Customer Reviews

The 25% Cash Machine: Double Digit Income Investing

5 star:		(13)
4 star:		(4)
3 star:		(5)
2 star:		(5)
1 star:		(4)

 

 

In The 25% Cash Machine, Bryan Perry of Changewave Investing, focuses on investing high yield equities. It's not 25% annual yield, mind you. The investments he recommends yield about 10% per year and he says you can then also get 15% annual capital appreciation for those investments.
The primary investments he recommends are: business development companies (BDCs), Canadian business trusts, Canadian energy trusts, closed-end funds, convertible securities, master limited partnerships (mostly pipelines), oil/shipping/tanker stocks and real estate investment trusts (REITs).
Only in passing does he mention (just a couple of sentences really) the high risk in high yield investments. Any equity which can appreciate 15% in one year can also lose 25% of its value quite quickly - as the Canadian energy trusts did recently. Never does he consider the main goal of most income investors - preservation of capital. Never does he present evidence (backtesting, anyone) of the validity of his claim to 15% annual long-term capital appreciation from the equities he recommends.
The style of the book is unrelentingly promotional. The book reads more like an e-mail promotion for Changewave Investing than a legitimate attempt to educate investors. In fact, the book mentions his Changewave advisory service innumerable times.
Finally, the book contains more typographical errors than any book I've read in the past five years. Shame on the publisher John Wiley & Sons.
Bottom line: It's a thin book, thin on ideas, with substantial hype and little regard for risk, written more to promote Changewave advisory services than to educate the reader.

The author gives an excellent categorized list of double digit dividend payers and explains very well what each of them does. Unfortunately, the risk associated with this style is probably understimated. For example, one entity mentioned in the book (NEW) has dropped 30% in the last 2 days. Although just buying and holding a diversified batch of the recommended entities is likely to outperform the market, the author introduces some dubious "dynamic sector rotation" that is unlikely to work and will probably underperform buy and hold. Worse, the author reveals that you and I probably can't do this rotation on our own, and the book then degenerates into an infomercial on his touting service, which belongs to the "Changewave Investing Group." I checked out the Changewave investment newsletter using the June 2006 Hulbert Financial Digest and discovered that it had underperformed the total stock market since its inception 7/31/02, so it's unlikely that good advice on sector rotation is coming from them. I would've given the book a higher rating if it hadn't been for the awful title and the infomercial.

This book is only a few months old. I went back and built a spreadsheet of all 100 stocks that were on the author's list. About 90% of the stocks had gone down significantly in the last few months, some by 80%!! There are some fairly decent descriptions of dividends, how they work and about the concept of having enough earnings to cover dividends, etc. But that is the only good thing I can say about it.

While I found this book somewhat helpful and supportive of my goals, I found it lacking depth in explaining the types of investment choices that were recommended. Furthermore, it offers very little help in grading one investment over another. For instance, the author just scratches the surface on explaining investments such as Business Development Companies, but does not go into methods for finding the best (managed) ones. It hails sector rotation, but doesn't really attempt to validate research methods beyond suscribing to the author's service. While I learned some new facts about high yield investments this book was short on content. It is simply a marketing primer set to get you to subscribe to the 25% Cash Machine newsletter.

The risk involved is severely downplayed.

If you want a 3% return on your investments, the risk is almost zero with a CD or money market account.

If you want a 7% return on your investment, you can go low risk with bonds and fixed income vehicles, but you usually have to take on some stocks, which always carries risk. But the downside is also fairly minimal. At least you can mirror the returns of the market indices.

If you want a 12% return, the risks increase. You could lose 12% as easily as gain 12%.

If you shoot for a 25% return as your goal, you are in grave danger of losing much more than 25% if you guess wrong. You have to take chances with dubious practices such as lack of diversification, leveraging your assets and trying to time the market. High risk stuff indeed.

Read this book and practice its teachings at your own risk.

Some problems with the 25% Cash Machine book:
It's not bad but it could be so much better.
1. Even though just published in January of 2007, it is out of date, especially regarding the Canadian Royalty Trusts. It does briefly mention the October, 2006 surprise but no real details or alternatives.
2. It shows many graphs with technical indicators but never mentions the significance or purpose of these. They seem to be simply filler material.
3. The book is basically a 212 page advertisement for the author's advisory service. By the way, the advisory service is grossly over priced compared with others on the market. Google Carla Pasternak for a fairly priced alternative.
4. The author is very positive on Canadian Royalty Trusts but fails to mention the following risks [...]:
Summary of problems with Canadian Income Trusts
Investor risks
Income trusts are equity investments, not fixed income securities, and they share many of the risks inherent in stock ownership. Each trust has an operating risk based on its underlying business; the higher the yield, the higher the risk. They also have additional risk factors:
* Over-valuation: When distributions include return of capital the investor is really receiving his own capital back through the distributions. Since the unit valuation is most frequently driven by a multiple applied to the whole distribution, units will be priced above their economic value. Although income trusts are not in themselves Ponzi schemes, when the market treats the return of capital as income they become one.
* Lack of income guarantees: income trusts do not guarantee minimum distributions or even return of capital. If the business starts to lose money, the trust can reduce or even eliminate distributions; this is usually accompanied by sharp losses in units' market value.
* Exposure to interest rate risk: since the yield is one of the main attractions of income trusts, there is the risk that trust units will decline in value if interest rates in the rest of the cash/treasury market increase. This risk is common to other dividend/income based investments such as bonds.
* Sacrifice of growth unless more equity is issued: because most income is passed on to unitholders, rather than reinvested in the business. In some cases a trust can become a wasting asset. Because many income trusts pay out more than their net income, the shareholder equity (capital) may decline over time. For example according to one recent report, 75% of the 50 largest business trusts in Canada pay out more than they earn ("Who should you trust on trusts?", Financial Post, November 23, 2005.)
* Exposure to regulatory changes: to the extent that the value of the trust is driven by the deferral or reduction of tax, any change in government tax regulations to remove the benefit will reduce the value of the trusts.
* Liability: depending on the local regulations, income trusts may be considered partnerships that do not provide the same limited liability protection as common stocks.
* Lack of diversification in funds of trusts: unlike mutual funds, income trusts are generally single-sector or even single-enterprise, and their investments are sensitive to business cycles, especially for real estate and commodities.
(Sources include: TD Waterhouse Canada July 2005 paper)
Issues
1. Tax revenues for governments are reduced, deferred or reallocated between jurisdictions. Differential treatments between the same economic entities is inherently unfair.
2. Economic efficiency is lost when cash is endlessly raised, returned to owner, and raised again - each time involving fees.
3. Cash is redeployed and recycled efficiently when managers are forced to exercise more discipline in investment decisions..
4. Mis-allocation of capital from its most productive use toward the enterprise with the cheapest tax structure.
5. Mis-pricing of investments due to incorrectly focusing on cash yield and misunderstanding return of capital.
6. Growth is put at risk, when new shares must be continually issued to fund growth.
7. Damping of price volatility due to frequent cash returns.
8. Broad Economic Benefits from the informative value of frequent cash distributions as an changing indicator of underlying business health such that a premium valuation can be paid for trust ownership in respect to reporting transparency qualities offered in the form of cash distributions.

The good is that Mr. Perry lays out a very good case for orienting one's portfolio to produce a maximum income stream. He uses real-world examples to show that whilst the "official" inflation rate may be stated as "low," the fact that we see more and more "green" going out of our wallets to merely stay in place belies the official prognostications. He then gives a fairly good representation of existing and newer security types that can be used to meet the stated goal.

The bad is that he only scratches the surface of most of these, leaving one feeling that you've gone past a tray of investment hors d'oeuvres, but are left waiting for something you can really sink your teeth into. Further, he fails to mention under MLP's (Master Limited Partnerships) that trade like stocks how much impact these will have when filing one's income tax with K-1 forms and amounts going into forms most people never likely see.

There's a certain condescension implied "yes, you can do this yourself *BUT* you'll really do much better if you subscribe to my several-hundred-dollar-a-year newsletter." He even refers to the "give a man a fish, teach a man to fish" parable, but the upshot is that you'd best keep coming back to the market to buy more fish from his stall, instead of truly fishing for yourself. Had the book been written more in-depth and with far less shameless self promotion it would be better than it is, and worthy of more stars. Still, it's a good intro to the concept and can serve as a jumping off point for more in depth research. Developing a high-income orientation and not accepting mediocre stocks to do so may be the best benefit of this book.

Maybe this is possible, maybe not. But please ponder the following:

1. His current 25% Cash Machine portfolio has had only a 9% total return to date. This is about what I made on coke stock I bought at $40 a couple years ago (dividend plus modest appreciation). Some of the stocks in his portfolio have dropped 50%!

2. He doesn't factor in dividend GROWTH. If you buy a stock with a current yield of 3%, but which grows it's dividend 10% a year, you will double the yield ON YOUR ORIGINAL INVESTMENT every 7 years. After 7 years, you'll have a 6% yield, after 14 years your yield will be 12%, in 21 years it will yield 24%. And that doesn't count capital appreciation!

3. Of course, only solid blue chips (which the author pooh-hoohs in this book) can be expected to provide this kind of consistent growth of dividend. Boring stocks like KO, JNJ, SYY...etc. have increased their dividends every year for decades because they don't depend on "Striking oil". Read "Single Best Investment" for a different perspective on income investing.

I'm not saying I wouldn't recommend the book. I would. And I've put some money into some of the equities he recommends to get a high current yield.

The title of this book caught my attention and I read it with great interest. The author promises 10% yields and an additional 15% in capital appreciation. He DOES delver on the yield part but gives no guidance on how to achieve the 15% capital appreciation except to vaguely talk about "sector rotation". I'm sure there are TWO reasons for that omission: 1.) He wants you to subscribe to his service, which he obnoxiously hypes throughout the book, and 2.) He has no clue how to achieve that kind of appreciation, himself! This became painfully obvious to me after I signed up for his service and took a serious beating on his "sector rotation" recommendations.

Also, in order to receive his emails for his service, you MUST be willing to receive spam emails hyping other Changewave "get-rich-quick" programs. I hate that junk!

So, buy the book if you're interested in the 10% yields, but pass on the advisory service, and know that you're on your own when it comes to the appreciation piece.

this item was used as a promo for Bryan Perry. It is not bad but one with some knowlege of the market probably does not need this book