There is a benefit to reading books on marketing for those that will never be marketers: it will immunize you to sales pitches.  Think of it as studying the strategies of the enemy.  When you talk to salesmen, you can flip their words back at them, or tell them “no,” to the questions that have a guaranteed “yes” attached to them.  Better, if you want, you can tell them, “Stop. I know your tactics.  Cease the sales language and answer these questions I have…” Maybe they will cease.  If not, leave.  There are many places to buy, and some people that will listen to you elsewhere.

Some weeks ago, I was traveling, and heard an ad for a “financial seminar.”  This one sounded better than most, and featured the teachings of a well-known writer.  For fun, I signed up for the free seminar, just to see what would happen.

In reading what little I had before the seminar, I concluded that the only way of doing what they claimed was private ownership of high cash flow properties or businesses.  When I went to the seminar, I was not disappointed — that was the main idea.  Secondarily, they said you could get non-recourse financing easily, or equity limited partnerships to finance you.  (Money grows on trees…)

The first problem is this: mispriced properties are few and far between, and there is competition to buy them, generally.  Second, financing for property investment is scarce, especially for anything where the lender has no recourse to the borrower.

Passive Income

Passive income is an idol in these shows.  It seems like free money, but in practice it is difficult for investors to buy properties cheaply, finance them, and get rents that are far higher.

If it were that easy, they would create a REIT and do it themselves.  I asked the presenter at the end of the presentation: “If there are that many high cash flow properties available, why doesn’t a REIT buy them?  After all, they can finance more cheaply than you.”  Response: “What’s a REIT?”

That’s more than the wrong answer; it means you don’t know what you are doing.

Tactics

There was a lot of framing going on.  The package was worth $5000, but we have a special offer for $600.  Today for you?  $200.  After some people leave — “Yes, $200, but your spouse can some too.”  Oh and if you buy today, we’ll throw in these extras…

I suspect there were shills in the audience, who went back to buy.  I looked back several times, and estimated that 50-60 out of 200 went back to buy.  At the end, only 30 remained to hear the ending advice.

Regardless, the gross revenue of the day was around $6000, which supposedly covered only the cost of the presenter and the hotel room.  I have my doubts.

Other  Notes

Twice the presenter mentioned that the company that the author worked with was publicly traded.  Well, sort of, it deregistered in Spring 2011, and the company is worth less than $10 million today as it trades on the pinks.  What can you say for a company with a negative net worth, normally negative income, and very low trading volume?  (Leave aside the lawsuits…)

The presenter appealed to Buffett on not diversifying, but Buffett tells average investor that they are best invested in mutual funds.  Being undiversified carries with it the idea hat one is incredibly smart, and able to do far better then the averages.

The reason that they put forth a private market strategy is that it can’t be falsified.  That is the great thing about selling people on investing in real estate.  There is no way to put forth an audited track record.  You can tell anecdotes, and people buy your educational materials.

Summary

Be skeptical.  Nothing good is easy.  Anything advertised in investing can’t be that good.  I knew this, and my experience proved it as I reviewed the charlatans.

I have long thought that Defined Benefit plans are the best retirement plans for workers.  They are also the worst for employers.  Why?

Employees are incapable of making intelligent investment decisions in aggregate, much as they like the feeling of “control.”  Far better to have professionals choose investments where they don’t give in (as much) to fear and greed, and lose a lot of money in the process.

Defined benefits give retirees a fixed budget, which is good; they are not capable of managing a lump sum over a lifetime.  Indeed that would tax most “professionals.”  The pensions are also judgment-proof, aside from QDROs.

The cost of providing fixed benefits amid low interest rates is tough for most employers, who have seen their liabilities expand dramatically.  It takes a lot more assets to provide a pension if you are investing in safe bond investments.

This is particularly true for public pensions, since they had the greatest tendency to defer making contributions to avoid raising taxes.  Now they are in the soup.  It will be interesting to see what the municipalities do with the pensions.  There may be compromises driven over retirement benefits for future employees, current employees, and even current retirees.  Then again, maybe taxes will be raised to cover the expense.

That will vary by state; some will accept more taxes, and some won’t… beyond that, some will move out of high taxation states, creating a “death spiral” for taxes, or a default/compromise on pension payments.

All that said, I can simply say that in a period of low interest rates and low returns from risk assets, it is unlikely that pension payments will be maintained in many states, unless taxes are raised, and many will oppose that, because their own retirements so not look so promising.