Category Archives: Investing

Old friends, and an investing epiphany

Live long enough, and even the somewhat socially awkward will accumulate a network of old friends with decades of experience in various fields. This is great for getting answers. When I have a question about physical science, I can contact a professor of physical science. Question about U.S. military history? I’m fortunate enough to know someone who teaches it at the collegiate level. Want to understand how a given firearm works? I can choose from multiple enthusiasts, none of whom need any encouragement beyond a hint of interest. Need an antique valued? One of the best men at my wedding has been in the business for thirty years. Question about the workings of a suburban police department? How about the deputy commander of a well-respected suburban police force? Real estate? In addition to agents I’ve worked with in three states, I could also call a friend and past client who made his career in the field. My uncle is a civil engineer, one cousin a retired petroleum chemist, another cousin a speech therapist, and so on.

The question is not whether one can locate the expertise, but whether one may fairly impose upon the friend. I’m not unique in this, nor even above the curve. I have this only because I lived to my mid-fifties without spending it all in a shack somewhere out near Glenallen, Alaska. Everyone else my age, except those who live in shacks near Glenallen, has at least as great a network. Those who got out more than I did probably have far greater networks, but I’m very satisfied with my folks. I wouldn’t trade any of you.

For them, it follows, I’m the old friend who edits. When they begin to consider doing some writing, it is quite natural that they ask me about it. I’m glad, because gods know I’ve bugged all of them often enough about this or that. If it comes to an actual project I’ll charge something, but advice is always free to old friends. Truth told, I don’t mind a bit. It’s rather nice that people would think I could help them understand something.

One old friend of mine is named Randy, and with some admitted contact gaps, we’ve known each other since college. Randy retired as a stockbroker with one of the big brokerages, and while in most people that might not mean as much, I’ve always known him as a maverick immune to peer pressure where he knows he is right. That tends to be true of me as well, so I found it easy to believe that he had knowledge and instincts on behalf of his clients that the average full-commission broker might not have had. Put another way, there aren’t very many such brokers I’d have steered anyone toward, but Randy would be the one.

Not long ago, Randy and I had a long conversation about investing. We agree in substance, especially in matters such as that people should remain within their comfort/knowledge zones. I told him I no longer buy separate issue securities, because while it’s possible I could develop the knowledge to do well at it, I know that I will not, and thus shouldn’t fool myself. I received a precious pearl of approval, which I will have set into a suitable mounting in a place of honor.

Maybe it’ll distract everyone from all the little tombstones representing my dumber investing mistakes.

While schooling me, Randy crystallized a realization that explains so very much: winning vs. losing, and the arithmetic. The instinct and habit is to look at an investing choice as one decision, to get right or wrong. It isn’t. Most investing decisions are based on some stated goal, even one as nebulous as “make money.” There are two decisions to make, and for an investment to meet or exceed expectations, both decisions must be right. There is the decision to buy (when/what/how much), and the decision to sell (when/how much) or hold (some or all). That’s a thing to consider: not to sell is also a decision.

If you are wrong 50% of the time, you will probably like your results 25% of the time because that represents the percentage of the time you will do what in hindsight turned out to be the right thing both times. That means that two times out of four you will likely be disappointed, and once out of four, you’ll probably take a straight-on bath.

If you are right 60% of the time, you will get satisfactory results 36% of the time, same reason. You are taking a hosing. About half the time, you will get one decision or the other wrong, with disappointing results. You’ll go splat big time about one time in six.

If you are right 70% of the time, all other factors being equal, you should be happy 49% of the time. You are still losing, though not by much. Slightly less often, one decision or the other will be wrong enough to disappoint. About once in ten, the disappointment will be great.

You have to be right just over 70% of the time just to be pleased more often than not. If you can arrange to be right 75% of the time, you will get a favorable result about 57% of the time. Not many people are that good. I’m not even close.

In the meantime, of course, the overall market does whatever it does. Goals can vary, as can strategies. This is a rabbit hole of exceptions, and I have felt the need to oversimplify this (yes, I am aware I am doing so), but the key takeaway is that there are two opportunities, not one, to screw up a given investment. A mistake in either case will probably cause disappointment.

Thus: even then, even being right three-quarters of the time, you’re pretty happy just slightly more often than not. Enough to matter, of course; enough to be meritorious, and definitely enough to offer a shot at outperformance over time. Your good decisions should outweigh your bad ones. And I guess if you are confident enough to feel you will be right 75% of the time, you probably should carry that through.

The minority of people who can achieve that success is small indeed. I have learned that I am not one. Many of the rest are more or less playing the slots in a different format. Whenever I find myself tempted, nowadays, I remind myself how much I despise gambling, and ask myself whether those glitzy casinos were built with the money people won. I suppose it’s like a former smoker who, when tempted to lapse, looks at graphic images of cancerous lung tissue: if that helps, go ahead.

And how often does one get to make an analogy between casinos and cancerous tissue? You’re very welcome.

For the rest of us, it’s buy and hold index ETFs all the way. We will generally not outperform, but we will get the market return less (very bearable) expenses. Even Jason Kelly, a noteworthy author and manager who has an excellent track record with stocks, has shifted entirely to a mechanistic method involving index ETFs. I’ve been running it in two different portfolios now for a couple of years, and I think it stands a good chance of outperforming because it takes the emotion out of the decision. The only free choice one makes is when to add more cash to the plan. From there, the entire course of events can be handled with a pretty simple spreadsheet and two trades per quarter per portfolio. You can learn more from his book on the topic.

Jason’s writing is entertaining and straightforward. My favorite part is the way he begins by politely butchering out the pundits who bray frequent predictions for which they are never held to account. It’s hard to imagine they can even keep writing, much harder to imagine anyone still wasting time on them, after Jason hits them with the literary equivalent of a fire hose loaded with ice water. He calls them “z-vals,” as in “zero validity,” and when he’s done with them they look like Leroy Brown at the end of the famous song.

You want to hate the media? Don’t hate the ones who are trying to tell you what has happened around the country and world. Start with the mainstream financial media, because they have hate coming. They get to tell you what will happen, be wrong on a consistent basis, and never suffer. They don’t even lose readers. Were you able to confront one, he (most of them are men; for some reason, it appears harder to find intellectually dishonest women) would tell you that doing your own research was your problem, and not to blame him. “If you believed me, it’s not my fault you were that big an idiot.”

Even the salesiest full-commission broker at Merrill Lynch has more accountability than that.

As for me, if I have to be right three-quarters of the time in order to do well, maybe I’d better keep my decisions in the comfort zone.

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What looks sillier than me trying to buy Hello Kitty stock?

Not much, I suppose.

There isn’t actually a Hello Kitty stock, of course; the character is a property (doesn’t that sound so cold?) of Sanrio, a company in Japan. Seems HK is an even bigger deal over there, definitely Sanrio’s cash cow. The little mink is worth seven bill a year. I am looking into this for a simple reason: all of my wife’s stock recommendations, except those where I help pick the stock, do well. Since she had thought about this before I did, just hadn’t gotten around to asking me, this makes it a Deb-Approved Security that should do well.

If it does well, I don’t give a damn how silly a security looks. (Or how odious. I don’t believe in ethical investing. I believe in activism, and in investing for gain, but I do not believe in confusing the two.)

I’m not sure how easy it is to trade the shares on the Tokyo exchange, but it has US-traded shares as SNROF. Did you know that, that in most cases you can buy major foreign companies on the US markets? Generally you can. However, you can face a number of issues. You will certainly pay foreign tax, and in some cases ADR (American Depositary [spelling is correct] Receipt) fees. And yes, this means if you get a dividend, you will have to check ‘yes’ on your tax return when it asks “Did you have any foreign income?” In case you’re interested, a five-letter ticker ending in F is a foreign stock. A five-letter ticker ending in Y is typical an ADR (the distinction is not tremendously important). Some foreign stocks do not have five-letter tickers, like Toyota (TM).

Thus, this has me researching a way to buy shares of a foreign company whose main revenue generator is the image of a cartoon cat. Why would I be all right with this? In addition to the noteworthy fact that it’s Deb-approved, it’s near a long-term low. It does not look to have much downside, and based on its price history, has potential for a four-bag upside. I’m enamored of stocks my wife likes that are cheap at the price. I’m also enamored of 4% dividend yields, especially when payout seems on the upswing.

I’m greedy on dividends. I am not a fan of annual report proclamations (authored by management) of how great management is, how we’re all going to roll in money, and so on. I think: “Screw you. Pay up. If I’m going to hold this, I expect compensation now and frequently. That’s money you can’t take back later. If you bomb financially, and you don’t pay up, no problem. I was just in it for the money and I’ll be going then.”

I’m less enamored of low liquidity. One has to watch for that with foreign shares, and with quite a few investments. During Friday’s trading day, according to my research, only 100 shares of SNROF traded. That’s it. What if someone had wanted to buy 200? Might not have gotten them, especially at a limit price. People need to remember that you don’t automatically get to sell stock and ETF shares; they are not sold into a void. They are sold to someone else who wants to own them. If you want to sell, and there isn’t enough buying interest, maybe you can’t sell at all. By the same token, if no one wants to sell you any shares, you can’t buy them. Oh, someone will always cough them up–but not always at a limit price.

Foreign investing is kind of wild-west stuff for reasons like these. The governing laws are different. The style of annual report bullshit is different. (That’s not to say it’s less bullshitty, just that different cultures present bullshit in different ways.) It is generally more speculative in part because it’s harder to say how a company is doing in another country. I mean, if you’re in the US and you hear that Ford Motor Co. has turned in a crappy year and is laying off workers, well, that wasn’t hard. But if Nissan was boning the beagle financially, you might not see that splattered all over the US financial news. You’d have to make extra effort to keep tabs.

Most times, I think it’s easier and safer to just buy an ETF or CEF (types of mutual funds you can trade on exchanges) to focus on a given sector of foreign investing, but not all my ETF or CEF picks work out well. All of Deb’s do. Thus, if she is feeling it on Hello Kitty, I’ll start watching Sanrio, feeling a little silly for doing so.

Hello, kitty.

Shareholder revolts

I love closed-end fund shareholder revolts, when you get two different ballots, and one of them is all about how management sucks. Such a refreshing change from ballots issued by management, which typically say that management is wonderful and that we should therefore vote as management desires.

(If you do not know, a closed-end fund is a form of mutual fund. Most trade in bonds. The biggest difference between CEFs and conventional funds, the kind most people think of when they hear the term ‘mutual fund,’ is that conventional funds are open-ended. All their trading is between the investor and the fund. Thus, when you buy shares, they are created; when you sell (redeem) them, they are annihilated. In a closed-end fund, shares are not created or annihilated. They are traded between buyer and seller, neither of which is the fund. I have given lengthy criticisms of conventional funds in the past, and probably will do so again, just because they need frequent slappage.)

What I love even more is when the rebels’ complaint is that the fund is going to be kept around two years before liquidation, and should be instead liquidated immediately. I guess I should have bothered to read their semi-annual reports, or perhaps this liquidation is a more recent development. In any case, it’s good to see something other than the standard blind endorsement of management. Usually the most revolutionary thing on the ballot is some proposal put forth by an environmental group or something, demanding greater accountability or constraints on executive pay. Management always votes against all such proposals, claiming that they are already doing more than what the proposal would require. You can believe them if you like; I don’t.

So. What to do?

In my case, first I go vote for the revolt. If I were keeping the shares, I might stick around to care who wins. However, if the fund is going to be liquidated, I don’t wait to be paid out. I slap trailing stop sell orders on my shares. Whatever drama they’re going to have, they can have it without my money. I can surely find a better job for my money than a fund that is being managed toward a liquidation date.

This one (KMM) was fun. It was one of my lowest yielding CEFs, and I had a capital gain to boot. Yes, please.

The financial education millennials aren’t getting

And I find it appalling, but not surprising. Ours was not much better. However, we should have done better by the next generation, and as in all other matters of managing society, we did not. So I’m donating time to fix this by explaining the whole reasoning as clearly as I can.

Why it matters: this is how you get to retire. Without this, you work until you die. If that sounds fun, stop reading and prepare to embrace lifelong serfdom.

In retirement, the idea is that you aren’t working, but life will still cost money. Two ways one can afford that: have a big enough money pile that it lasts you to the end, or get income to replace a paycheck. Imagining any other outcome is fantasy, though it is reasonable to include cost-of-living cuts in that planning as long as you also think about unavoidable cost-of-living increases.

Therefore, in essence, your retirement planning means figuring out how to replace the work income, or how to save enough money to last you. If you do neither, plan to work until you fall apart, then eke out a living in poverty–and even that may be taken away. You can’t know what’ll happen forty years out. By now, you should be alert to the probability that the reality turns out worse than you were promised.

The two methods can work together. Your big money pile can generate income, which you then live on, with the money pile itself as some security against a real disaster.

You cannot trust Social Security (for income to live on) or Medicare (for affordable medical insurance, the number one crumple zone of retirement money disasters) to be there. That’s because my generation let the politicians steal too much, yet mine will demand that you sacrifice so that mine gets what it was promised. (We will then die off, sticking you with the bill, all the while grumbling about you. Aren’t we charming? This is why we, as a class, have no basis to look down upon you; we forfeited that right by talking a great game about your future, then doing absolutely zero to back it up. We didn’t bus the tray of our life.) But in the meantime, you need to look out for yourself, and it is safest to plan for the government to do nothing to help you in your old age. Then if they do, hurrah, but it’s a pleasant surprise.

Some employers will offer a retirement savings plan as a benefit. This is nearly always flawed, but far better than nothing, especially if the company matches some of your contributions. How you do this affects your Federal income taxes, so it’s important to understand the different kinds.

There used to be things called ‘pension plans’ that would give you retirement income someday, as a benefit of a long career with one employer. (Kindly stop laughing. My generation was the one from whom that sky-pie was yanked away.) Our precious corporations declared war on pension plans, and lacking all spine, my generation surrendered. We will be the last ones to get the last few of those, for the most part, and if it makes you feel any better about this, most of us won’t even get any. Our parents did.

Don’t get concerned about the insulting interest rates from bank savings accounts. That just means that bank savings are not the place for your retirement savings, because you retire on the money your money earns (and money in bank savings currently earns nothing of note), not on the money you save. That’s why an early start is most important: your $1 at 22 may become $10 by 62. The piddly savings you can afford in your early working years will be the dollars that work longest and hardest for you. But do bear in mind that things go in cycles, that your parents remember 7% interest rates on savings. They also remember 14% interest to buy a car. That sword always cuts both ways.

There are two basic types of retirement savings, both of which exist in employer-sponsored and private forms. You must understand these to have any potential for retirement savings. For ease of description, we’ll call them Trad(itional) and Roth. They appear both in 401k plans (work-sponsored) and IRA plans (something you usually do on your own without employer involvement). Salient difference: what you put into the Trad is deducted from your taxable income, up to a limit, but someday when you take money out, those distributions (withdrawals by you so you can live) will be taxable. What you put into a Roth is not deducted from your taxable income, but in retirement, withdrawals will be tax-free–or so they promise us now.

The skepticism you sense here is based upon three things: a long history of government ineptitude and evil, the fact that my generation will probably eat all the cookies (then blame you for not baking enough; aren’t we sweet?), and the bird in the hand outlook (once you get the benefit, it is too late to steal it back). I, myself, do not believe the Roth promises. I believe that when the time comes, government will renege on them, and count on a cowardly and supine citizenry to kneel and pay the tax. Because I do not believe the promises, I want my tax benefit now, so that it’ll be too late for government to take it away later. For me, that means that a Trad IRA is most sensible.

I also prefer the basic wager of a Trad IRA: if I retire with high income, yeah, those taxes will be brutal…because I am well off. Boo hoo. Whereas in case I retire with low income, my tax burden will be less than if I’d paid the tax up front, and in the meantime, I got many years’ use of the money to make more money.

How you feel is up to your confidence in the future and your own tax planning. Let’s say you take the Roth promise at face value. If you are low income, a Trad IRA’s tax writeoff would mostly be worthless to you. Only higher income people gain much from tax writeoffs, since tax rates are higher on higher incomes. The ideal Roth saver would be a person of low income who saves diligently all his or her life, gradually building up an impressive money pile from careful scrimping and smart investing. If you think that’s you, then by all means do so. The ideal Trad saver would be a person with higher income who accents that high income by taking the tax benefit now, ideally reinvesting the savings for still more gain, or a person who has zero faith in government promises. If either is you, then the Trad makes sense. (I wouldn’t say we are high income, but we are middle income, and I have zero faith in government promises. Advantage: Trad.)

But remember that you can do both, provided you don’t contribute to both in the same year. So if you decided to put money in a Roth while you were young and po’, and then in a Trad while you finally started to make real money, that’s fine. You just need to make a choice each year which to contribute to, and live with it. Both accounts would continue to exist, and if you handled them well, to make retirement money for you. That would also mean not putting all your eggs in one basket, a philosophy of which I approve with a mighty approving.

Okay. Here is how it works in real life practice, each of the four rough possibilities:

Employer Trad (usually also called a Traditional 401k): you agree to have your employer take money out of your paycheck. The employer may match the amount up to a preset limit. A financial institution holds onto these funds, though you remain their owner. The institution offers you a limited number of ways to invest the funds for gain. A few institutions offer great options. Most offer mediocre to lousy options. (Also, the institution gets a big fee for sitting on your money pile, and if you think you do not ultimately pay it, you are naïve. One way or another, no matter how clever the shell game, you always pay all fees, and the sooner you grasp that, the better.) However, even if the options are not great, they beat all hell out of no retirement account at all. And in a Trad, at least you get the tax bennie up front, in essence paying you a bonus every time you contribute. Always contribute at least up to the employer match, and if you can afford more, pour it on.

Employer Roth (usually also called a Roth 401k): like above, except no tax writeoff; you are planning to get to take money out tax-free when you are old. Other than that, same basic philosophy except that piling extra money in now is not getting you a greater tax benefit. Even so, you might still do it.

When you leave that employment, the vested percentage of your account is still yours. Hopefully you worked there long enough to become 100% vested. The sooner you get it away from your former employer, the sooner it is secure from some mismanagement or stupidity on their part. (That would be illegal, of course, but it happens all the time. If you saved $200K, and lost half of it due to an unscrupulous former employer, will it make you whole if the employer goes to jail? Of course not.) Because there’s a lot of stupidity and mismanagement in our precious corporate world, you want to take possession of your 401k funds at your earliest convenience. This is called a “Rollover.” In effect, it becomes (or goes into) one of the following, depending on what it was before:

Personal Trad (usually called a Traditional IRA): this is when you sign up with a bank or brokerage for your own version of the Employer Trad. You deposit some money, and you can invest it however the bank or brokerage allows. Short version: with a bank, you will make no money, so that’s stupid. A lot of people have these at Schwab, Fidelity, Scottrade, TD, or other discount brokerages.

Personal Roth (usually called just a Roth IRA): when you sign up for your own version of the Employer Roth. Same principles, different investing options. The most salient fact–the tax impact–is the same; the ‘Roth’ descriptor is key here. (Roths came along later than traditional IRAs, so if you speak of an IRA without Roth, people think you mean a traditional IRA.)

So when you leave an employer, and want to take your retirement money with you, you either have a personal account of the right type into which you can merge it (“roll it over” in industry lingo), or you will have to open one. The brokerages will be delighted to help you do that, and they’ll even go get the assets for you. Most brokerages have lower minimums for retirement accounts, because they find that profitable (since people rarely loot their retirement accounts). However, you will very likely first have to sell any mutual funds you hold. That’s fine, as they are probably subpar investments anyway. Traditional mutual funds typically are. Key thing to know: there is no salient difference between a Rollover Trad IRA and any other Trad IRA. They share the same tax issues.

You can convert a Trad IRA to a Roth, if you’re willing to pay all the associated tax on every dollar in the account. I’d have to have a good reason to do that, but everyone’s circumstances are different, so I can’t say no one would ever do that. For example, suppose you already had a personal Roth IRA, and you rolled over a relatively tiny Trad IRA, and this was a year of not very high taxable income. As a Roth believer, you might go ahead and pay the tax to roll the Trad IRA into your Roth, because this is a low income and thus a low tax year, minimizing the bite and simplifying your accounts.

Two paras ago, I mentioned mutual funds. If your mind generated the question “Wait. How is a mutual fund different from an IRA?”, and you then felt that you sounded dumb, relax; the question is natural. An IRA is at heart a form of bank account, like a regular savings account: it’s a money pile. A mutual fund is an investment option (like a stock, bond, CD, what have you) available to an account’s holder. Thus, your whole account is an IRA or 401k, in which you might or might not choose to own one or more mutual funds, depending on what you think is to your advantage. A mutual fund is basically a bunch of stocks and/or bonds bundled up together. Simplified further, it most resembles a single stock–at least, it resembles that more than it resembles a bank account.

Thus: I might say “I hold shares of the Fidelity Magellan Mutual Fund in my Trad IRA account.” However, I would never say: “I hold shares of a Trad IRA in my Fidelity Magellan Mutual Fund account.” Cart before the horse.

So how does one pile up this money? From a strategy standpoint, the goal is to make the biggest possible heap of money in the most tax-advantaged way. As my CPA has drummed into me, there is tax avoidance (which is legal), and tax evasion (which is a felony punishable by imprisonment and fines). Earlier, we went over the decision process between Trad and Roth, which is a very personal one; the math favors one or the other depending on how you forecast your life will unfold. Whatever you pick, if you’re twenty right now, I would guess that you’ll need close to $2 million to retire comfortably, but no one really knows. Safest way is to keep saving until you do know. It’s not possible to retire with too much money.

If your main retirement is with an employer, and you’re under 35, know this: conventional separately managed mutual funds (i.e., run by a trained professional with discretion as to what the fund will buy and sell) usually underperform the market. They get paid handsomely anyway, which I personally think is disgusting. Why pay someone handsomely to do worse than the market? I don’t need to hire ineptitude; I can supply all of that I might want, right, free of charge? (Gods know I often have.) There is usually an index mutual fund among the account’s investment options, which I consider nearly always the most sensible choice, because it outperforms the pros in a majority of cases simply by doing its best to achieve the market return minus very modest fees. It buys and holds the securities that are in the index, period. However, be prepared for some fluctuations in value over a lifetime, as you go through market crash cycles. Those typically occur when a lot of people are doing a stupid thing, which you can expect the public to do as soon as it forgets the lessons from the last fiasco. In my life, they were in 1987, 2000, and 2008; my guess at the next one is circa 2020. Every ten to twelve years isn’t a bad guess. The only certain way to avoid those market crash cycles is to invest so that you never really make any money, so that’s like saying the only way to stay out of the hospital is to commit suicide. True, but no way to plan your life.

If you have a retirement account that only you control–either rolled over from an employer, or started on your own–you have many options, including many that were not available to me in my callow youth. If I had it to do again today, with a full working life ahead of me, I’d put it all in several different index ETFs, and put new money into whichever was lagging the rest (on the logic that the laggard is most ripe to bounce back). It is therefore time to explain about index ETFs.

We covered my complaints about conventional separately managed mutual funds, and my preference for index mutual funds. While the latter are usually more sensible, both suffer from the outdated conventional mutual fund model. ETFs–exchange-traded funds–are technically also mutual funds, but unlike conventional funds, their shares aren’t created and destroyed daily as people buy and sell. A finite consistent number of their shares exist, one may buy those shares on the open market, and one can set a limit price. Index ETF fees tend to be very, very low–as they should be, because any non-moron owning a computer and subscribing to a market news service could manage an index ETF. An index ETF manager has the discretion/choices of a U.S. Marine recruit in boot camp.

What it means is that if a young person started a Trad IRA and put all his or her contributions into an S&P 500 index ETF, or other stock index ETF, and kept doing so all his or her working life, the following would be true:

  • That person would probably retire in comfort.
  • That person would probably not ever need any more advice from me.
  • That person would probably not stress much about it.
  • That person’s trad IRA would probably outperform any employer-ruled 401k s/he might also have.
  • I would be very happy for that person.

Oh, that person would deal with job changes and rollovers, sure; however, the rollovers would probably go to bulk up the existing IRA. The biggest issue would be the need to avoid going over one’s allowable tax-deductible annual contribution, because the limit is not per account–it is per person, per year, and exceeding it sucks. The IRS makes sure it will suck. Take whatever actions you must in order not to exceed it.

If that seems a little unfair, think on this: if your biggest problem is having to ask some questions and do some math to figure out how to put the max into your retirement portfolio every year, you are very fortunate or very thrifty. But if you already have enough basic savings to act as your crisis crumple zone, you could always just open up a taxable brokerage account (householded with your IRA for easy review and management) and invest that money however you see fit.

And some year, maybe the year you are out of work for four months and money got tight, maybe you’ll come up short of the max to put into your retirement. If so, you’ll have money in the brokerage account to move over and make the full contribution. In the meantime, if you have to sell a stock or ETF to raise that cash, you’ll pay tax on part of the gains (the dividend and capital gain part), but it’s rarely a big hit. Nothing like the three-finger shocker you’d get if you’d put it all in a conventional mutual fund that lost 20% that year, and then notified you in December that oh, by the way, here’s the amount of taxable income our realized gains and dividends will cost you. Yes. It really is that bad. Such a fund can lose a bundle, and due to tax laws, have to distribute capital gains and dividends so that the IRS can tax you on them. I trust you can see how miserable that would be. If you are wise, unlike me, you will opt out of receiving and paying that invoice.

Does it sound like this is a lot simpler than people make it out to be? I think it is. You can make it as complicated as you choose, but for most people I think simplicity and a mechanical investment discipline are best. There are no guarantees, just like there are no guarantees one won’t die in a car wreck tomorrow. Just as you maximize your odds of safe travel by driving defensively, you maximize your odds of safe and profitable investing by doing sensible things.

One last word on market trends. On any given day, you can find pundits writing articles ‘calling a top,’ ‘calling a bottom,’ predicting a crash, predicting a huge runup, anticipating a ‘correction’ (that’s marketese for ‘dropping a financial deuce’), and so on. They all have one thing in common: no one ever calls them to account when they are wrong. That’s why Jason Kelly, one of the better financial authors and a very good guide to the nuts and bolts of smart investing, calls them “Z-vals” (zero-validity predictors). They might as well be rolling dice. Since they are never fired or hanged when they are wrong, their opinions mean nothing, and should mean nothing to you. Don’t let them get you worked up or demoralized. They don’t really know; they just get paid to write articles.

And always remember: you retire not on the money you saved, but the money you made.

As for me, I’m your Robin Hood. I hate Wall Street, a snake pit full of entitled criminals that goes about buying and selling elected leaders like some cities used to sell and buy human beings. I hate all the people, and there are many, who have positioned themselves to take away more of your money than they deserve and earn. I don’t make any money from your gains. The only satisfaction I get is the moral joy from helping you game the system to your advantage.

My payoff is to sit here and do the mental math about the revenue denied to a class of criminals because of each person I tipped off.

Good hunting.

Sitting by the window with my checkbook

One of my investment philosophies I call “sitting by the window with my checkbook.”

Imagine there’s a downtown building, not too tall for openable windows. It houses mostly investment people. They are rich, but are too small to do it like the big boys, and have the public cover their biggest losing bets. If they take a bath, they’re wiped out.

They’re taking baths today, and they’re jumping from the 8th floor window. They cannot face their families with the news that they are falling out of the upper middle class. They will have to sell the cabin. The children will have to go to public school. The eldest will have to start doing yard chores, because the gardener is too costly. They have become what Trump calls ‘losers.’

They mistook their wealth for their sense of self. It’s impaired, and they are fundamental cowards who panic rather than hunker down and toughen up. I like that. I plan to profit from their pain. I’m not making any money today off anyone who isn’t a coward.

I’ve watched a few cowards jump already this morning. I judge the markets by the number of jumpers. When that number rises, I get my checkbook, grab a seat by the window (but not in their way; they will run you over), and wait.

They’re all still done for. They are all having trouble selling their shares. In fact, the shares have not declined in value that much, and will recover in time, but all these men (no women are this stupid) think purely short-term. They have become losers in life, according to their own hypercapitalist, left-hand path world view and assessment of human value. They would have to get real jobs.

I wait for them by the window. I keep the window down when no one’s jumping, to slow them down long enough to talk. As each one comes to the sill, we have a conversation. It may go like this:

Me: “Hey. Before you jump, think about this. Those shares you paid $11/share for? I’ll give you $6/share for them.”

The jumper looks at me in angry moral outrage. “You’ve got to be fucking kidding me! Why would I do that?”

“Well, you’re about to jump. If you find someone to buy them, there’ll be something to pass along to your family. If not, there won’t. Your call?”

“What kind of human being are you, to stop people on their way to this window and offer them bargain basement prices without trying to talk them out of jumping?”

“A smarter kind than you, apparently. You’re jumping and I’m buying. But if you don’t want to, feel free to jump. Another jumper will be along.”

“That is beyond evil. You don’t care about me.”

“Of course I don’t. That’s how this works. It’s how it worked for you until today. It’s not as evil as playing casino under rules that say you can’t lose. At least if I lose, I truly lose, and truly have to pay up. Or jump, if I’m afraid to face my consequences. If I were the jumper, you’d be happy to get a good deal from me before I jumped. Look in my eyes and you look into a mirror.”

“God! Okay, I’ll sell, you horrible bastard.”

Pleasant smile. “Price went down to $5.50.”

“You are insane!”

“$5.40. Deal or no deal?”

“Fine! Give me my $5.40! At least by jumping now, I never have to see your face again!” *leaps, screams, goes splat*

“True. Don’t care. Ah, another jumper. Hey, hold on just a sec, man. I don’t mind if you jump, but before you do, I’ll give you $5.25 for those shares…”

Evil? Yes, in the purely capitalistic, satanic sense of self-interested evil. Capitalism is the purest form of satanism, of left-hand path worship. In LHP worship, one takes what one can according to a few morals and one’s own self-interest and ability. There are reasons why the Judeo-Christian scriptures equate money with a big-ass demon, and say that one cannot worship their god and the demon at the same time.

It’s very amusing to me watching rich televangelists ask poor people for their money–and get it, up to nine figures of it. The televangelists are Anton Szandor LaVey’s wet dream of Satanic principles in action. If people are stupid enough to give them the money, take it, and live high on the hog! the old carny and bunco artist would say.

I’m not LHP, but I play one for the markets.

If I were truly that evil, I wouldn’t come out here and tell you how I do it.

If you think this requires six figures of disposable wealth, think again. Entry point is about $5000 of investable capital.

Interested?

=====

There’s a junk bond selloff. Junk bonds are bonds that pay high yields because they have low ratings, i.e., the chance they might fail is greater than infinitesimal.

When any selloff happens, it means people are very fearful. Buffett tells us to be greedy when people are fearful. Therefore, this morning, I am greedy.

What that means is that I’m shopping for closed-end junk bond fund shares. I find that this topic is eye-glazing for many people, so I am going with very short paras that won’t lose folks.

First, Sunday is a good day to do this, because the market is closed. Prices aren’t moving. If I make any decisions, I have all day to think about them, chicken out, whatever.

Mutual funds are pooled investments; in essence, you send them your money and they invest it for you.

Closed-end mutual funds are also pooled investments, except that they already got all the money, so when you buy the shares, you buy them from someone who wants to sell, at the market price.

All mutual funds have both a market price and a net asset value (NAV). NAV is what the fund’s actual investments (the bonds themselves) divide out to be worth, per share of the fund in existence. Market price is what you can actually buy or sell those same shares for.

With old school open-end funds, you have to pay NAV. With CEFs, they may trade (could also say: “market price may vary”) at a discount or premium to NAV.

I like discounts, the bigger the better. I especially like them when they come from people’s panic and irrational behavior, because I believe courage should always defeat terror. I am not only willing to make money from freakouts, I find it sardonically satisfying.

Since mutual funds must adjust their investment values to agree with the markets, and since the markets are affected by fear and panic (or euphoria, in its time), we can agree that the NAV incorporates fear into its price, right?

If we agree that fear is priced into the NAV, it follows that a discount to NAV means that said fear is priced into the fund’s shares a second time. It has to be.

Example: If the JKK closed-end fund holds securities that the market has pummeled down to a total NAV of $20/share, but you can buy JKK on the markets for $15/share, obviously the market is adding a second dose of fear. That dose is irrational. The markets already beat it up once.

It’s too bad there isn’t a CEF that invests purely in CEFs of junk bonds. We could get yet another level of fear pricing.

When you look at a yield, the % is meaningless without understanding how your payout money would be calculated if you bought it.

One buys CEFs mostly for yield, not growth. If they appreciate, that’s a bonus, and the best way to have a shot at that is to buy during fear.

That goal harmonizes with the goal of maximum yield, so it’s even greater reason to go full avarice at those times.

That has me updating my CEF shopping list. I might sell some and buy others.

I keep a list of CEFs. Now and then, I look them all up and note the NAV, the market price, the payout, how many of those payouts per year. All that is easy to discover.

From that, the list will calculate the annual yield at market price (this matters), yield at NAV (this is fantasy, since I can’t really buy it, but it helps me compare and gloat), and current premium or discount of market price relative to NAV (of reality to fantasy).

If I see a good chance for a great yield emerge from that list, I consider buying. If I still feel like buying on Monday, I make a note to place an order.

Of course, by then, the market rate will have fluctuated. Naturally, I am not satisfied with a ridiculous bargain. I hold all the leverage here and I’m going to insist on an even bigger discount. If no one will sell it to me for that, fine, no deal. No hard feelings.

Therefore, if I do buy on Monday, I’ll place an order at a price lower than the day’s lowest market price. It will be good until canceled (I’ll have it expire about a month out). Maybe it will reach that price and fill, today or in days to come. Maybe not.

The best deals are when people are jumping.

At first, they all lose more money. That’s fine. A few of the underlying junk bonds may even go bust. All of them won’t. And all the while, every month (in the case of most CEFs), they will send me my yield payout. For years.

Today, I’m checking to see if any of those payouts have dropped, and how they relate to the prices I might have to pay as I sit beside my window with my checkbook.

Days like this come less than once a year, so I’m taking a comfortable seat.

Headlines + Dow = artificially generated freakout

In the past, I’ve written about how financial media spread panic, and how handy the Dow Jones Industrial Average is for them. Right now, this very day, I can give you a case in point.

As I type, the DJIA is off by 311, which takes it to 16,680. That is a decline of 1.83%. And Marketwatch is splashing the headline in huge bold letters: It’s getting ugly – Dow nosedives by 350.

Let’s take this one out with a series of quick snapshots, like in urban warfare training.

  • Obviously the index has rebounded by a fair bit, but the frantic headline remains. An alarming percentage of people absorb headlines as gospel, making them prey to the modern art of the misleading headline.
  • 1.83% is not that ugly. It’s a definite down day if that’s where it ends (and as I write, there are two and a half hours left in the trading day), but the sky isn’t falling. Ebola wasn’t found in all our supermarkets. A Kardashian didn’t have a wardrobe malfunctian.
  • Notice the verbiage: ‘ugly.’ Implies there’s blood in the aisles. There isn’t. ‘Nosedives’ emphasizes the deception: ZOMG PANIC DO SOMETHING OMG OMG YOUR ALL GONNA DIE OMG THIS IS THE END! This is the equivalent, in terms of common sense, of recommending someone get an ambulance ride to the ER because he or she woke up with a headache.
  • On the year, the DJIA is slightly down. It began the year at about 17,250. That’s fairly close to a flat year, if it ended today, which is not great, but it hasn’t been very volatile for most of the time. It’s been dull, and the media haven’t had anything to wet themselves over. Anything will do.
  • For the last five years, the index is up from almost exactly 10,000. I’m not doing the arithmetic, but that looks to me like annual gains of about 10%. After five years of that, you’d probably start to anticipate a flat year. No bull market is eternally sustainable. When it hiccups, that’s not a ‘bloodbath,’ another term MW is bandying.
  • People, in obedience to punditry whether they realize it or not, are still reacting to the Dow’s numeric change the way they did when it was at 10,000, or even 5,000, and such a numeric change was greater. When the index was at 10,000, a decline of 350 would be 3.5%, which is a bad day, but not a disaster. If you watch indices long enough, you’ll see those days a few times a year. At nearly 17,000, a decline of 350 is 2%, which is the kind of bad day you’ll see rather more often in a given year.
  • It follows that, after paying any attention to the Dow in the first place, the next dumbest investing blunder is to pay attention to its number rather than its percentage. Show me a day when it’s down by 10%, or 20%, and that’s at least got me looking at valid indices to see if there really is a bloodbath. For 2%, it’s not worth my time.
  • In the meantime, we can use MW’s helpful tools to find out what’s driving the decline. There are thirty stocks in the Dow. Microsoft, Apple, and Nike are taking the biggest hosings, along with Goldman Sachs. The first three are down over 4% each. It’s raining, but the sky isn’t falling. Three of the companies most unlikely to fail, are seeing a lot of selling today. That is all this means.
  • Since the DJIA is compiled according to a formula that was infantile and distortionate at inception (1896), it’s idiotic anyway. On a field of baseball players maneuvering to hit behind the runner, put the curve ball on the outside corner, and shade toward the line to avoid that long hit into the corner that could become a triple, the DJIA is the naked fan who streaks the field while we’re all trying to be observant.
  • Marketwatch is a publication of The Wall Street Journal, which is a publication of Dow Jones & Co., a subsidiary of News Corp. So you’ve got a website owned by the people who maintain this index. And they love this index, because the S&P 500 (a saner large-cap index) is around 2,000. You won’t get many triple-digit days from it, so it’s harder to generate a freakfest with the S&P.

Behold the current state of a venerable name published by a venerable name. Misleading garbage.

Simple true statements about investing to cut through the mountain of baloney

When I talk to people about investing, I see how easily they get overwhelmed. Can’t blame ’em. So let’s reduce it to a series of statements that are simple and true (in my opinion and experience), independent of one another, and see if that helps.

My suggestion is to read and absorb just one a day. That ought to last a while.

  • All stocks, bonds, and mutual funds are securities. When one says ‘securities,’ one means all those, but excludes raw precious metals, commodities, real estate, Cabbage Patch Dolls, and stuff like that.
  • An index, like the Dow or S&P 500 or NASDAQ, just watches a pool of securities and reduces it to a total number. It’s only as indicative as the chosen securities and the weight each receives.
  • In all investing, percentage is key. Don’t look at the raw number change of the index, or the security. Look at percentage change. If you can’t divide using Windows Calculator, you can’t understand investing. Of course, if you can divide using Windows Calculator, you can understand investing.
  • Stock splits mainly change looks and convenience. If a $500 stock splits ten for one, the fundamental valuation didn’t change. Everyone just got ten shares of $50 stock in return for one share of $500 stock. It’s about as significant as breaking a $20 bill into tens, fives, ones, whatever.
  • A common stock represents a share of ownership of a company. On the fundamental level, it is buying a piece of a business.
  • A bond represents borrowed money, with bondholders as debtholders. Your car loan or mortgage would be in effect a bond issued by you to your bank, if you only had to pay the monthly interest as you went and then had to fork over the principal at the end of the term. Since you have to cough up principal as you go, it’s not quite the same.
  • A preferred stock is a hybrid of bond and stock (oversimplification for ease of understanding), but in my opinion is more like the bond part than the stock part.
  • When we say ‘fixed income,’ we generally mean bonds, but preferred stocks fit the category as well.
  • There are two main ways to make money: growth and income.
  • In growth, you want to sell it later for more than you paid for it. In income, you want to get paid as you go along. Some go for one, some the other, some for a combination. I like getting paid as I go along, myself. Then it’s too late for them to back out on paying me.
  • Conventional open-end mutual funds (most of the ones you hear about) apply 1975 logic and constraints to 2015 investing. Which was fine in 1975, less so today.
  • Roth vs. traditional IRA: you are deciding whether you want to get the tax benefit now (traditional) or trust the government to give it to you later (Roth). Your call, and there are good arguments for both sides.
  • Your employer’s 401k often limits your choices to crappy open-end conventional mutual funds. Not much you can do about it. It’s a great racket for fund administrators and fund companies, which is not to say it’s all bad for you. Rather, it’s not as good as if you were free to invest it as you chose.
  • Most conventional open-end mutual funds don’t beat their target market indices, so it raises the question of why keep paying them 1-2% per year when you can, in effect and with ease, buy the performance of the index and pay the index fund manager about 0.2%.
  • Buying a precious metal fund or mining company stock is not the same as buying the metal, and the two shouldn’t be confused.
  • Looking at interest/dividend yields, here’s the simple math: divide the total annual money they pay you per share by the price you paid for the share. Payout$ / price$ = yield%. If they pay you $5 per year for a share that cost you $100, you are getting 5%. If the share went up to $150, you are still getting 5%, provided the dollars paid you per year do not change.
  • A full-commission broker is only as good as his or her thinking, and has to outperform by the commission amount just to break even for you. Worse: the broker generally has a vested interest in trading. Buy-and-hold makes him/her no money, unless it’s an unlimited free trades setup, in which case you’ll pay about what you’d pay a conventional mutual fund manager.
  • The Dow Jones Industrial Average is worse than worthless. Why? Because if you take two stocks of companies of the same overall value, one priced at $10 and one priced at $100, and each change by $1 in a given day, for the first it’s 10% (a huge day) and for the second it’s 1% (a typical day). Yet both have equal impact on the Dow. You would be better off if you strove never to even learn what the Dow does.
  • You don’t know how good your investing nerves are until you watch the whole market go to hell one day. What you do, or do not, when that happens for weeks, is your answer.
  • Bond funds are not the same as bonds, any more than gold stocks are the same as gold.
  • Bonds don’t have a market like the NYSE or NASDAQ. They’re bought and sold from inventories. As such, bond indexes can’t perfectly imitate their markets; they can only try very hard for representative samples.
  • Bonds die. Stocks don’t. In ten years, a ten-year bond goes away, with its principal paid out in redemption, and it no longer exists to buy or sell. IBM stock, in some form, has existed for nearly a century.
  • The bond your school wants you to approve involves them getting a loan from investors, with you agreeing to pay the investors the interest, and in time, reimburse the investors for the principal. So investing is part of your world if you pay rent, because your rent covers the property taxes, and that’s where school bond taxes are paid.
  • It’s unrealistic to expect gains every year. The realistic comparison is to the relevant indices: did your total return % (growth plus income) exceed them? Match them? Underperform them? If the indices took a 20% dump, and you only took 15%, good job, well done. If the indices climbed 30%, and you only got 20%, you took a bath. Terrible year.
  • The market is full of euphemisms. One is ‘correction.’ A correction means that the market took a big dump. It sounds so much better in print than ‘big dump,’ more dignified, but money is money.
  • Feel free to engage in ethical investing, long as you accept that you have reduced the focus on making money. And remember this: the total amount of stock doesn’t change because you refuse to own Monsatan (poisons), Wal-Mart (first world exploitation), Nike (third world exploitation), Reynolds (tobacco), or Exxon (fossil fuels), or Diageo (alcohol). To sell it, someone has to buy it. If you really want to annoy the company, buy their stock, donate the dividends to causes that hassle the company, and vote against management’s recommendations in shareholder elections.
  • Read too much investment media, and it’s like politics or football: you can find articles to confirm any perception. Want to believe next year is crash year? There’s a guy at Marketwatch who predicts crashes every year. About once a decade, he’s right. No one calls him out on the other nine years.
  • If you get your market information from Jim Cramer, that’s like getting your history information from the History Channel, or your understanding of basketball from the Globetrotters, or your science information from a religious scripture. As in all media, do not confuse financial news with financial news entertainment.
  • If you hand your money to a financial planner, find out how s/he gets paid. With every investment: find out who gets paid, and what. No one’s doing any of this free. Two things are true: 1) everyone is getting paid, and 2) you are paying them, somehow, somewhere. It’s okay to pay, but stupid not to know what/who/when you pay.
  • I keep using the long phrase ‘conventional open-end mutual funds’ not to be cumbersome, but because there are a number of mutual funds that are neither conventional nor open-ended, which I want to exclude from the statement.
  • For equities (securities representing ownership rather than debt), we identify them by a ‘ticker’ of one to five letters (AT&T is T, Microsoft is MSFT, Fidelity Magellan Fund is FMAGX). Five letters ending in X is a conventional open-end mutual fund. Five ending in Q is usually a company in bankruptcy, delisted from the major exchanges. Five ending in Y is a foreign stock’s American shares, without getting too complicated. Five ending in F is a foreign stock.
  • Note that there is no way to tell exchange-traded mutual funds, real estate investment trusts, closed-end mutual funds, and many other pooled investment shares from common stocks by looking at the ticker symbol. Note also that not all foreign stocks have an F or Y at the end, or five letters. Toyota is TM.
  • Any dividend that looks too enormous is soon to be cut or eliminated. Simple.
  • When you see lots of people around you doing a stupid thing financially, brace for impact. Security guards bragging in the elevator of your skyscraper about big returns? Venture capitalists throwing money at anyone with a domain name and a tattoo? Banks lending money to people who can’t pay it? Brace for impact.
  • 95% of Americans should just buy index ETFs and sit on them, rebalancing every year or two. That works unless you forecast an apocalypse that destroys the value of the US dollar and economy.
  • If you forecast an apocalypse, not even your mattress is safe. If you really believe it, you should emigrate to someplace you do not forecast will face an apocalypse, because even if your doomsday doesn’t kill you, it will make your life suck.
  • Investing is a great way to find out what people really believe, as distinguished from what they like to say and think they believe. Show me someone who thinks it’s all going to hell, and who’s putting money in a 401k, and I’ll show you someone who doesn’t believe his or her own words.
  • Rebalancing is good. It means when you divide your investments among several things, and adhere to a percentage allocation by selling what you now have an excess of, and using it to buy what you have a shortage of.
  • Yes, Wall Street is ripping us all off. Imagine if you were allowed to go to Vegas (or the local Native American casino), but if you lost big, got bailed out. You will not get to play by Wall Street rules, which are for very rich people. That, however, doesn’t mean you can’t make gains; they just will never match the gains guaranteed to those who own the system and operate it mostly for their own profit. That’s no reason not to get some gains of your own.
  • If you think the investing public is smarter than you are, think on this. Money market mutual funds are basically savings accounts in most people’s eyes, but in reality they aren’t guaranteed. They maintain a share value of $1 a share, and that’s what you actually own in them: shares. In 2008 or so, a few MMFs ‘broke the buck’–had their share value slip below the $1 which everyone takes for gospel. It was cause for panic, and in panic times, people run for safe havens. Where did they rush to? The safe haven of…money market mutual funds! To get out of the burning building, they ran outside, then back into the building. That’s your competition. Still think they’re smarter?

Our system is greed-based, and the extent and style of your participation in it is a personal decision.