Gold and Silver Backings Fallacy, Fool.com

Is Your Safe Haven a House of Cards?

By Christopher Barker
April 5, 2010 | Comments (16)

If automatically dismissing allegations about the suppression of gold and silver prices as tinfoil-hat madness helps you to sleep better at night, then I wish you sweet dreams.

If you prefer to consider the evidence on the merits; and draw your own conclusions, then you will want to read on.

A recent extraordinary hearing held by the Commodity Futures Trading Commission (CFTC) to discuss the need for position limits in metals futures morphed unexpectedly into what I will argue was the grandest expose of potential fraud in modern financial history.

A little background
There is not an investor among us who has not been deeply disappointed by revelations of shady dealings in the financial sector over recent years. The list of prior assumptions about the economic landscape that people have been forced to begrudgingly shed stretches out like a list of Bernie Madoff's unsuspecting victims. We've witnessed the forensic discovery of Lehman's pre-collapse book-cooking, and now Goldman Sachs (NYSE: GS) has admitted (and defended) its role in disguising some of Greece's sovereign debt woes.

Given a financial industry so awash in systemic impropriety, perhaps the notion of a scheme to manipulate and suppress the prices of gold and silver isn't so loony after all.

I have been tracking this topic for several years, and we would need to sit down over a gigantic cup of coffee to pore over all the verifiable evidence amassed by researchers like GATA (Gold Antitrust Action Committee), John Embry of Sprott Asset Management, silver analyst Ted Butler, and many others.

Fools may recall GATA from a full-page ad that appeared in the Wall Street Journal in 2008 calling for an independent audit of the United States' gold reserves. GATA also "seeks to disclose and publicize the huge speculative short positions in gold taken by financial institutions and bullion banks" and has spent more than a decade compiling evidence of gold price suppression.

One year ago, GATA board member Adrian Douglas issued a seminal report entitled Pirates of the COMEX, in which he deduced by comparing two sets of government-supplied data that JPMorgan Chase (NYSE: JPM) and HSBC (NYSE: HBC) were the principle holders of derivatives in precious metals. When only two entities control 85%-100% of a futures market segment, as Douglas alleged, they can effectively control the price of the underlying commodity. Fools eager to dig further into the reams of evidence pointing to price suppression in gold and silver are encouraged to visit my CAPS blog post here for a collection of relevant links.

They finally have a whistleblower
Whereas this research has come from the outside looking in, during the CFTC hearings the world was finally offered a glimpse from inside the alleged manipulation process. Andrew Maguire, a professional metals trader in London, has claimed colleagues from JPMorgan Chase bragged of their ability to knock down the price of silver at will.

On February 3, 2010, in an email message posted here on GATA's website, he reportedly informed the CFTC's enforcement division of a manipulation event that would occur two days later when U.S. non-farm payroll data was released. He apparently then followed up with detailed insight into the process while it was occurring.

Ultimately dissatisfied with the CFTC's response to his communications, Mr. Maguire alerted GATA of his allegations ... which were then made public by GATA Chairman Bill Murphy during the recent hearings.

But wait ... the story gets bigger still.

Is your "physical" gold or silver leveraged at 100:1?
A critical exchange occurred after GATA's Adrian Douglas chimed into a conversation with his assertion that the leveraged market for physical metal is essentially a game of "paper backing paper." The underlying argument here is that the volume of gold traded daily at the London OTC metals exchange (LBMA) is so large (at about 20 million ounces of gold per day), that in fact the over-the-counter market for "physical" metal can not possibly be backed on a 1:1 basis by actual physical supply. As Mr. Douglas asserts: "it's fractional-reserve accounting, and you can't trade that much gold -- it doesn't exist in the world."

Jeffrey Christian, founder of commodity consultancy firm CPM Group and "one of the world's foremost authorities on the markets for precious metals," brazenly confirmed Douglas' characterization of the metals market:

The previous fellow was talking about hedges of paper on paper and that is exactly right. Precious metals are financial assets like currencies, T-bills, and T-bonds; they trade in the multiples of a hundred times the underlying physical and so people buying them are voting and giving an economic view of the world or a view of the economic world.

In case you're thinking that Mr. Christian surely must have miscommunicated his intended point, he clarified most pointedly:

People say, and you heard it today, there is not that much physical metal out there, and there isn't. But in the "physical market," as the market uses that term, there is much more metal than that. There is a hundred times what there is.

I repeat: "There is a hundred times what there is." Did he learn from Bill Clinton what the definition of is is? I sure hope that kind of leverage never comes toppling down the way lesser leverage did in the mortgage securitization industry. Not to fear, assures Mr. Christian while commenting earlier on the short segment of the market, "there are any number of mechanisms allowing for cash settlements." It appears that he actually perceives no structural problem inherent in a metals market that would seek to deliver cash in lieu of physical bullion to investors who may be inclined to call this paper bluff. In some circles, one could call that for what it would be: default.

Fools may recall a couple of instances in 2008 when physical supplies of bullion were very tight even as spot prices were mired in weakness. I believe that kind of anomaly results from an enormous disconnect between a leveraged market for paper gold and a much smaller market for actual, hold-it-in-your-hands physical bullion.

Taking it all in
If you have never considered the topics of price suppression or leverage in silver and gold before, this is a lot of material to process all at once. I believe that these revelations place this entire leveraged house of cards at risk. Conceivably, all it would take would be a few deep-pocketed investors overseas to call the market's bluff by demanding physical delivery of bullion, and the world's major futures exchanges could break down before our very eyes. Adrian Douglas points out that the LBMA exchange in London alone trades some $5.4 trillion per year in "gold" on a net basis. If the leverage of paper instruments to bullion stands anywhere near 100:1, then the implications are sufficient to make the Enron debacle look like child's play. Without mincing words, if the supposed quantities of gold and silver bullion simply are not there, then we may witness the greatest incidence of fraud in financial history.

Investors with exposure to the popular gold and silver "bullion" proxies have some very critical assessments to make. Fools are encouraged to note that HSBC is the custodian for the holdings of the wildly popular SPDR Gold Trust (NYSE: GLD). On the silver side, we have JPMorgan Chase serving as custodian for the holdings of the iShares Silver Trust (NYSE: SLV). Both trusts indicate that underlying metal holdings are held on an allocated basis for the trusts, although the silver vehicle permits some 1,100 ounces of unallocated silver per trading day. This allocated nature of the holdings is enough to reassure many investors, but I still have my concerns.

For my part, I have consistently stated my preference for Central Fund of Canada (AMEX: CEF), which has been around since 1961, and offers the magic words that discerning precious metal investors pine for. The fund holds "allocated, segregated and unencumbered gold and silver bullion and does not speculate in gold and silver prices". Another compelling alternative, the Sprott Physical Gold Trust ETV (NYSE: PHYS), was launched recently by the very firm that has been a vocal advocate for terminating the manipulation of the gold price for many years running.

Pitney Bowes Option Sell April 2010; Gurufocus.com

Pitney Bowes – Making Money in a No-Growth Business
Apr. 07, 2010
Author:

Dr.Paul Price

Pitney Bowes [NYSE:PBI - $24.70] is the worldwide market leader in postage meters and mailing equipment. The U.S. and Europe contribute about 68% of revenues and 84% of profits. Their ‘Services’ segment provides mail room, marketing and document management to account for the other 32% of revenues and 16% of earnings.

The rise of the internet has put a permanent damper on overall mail volume and PBI is no longer a growth story. Earnings from continuing operations came in at $2.28 /share in 2009 versus $2.32 in 1999 although EPS did peak at $2.69 - $2.76 in the period from 2005 – 2008.

The basic business remains a predictable cash-cow, however, and capital needs are not high. The company has gradually increased their dividend rate to $0.365 quarterly making for a juicy 5.9% current yield. In today’s close-to-zero interest rate environment, the dividend alone makes PBI shares a reasonable choice for income oriented investors.

Zacks, Value Line and Standard & Poors all expect $2.40 /share in 2010 earnings with a 2011 projected range running from a low of $2.47 (Zacks) to $2.60 (S&P). That puts PBI at about 10.3x this year’s and 10x the 2011 estimates versus their 10-year median P/E of 16x.

I don’t expect to see a sixteen multiple again but it doesn’t seem unreasonable to think PBI can trade at 11x – 12x normalized earnings over the next year or two. That leads me to a minimum 12-month target of $27.60 or about 11.7% above today’s quote. If it takes a year to get there you’ll have a total return of > 17% on a stodgy, low volatility [Beta = 0.9] company.

Is that rational? Standard and Poors carries a $27 one-year goal and rates PBI at 4-Stars (out of 5). Value Line sees a 3 – 5 year P/E of 12x in figuring their long-term price target and notes Pitney Bowes ‘earnings predictability’ falls in the top 1% of all companies from their 1700 stock universe. They also note PBI’s 90th percentile ranking for ‘stock price stability’.

PBI peaked at $27.50 in the disastrous 2008 market and traded at $40 and higher during each calendar year in the entire decade prior to that year. With slightly improved EPS likely and the yield support I see low risk and a high likelihood that my $27.60 goal can be achieved.

These are not ‘home-run’ shares. They can provide conservative investors with a total return many times greater than fixed income without a huge risk factor.

***********************************************************************************
Another way to play with PBI would be to buy shares while writing October puts and calls at the $25 strike price. Here’s how that would look if you set that up right now:
--------------------------------------------Cash Outlay----Cash Inflow
Buy 1000 PBI @ $24.70 /share -------------- $24,700
Sell 10 PBI Oct. $25 Calls @ $1.05 /share -------------------- $1,050
Sell 10 PBI Oct. $25 Puts @ $1.90 /share ----------------- $1,900
Net Cash Out-of-Pocket ---------------------- $21,750


If PBI shares rise by at least 1.3% to $25 or higher by Oct. 16, 2010:
· The $25 calls will be exercised.
· You will sell your shares for $25,000.
· The $25 puts will expire worthless (a good thing for you as a seller).
· You will likely have collected two $0.365 dividends x 1000 shares for $730.
· You will have no further option obligations.
· You will end up with no shares and $25,730 in cash.

That best-case scenario profit would be $25,730 - $21,750 = $3,980.

$3,980/$21,750 = 18.29% cash-on-cash achieved in less than 7 months on shares that only needed to rise by 1.3% or better.

What’s the risk?
If PBI remain below $25 on the October 16, 2010 expiration date:
· The $25 calls will expire worthless.
· The $25 puts will be exercised.
· You will be forced to buy another 1000 shares of PBI.
· You will need to lay out an additional $25,000 in cash.
· You will likely have collected $730 in dividends.
· You will have no further option obligations.
· You will end up with 2000 PBI shares and $730 in cash.

What’s the break-even on the whole trade?

On the original 1000 shares it’s their $24.70 purchase price less the $1.05 /share call premium = $23.65 /share.

On the ‘put’ shares it’s the $25 strike price less the $1.90 /share put premium = $23.10 /share.

Overall your break-even would be $23.38 /share (ignoring dividends) or $23.02 /share if you include the expected yield.

PBI could fall as low as $23.02 or (-6.8%) from the trade inception price without causing a loss on this trade.

Dr. Paul Price - www.BeatingBuffett.com

Disclosure: Author is long PBI shares and short PBI options.

Fool.com How to Stay Invested in Any Market

How to Stay Invested Through Any Market

By Chuck Saletta
March 30, 2010 | Comments (2)

If you were 100% invested in the S&P 500 when that index hit its low point last March and you simply held on, you would have seen an incredible return of around 65% in just about a year. That's an astonishing return for doing nothing more than nothing.

Of course, doing nothing is often easier said than done. At the market's low point, the panic was palpable. We were dealing with a collapsing housing market, crushed investment banks and other financial institutions, and a recession that was already well on its way to being the longest one since the Great Depression.

Staying invested in an environment like that took more than just a little gumption -- it took significant confidence in the companies you were holding.

What it took to persevere
To not pull out what was left of your capital during the market's panicky lows, you had to be certain that the companies you owned would at least survive. The typical questions around how fast they would grow or how much they would earn often took a back seat to that far more primal concern.

And with the debt market in shambles, that survival became a question of balance sheet strength and cash flow. If a company needed to borrow money to make ends meet or even to refinance existing maturing debt, it either couldn't at all or couldn't at anything approaching reasonable rates. That meant that only the most exceptionally strong businesses were able to survive relatively unscathed.

Things may have stabilized a bit since then, but the lessons from that era still remain valid. Indeed, the very characteristics that let the strongest companies survive the downturn are the same ones that will let them thrive as the economy recovers.

And if by some unfortunate event, the recovery never does get to Main Street, those same characteristics that helped them survive the latest crash will help them through the next one, as well.

What corporate strength looks like
Companies set up to survive a mess like the one we've been living through are ones that have -- and had -- their financial houses in order. Key signals of strength include:

* A debt-to-equity ratio below 200%, which indicates the company is not overleveraging itself to try to juice financial returns on minimal business,
* A cash and equivalents-to-current liabilities ratio above 50%, which indicates the company has enough money to cover at least a half-year's worth of its balance-sheet obligations, and
* A free cash flow-to-net income ratio above 90%, which indicates the company is legitimately generating the sort of cash implied by the net income it reports.

When you put that all together, you find companies like these:

Company

1) Debt to Equity (<200%, not slave to debt)
2) Cash and Equivalents to Current Liabilities (>50%, 6 mos reserve)
3) Free Cash Flow to Net Income (>90%, legitimate earnings)

Coca-Cola (NYSE: KO)
1) 47.8%
2) 51.2%
3) 90.8%

Abbott Laboratories (NYSE: ABT)
1) 73.3%
2) 67.5%
3) 107.7%

Oracle (Nasdaq: ORCL)
1) 53.6%
2) 174.8%
3) 145.2%

Intel (Nasdaq: INTC)
1) 5.7%
2) 52.5%
3) 152.3%

Reynolds American (NYSE: RAI)
1) 68.3%
2) 62.7%
3) 136.5%

Fluor (NYSE: FLR)
1) 3.9%
2) 51.1%
3) 97.3%

MasterCard (NYSE: MA)
1) 2.1%
2) 64.9%
3) 90.4%

As you can tell from that eclectic list of names, financial strength can be found in a wide variety of industries. What ties these businesses together, though, is that they've all demonstrated mastery of the cash management side of running a business.

In ordinary times, that's important because it assures they remain disciplined in the expansion opportunities they pursue. Companies with looser cash controls risk grasping at every growth chance they can get, no matter how long the time before the expected payout. Such an undisciplined approach often leads to cases where a business is so expansion-happy that it becomes dependent on being able to roll over its debt at low rates to just survive.

In times of constraints on capital -- our recent experience -- or in times of rising rates -- what we're going into now -- a lack of solid cash management controls can be devastating.

Stay invested in the best
The companies designed and financed with cold, hard cash management in mind are built with the flexibility and strength to survive just about anything the economy can throw at them. By owning companies that are built to survive, you can help yourself maintain the confidence you need to stay invested, no matter how the market performs.

At Motley Fool Inside Value, our unyielding focus on the underlying strength of the companies we've selected enabled us to stay invested, even as the market and the economy tanked. As a result, we've managed to both earn a positive return and stay ahead of the S&P 500 since our launch in 2004.

Fool Article: Dividend Millionaire by holding forever

The Easiest Way to Become a Millionaire

By Adam J. Wiederman
October 27, 2009

Sure, there are folks who have become rich finding stocks like Hansen Natural (Nasdaq: HANS) or Celgene (Nasdaq: CELG) when they were micro caps, then staying with them until their market cap is well over $1 billion. Others have become wealthy with smart options plays, still others by discovering high-momentum growth stocks like Amazon.com (Nasdaq: AMZN) or Intuitive Surgical (Nasdaq: ISRG) before other investors catch on.

But these complicated, labor-intensive tactics are ones that many investors don't have enough time to master.

I'd like to share with you a simple, easy strategy for becoming wealthy -- and then give you stock recommendations based on it. Although it's simple, it takes discipline to adhere to the rules. But if you follow this advice, you'll be well on your way to a million-dollar portfolio.

Keep it simple
One of the biggest mistakes investors make is complicating the process. Academics have proven that more information doesn't necessarily lead to better decisions -- but it does lead to overconfidence. Even worse, the more time and effort you put into researching, analyzing, and deciding whether to buy a stock, the more likely you are to buy it -- even if it's a horrible stock after all.

Overconfidence and overcommitment are counterproductive in investing -- and it's why keeping your investment criteria simple and easy can help you avoid falling into these traps.

What sort of criteria am I suggesting? Just two steps:

1. Find strong, long-term dividend-paying companies.
Dividends are the surest gains you can find in any market environment. As Bloomberg recently reported, even though the 10-year trailing return of the Dow Jones Industrial Average was negative through Sept. 30, when you factored in dividends, the return was actually a positive 18%.

What's more, between January 1926 and December 2004, 41% of the S&P 500's total return came from dividends. Without dividends, a $10,000 investment in 1926 would have become $1,013,000 by 2004 -- a remarkable return, to be sure. But with dividends, $10,000 would have become $24,113,000.

It's best to look for companies with a long history of paying out dividends. If a company only has a few years of dividend history under its belt, those payouts might be cut or suspended to fuel future growth -- as happened at Whole Foods (Nasdaq: WFMI) and DryShips (Nasdaq: DRYS) during this bear market.

Of course, that didn't stop many former stalwarts from cutting their payouts over the past year. So it's also wise to find companies with a culture of insider ownership and enduring demand. And you should also find companies with predictable, sufficient free cash flow, so you can be reasonably sure these dividends will continue to be paid. This is often easier said than done, but just below I'll tell you whom I look to for help in this regard.

But now for the hard part ...

2. Hold forever.
The strongest of dividend-paying companies raise their dividend over time. So when you hold one for long enough, you eventually reach a point where you are making more money annually in dividends than you initially invested in the company.

This is hastened when you reinvest your dividends back into the company, with each dividend purchasing even more shares of the company, meaning even more payout at the next quarterly dividend.

So long as the business continues to perform, and the company continues to maintain or raise its payouts, the simplest and oftentimes most lucrative approach is to remain an owner and collect your dividends.

Implement this strategy today
Motley Fool dividend expert James Early has seven "buy first" stocks for members of his Motley Fool Income Investor newsletter service, and they have an average yield of 3.8%. These stocks are, in his opinion, timeless investments that should serve as the foundation for a dividend-paying portfolio -- stocks you can feel comfortable holding for decades.

One of the companies on this list is legendary dividend payer Johnson & Johnson (NYSE: JNJ), which is yielding 3.3%. This company, which has paid out a dividend since 1944, not only has a long dividend history, but also has a long history of increasing its dividend. Over the past five years alone, it has grown its dividend annually by an average 12%. Better yet, it's trading well below James' estimate of its intrinsic value.

We've seen more than a fair share of dividend blowups over the past year, but if you look for the three criteria I outlined above when looking for dividend-paying companies -- insider ownership, a company with enduring demand, and sufficient free cash flow -- you are following the easiest way to become a millionaire.

I invite you to read more about why James believes Johnson & Johnson is a strong core dividend holding, check out the six other stocks on his "buy first" list, and read more about how he uncovers top-notch dividend investments, completely free for 30 days. Click here for more information.

Adam J. Wiederman do

Fool: Mungers Advice and Reading list

Charlie Munger's Advice for Striking It Rich

By Ryan Fuhrmann, CFA
June 27, 2008 | Comments (1)

It's been well documented that Warren Buffett spends most of his time reading, and he attributes the secret of his success to spending most of his day hunkered down in the details of company annual reports, business periodicals, and numerous other books. The same can be said for Charlie Munger, best known as Buffett's right-hand man and co-chairman of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B).

Describing Munger as Buffett's sidekick ignores much of Munger's talent, because Munger also happens to be a billionaire who's made a name for himself through a deadpan yet hilarious delivery of timeless investment advice. It's clear that he's had a beneficial impact on Berkshire's success, as well as that of Wesco Financial, a Berkshire subsidiary that Munger leads

Like Buffett, Munger concedes that being well-read has proved invaluable in earning superior investment results through holdings such as Costco (Nasdaq: COST), where he is also on the board. In that spirit, for those interested in learning more about Munger, his enduring investment philosophies, and his views on just about everything, let's go through an overview of three key books that make the rounds during Berkshire's annual shareholder meeting in Omaha.

Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, edited by Peter Kaufman
Now in its third edition and topping out at more than 500 pages, Poor Charlie's Almanack offers the most thorough and insightful summary you'll find on why Munger has become an investing legend. Buffett and Munger cooperated on this book as a collection of writers compiled Munger's biographical details, lectures, and public commentaries. There are also countless interviews offering a firsthand account of Munger's personal life and investment wit.

The best chapters cover a series of talks Munger gave from 1992 to 1995, collectively titled "The Psychology of Human Misjudgment," in which he summarizes 25 inherent psychological traits that frequently trip up investors. I read through the second edition recently and can't recommend Poor Charlie's Almanack enough.

Seeking Wisdom: From Darwin to Munger, by Peter Bevelin
I picked up a copy of Seeking Wisdom at this year's meeting. What drew me to the book is its overview of world-renowned thinkers who have a penchant for thinking clearly and avoiding the psychological pitfalls that cause humans to act irrationally.

Chock-full of findings from many academic disciplines, the book mirrors Munger's thinking that a combination of factors, or "Lollapalooza effects," work together in producing potentially exponential investment returns. Berkshire's holdings in Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and Procter & Gamble (NYSE: PG) are prime examples of the benefits of these effects.

Influence: The Psychology of Persuasion, by Robert Cialdini
A frequent recommendation from Munger himself, Cialdini's Influence dives into the art of persuasion and the tactics that salespeople successfully employ to persuade people to buy goods. It's fascinating to see how savvy marketers effectively employ compliments, clothing, and social acceptance to get you to buy a product. Better yet, Cialdini offers a game plan to better withstand their sly advances. I can't say it will prove successful in negotiating a lower price for my next Ford (NYSE: F), but the lessons the book has taught me so far are definitely eye-opening.

So if you want to learn from the investing masters, consider picking up some of these books. As Munger and Buffett would attest, sitting on your rear end cozied up with a good read has its advantages.

Ten Roads to Riches

Repost: http://www.think-differently.org/2009/07/ten-roads-to-riches.html

For Ken, true "riches" start at around the $100M plus point. You have to have some standards! This book is about what kind of paths you can take to get there.

Ken's thesis is that, putting aside factors he considers beyond our control such as winning the lottery or benefitting from an inheritance, there are really only 10 ways that people get really wealthy: 10 roads to riches! These are illustrated in his diagram:

The 10 roads, in a nutshell, are:

1. Build your own business ("the richest road") - and to build it either to sell or to last
   
2. Become a CEO
   
3. Become a "ride along" - a trusted second in command the CEO needs and trusts who profits with the firm
   
4. Become excellent and successful at what you do (sport, writing, music) and famous - or better yet manage a portfolio of other people who are excellent and famous
   
5. Marry really really well
   
6. Steal it legally - become a Plaintiff Lawyer
   
7. Manage other people's money well, and both win
   
8. Invent income - create an ongoing income stream you own, from an invention, a song, a merchandising line, movie rights to stories, and other means
   
9. Become a real estate Baron
   
10. Save and invest wisely, consistently and effectively ("the road most travelled")
    

The roads can be combined: for example Ken founded his own company (road 1) which focused on managing other people's money (road 7).

The first thing I did after buying and opening this book, of course, was to scan through and see which road or two I related most strongly to.

But the most fascinating thing was how much I learned from and enjoyed each chapter, even those I did not expect to gain a lot from. For example, I have no intention of becoming rich by marrying really really well (if I marry really really well my first criteria for "really really well" is not how much money my potential partner has). But the chapter contains a story about a young woman who developed a strategy for meeting wealthy men and put this strategy in to action in a way that was fascinating.

On another note, his strategies for gaining the CEOs job are terrific!

The best thing though was the pithy insight. Ken has clearly learnt a thing or two along the way after 24 years of running his company.



Preface: Why Ten Roads?

Acknowledgments.

Chapter 1 The Richest Road.

Picking a Path.

Newer or Better?

Built to Sell or Built to Last?

Bootstrap or Finance?

Public or Private?

The Big Bulls Eye.

Founders Are Quitters-Just Do It.

Chapter 2 Pardon Me, Thats My Throne.

Gray Hair and Dues Paying.

A CEO volution (Through My Fathers Eyes).

How to Lead.

How to Get the Job.

The Big Payday.

CEOs and Superheroes.

The Best Part.

Chapter 3 Along for the Ride: Ride Alongs.

Why Ride Along?

Pick the Right Firm.

Be the Right Guy.

Chapter 4 Rich . . . and Famous.

The Talent Show.

Potholes Ahead No One Sees!

Mogul Meandering.

Chapter 5 Marry Well. Really Well.

How to Marry a Millionaire Billionaire.

Like a Fine Wine-Well Maintained.

Men Can Play Too!

Love, Marriage, and Money.

Chapter 6 Steal It-Like a Pirate, but Legally.

Crusader or Pirate?

Raiders Road.

The Richest Legal Road.

Tort Us and the Scare.

Target Practice.

When a Pirate Becomes a Villain.

The Inside Track.

Chapter 7 OPM-Not Opium: Where Most of the Richest Are.

Basic OPM Career Rules.

Steps to OPM Wealth.

Hedge Your Bets.

Private Equitys Big Bucks.

Dont Break the Law.

Love Capitalism, Not Social Acceptance.

Chapter 8 Inventing Income.

The True Inventors.

Writing for Dollars.

Political Pensions-and Good News.

If You Cant Be President . . . .

Think Tanks Run Amok-a Sham Scam.

Chapter 9 Trumping the Land Barons.

Monetize It.

The Fools Bargain.

Getting Started.

Buy, Build, or Both?

Where to Be and Not to Be, That Is the Question.

Chapter 10 The Road More Traveled.

Income Matters.

Saving Grace.

Get a Good Rate of Return (Buy Stocks).

The Right Strategy.

Bonds Are Riskier Than Stocks. Seriously.

Like Hetty?

Conclusion.

Notes.

Index.

Venture Capital's Open Secret Forbes.com 8/09

Velocity

Venture Capital's Open Secret

Brian Caulfield, 08.25.09, 04:30 PM EDT

TheFunded.com pitches a streamlined term sheet

BURLINGAME, Calif. -- Sell a company for $50 million and you'd think the company's founders would be some very rich people.

Not necessarily. That's because conditions in the term sheets many start-ups sign in order to raise funding can quickly leave a founder's equity "sliding towards zero," says Adeo Ressi, founder of TheFunded.com, an online community for entrepreneurs looking to raise venture funding. Here's how it works. Start with a common clause called a "liquidation preference." It gives an investor the right to, say, 30% of the proceeds of a sale if they own 30% of the company. Fair enough, right? Well, many start-ups agree to terms that give investors 1.5 or even two times that amount.

Now add such a 2x liquidation preference to a "participation clause" that returns the investors money to them, in full, on top of their out-sized share of the proceeds of any sale. That lets an investor double dip, pushing the investors take to $39 million, and everyone else's down to $11 million.

Now add in a clause awarding certain shareholders "dividends" that result in investors getting a bigger chunk of the company over time. After a while, the numbers no longer work out for those working at the company. "The management looks around and says 'I could continue working 70-hour weeks, and I'm not going to make any money,'" Ressi says.

The terms basically give investors a much bigger share of a company's upside than their chunk of the company's equity would imply. Ressi experienced this firsthand when he sold a company he founded. On paper he owned 20% of the company. In reality, he walked away with less than 5%.

That's why Ressi is pitching a streamlined term sheet. The terms include a 1x liquidation preference and no participation clause. In short, the term sheet is a way for Ressi to express his point of view, which, considering the state of the venture capital industry, might be worth listening to. Particularly if you're an entrepreneur.