I have a confession to make. During college I was busy, I didn’t keep a full time job. Unfortunately, I also didn’t consider the opportunity I had. There are many jobs out there that are compensated really well on an hourly basis, simply because it’s too hard to get a lot of hours, and they aren’t benefitted. Instead of working part time for the same wage I might make if I was working a more scaleable job, I should have poked my head up and looked at some of these, far better options. Those of you in college, or maybe even high school. Bypass the burger flipping. Figure out what your actual skills are and contract them out. Here are a few examples to get you started.
If you are in school, you probably know how to pass the classes you have taken. Learn how to explain these concepts to people one year behind you. It’s probably worth practicing helping friends first. If you’re able to help them reliably think about marketing to folks who aren’t your friends and charging them for your services. Check what tutors in your area charge. Aim for something in the middle. The pricing here will undoubtably shock you. What’s going on here is that most college students don’t actually pay you. Their parents pay you. Their parents really want them to pass the classes that they’re paying thousands of dollars for. They would probably be happy to pay you $100 an hour if there weren’t other tutors out there charging less. You can probably make about $25 per hour of actual work doing this. You need to account for the time you spend marketing as well so your “sticker rate” will need to be something like $30-$35. Alternatively, farm out the marketing. Your fliers are never going to reach all the people you need to in the internet age. Half of your customers have their out-of-state parents scrounging for tutors anyway. Personally, I use wyzant.com. I charge about $40 per hour. Wyzant takes a huge cut (40%, so my take home is $26), but they add a great deal of value for this. They do all the marketing, billing, and overall management. I just take jobs that sound interesting, show up, and tutor. The vast majority of this is freshman physics. There’s no reason it should have taken me until senior year to do this. Keep in mind, some fields are more in demand than others. Folks studying math, the hard sciences, and economics have an edge here.
“But Adam,” I hear you cry, “I’m an English major, and all of these potential students need math/science help. You’re advice has failed me!”
Do contract writing. Depending on the topic pricing per blog post can vary wildly, if you’re interested in high value topic this can be $30 or more per post. If you want to do creative writing the pricing is a little tougher, the spread appears to be between $15 and $25 per hour. You can also do editing and proofreading for other folks. The hourly earnings here seem to be somewhat lower, between $10 and $20 per hour. All in all, this is a great thing to do if you can find a niche.
Alright, so lets say that you’ve really got a good handle on the technical end, but you have trouble communicating it to other people. So maybe, tutoring or writing isn’t your bag. You can still sell you’re actual skills in the marketplace. If you know how to program software in just about any programming language, freelance that. Check out freelancer.com or upwork.com. Seriously, even if you know something really weird, like fortran, there are people who will pay you well to fix their broken code, translate their code from one language to another, or build some module for them. Usually folks will post specific projects that they’re willing to pay a fixed amount for. You need to get good at coding fast, and correctly estimating how long a specific project will take you. You can easily clear $20/hr here.
Maybe you can’t do any of this stuff, but you can do a funny voice. Turns out that’s a thing too. You need careful diction, and to make sure that the audio you record comes through crystal clear, but you can make $20+ per hour. Take the voices you can do and make a demo reel. Look at what other voice actors have done to get an idea of where to start. Upwork seems like a good place to look for jobs, but don’t let that be the only place you check.
The world is a really wide place when it comes to deciding how to make a living. Many of these jobs would be really difficult to turn into a career, but if you only need five to ten hours a week of work, getting stuck in this minimum wage job box doesn’t make a great deal of sense. We’ve only scratched the surface here. You have some skill, that somewhere someone else desperately needs. Use it!
Every year I do my best to minimize my taxes without reducing my income. Most people think that they do this. However, most people go through the year spending and earning money without much thought as to how it impacts their tax situation. Then, come April next year they hire an accountant or use some tax software to figure out how to minimize their tax burden. Like everything else in life a little planning can go a long way. I start trying to work out my tax situation at the beginning of the tax year. My main goal every year is to hit the limit for the saver’s tax credit.
Saver’s tax credit
This sounds like exactly the sort of tax credit an aspiring Thousandaire should want. It might as well be called the Thousandaire tax credit. Basically it is a tax credit for a portion of the money set aside for retirement. Essentially it is the government 401k match. It matches depending on your income between 10% and 50% of your retirement contribution. It only counts the first $2000 of your retirement contribution as well. If you meet the 50% income limit and contribute $2000 you get a $1000 tax credit. It is substantially easier to make the income limit for the 10% credit. This is one area of the tax code where it pays to get your income exactly right. Make even a dollar more than the limit and you pay hundreds extra in taxes. So, in order to take advantage of this we have to aim our income pretty carefully.
|Saver’s Tax Credit||10% credit||20% credit||50% credit|
|Single and Married Filing Jointly||$30,500||$19,750||$18,250|
|Head of Household||$45,750||$29,625||$27,375|
|Married Filing Jointly||$61,000||$39,500||$36,500|
The good news is that the saver’s tax credit doesn’t check your gross income, but rather your adjusted gross income. What’s the difference, I hear you ask? Well the difference that we care about is that the AGI is your income after 401k, traditional IRA, and HSA contributions have been accounted for. So if your gross income is $40,000 and you contributed $10,000 to your 401k then your AGI is at most $30,000. Step one to reducing your taxes significantly means figuring out what level of 401k contributions are necessary to get below the desired income limit for the Saver’s credit. Make sure you include the impact of possible raises and bonuses (or bump your 401k contribution up by the amount of the raise when it arrives, this is probably good practice anyway). If you find that your income is too high (my heart bleeds for you) you can squeeze another $3,000 out of an HSA, giving you $20,500 of reach to get your AGI below one of the Savers breakpoints. In principle you could use a traditional IRA to get an extra $5,500 of reach but at these income levels I’d guess you’re better off with a Roth. Obviously if you are only off by a few hundred dollars contribute that amount to a traditional and the rest to a Roth, but if we’re talking about using up all of your IRA space, I’d say don’t do it.
All of these tax shelters essentially mean that, for single people making less than $50,000 per year US income taxes are consumption taxes rather than income taxes. Income you don’t consume can and should go into tax shelters.
Let’s suppose that you own more house than you actually use. Basically this means that you have more bedrooms than people sleep in. (Guest rooms are an absurd waste. Buy everyone who ever visits a 5-star hotel room for the night, you’ll probably come out ahead. Don’t believe me? Do the math.) Rooms generally rent for more than you’d expect, (as much as $800 near where I live) therefore you can get a substantial portion of your mortgage paid for if you’re just willing to take on a boarder. In principle you have to pay taxes on the rent, in practice you shouldn’t be paying any substantial amount of additional tax.
The tax situation
Need to fix your furnace? That’s a deduction. Need to run your furnace? That’s a deduction too. Water? Deduction. Trash? Deduction. New carpets? Yup. Depreciation on your house? Huge deduction. Basically every expense related to your house? It’s a deduction now. There are a few caveats to keep in mind here. You only get to deduct a prorated portion of the expense depending on your roommates usage. Some things, like depreciation, you probably deduct based on the square footage they are renting. Other things, like water, you can probably prorate based on the number of people in the house. Thing number two to keep in mind is that if you do replace that furnace, you don’t get to deduct the whole thing all at once. The cost has to be spread out over its lifetime. Still, you officially have every reason to stop putting off home repairs and upgrades. This means that a dollar earned working for money for home upgrades and expenses is worth less than a dollar earned renting a bedroom for the same upgrades and expenses. So that $600/month bedroom you’re going to rent out might be like getting an $800/month raise from work.
The living situation
Well, the downside about renting out a room is that now you have to live with the person that you rented the room to. (Duh). Fortunately, since you are an owner occupier, you get a lot more say in who you rent your room out to. This means you can be a great deal more particular, since the government realizes that you’re actually going to have to live with this person. In most jurisdictions, if you feel like you aren’t comfortable renting out your extra room to a man (fairly common), that’s up to you. If you don’t want to rent your room to some smarty pants scientist, that’s up to you too. If you’re only willing to rent your room to a female rugby player over 6’4″ that only walks on her hands when indoors, you get to stick that in your ad. This is substantially different than when you are renting out an investment property. (Disclaimer: check your local laws before writing anything crazy into your ad seeking a roommate). When you’re renting a property you aren’t living in the government applies a great deal more scrutiny to whom you are saying no to. Also, I shouldn’t have to say this, but if you use the fact that you’re an owner occupier to not live with someone from a marginalized group because you don’t like minorities, you’re an asshole. Just because you can do something doesn’t mean you aren’t literally the worst person on you’re block when you do it. You’ll want to interview applicants very carefully, and spend the money on background checks. Spend the money on background checks. Run a credit report. Also, spend the money on background checks (got it?). It’s always worth understanding what you’re getting yourself into.
So there it is. Rent out your extra room. The money goes further than you think due to delicious deductions. Also, the situation isn’t as bad as it sounds because you can say no to anyone you want until you find the perfect roommate. Yes, you’ll have to share space with another human being. Get over it. Some things are more trouble than they’re worth. Extra rooms for “storage” or “guests” are one of them.
The United States is a great place to live. In my view we generally have the right idea on most of our politics. Nobody is proposing millionaires taxes, the courts are generally fair, and you can get a tomato with fish genes in it (I’m looking to develop superpowers; do you really think regular tomatoes are gonna cut it?). There are a couple issues that the United States has moved one way on that the rest of the developed world has gone a completely different direction. Just because everyone else thinks you’re wrong, doesn’t make you wrong, but it shouldn’t inspire a great deal of confidence. Here are three ideas from the right, left, and center that I think the US would be well served by taking the lead of literally every other not-crazy country. (Don’t get me started on the metric system, that’s not even worth arguing about).
The English Rule
Why is it that, in the US, we have all these dismissive little names for sensible policies which we have not adopted? This should be called the, “let-us-not-have-attorneys-go-crazy-and-ruin-everything-they-come-into-contact-with rule.” I bet when you hear it you’ll think to yourself, “Isn’t this how we already do things?”. The English (or maybe lunhagcaretcicw…it’ll catch on) rule means that the loser of a court case pays both attorneys. In the US system, if I decide to sue you for a comment you wrote on my blog post (which is totally legal for me to do) I will obviously lose the case, but you’re still screwed because you had to hire an attorney to tell you how screwed you weren’t. Sure, you could just figure this isn’t really risky, but if you get served a letter from a fancy looking lawyer telling you that I’m going to sue you in Nevada for $15,000, are you really going to run the risk? We constantly worry about frivolous lawsuits in this country (which, really, no other country ever seems to worry about, I wonder why). We come up with all kinds of extra rules like, you can’t sue doctors on a Tuesday. We have to print all kinds of waivers on products like, do not eat this credit card. These rules probably keep legitimate lawsuits out of courts. It is far better just to say, “sure, you can sue anyone for any reason, but if you’re wasting everyone’s time with a stupid reason and lose, you’ve got to pay.” Dumb lawsuits would go away overnight.
Every country has their own way of doing this. Usually it just means that the government pays for healthcare. Before you have a panic attack consider this, the Spanish government pays for everyone’s health care and a private system operates alongside it. To do so it cost them less per person than we spend on medicare, and medicaid per person. You’d think we’d get some sort of economy of scale out of the thing! This means we could adopt the Spanish system wholesale, give everyone a tax cut, and if you wanted you’d still have the privilege of paying for the most expensive healthcare system in the world like you do now. You’d just have a tax cut to go with it, and get free medical care if you felt like it. I’m a libertarian ideologue. I can’t come up with any argument against this that doesn’t make me sound like an idiot.
Territorial Tax System
In the world there are two countries that tax your income no matter where you live. The United States and Eritrea. That’s it. Zero other countries are that crazy. Now this isn’t synonymous with a territorial tax system. A territorial tax system is an income tax system that says, you pay taxes in the country you earned the income. Many countries have a system that says if you live in our country you pay taxes on money you earn anywhere. The US has a system that says, if we met you at a cocktail party, you pay taxes to us forever no matter what. That’s an example of governmental over-reach. If I live in a foreign country and earn all of my money in a foreign country and pay taxes to a foreign government, why should I also pay taxes to the US on top of that? For corporations every developed country has a territorial tax system. They treat corporations as distributed entities, which pay tax where they earn income. The US does not. US corporations hold trillions of dollars overseas because if they brought it back to the US the US government will charge them 35%. Every socialist country in the world is smart enough to realize that this is a dumb idea. When you’re standing to the left of France, Norway, Greece, and Sweden on a tax issue you should realize that you’re an idiot, or at least admit that Stalin would agree with you.
That’s it. Three ideas that have been shown to work in other countries that a certain special interest, and ideologues from both parties just don’t want to see happen. Don’t feel bad if you don’t want one of these to happen. There are a couple other ideas I think are terrible that most other countries have adopted (gun regulation, death penalty). Just because every other country in the world does it a certain way doesn’t make it a good idea. But, you should look into these things in more detail.
The first place I start when attempting to analyze a company is to head over to yahoo.finance.com and look the ticker (SORL) up. Based on the P/E (3.65) something must be terribly wrong with this company. Our purpose here is to figure out what the problem is. My first guess is to assume that the earnings over the past year have some kind of adjustment which causes them to be overstated for some reason. To check for this we’ll go to the income statement page on yahoo finance. SORL’s net income over the last three years hasn’t varied too much. The low is about $9 million and the high is about $13 million. The most recent annual data is 2014. Maybe the last couple of quarters have been really bad. We can adjust the view on the income statement to “quarterly”. It appears that the last two quarters together brought in $5.25 million, not on track for the best year but not terrible either.
Next thing to check up on is the cash flows. Perhaps the company is making large accounting profits (net income) but is actually hemorrhaging cash. By looking at the “cash flow” page a very different picture develops. Total cash flow from operating activities is what we are looking at here. From this we are going to subtract capital expenditures to get an idea of the cash that comes into the company, which owners might be able to keep. Operating cash flow is all over the map. The lowest in the last three years is $1 million, and the highest is $31 million.
Capital expenditures seem to be substantially smaller than depreciation. This could be a warning sign that the business is slowing down. Depreciation should similar to capital expenditures on average. When a company makes a capital expenditure, say they buy a piece of equipment, like a truck. Every year they charge a percentage of its value as depreciation against income. The percentage is based on how long they expect the truck to last, so if they expect it to last 10 years they charge 10% of its value as depreciation. When they buy the truck the whole thing is charged at once against cash flow as a capital expenditure. Therefore, over the course of ten years, if they just buy one truck, the total charged against cash flow as a capital expenditure and the total charged against income as depreciation should be the same. If capital expenditures are chronically lower than depreciation that could mean that the company isn’t replacing its equipment as fast as the equipment is getting used up. We should take this into account. If SORL was spending $7 million (roughly its depreciation) every year in capital expenditures it would have been cash flow negative (meaning cash was going out the door rather than in) during 2013.
Other items on the cash flow page
You may also notice there are some other items that bring up questions. What did SORL just spend $34 million dollars investing in? Why is the company taking on so many liabilities? To answer these questions we go to the “balance sheet” page! The first thing that I always like to check is the difference between current assets (stuff that the company expects to get cash for within the year) and total liabilities (also known as the net current asset value or NCAV). The larger that number is compared to the market capitalization (total number of shares multiplied by the share price) the safer the company is. By switching to quarterly data we see the balances as of the most recent quarter. This is starting to get quite suspicious. The net current asset value of this company is $169 million, that works out to $8.75 per share, the share price is $2.20. If the company simply liquidated shareholders could end up with a 300% gain! Numbers like this good are extremely suspicious and generally mean that we’re missing something important!
It’s a Chinese company
The business description has an important note:
SORL Auto Parts, Inc. develops, manufactures, and distributes automotive brake systems and other safety related auto parts. It operates in two segments, Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems. The company produces a range of products covering 65 categories and approximately 2000 specifications in automotive brake systems and others safety related auto parts. Its products are principally used in various types of commercial vehicles, such as trucks and buses. SORL Auto Parts, Inc. markets its products under the SORL brand to automotive original equipment manufacturers and the related aftermarket. The company sells its products in approximately 104 countries and regions. SORL Auto Parts, Inc. was founded in 2003 and is based in Rui’an, the Peoples Republic of China.
Emphasis mine. Over the last several years it was discovered that several companies in China were fraudulently overstating their accounts. This is a possible explanation for this company’s valuation as well. If it isn’t a fraud the company is probably worth $10 per share, or at least $4 per share. If the company is a fraud it’s probably worth $0. This is good news, because we know one thing for sure, there’s no way SORL is worth $2.20 a share. Its either worth a lot more or a lot less. If its a fraud we can short it and make money, if its the real deal we can buy it and make money, so what now? The important question now is how do we determine if SORL really has the goods or not, or at least what is the probability that the accounting statements are truthful? Well, it looks like its time to go to www.SEC.gov and start pulling some financials!
Disclaimer: I have no position in SORL, I reserve the right to either buy or short it at some point over the next week, if I do I will update this disclaimer. Nothing I’ve written here is investment advice, but is rather my opinion. Do your own research before buying, selling, or holding any stock, bond, or other financial instrument.
Alright, so you’ve decided to become a value investor. How do you go about finding stocks with an intrinsic value much higher than their prices? One place many investors start is with a screen. There are a number of tools available online. I like Zack’s stock screener. The question then is what do you screen for?
Price to book less than 0.67
The book value of a company is the accounting value of all of its assets minus the accounting value of all of the liabilities. The theory here is that if the company in questioned is worth its accounting value, then you would make 50% on your investment. As of October 25th there are 703 companies on the screen that satisfy this criteria. At this point the question becomes, are the assets that the company owns really worth their accounting value. This can be very difficult. Studies have shown that the stock price of companies with low price to book ratios outperform companies with high price to book ratios. If you think that 703 companies are too many to go through you can go ahead and add more filters. I’d be inclined to demand that the company be profitable over the last 12 months. You can do this by going to “Income Statement and Growth” and demanding that “net income is >= 0”. This reduces the number of companies from 703 to 375 companies. One thing that I generally demand is that the company is very small. I assume, perhaps incorrectly, that smaller companies are less covered by analysts and therefore I assume that it is more likely that stock prices could diverge from the true value of the company. I therefore also limit the market cap to be below $100 million. This reduces the number of the companies in the screen to a much more manageable 101.
Price to earnings of less than 10
Ultimately a share in a company is a claim on the earnings of that company. The point of owning a company is ultimately to share in the profits of that company. The lower the price to earnings ratio the less a dollar of profits costs you to buy. This seems straightforward, if you could buy one business generating $100 per year for $1000, or you could buy another business generating $100 per year for $1500. All things equal you should prefer the cheaper company. If you use the screener (under “valuations”) to screen for stocks with a trailing 12 months P/E of less than 10. The number of companies matching this screen is 599. We also don’t want negative P/E ratios as that indicates that the company is losing money, so we need to add net income > 0 as well. This drops the number of companies matching the screen to 526. If you further demand that the market cap of the companies is less than $100 million you get a list of only 137 companies.
The goal here isn’t to then put money into each of these companies, but instead to provide ourselves a starting point. My plan is to use this list to look more closely at Sorl auto parts (SORL), Skypeople fruit (SPU), and Orange City Bus (OCBB). If none of these companies prove to be interesting we come back to the list. Now, you’ll want to find more ways to screen for companies as you may miss some good bargains; companies might have highly valuable real-estate with appreciation that hasn’t been reflected in the book value. Another option is to simply run a screen for companies trading at a low P/E (price to earnings) and low P/B (price to book) and buy them all as a basket. Studies show that this approach has historically outperformed the market. I think that we can do better by studying the individual companies more carefully and using this as a starting point.