Suze Orman talks money
Financial guru, writer, producer, speaker and multimillionaire Suze Orman trades tips with Anna Healy Fenton on a recent trip to the city
With interest rates at next to zero, it's the million-dollar question. Where should retail investors put their money? "It's very, very difficult to invest right now when no one knows what's going to happen in Europe," says Suze Orman, America's favourite finance guru, famous for her no-nonsense advice on CNBC's The Suze Orman Show.
"They're kicking the can down the road in Europe and it will backfire on them," she adds. "I personally would avoid Europe or taking any risk whatsoever." The American stock market has obviously been a very nice return, but Europe will affect everything if it blows," she cautions.
Orman is in Hong Kong to have a haircut, with celebrity crimper Kim Robinson, en route to Australia where she is taking her financial self-help gospel to Melbourne's I Can Do It! weekend retreat. She's been invited as one of several leading motivational speakers. Her topic: The Eight Qualities of a Wealthy Person - Learn how to create a life of spiritual and material abundance.
But before the enlightenment starts she's banging the drum for individual stocks or Exchanged Traded Funds (ETFs), a favourite subject of hers since her 1999 book Courage to be Rich. "Now people are starting to talk about them," she says, with thigh-slapping satisfaction.
However, she inserts a caveat ahead of coming US tax changes. "High-yielding dividend stocks have been extremely popular but if the US government is stupid enough - you can underline that word stupid - to let capital gains tax expire, to let dividend tax expire …" she's getting steamed up at the prospect of dividend tax, now 15 per cent, rising to ordinary income tax levels soon. "You are going to see a mass exodus of those dividend-paying stocks. Who's going to buy them, when municipal bonds, at least in the US, make more sense?"
Orman tells investors to be nimble these days, that buying and holding stock in the style of their parents and grandparents no longer works. "You must make investments for the moment. If the moment changes, you must be able to get out in a second," she says sternly.
That's why she preaches ETFs over unit shares, at least in the US. "When things happen they happen fast," she says. " When you do a mutual fund, you place an order to sell it, but you don't get to do it at that moment. So ETFs that operate like a mutual fund - which has a lower expense ratio and you can buy and sell at a moment's notice - offer a tremendous advantage in today's markets."
Orman knows all about creating and taking advantage and making it stick. Her approach to her professional life has been nothing short of stratospheric and for someone who by her own admission is worth "tens of millions of US dollars", she's very grounded.
Born in Chicago to a Russian father and Romanian mother, she studied social work at University of Illinois, took a first job as a waitress in California and dreamed of running her own restaurant. A group of customers cobbled together US$50,000 to help fulfil that ambition. Orman then walked into the offices of Merrill Lynch where a broker promised to increase her investment who instead lost it in three months. An impassioned Orman locked down a job at the same office, exposed the broker whom it transpired had violated company policy and successfully sued Merrill while still an employee. Merrill settled out of court and Orman left to become vice-president at Prudential Bache Securities for three years, a stepping stone on the way to setting up Suze Orman Financial Group [she was a director until 1997].
She has since leveraged that ambition into a one-woman industry as investor, writer, producer, online columnist and leading motivational speaker. There's even a Suze Orman-approved Visa card in the US. Orman's CNBC show has aired for 12 years and attracts some of the network's highest ratings. She's written nine consecutive New York Times best-seller list books and hosted PBS specials on them which have won her two Emmy awards. In 2010, Forbes tagged her 18th on its list of Most Influential Women in Media. Orman's self-described mission has become "to change how the world thinks, feels, and acts with their money - one wallet at a time."
Despite her accomplishments and the ever-present glare of the media spotlight, Orman spends much of her time listening to those less fortunate. "I'm from the US, where one out of two people is either on the brink of poverty or in poverty. It's no longer talking about where you invest your money, it's about how you survive to buy milk be able to feed your babies. Twenty million jobs have been lost in the US, and are never ever coming back."
If she were to stand in a room of 5,000 or 100,000 people in the US and say 'stand up if you have credit card debt, car loan debt, student loan debt and mortgage debt' - everyone of them would stand up, she says. "How can I talk to you about money. You don't have any!"
Orman thinks China is reluctant to admit its present slowdown. "They are not a country that readily admits when something isn't going their way. That's having an effect on Europe as well. Now we are all a global economic society and must be very careful. But it was the US that threw the biggest kink into the system. And now the world's paying for it."
She referring to the US banking scandal that initiated the current financial slump. Does she blame the bankers for it? She snorts. "About 150 per cent I do, and the real estate markets, the ratings agencies, the administration and so on and so on."
Not only were bankers largely unpunished, they were in many cases rewarded for their exploits, she says: "Not one of them was penalised, not one went to jail, they all should have gone to jail." But memories are short too. "People are so tied up in their own economic survival."
When it comes to China, she believes the US has taken time to understand its workings and adopt a more humble approach to negotiation. "They are never going to be a country you can tell what to do with the RMB. And I don't think the United States got that."
And then we get to the two million-dollar question. Where does Orman put her money? "Since 2007, when I thought real estate was going to head down, I told people to put 100 per cent of their money into municipal bonds. That's where the majority of my money has been since and I am still buying them. They're getting harder to find, because not all issuers are solvent, but, 4-to-5 per cent tax-free yield."
Orman's are up 40 per cent, because as interest rates go down, the value of bonds goes up. She admits to having several millions in individual stocks across the board, but all in high-yield dividend-paying stocks. One of her biggest gainers has been United Online. "It's at US$5.20 today but I've been buying it at US$4, paying a 9 per cent dividend yield, and it's up 50 per cent in the past two weeks. I have a sell order in at US$6. I also have a tremendous position in Sprint; I bought it at US$3-something, it was almost at US$5 the other day."
She picks her own stocks but doesn't stress over Price/Earnings (PE) values. The main thing is for how many quarters they have being paying dividends, at what percentage, and can they afford to prolong that dividend. "United Online had 30 quarters paying a dividend at 10 cents a crack. As long as I am being paid to hold something I don't really care, as long as I am being taxed in a favourable tax bracket."
Taxing dividend-paying stocks at ordinary income tax rate is a big mistake, she believes. It makes a big difference getting 4 per cent taxed at 15 per cent versus 4 per cent taxed at 50 per cent. This is for her tax bracket, she explains, but the threshold for the additional tax is just US$250,000 in annual income. "So for people that pay state income tax, they are looking at a tax bill of 39 to 40 per cent, I'm looking at 50 per cent. That affects what rich people do; it makes them go offshore or into municipal bonds.
"I don't mind if they increase my taxes, but don't consider income of US$250,000 wealthy. If you earn that with a family of four in New York City, after taxes, you're barely making it. I have been very vocal about that in the US. Big mistake."
Meanwhile, back to the hair. The reason she happily pays Kim Robinson US$1,000 per cut is that she believes firmly in investing in yourself to look and feel good - but only to a limit you can afford.
And despite flying to Australia via Hong Kong so she can have her immaculate tresses tended, she insists she's nevertheless a frugal woman. Orman tells us the boots she's wearing are 15 years old and her blue jeans and shirt cost 50 bucks. "It's not about branding; it's about what makes you feel the best. Find the person that's right for you. For me it's Kim Robinson and I'm lucky enough to be able to easily afford him. Ultimately, it's all about investing in yourself," she says.
In Orman's case, looks impact ratings. "When I feel great, especially when I'm on TV and constantly in the public eye, as soon as I don't look good, I get 10,000 e-mails saying what was wrong with your hair Suze, are you not feeling good?" If she doesn't look her best, they don't listen, she says. "I've discovered the shows where I look and feel great give me my highest ratings."
For Orman it seems, life - and investment - is one permanent high.
SUZE'S TOP THREE DO'S AND DON'TS
- If you have any debt, pay it down.
- The paperwork today to protect your tomorrows. Make a will.
- Check your investments every day. Be an active investor.
- Invest in a life insurance policy as an investment. That's my biggest don't of all times. It's a ridiculous investment.
- Take financial advice from a friend.
- Stock up on commodities. Be a little bit careful with gold.