Tuesday, January 5, 2010

Bromma, How to Make Money in Alternative Investments

I come from a family that never invested a penny in the stock market. They were risk averse and distrustful of Wall Street. Nonetheless, they managed to increase their wealth bit by bit through a combination of frugality and assorted no- to low-risk schemes. For instance, when silver started to appreciate in value my father would go every night to someone he knew who had vending machines and buy the day’s take. My parents would then sort through the coins looking for silver, sell the silver coins to a dealer, and deposit the remainder in the bank. This was an absolutely no-risk strategy on which they got a handsome return. They were, of course, sorely disappointed when silver cratered, but all they lost was a source of income, not invested money.

I thought of them when reading Hubert and Lisa Moren Bromma’s book How to Make Money in Alternative Investments (McGraw-Hill, 2010). The Brommas outline an assortment of methods for making money outside the traditional markets. For instance, they describe opportunities in private lending and business-to-business cash flows, in precious metals and natural resources (including green investments), and in real estate (domestic and international). These investments can be made through an IRA or 401(k), though currently only 1.5% of all the money in retirement accounts is devoted to anything other than stocks, bonds, mutual funds, and CDs.

The book is an occasional eye-opener for the na├»ve. For instance, the authors describe how a person could get involved in floor plan auto financing. That is, he would lend money to a used car dealer to buy cars at auction; as the dealer sells each car he pays off the loan and gets title to the car. This business at the retail level can be even sleazier than we might imagine. The authors describe the operations of one used car lot. The lot owner would buy a car at auction for $400 and would then sell it for $1,600 with $400 down and the remaining $1,200 financed at the highest rate allowable under state usury laws—say two years at 21%. He broke even the minute the car left the lot. Since the used car dealer didn’t run any credit checks, he ended up repossessing about 75 percent of the cars he sold. No problem; he just resold them under the same terms—another guaranteed $400 profit and a shot at getting at least some of the $1,200 he financed.

The Brommas stress the importance of due diligence in making any of the investments they describe in their book. For instance, purchasing tax liens can be a good investment for someone with a modest amount of cash. You will normally get a handsome interest rate and can expect to be paid in the vast majority of cases because the property owner can’t sell the property until he pays off the tax lien. But you have to make sure that there are no legal complications or environmental issues that could snarl the investment.

This book opens the door to a world beyond the normal financial markets and offers the investor some opportunities for genuine diversification. I found it a refreshing break from the run-of-the-mill investing books.

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