Partnership and road map

The BLOCK SIM and SIM tokens were conceived in April 2017, after which research and development was conducted, culminating in the launch of BLOCKSIM ICO in March 2018. The ICO ended in April 2018, and in October the world will see the introduction of the BLOCK SIM with the mobile app. for Android and iOS. The company aims to have at least 15% of BLOCK SIM card users in the world by 2020.

Walgreens, CVS, and Rite Aid – What RE Investors Should Know

There are 3 major drugstore chains in the US: Walgreens, CVS, and Rite Aid. Below are some key statistics about the 3 major drugstore chains as of 2012:

1. Walgreens ranks first with market cap of $28.51 Billion, $72.2 Billion in 2011 total revenue ($45.1B from prescription revenues), and an S&P rating of A. According to Walgreens, 75% of the US population lives within 3 miles from its stores. In April 2010, it acquired 258 Duane Reade drug stores in New York Metropolitan area which brings a total of 7841 drug stores Walgreens operates as of February 2012, including 137 hospital on-site pharmacies.

2. CVS ranks second with market cap of $56.56 Billion, $107.1 Billion in revenue ($40.5 Billion from CVS prescription revenues and $16.1B from its Caremark prescription mail order revenue), and an S&P rating of BBB+. As of December 31, 2011, CVS operates 7404 drug stores.

3. Rite Aid ranks third (fourth, behind Walmart in terms of prescription revenues) with market cap of $1.49 Billion, $26.1 Billion in revenue ($17.1B from prescription revenues), operates 4714 drug stores as of February 2011 and has an S&P rating of B-.

Investors purchase properties occupied by these drugstore chains for the following reasons:

1. The drugstore business is very recession-insensitive. People need medicine when they are sick, regardless of the state of the economy. Both rich and poor people in the US have access to medicine. Some even argue that low-income people use more medicine due to free or low-cost drugs offered by government-assisted programs. So the tenants should do well during tough time and have money to pay rent to landlords.

2. The drugstore business has a good prospect in the US:

· People are living longer and need more medicine to sustain longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer’s symptoms. Older people tend to use more medicine than younger ones as they often have more medical problems. As the 78 million baby boomers are getting closer to retiring age starting from 2008, the drugstore chains anticipate the demand for medicine to increase in next 20 years.

· The drug market continues to expand as the US population continues to grow. More and more Americans suffer from various diseases. The number of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million people per Fortune magazine. They spent $5.4 Billion in 2009 for allergy drugs. As their waist lines balloon (75% of Americans are forecasted to be either overweight or obese by 2020), more Americans are diagnosed with diabetes, along with high cholesterol at younger and younger ages. In addition, doctors also recommend treating various diseases sooner than later due to better understanding about the diseases. For example, doctors now prescribe antiretroviral drugs for patients soon after infected with HIV virus instead of waiting for the infection to become AIDS. More doctors combine insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors increase the size of the drug market.

· Advance in genetic engineering has introduced various new genetic DNA testing kits which allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest growth segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug stores in the near future.Upon FDA approval, these new products will potentially bring in additional revenue for drug stores.

· Using a new method of tailoring molecules called structure-based design; drug companies come up with new medicines that they might not have discovered otherwise, e.g. Xalkori by Pfizer to treat lung cancer.

· The passage of Health Care Reform Bill on March 23, 2010 provides insurance coverage to an estimated 33 million more American. This is a great present to the drugstore industry.

· There are new drugs to treat previously untreatable illnesses, and new diseases, e.g. Viagra for men’s unhappiness, Avastin for colon cancer, Herceptin for breast cancer,. The new medicines are very expensive, e.g. a year’s supply of Avastin costs about $55,000. Eli Lilly has sold about $4.8 billion of Zyprexa in 2007 for schizophrenia and yet most people have never heard of this medicine.

· There are existing drugs now approved to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damagein people with diabetes. It is now approved by FDA to treat Fibromyalgia which affects 5.8 million Americans per WebMD.

· Big advances in genetics, biology and stem cells research are expected to produce a new class of drugs to treat diabetes, Parkinson’s and various rare genetic disorders. For example the new drug Ilaris from Novartis targets genetic causes of an inherited disorder that there are only 7000 known cases worldwide. However, Novartis hopes to gradually broaden its drugs to a blockbuster drug to more common disorders caused by similar genetics.

· Technology and modern life introduce and require new products, e.g. pregnancy test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Propecia for male hair loss, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, contact lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly $26B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting company that monitors pharmaceutical sales.)

· Before the customers can get to the medicine aisles or pharmacy counters, they have to pass by chocolates, sodas, digital cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. Drug stores hope you use the one-hour photos services there. The stores also carry seasonal items, e.g. Halloween costumes, and “As Seen on TV” merchandise, e.g. Shamwow. As a result, customers buy more than their prescriptions and medicine in these drugstores. CVS reported that non-pharmacy sales represented 30% of the company’s total sales in January of 2007. The figure for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are in effect convenience stores especially ones that are in residential or rural areas. And so Walgreens hopes that customers also pick up WD-40, and screwdrivers at its stores instead of at Home Depot; Thai Jasmine rice, and fish sauce to avoid a trip to Safeway or Kroger Supermarkets. During the recession, sales of these non-drug items are down as customers buy what they need and not what they want. Walgreens tries to reduce the number of items by 4000. It also introduces its own private label which has higher profit margins.

· There are more and more generic medications on the market as a number of enormously popular brand-name blockbusters lose their 20-year long patents, e.g. Lipitor (best selling drug in the world to lower cholesterol) in 2010, Viagra (you know what it’s for) in 2012. Drugstores prefer to sell generic drugs to customers due to higher profit margins than the brand-name medications.

· Many people are addicted to pain killers, e.g. Hydrocodone/Oxycodone. Per the DEA in 2012, there are 1.5 million American addicted to cocaine but 7 million addicted to prescription drugs.

· This author estimates that at least 10% of the dispensed prescription drugs are not used at all and sit idle in the medicine cabinets. They are eventually expired and thrown away.

3. These companies sign very long-term NNN leases, guaranteed by their corporate assets. This makes the investment in the underlying property fairly low risk, especially for Walgreens with a S&P “A” rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent promptly and timely. This author is not aware of any properties leased by one of these drugstore chains in which the tenants failed to pay rents. Even when the stores are closed due to weak sales (Walgreens closed 119 stores in 2007), these companies may sublease the properties to other companies, e.g. Advance Auto Parts and continue to pay rents on the master leases.

· A typical Walgreens lease consists of 20-25 year primary term plus 8-10 five-year options. During primary term and options, there will be no rent increases in most of the leases. This is the main disadvantage of investing in Walgreens drugstores.

· A typical CVS lease consists of 20-25 year primary term plus 4-5 five-year options. The rent is normally flat during the primary term and then there is a 2.5%-10% rent increase in each 5-year option.

· A typical Rite Aid lease consists of 20-25 year primary term plus 4-8 five-year options. The lease often has a rent increase every 5-10 years.

Investment Risks

Although the pharmacy business in general is recession-insensitive, there are risks involved in your investment:

1) The main downside about investing in pharmacies is there is little or no rent bump for a long time, e.g. 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not appeal to younger investors, especially when the cap rate is low.

2) The 3 drugstore chains now have a new formidable competitor, Walmart. Walmart sells prescription drugs in more than 4000 Walmart, Sam’s Club and Neighborhood Market stores in 49 states. As of 2012, Walmart is the third largest drug retailer with $17.4B in prescription sales, just ahead of Rite Aid with $17.1B in prescription sales. The retail giant is known for launching in 2006 a highly-publicized $4 generic prescription drug program which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Walmart probably makes very little profits on these medications if any. However, the marketing campaign–created by Bill Simon, the President and CEO of Walmart US, generates a lot of publicity for Walmart. Walmart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Walmart at the middle. Other drug chains try to counter Walmart in different ways. Target now offers the same 350 generic medications for $4 for a 30-day supply. Walgreens has a Prescription drugs club with membership fee which offers 1400 generic medications for as little as $1/week. CVS says it will match any offers from its competitors.

3) Chief Business Correspondent Rick Newman from US World & News Report predicted that Rite Aid might not survive in 2009. Rite Aid is still around in 2012. The prediction seems to go away in 2012 as Rite Aid as it was able to refinance the long terms debts and sales revenue has increased.

4) Drugs are also sold in thousands of supermarkets, Target stores, and Costco warehouses. However, there are no drive-through windows at these stores or Walmart to conveniently drop off the prescriptions and pick up medicines. Customers will not be able to pick up their prescriptions during lunch hour or after 7PM at Target stores or supermarkets. They need to have membership to buy medicines at Costco. Others may not fill their prescriptions at Walmart because they don’t want to mingle with typical Walmart customers who are in lower income brackets. And some baby boomers don’t want their prescriptions filled at Target or Walmart because there are no comfortable chairs for them to sit down and wait for their medicines.

5) Drugs retail business to some degree is controlled by the Pharmacy Benefits Managers (PBMs). Customers normally get prescription coverage from their health insurance companies, e.g. Blue Cross. These PBM manage prescription benefits on behalf of the insurance companies. In 2012 Walgreens lost a contract valued at over $5 Billion with Express Scripts, a major PBM. Walgreen revenue was immediately fallen in the first quarter of 2012 as Express Scripts customers cannot fill their prescriptions at Walgreens. The PBMs are also in the drugs retail business via mail orders which do not require leasing expensive retail spaces. The prescription mail orders currently capture over 20% market share of the total prescription revenue. Should customers change their prescription purchase habits to mail orders (there is no such evidence in 2012), it could have negative impact to the business of drugstore chains.

6) Many leases in areas with hurricanes and tornadoes are NNN leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.

7) The tenant may move to a new location down the road or across the street when the lease expires. This risk is high when the property is located in small town where there is low barrier for entry, i.e. lots of vacant & developable land.

8) The tenant may ask for rent concession to improve its bottom line during tough times. The possibility is higher if the tenant is Rite Aid and if the store has low sales revenue and/or higher than market rent.

9) More Americans are walking away from their prescriptions, especially the most expensive brand-name medicines. This may have negative impact on the sales revenue and profits of drug stores and consequently may cause drug store closures. According to Wolters Kluwer Pharma Solution, a health-care data company, nearly 1 in 10 new prescriptions for brand-name drugs were abandoned by people with commercial health plans in 2010. This is up 88% compared to 4 years ago just before the recession began. This trend is driven in part by higher and higher co-pays for brand name drugs as employers are shifting more insurance costs to their employees.

Among 3 drugstore chains, Walgreens and CVS pharmacies in general have the best locations-at major intersections while Rite Aid has less than premium locations. Walgreens tends to hire only the top graduates from pharmacy schools while Rite Aid settles with bottom graduates to save costs. When possible, all drugstore chains try to fill the prescriptions with generic medications which have higher profit margins.

1) Walgreens: the company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has existed for more than 100 years, most stores are only 5-10 years old. This is the best managed company among the three drugstore chains and also among the most admired public companies in the US. The company has been run by executives with proven track records and hires the top graduates from universities. Due to its superior financial strength–S&P A rating– and premium irreplaceable locations, properties with leases from Walgreens get the highest price per square foot and/or the lowest cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increases for 20 to 60 years. The cap rate is often in the low 5% to 6.5% range in 2012. Investors who buy Walgreens tend to be more mature, i.e. closer to retirement age. They are looking for a safe investment where it’s more important to get the rent check than to get appreciation. They often compare the returns on their Walgreens investment with the lower returns from US treasury bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and thus you see many new Walgreens stores for sale. It will slow down this expansion in 2010 and beyond and focus on renovation of existing stores instead.

2) CVS Pharmacy: CVS Corporation was founded in 1963 in Lowell, MA by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name CVS stands for “Consumer Value Stores”. As of 2009, CVS has about 6300 stores in the US, mostly through acquisitions. In 2004, CVS bought 1,200 Eckerd Drugstores mostly in Texas and Florida. In 2006, CVS bought 700 Savon and Osco drugstores mostly in Southern California. And in 2008 CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $2.9B dollars. The acquisition of Long Drugs appears to be a good one as it CVS did not have any stores in Northern CA and Arizona. Besides, the price also included real estate. It is also bought Caremark, one of the largest PBMs and changed the corporation name to CVS Caremark. When CVS bought 1,200 Eckerd stores, it formed a single-entity LLC (Limited Liability Company) to own each Eckerd store. Each LLC signs the lease with the property owner. In the event of a default, the owner can only legally go after the assets of the LLC and not from any other CVS-owned assets. Although the owner loses the guaranty security from CVS corporate assets, this author is not aware of any incident where CVS closes a store and does not pay rent.

3) Rite-Aid: Rite Aid was founded by Alex Grass (he just passed away on Aug 27, 2009 at the age of 82) and opened its first store in 1962 as “Thrif D Discount Center” in Scranton, Pennsylvania. It officially incorporated as Rite Aid Corporation and went public in 1968. By the time Alex Grassstepped down as the company’s chairman and chief executive officer in 1995, Rite Aid was the nation’s largest drugstore chain in terms of total stores and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid’s earnings in the late 1990s. Rite Aid is now the weakest financially among the 3 drugstore chains. In 2007, Rite-Aid acquired about 1,850 Brooks and Eckerd drugstores, mostly along the East coast to catch up with Walgreens and CVS. In the process, it added a huge long term debt and is the most leveraged drugstore chain based on its market value. The integration of Brooks and Eckerd did not seem to go well. Revenue from some of these stores went down as much as 20% after they change the sign to Rite Aid. In 2009, Rite-Aid had over 4900 stores and over $26 Billion in revenues. The figures went down in 2010 to 4780 stores and $25.53 billion in revenue. On January 21, 2009 Moody’s Investor Services downgraded Rite Aid from “Caa1” to “Caa2”, eight notches below investment grade. Both ratings are “junk” which indicate very high credit risk. Rite Aid contacted a number of its landlords in 2009 trying to get rent concession to improve the bottom line. In June 2009, Rite Aid successfully completed refinancing $1.9 Billion of its debts. In 2012, Rite Aid benefits from Walgreens contract problem with Express Scripts. Same store sales increased 2.2%, 3.2%, and 3.6% for January, February and March of 2012, respectively. Rite Aid is still losing money in fiscal year 2012 which ended in March 3, 2012. However, it is losing less, $0.43 per share in 2012 versus $0.64 per share in fiscal year 2011. The company expects better outlook in fiscal year 2013.

Things to consider when invested in a pharmacy

If you are interested in investing in a property leased by drugstore chains, here are a few things to consider:

1. If you want a low risk investment, go with Walgreens. In stable or growing areas, the degree of safety is the same whether the property is in California where you get a 5.5% cap or Texas where you may get a 6.5% cap. So, there is no significant advantage to invest in properties in California as the property value is based primarily on the cap rate. In 2012, the offered cap rate for Walgreens seems to come down from 7.5%-8.4% in 2009 to 5.5%-6.5% for new stores.

2. If you are willing to take more risk, then go with Rite-Aid. Some properties outside of California may offer up to 9% cap rate in 2012. However, among the 3 drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it declare bankruptcy, Rite Aid has the option to pick and choose which locations to keep open and which locations to terminate the lease. To minimize the risk that the store is shuttered, choose a location with strong sales and low rent to revenue ratio.

3. Financing should be an important consideration. While the cap rate is lower for Walgreens than Rite Aid, you will be able to get the best rates and terms for Walgreens.

4. If you are not a conservative investor or risk taker, you may want to consider a CVS pharmacy. It has BBB+ S&P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer better rent bumps. On the other hand, some CVS leases, especially for properties in hurricane areas, e.g. Florida are not truly NNN leases where landlords are responsible for the roof and structure. So make sure you adjust the cap rate down accordingly. Some of the CVS locations have onsite Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it’s not clear having a clinic inside CVS is a plus or minus to the bottom line of the store.

5. All 3 drugstore chains have similar requirements. They all want highly visible, standalone, rectangular property around 10,000 – 14,500 SF on a 1.5 – 2 acre lot, preferably at a corner with about 75 – 80 parking spaces in a growing and high traffic location. They all require the property to have a drive-through. Hence, you should avoid purchasing an inline property, i.e. not standalone and property with no drive-through windows. There is a chance that these drugstores may not want to renew the lease unless the property is located in a densely-populated area with no vacant land nearby. In addition, if you acquire a property that does not meet the new requirements, for example a drive-through, you may have a problem getting financing as lenders are aware of these requirements.

6. If the pharmacy is opened 24 hours a day, it is in a better location. Drugstore chains do not open the store 24 hours day unless the location draws customers.

7. Many properties may have a percentage lease, i.e. the landlord can get additional rent when the store’s annual revenue exceeds a certain figure, e.g. $5M. However, the revenue used to compute percentage rent often excludes a page-long list of items, e.g. wine and sodas, tobacco products, items sold after 10 PM, drugs paid by governmental programs. The excluded sales revenue could account for as much as 70% of store’s gross revenue. As a result, this author has seen only 2 stores in which the landlord is able to collect additional percentage rent. The store with a percentage rent is required to report its annual sales to the landlord. As an investors, you want to invest in a store with strong gross sales, e.g. over $500 per square foot a year. In addition, you also want to check the rent to revenue ratio. If the figure is in the 2-4% range, the store is likely to be very profitable so the chance the store is shut down is low.

8. It does not matter how good the tenants are, avoid investing in declining, e.g. Detroit and/or low-income areas or small towns with less than 30,000 residents within 5 miles ring. In a small town, it may be the only drug store in town and captures most of the market share. However, if a competitor opens a new location in the area, revenue may be severely affected. In addition, the tenant can always moves to a new location down the road when the lease expires since there is low barrier to entry in a small town. These properties are easy to buy now and hard to sell later. When the credit market is tight, you may have problems finding a lender to finance these properties.

9. Many properties have an existing loan that the buyer must assume. If you have a 1031 exchange, think twice about buying this property. You should clearly understand loan assumption requirements of the lenders before moving forward. Should you fail to assume the existing loan (assuming an existing loan is a lot more difficult than getting a new loan), you may run out of time for a 1031 exchange and may be liable to pay capital gain.

10. With few exceptions, drugstore chains do not own the stores they occupy for several reasons. Here are just a couple of them:

– They know the pharmacy business but don’t know real estate. Stock investors also don’t want Walgreens to become a real estate investment company.

– Owning the real estate will require them to carry lots of long term debts which is not a brilliant idea for a publicly-traded company.

11. About 10% of the drugstore properties for sale and typically CVS pharmacies require very small amount of equity to acquire, e.g. 10% of the purchase price. However, you are required to assume an existing fully-amortized loan with zero cash flow. That is, all of the rent paid by the tenant must be used to pay down the loan. The cap rate may be in the 7-9% range, and the interest rate on the loan could be attractive in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, you have no positive cash flow. This requires you to come up with outside cash to pay income tax on the rental profits (the difference between the rent and mortgage interest). The longer you own the property, the more outside cash you will need to pay income taxes as the mortgage interest will get less and less toward the end. So who would buy this kind of property?

– The investors who have substantial losses from other investment properties. By acquiring this zero cash flow property, they may offset the income from the drugstore tenant against the losses from other investment properties. For example, a property has $105,000 of rental profits a year, and the investor also has losses of $100,000 from other properties. As a result, the combined taxable profits are only $5,000.

– The uninformed investors who fail to consider that they have to raise additional cash to pay income taxes.

Out of the Box Thinking

If you put too much weight on the S&P rating of the tenants, you may end up either taking a lot of risks or passing up good opportunities.

  1. A Good location should be the key in your decision on which drug store to invest in. It’s often said a lousy business should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is closed down later on (yes, Walgreens closed 119 stores in 2007) is still a bad investment even though Walgreens continues paying rent on time. So you don’t want to blindly invest in a drug store simply because it has a Walgreens sign on the building.
  2. No company is crazy enough to close a profitable location. It does not take rocket science to understand that a financially-weak company like Rite Aid will make every effort to keep a profitable location open. On the other hand, a financially-strong Walgreens will need justifications to keep an unprofitable location open. So how do you determine if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The answer is you cannot. However, you can make an educated guess based on the store’s annual gross revenue which is often reported to the landlord as required by the percentage clause in the lease. With the gross revenue, you can determine the rent to income ratio. The lower the ratio, the more likely the store is profitable. For example, if the annual base rent is $250,000 while the store’s gross revenue is $5M then the rent to income ratio is 5%. As a rule of thumb, it’s hard to make a profit if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to income ratio then you know it’s likely a very profitable location. In the event Rite Aid declares bankruptcy, it will keep this location open and continue paying rent. If you see a Rite Aid drug store with 3% rent to income ratio offering 10% cap, chances are it’s a low risk investment with good returns and the tenant will most likely to renew the lease. The weakness of corporate guaranty from Rite Aid is probably not as critical and the risk of having Rite Aid as a tenant is not really that significant.
  3. Drug stores with new 25 years leases tend to sell at lower cap, e.g. 6-7% cap on new stores versus 8.0-8.5% cap on established locations with 5-10 years remaining on the lease. This is because investors are afraid that the tenants may not renew the leases. Unfortunately, lenders also have the same fear! As a result, many lenders will not finance drug stores with 2-3 years left on the leases. The fact that drugstores with new leases have a premium on the price means they have potential of 20% depreciation (buying new at 6% cap and selling at 7.5% cap when the leases have 8 year left). Some investors will not consider investing in drug stores with 5-10 years left on the lease. They might simply ignore the fact that the established stores may be at irreplaceable locations with very strong sales. Tenants simply have no other choices other than renewing the lease.

How to trade cryptocurrencies – Basics of investing in digital currencies

Whether it’s the idea of ​​the cryptocurrency itself or the diversification of its portfolio, people from all walks of life are investing in digital currencies. If you are new to this concept and you are wondering what is going on, here are some basic concepts and considerations for investing in cryptocurrencies.

What cryptocurrencies are available and how to buy them?

With a market capitalization of about $ 278 billion, bitcoin is the most famous cryptocurrency. Ethereum ranks second with a market capitalization of more than $ 74 billion. In addition to these two currencies, there are a number of other options, including Ripple ($ 28 billion), Lightcoin ($ 17 billion) and MIOTA ($ 13 billion).

Being the first in the market, there are many exchanges for bitcoin trading around the world. BitStamp and Coinbase are two well-known exchanges in the United States. is an established European exchange. If you are interested in trading other digital currencies along with bitcoins, then on the crypto market you will find all digital currencies in one place. Here is a list of exchanges according to their 24-hour trading volume.

What money storage options do I have?

Another important point is the storage of coins. One option, of course, is to keep it on the exchange where you buy them. However, when choosing an exchange you need to be careful. The popularity of digital currencies has led to the emergence of many new, unknown exchanges. Take the time to exercise due diligence to avoid scammers.

Another option that you have with cryptocurrencies is that you can store them yourself. One of the safest options for storing your investment is hardware wallets. Companies like Ledger allow you to store bitcoin and several other digital currencies.

What is a market and how can I learn more about it?

The cryptocurrency market fluctuates greatly. The changing nature of the market makes it more suitable for long-term gaming.

There are many established news sites that report on digital currencies, including Coindesk, Business Insider, Coin Telegraph and Cryptocoin News. Aside from these sites, there are also many Twitter accounts that write about digital currencies, including @BitcoinRTs and @AltCoinCalendar.

Digital currencies aim to destroy the traditional currency and commodity market. Although there is still a long way to go before these currencies, the success of bitcoins and Ethereum has proven that there is a real interest in this concept. Understanding the basics of investing in cryptocurrency will help you go in the right direction.

Index trading

Stock markets around the world maintain a variety of “indices” for stocks that make up each market. Each index represents a specific industry segment or broad market. In many cases, these indices themselves are traded instruments, and this feature is called “Index Trading”. The Index is the aggregate picture of the companies (also known as the “components” of the Index) that make up the Index.
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For example, the S&P 500 is a broad market index in the United States. The components of this Index are the 500 largest US companies by market capitalization (also called “Big Capitalization”). The S&P 500 is also a traded instrument in the futures and options markets, and it is traded under the SPX symbols in the options market and under the / ES symbol in the futures markets. Institutional investors as well as individual investors and traders have the opportunity to trade SPX and / ES. SPX can only be traded during normal hours of market trading, but A / ES can be traded almost 24 hours a day in futures markets.

There are several reasons why index trading is so popular. Because SPX or / ES is a microcosm of the entire S&P 500 companies ’index, an investor instantly gets an idea of ​​the entire basket of stocks representing the index when he buys 1 contract or a contract for future SPX and / ES contracts. respectively. This means instant diversification to the largest companies in the US, built into the convenience of one security. Investors are constantly looking to diversify their portfolio to avoid the volatility associated with holding just a few stocks of a company. Buying a contract on the index provides an easy way to achieve this diversification.

The second reason for the popularity of index trading is due to how the index itself is designed. Every company in the Index has a certain relationship with the Index when it comes to price movements. For example, we can often see that when an index rises or falls, most component stocks also rise or fall very similarly. Some stocks may rise more than the index, and some stocks may fall more than the index for similar movements in the index. This relationship between the stock and its parent index is a “beta” of the stock. Looking at the past price relationship between the stock and the index, the beta for each stock is calculated and available on all trading platforms. This then allows the investor to hedge the stock portfolio from losses by buying or selling a certain number of contracts in SPX or / ES instruments. Trading platforms have become sophisticated enough to instantly “weigh in” your portfolio in SPX and / ES. This is a major advantage when a widespread market collapse is imminent or is already underway.
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The third advantage of the index trade is that it allows investors to get a “macro view” of the markets in their trading and investment approaches. They no longer have to worry about how individual companies perform in the S&P 500. Even if a very large company faces difficulties in its business, the impact that this company will have on the Broad Market Index is exacerbated by the fact that other companies may be well . This is the effect that diversification should bring. Investors can adapt their approaches based on broad market factors rather than individual nuances of the company, which can become very cumbersome to follow.

The downside of index trading is that broad market returns tend to average single figures (6 to 8% on average), while investors have the opportunity to make much higher returns on individual stocks if they are willing to face volatility that goes along with owning individual stocks.

Small Capitalization Means: Some Tips To Stay Safe During Market Hits

Investing nowadays is not as easy as it may seem. Whether it is investing directly in equity or through mutual funds, each method requires a significant amount of research and effort to select the right stock or fund, manage it and make a profit. In the case of mutual funds, it becomes difficult for a person if the chosen fund varies depending on market conditions. Yeah! Here we are talking about small-cap mutual funds. These funds are too volatile in nature and can easily confuse their investors with their constant fluctuations.
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But do not take risks and turn away from the funds of this category. The most important thing that investors need to understand is the investment in capital associated with risk that varies according to the size of the company. Risk and profit are directly proportional to each other in the case of small-cap funds. The more you dare to take risks, the better your chances of making a high profit.
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Over the past three years, we have witnessed exceptional performance of small-cap funds that have attracted too many investors. But some risk-averse investors believe that these investments in mutual funds are like a pie in the sky, for obvious reasons. For these investors, we have some tips to keep in mind before investing in these mutual funds.


  1. Investigate thisIt is known that the fund’s past performance does not guarantee its future performance. But that doesn’t mean you shouldn’t conduct a preliminary study of the investment strategy, fund manager, past performance, etc. before investing in it. Of course, if you want to make a great profit by investing in small-cap funds, you need to spend enough time researching this.
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  3. The goal is a long-term investment horizonAs mentioned earlier, low-cap funds are very volatile in nature and tend to fluctuate regularly with the bearish and bullish phases of the market. Therefore, investing in them in the short term is not a solution. You have to work on the saying, “Patience is the key.” If you want to know how these funds work, you have to look at their results over the last 5 or 10 years. So, if you are going to invest in these funds, you should invest for a long period of 5-10 years.
  4. All eggs in one basket – NO!Diversification is a capacious term, which when applied to investing means the purchase of more than one type of equity instruments. Portfolio diversification helps to allocate risks and minimize losses. Because sticking to just one style of investing, which forces you to keep only funds with a small capitalization, can lead to losses when the market declines. A well-diversified portfolio containing a mix of stocks can help you make a profit, even as those funds dwindle.
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  6. Market time – NO, market time – YES!Many financial industry experts considered timing in the market a foolish activity. Time to market is not only nerve-wracking, but also risky for your investment portfolio. You can never predict the market and its confidence because you never know what factor will affect, therefore, the mood of the market by lifting it up and down. So the best way is to stay away from the habit of fixing the market and start your investment as early as possible for the long term.
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  8. Investment Philosophy SuitabilityThe investment philosophy of the fund must be consistent with the objectives of the portfolio. This aspect of investment is very important in times of high volatility. Because being an investor is very difficult to remain patient at a time of market decline, so when investment strategy and philosophy should be such that should support your risk profile and investment goal.
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Although we cannot predict how a small-cap fund will work in certain market conditions, but if you remember the tips above, then investing in these funds will also be beneficial to those who fear high risk. If you have not yet invested in mutual funds, you should seek the advice of a financial advisor and start investing now.
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Why mid-cap funds are for you

The market capitalization of the fund helps the investor know the size of the company in which he can potentially invest. These sizes of capitalization tend to change over time. They also vary depending on the brokerage houses. Typically, a small-cap fund falls in the range of less than $ 1 billion, a medium-cap fund ranges from $ 1 billion to $ 8 billion, and a large-cap fund ranges over $ 8 billion. Large funds tend to have restrictions on the level of ownership, and they are best suited for long-term investors who are not looking for big risks. However, small-cap funds invest in companies that may not be as stable – as they are still likely to be in the early stages of their business and may collapse. This is why small ones are very volatile for investing, even though they can make big profits. You have to be on your feet and know what you are doing to get the best out of here.
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The mid-cap fund is somewhere in between these two funds. Companies in this range are slightly more stable than small-cap funds. It doesn’t always end up moving with the market and its ups and downs – so there’s more stability. This means you need a little less fear of their volatility.
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It gives you more profit than others – and it doesn’t last long. This way, you get a better return than a large capitalization, and better stability than with a small capitalization if you choose a mid-cap fund. Over a period of time small and medium are likely to outperform a fund with a large capitalization. This is because small and medium-sized funds are more likely to focus on their growth strategy than already large conglomerates. They are more dynamic in their business because they are more compact.
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But it doesn’t depend on every foundation that works well – there are always exceptions to the rule. Look at your own finances and figure out where you can afford to use your money. If you’re more interested in a long-term investment, maybe this isn’t for you. But if you want to get higher returns with less volatility, you can invest in it. Remember to do your homework before investing in mutual funds. You need to know where your money is going and what risks are associated with a particular investment if you decide to invest. The value of this fund is invested in medium-sized companies, which will give you higher profits. Usually people invest in this fund because it offers ample opportunities for growth compared to other sectors.
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Small companies often offered more growth than large companies. So we need to invest in a fund that can invest in small, large and medium-sized companies
So before you invest in it, research the market, analyze it, which will help you get what you think about the amount of return.