I’m bullish on entrepreneurship. And I’m at least as bullish on real estate. Stocks are much riskier than real estate—to me—because (1) I’ve lost money investing in stocks and/or stock funds time and again and (2) I’ve seen so many others lose money. Again, I do believe that the stock market has been and will continue to be a pretty good long-term investment. But long term as far as the market goes is a 10- to 20-year time frame. Since we are concerned with getting wealthy in 7 to 15 years (and since the market is currently overvalued, from a fundamentalist’s point of view), I don’t feel confident in stocks.

Nevertheless, since I began actively investing in real estate—about 11 years ago—I have never lost money on a single transaction. The worst two deals I’ve been in since my first big lesson (i.e., disaster) produced yields of 7 percent and 12 percent annually. And that’s not including tax benefits—which were significant. Most of the real estate investments I’ve made have been good to great.

Occasionally, bond investors experience complete powerlessness. When interest rates and inflation rise dramatically, the value of bonds declines dramatically. If prospects are for continued high interest rates and inflation, bond interest will never compensate for lost purchasing power. In the 1960s, government bonds paid 5 percent or less in interest. During the 1970s, inflation averaged better than 8 percent. Bond investors who bought in the 1960s sat by powerless as the purchasing power of their principal and interest dwindled.

On the other hand, treasuries are the best asset class during extended periods of deflation. In the 1930s, treasury savers had to guard against grandiosity rather than inferiority. Treasuries were the best asset class.

Selling government bonds before maturity brings up feelings of regret if interest rates have risen and the bonds must be sold for less than face value. Commissions, as well as spreads, must also be paid.

Letting bonds mature eliminates both commissions and spreads. Still, when bonds mature, the saver is faced with the dilemma of what to do with the principal. For some, the answer is simple. Others experience anxiety.

Savers who fret over what to buy may be more comfortable in bond funds where the money manager makes all the buy decisions.

The next figure shows the same kind of relationship between the assets and liabilities accounts. If we add $100 to assets, the debits go up $100, and the credits go down $100. At the same time, in the liabilities account, debits go down $100 and credits go up $100.

The figure shows how an accountant would record four common transactions in terms of debits and credits:

The company borrows $8,000. Cash (an asset) is debited and Notes Payable (a liability) is credited.

The company sells $5,000 in merchandise on credit. Sales Income (an income account) is credited and Accounts Receivable (an asset) is debited.

The company pays its electricity bill of $200 immediately. Utilities Expense (an expense account) is debited and Cash (an asset) is credited.

The company sells some of its older computers for $1,500. Office Equipment (an asset) is credited and Cash (an asset) is debited.

Simple as it should be, the concept of debits and credits is a little like a Zen koan (a paradox). Terms are easily defined, but how they integrate into your balance sheet and income statement and the effect they have on your accounts… Well, that’s not so clearly understood without first understanding how liabilities and owners’ equity are treated in relation to assets. That may take a little getting used to.

Debits are always listed on the left-hand side of T accounts. They represent an increase in asset and expense accounts, or a decrease in liabilities.

Sometimes, the accounting process appears to be a mirror image of what logical thought says it should be. But there’s a root of logic to it that makes it more than just an algebraic equation. Remembering the following formula may help:

Assets = Liabilities + Owners’ Equity

Assets are goods owned by the company—real estate, inventory, and other items of value. Liabilities are obligations, generally owed to suppliers. Owners’ Equity is what belongs to the owners.

If the owners decided to sell all the assets and pay all the liabilities, what would remain belongs to them—their equity. The formula would then work as follows:

Assets – Liabilities = Owners’ Equity

from this simple equation we derive the basic method for recording all business transactions in terms of their effect on the various accounts.

It’s clear that owners’ equity is increased by amounts invested by the owners, and de creased by what they withdraw from the company. It’s also clear that if we order some materials, we’re increasing our assets and increasing our liabilities. Unfortunately, it’s not all that easy. However, you should understand the basic concept of T account diagrams and how they reflect business activity in terms of debits and credits while maintaining the balance of the assets = liabilities + equity equation.

Opportunity cost is a concept from economics that states whenever you make a choice to do something, you are also making a choice not to do many other things. Oftentimes, those other choices had benefits attached to them that you will now miss out on because you chose another seemingly good option.

Great examples of opportunity costs in action can be found on any number of TV games shows like Who Wants to Be a Millionaire or Deal or No Deal. In these shows, a contestant has to make a tough choice between taking a sure thing like $25,000, or taking a chance of winning $1 million or going home broke. If you choose the $25,000, it costs you an opportunity to possibly leave with a million bucks. If you choose to roll the dice and you lose, you missed an opportunity at a guaranteed $25,000.

Everything in your personal finances has an opportunity cost. If you pay down your debt, you lose the opportunity to do all kinds of fun things with your extra cash, from spending it to investing it. However, if you pay down your debt, you’ll likely be debtand stress-free much sooner.

Although there are many benefits associated with loan workouts, they can suffer from drawbacks that make them unsuitable for all cases of corporate distress.

The principal problem is that they need all the participants affected by the terms of a workout to agree to its terms. This can create a ‘hold-out’ problem, whereby one or more disgruntled creditor can demand disproportionately preferential terms in exchange for their consent. Similarly, parties not necessarily directly affected by the loan workout, for example trade creditors, may seek to improve their position by taking, or threatening to take, legal action to recover their exposures to a company. This can undermine the entire process.

In addition, the structure of the creditor group in amulti-creditor workout can have a considerable impact on its effectiveness. The larger this group is, and the more divergent its interests are, the more difficult and time-consuming the process of developing a consensus is likely to be. For example, a loan workout involving a significant number of banks, purchasers of distressed debt, bondholders and shareholders, with each group potentially having conflicting objectives, may not be possible to agree without some form of recourse to the courts.

One of the major advantages of loan workouts is that negotiations can be conducted in private. In some situations, the entire process can be resolved without any publicity, thereby avoiding uncertainty among customers and suppliers, and any consequent instability to the business. Even in cases where the disclosure of a company’s financial problems is unavoidable, for example to meet local stock exchange requirements for quoted companies, the parties involved are usually able to manage communication flows better outside a statutory process.

The participants in a loan workout are able to retain control over the transaction, rather than relinquishing it to the court. As a result, the final outcome more closely reflects the needs of the participants most affected by the company’s problems. The ability to control the process also results in flexibility. Provided the needs of the participants are met, the process (for example, the timetable) can be varied to respond to the prevailing circumstances. This is often impossible under a court-administered process.

The range of solutions possible, for example, the use of innovative financial instruments, is often greater under an out-of-court process. Less reliance on the legislation and judiciary can overcome many of the other shortcomings associated with statutory processes highlighted previously in this chapter. For example, transactions can usually be completed quicker, and with more focus on commercial issues. The fact that it is up to the participants to agree a financial restructuring and ensure the rescue of a company, rather than delegating that responsibility to a third party, can also engender greater ownership and commitment to the process.

An increasingly competitive banking industry and a more critical focus on return on capital, is shortening the decision-making horizon. There is less willingness to become drawn into complex and time-consuming loan workouts. As a result, practices such as the sale of distressed debt are becoming more common. A more competitive environment for companies means that if their financial problems are publicised, it can have a severe impact on their prospects for survival. Increasingly stringent disclosure requirements, for example for stock exchange quoted companies, exacerbate this problem. All these factors contribute to considerable instability in a workout transaction. The diverse range of interests represented in a workout add to this instability. Consequently, the time available to develop and negotiate a restructuring is curtailed.