Sunday, November 23, 2008

Boomer's Wake Rule #2 - Find out what "they" want... and sell it to them!

Boomer’s Wake Rule #2 – Find out what “they” want… and sell it to them!
This is an obvious, but often overlooked rule. As we have discussed, two very large demographic pools are the baby boomers and their kids, the echo boomers. Remember that baby boomers are 48 to 62 years old right now and their kids are around 16 to 26 years old.


So how is this for a strategy? Find the oldest ones in either of the two groups and see what they buy. Isn't it reasonable that if the oldest ones are buying it now, then as the entire group grows older, they could all have similar needs and wants? This knowledge is what I call investing with wind to our backs.

Build boomer/echo boomer friendly businesses
If you are entrepreneurial, how about examining your products or potential products through the demographics filter? Which group does your products relate to most? Are there any simple alterations that can be made to either the product or the marketing message that will excite the boomers or echo boomers? If you are trying to build an expandable business, but find your target market is outside these desired ranges, you may find it a struggle to be successful.

Many examples come to mind. The iPod is a great example of a product that is very echo boomer friendly and had a wonderful tail wind for years as that product evolved. Can you find an echo boomer that doesn't own an iPod now?

Fitness clubs, on the other hand, especially those targeting 25-45 year olds, see that their growth in the past 10 years has been less robust than the prior 10 years. Niche clubs targeting boomers and seniors will likely do well and the industry as a whole will likely start to grow more rapidly as the echo boomers start to join in more freqency.

And how about the boomer friendly business of Viagra? Need I say more?

Not discounting the niche
Of course there is a difference between a niche business and one aimed at the general public. People can be successful selling to 30 and 40 somethings right now, but they just have to be aware that they are running in head winds in the process. Opening up a chain of retail stores targeting 40 year olds may be a bad idea, but a single boutique store in Santa Monica may do great.

Own boomer/echo boomer demanded assets
If the typical age for people to purchase their largest home is around 42-46 years old, when they make the most money and have teenage kids, than it would explain why owning real estate in the suburbs was a great idea in the '90s and early 2000s. The last boomers just passed through that age range. And their kids are going off to college now. Owning expensive, suburban real estate, unless it is in niche communities, may not be the best investment strategy going forward.

However, the older boomers are moving back to the cities right now and grabbing condos in clean and desirable urban centers. Likewise, the echo boomers are just getting their first real jobs and want to rent or buy in the same urban areas as well. Why not start to own real estate that these groups will want?

What other assets are in demand? Figure it out and own them.

But don’t get caught holding assets after the trend is over and the bubble has burst
The flip side of owning what they are buying is not owning what they no longer buying. Owning stock, for example, in SUV manufacturers when the last boomer's kid is going off to college seems like a bad idea. Investing in real estate developers building cookie-cutter, 4 bedroom homes in the 'burbs seems like a bad idea. Starting to build a long term investment strategy developing retirement communities? Now that sounds like a good idea.

Monday, November 17, 2008

Boomer's Wake Rule #1 - Do not follow the herd!

Boomer’s Wake Rule #1 - Do not follow the herd!
I remember back in the ‘90s when I wanted to invest in what turned out to be one of the strongest markets we have ever seen. It was frustrating that I just didn’t have the money to invest. I was only in my 20’s and they were in their 30’s and 40’s already and obviously had a huge head start. By the time I started making enough to invest, it was right at the peak in 1999. I was following the herd and got killed in the process.

Don’t chase winners
Chasing winners means that you notice that an investment has been up a lot over the past year. You feel like you are missing out on something so you get in on the investment late in the game. How do you know it's late? Unfortunately, when you finally hear about some idea and finally feel comfortable dipping your toe in the water, the time it took you to validate the investment was the prime time for the investment.

The key to investing in momentum investments and bubbles is that there must be a larger base of people buying after you. If your friends, the cab driver and your aunt Edna are all talking about what a great investment something is, chances are you are chasing a winner and will be among the last to buy before it starts to go down.

Beware of “hot tips”
People who already own investments love to give tips. But think about it! They want others to buy what they own to justify their position and ultimately to have others to sell to. You need to clearly understand the motivation of those giving the tips. Is it your uncle who works in insurance but telling you about webvan.com? Or is it your friend who works for Apple and just got a chance to see this new thing called the iPod?

Do the opposite at euphoric and pessimistic extremes
We have had the luxury of witnessing at least 4 or 5 major extremes in the past 8 years in various markets. We need to remember these times and learn from them. Remember the Dot Com euphoria? How about post 9/11 pessimism? Housing? Oil? We need to become fearful when everyone is euphoric and euphoric when everyone is fearful.

If you look at a stock chart over time, you can easily see that when everyone was euphoric about Dot Com, it was exactly at the top of the market. Boomer's Wake investors need to ride with the masses during the middle of the trend, but never be afraid to sell near tops, even if we think we will miss more gains. Holding out for that last 25% may cost you 50% or 75% of your money!

Understand macro-economic trends and micro-economic swings
It is very important to understand that marco-economic trends (those lasting many years or even a decades) have many micro-economic swings within them. In fact, when something with a strong macro-economic trend has a micro swing in the opposite direction, it is a great time to invest.

For example, we know there will be a shortage of energy on the planet for the next 10-20 years while we work on alternative energy. But we happen to be in a recession, causing the short term demand to diminish temporarily. If we believe the macro-economic trend is still in place, we should jump on the chance to invest while the market is thinking in such a short-sighted way.

Sunday, November 16, 2008

Rules of Boomer's Wake Investing

Some of my friends in the Boomer’s Wake are feeling a little helpless at the moment. We are watching our 401ks drop by 30-40%, hearing that we are trillion dollar bailouts away from financial Armageddon and learning that we are in the beginning of an extended recession with our jobs in jeopardy. And yet we realize that living in the Boomer’s Wake means that we have to fend for ourselves now and in the future. Face it! We won’t see a dime of any of these “bailouts”. And the projected $54 trillion US debt? The only thing we will get from all that debt is the bill to pay it back. We are on our own!

So there are several ways to deal with this situation.
· We can bury our heads in the sand (and hope someone else fixes it for us)
· We can party like its 1999 (but that is so 10 years ago)
· We can learn how to navigate these rough waters, survive and even thrive

Over the next few weeks, we will be reviewing the Rules of Boomer’s Wake Investing, but for now, here is a sneak preview of the rules...



Rules of Boomer’s Wake Investing:
Boomer’s Wake Rule #1 – Do not follow the herd!
Boomer’s Wake Rule #2 – Find out what “they” want… and sell it to them!
Boomer’s Wake Rule #3 – When opportunity knocks be at home to answer the door!

Boomer’s Wake Rule #4 – Old people don’t spend much money!
Boomer’s Wake Rule #5 – Understand that we are addicted to bubbles!
Boomer’s Wake Rule #6 – Build a team of advisors, a group of peers and an army of soldiers
Boomer’s Wake Rule #7 – Beware of boomers bearing gifts!  Especially Politicians' Gifts!
Boomer’s Wake Rule #8 – As scary as it seems, you need to get started, now!

Wednesday, November 12, 2008

My friend's family is on the verge of bankruptcy...

My friend’s family is in financial trouble. They find themselves in a situation where they have a huge amount of debt, decent revenue, but more expenses than the revenue can cover. And unfortunately, in these tough economic times, their prospects for growing their revenue any time soon is not looking so good, yet their expenses are scheduled to continue to rise for the foreseeable future.

They have hope, but also seem to be in a great deal of denial.

Here is the breakdown:
Total Salary after taxes – $120,000 (not expected to increase any time soon)

Total Yearly Expenses – $145,000 (expected to increase for many years to come)
Total Debt – $550,000 (likely to grow to over $1,000,000 in 10 years)

Here is their budget:
$33,000 in legal fees defending their business, expected to stay this high for years to come

$29,000 to support their parents, expected to increase for years to come
$20,000 to cover their parents medical bills, expected to increase for years to come
$15,000 to supporting a sister who is out of work and not in a great position to get a job
$12,000 interest expense on their debt
$5,000 on their kids education
$4,000 on gas, auto expenses, transportation
$4,000 helping their uncle who lost his legs in Vietnam
$4,000 in charity donations globally and locally
$19,000 on general expenses

What should my friends do when they only see expenses increase in the years to come and know that they will never be able to pay down their debt?

Bankruptcy seems to be one of the only options on the table for them. And unfortunately, this is a common and truly sad situation for everyone in this situation.

Do you know someone in this situation? What, if anything, can we do to help them? What do you say to them to give them hope?

But…I haven’t been 100% honest with you.

This isn’t my friend’s family situation.

It is the United States Federal Government! And it is our actual 2007 Tax Base, 2007 Budget and our Current National Debt. I simply divided the
actual numbers by 20,000.

The idea being that as long as we keep speaking in Billions and Trillions, no one would be able to relate to these figures and understand the severe state we are in. If we reduce it down to what a family would have to deal with at a personal level and it becomes something we can actually understand and digest.

So here are the 2007 figures:
US Tax Revenues – $2,400,000,000,000 (2.4 Trillion)
US Expenses - $2,900,000,000,000 (2.9 Trillion)
US Debt – $11,000,000,000,000 (11 Trillion)

Tax revenues will likely be flat for a while as we work through a deep recession
Spending will likely grow as the boomers retire and start asking for their benefits, not to mention a government that refuses to cut spending in good times or bad.

When all is said and done, some say the US Debt will exceed $50 TRILLION when you account for social security and medicare benefits for the boomers. In this analogy, it would equate to $2.5 Million debt for this fictitious family currently making about 120,000 in after tax salary.

And we are financing this debt at the low “teaser rates” right now of 2 or 3%. What if interest rates go back up to 5 or 10% in the future? What if 100% of your salary can't even cover the interest payment on your debt? Makes it hard to live, doesn’t it?

Did the concept of the United States declaring bankruptcy in the future seem impossible? I think it is an absolute possibility.

Welcome to the Boomer's Wake



Thursday, November 6, 2008

Welcome to the Boomer's Wake!

A baby boomer is defined by Wikipedia as person who was born during the post World War 2 baby boom between 1946 and 1964, and are currently in their 50's and 60's.

Being the largest population group in the United States, the boomers play a major role in setting the political agenda, driving the economy and using up the planet's resources.

Why do we pay attention to demographics?

Studying demographics helps tell the future, because there are pretty consistent trends that occur when a person moves through various age groups. In a very simple analysis of typical trends and consumption at various ages, we see the following:

Age 1-10 - Childhood - diapers, baby products, early education, etc...

Age 11-20 - Jr. high, high school and college years - clothing, games, music, movies, fast food, etc...

Age 21 - 30 - Young adult - technology, alcohol, social causes, entertainment, starter jobs, new cars, starter homes, etc...

Age 31 - 40 - Career and family - home upgrades, kids, entertainment, vacations, larger cars, peak borrowing, heavier income tax contribution, etc...

Age 41 - 50 - Disposable income - high salaries, reduced debt, peak spending, teenage kids, empty nest, retirement contributions, comfort, etc..

Age 51 - 60 - Investors/Leaders - Retirement investment, real estate investment, business investment, charity, travel, medical procedures, etc...

Age 61 - 70 - Retirement focused - fixed income, medical issues, retirement deductions, downsize homes, leisure, etc...

Age 71+ - Senior years - medicare and social security dependency, retirement homes, charity contributions, etc...

Given the predictability of behavior of people in a particular age group, look at how easy it is to explain our recent history and give us a crystal ball into the future.

By the end of the '50s, the boomers became teenagers. This explains the massive explosion of music, movies, diners. i.e. Happy Days and hula-hoops.

In the '60s and '70s, the boomers were in their 20's and were very socially active, fighting against the war and going to Woodstock.

In the '80s, the boomers were hitting their prime and the economy started to roar. Real estate and the auto industry thrived as the suburbs exploded.

In the '90s, the boomers were peaking financially and the stock market started to peak as well.

And now that the boomers are starting to retire in this decade, converting themselves from earners and consumers to retirees, it is not a coincidence that the stock market and economy has stalled considerably. Those who study demographics know it happened right on schedule, starting in 2007 when the first baby boomers hit retirement age.

So if economic activity booms when the majority is in their 30's and 40's, but slows when they reach their 60's and 70's, it would seem that we are now facing an insurmountable economic slowdown for years to come. And if you throw in the financial ramifications of funding medicare and social security in the next decade, we are facing an enormous economic burden. But don't worry...

Here comes the calvary!

The good news from an economic perspective is that the baby boomers had kids in large numbers. Their kids are known as echo boomers, or Gen Y. This is an almost equally large population of people born in the 80's and 90's. Echo boomers are between 15 and 28 years old right now and given the predictable trends we mentioned earlier, they are just getting through college and starting their careers. So when they reach their 30's and 40's, they will become truly significant earners and tax payers, but unfortunately, this will not occur for about 10 years.

So...

Welcome to the Boomer's Wake!




Looking at the demographics chart above showing birth rates for the past 80 years, you can clearly see the baby boomer wave and the echo boomer wave. Most importantly for those of us in our 30's and 40's, you can also see the huge gap on the chart between the two demographic waves. That gap is us! The people currently in our 30's and 40's. We are the smallest generation of the three, but are becoming the primary earners and tax payers for the next decade.

We are the ones that are now being asked to pay for the retirement benefits that the boomers promised themselves, deal with the US debt and deficits created by politicians who also happen to be boomers and take responsibility for repairing the planet after decades of reckless resource depletion and pollution by the same group.

Like a cruise ship cutting through the water and leaving a turbulent wake behind, this baby boomer generation cruised through the '80's, '90s and 2000s and have left a huge wake behind them for us to try to navigate through.

Welcome to the Boomer's Wake!