Category Archives: Investing

Investing, Religion, Social comment

Sitting by the window with my checkbook

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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?

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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.

Investing

Headlines + Dow = artificially generated freakout

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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.

Investing

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

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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.

Investing, Social comment

Ebowling for dividends and growth

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I take a weekly investing e-letter authored by Jason Kelly, a Coloradoan* who lives in Japan. Jason is an interesting guy, a rare combination: an experienced financial advisor with a fine track record and a degree in English. He is author of The Neatest Little Guide to Stock Market Investing, which remains the clearest introductory book I have seen on the topic. Jason has writing game. Jim Cramer is not fit to do Jason’s laundry, either as writer or financial advisor.

In addition to insightful, readable commentary on the financial markets, the typical Kelly Letter incorporates some social comment at the end. Like me, Jason does not consider himself obligated to join in media-purveyed panic. Also like me, Jason doesn’t mind making fun of the inherently ridiculous. This week’s edition ended with Jason’s commentary on the Ebola situation. I laughed so hard that I requested and received gracious permission to share its full text with my small but smart audience. Thanks, Jason.

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That’ll do it for this week.

With America’s nationwide Ebola death toll up to one and possibly rising, public health officials warn it’s not too early to take personal precaution. A recent survey by Boston-based Hitseeker Group found that six of nine people who’ve heard Ebola mentioned at least three times since Oct 6 believe they know somebody who comes into frequent physical contact with Ebola-infected blood, urine, saliva, stool, and/or vomit, and are therefore at risk of contracting the deadly virus themselves by handling said fluids among their friends.

Worse, this is under current circumstances. Should the American hot zone spread, the incidence of thinking one knows a person at risk of contracting Ebola is likely to spread, too. Officials point out that should authorities in Dallas fail to contain the disease, it could get as far as Plano and Fort Worth. Pressed for details, they project the maximum possible death toll in the United States to lie between 316.1 and 317.9 million people accounting for those who die prior to contracting Ebola due to heart disease, cancer, or stroke.

A spokesperson for the new Homeland Quarantine Coordination Agency cautioned against distraction from the Ebola threat by reports that, every day, an average of 1,973 Americans suffer a heart attack. “This is old news,” he said. “We must face the new threat head-on while there’s time.” Citing a statistics book, he illustrated how easily the Ebola death toll could double. “With one more death,” he said, holding up a finger and pausing, “just one, we would double the number of people who have died from this terrible disease. Think of what two more would do to the growth rate. Then … three. We could see the number of deaths rise tenfold in no time if we don’t nip this in the bud.”

The agency has devised a color-coded Ebola alert system to help guide behavior. It’s currently flashing bright red, leading some to wonder what color will be used should the rate of expansion increase, but the issue has been tabled for a less pressing moment. The simplest cautionary procedure during a bright-red alert such as the current one is to limit blood, urine, stool, and vomit play to people one knows well and trusts, an admittedly daunting task in a society as friendly as America’s, but well worth it in the short term.

Be careful out there.

Yours very truly,
Jason Kelly

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*Some say ‘Coloradan,’ others ‘Coloradoan.’ My own Colorado cred comes from Fort Collins, where the city newspaper is called The Coloradoan. My parents were/are CSU Ram alumni, and we lived up on the Poudre. Jason’s a CU Buff, but I also like to see them win, so no divide there. But I will always maintain that the term for a Coloradoan is, well, a Coloradoan, because when I was a Coloradoan, that’s how I learned it was put.

Adventures, Investing, Married life, Scumbag studies

Hosing off after automobile shopping

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It will take a high-pressure nozzle. After dealing with most of the auto sales outfits in my wife’s area, it may take that to denude us of the ick.

My wife’s work requires her to drive moderate distances on a regular basis, which means that when her vehicle ceases to feel reliable, she isn’t the only one uncomfortable with that. Call me a sexist pig to your heart’s content: I view it as my personal undelegateable husbandly duty to make sure that my wife has a safe, reliable vehicle. I’m still driving my 1990 Toyota pickup, and with luck, I may drive it for another twenty-four years. She goes through cars in six to eight years. When it’s time to go shopping, I do most of the research, because I have more time to do it.

I have a number of friends, however, who know many things I do not. One goes back with me to third grade: my man Russell Deason, a fellow veteran of Heritage Child Abuse Christian School in beautiful Fort Collins, Colorado. Among Russell’s virtues is a mean streak when it comes to those who prey upon others, and with his sales background, that’s terrible news for car dealerships.

Before I get on with the story, with Russell’s kind permission, I quote here most of the advice he gave me. I took as much of it as possible, and kept some of the remainder in the quiver in case I needed it. I would like to share it with the world.

RD: “Look and show interest early in the month but walk on all offers. Return the last week of the month when they are desperate to make sales and fulfill their quotas. Continue to string the salesman along all month with teaser contacts (usually less painful over the phone than in person). Beware of the “tie down” questions. Those are designed to get you to answer yes, nod your head and other affirmative actions which in theory make it psychologically easier for them to ask you for the purchase. Drive the salesman nuts by constantly answering those questions ambiguously or negatively. Create a very long objections list to each vehicle you are considering. Dig through every consumer report on each and compile every petty complaint. Salesmen are taught to “answer objections” in ways that allow them to turn the objection in a “tie down.” If you beat them at this game they will become frustrated, their egos get bruised and they get desperate to land your sale because they cannot stand to be beaten at their own game. Finally, beware the “manager.” This person is their most well trained “closer.” They are the party best at the “tie down” and high pressure tactics. Do everything possible to avoid that person until you are actually ready to make the deal. When you do reach that point, insist on changing the chair position in the office. They will seat you back to the door. Turn the chair sideways so you can see the door. This unnerves them as this is a key point in their tactics. Tell the actual salesman to either not stand behind you or leave the room. Make that statement an order. They use that tactic to create an uncomfortable environment. Insist on time alone in the room to read the contracts in their entirety and hold out the possibility you may ask your lawyer to review them before finalizing the purchase. These are all things I was taught in sales training. Use them to your advantage with my full blessing. Please make the salesmen squirm so I can hear about it afterward.”

And I did. Russell, I know this is the best way to thank you.

Unfortunately, it wasn’t practical for us to time it that well. We needed to get Deb a new car, my window of time to help her was July 4, and that was that. But we were well prepared for their psychological warfare, and when they cut loose with it, we made sure it backfired.

RD: “I very much like David’s [another helpful commenter, David Lee] idea of a list the salesman is not allowed to see. They will find that most unnerving. I agree it’s also a very good idea to withhold job, family, downpayment amount or any other personal info back until you are ready to negotiation in earnest. Simply tell them that information isn’t relevant until “you are ready to be closed.” They hate customers who know what the close is and know how to avoid it. Also tell them upfront that you “will tell them when you’re ready to be closed. Please don’t try before that time as I find it offensive and more likely to go to your competitor if you do.” The more you take control of the entire situation the better. Their entire sales system is predicated on isolating the customer, controlling the conversation and narrative, creating a conversation full of the “tie down” (yes it does work on most people), and in hyping the emotional interest you show. Be dryly analytical about your interest in the vehicles. They play on emotion. They prefer the customer who is impressed by horsepower, options, fancy colors and street presence. If you display nothing but a dry analysis which allows no room for emotional manipulation you’ll be better off.”

I steeled myself. I think the points on my ears actually become more pronounced.

RD: “One more thing … the salesman is trained to exhibit positive body language especially when using “tie down” statements. They will nod their heads affirmatively vigorously, touch the vehicle fondly, pat you on the back or any other thing they can think of to reaffirm their desire for you to respond positively. They are also taught to watch for your compliance. So be VERY conscious of this and any time they are nodding yes, nod no. Respond to every question designed to get an affirmative answer (even if you answer affirmatively) with a negative head shake or other action like turning your back on the vehicle or salesman, scrunched face or a fart for that matter. This also confuses the salesman because they aren’t getting their desired reaction.”

We did not really get into this part as much, since we made looking at vehicles the last step, and did so only at the dealership where we had already negotiated what I think was a reasonable price. However, it does apply to most people.

RD: “If you are mindful in person, and force yourself to be cold it’s a great advantage. Go in person only when you are already in a bad mood and have negativity on your mind. Do anything that will put you in that frame of mind before meeting them. It helps.”

That was easy. After a month of emailing with dealer sales representatives, being put on spam lists, having my questions ignored and getting answers to many questions I never asked, the hard part was not being cold. The hard part was not betraying any emotion at all, especially the dominant ones of a) quivering with revulsion, or b) visceral loathing that burned with a sickly greenish-yellow flame.

RD: “Another good help with the in-person contact is to be in a hurry. Tell the salesman you have fifteen minutes and nothing more. Carry a stopwatch or set your phone for one if necessary. Control the situation by announcing the time left every 5 minutes and every minute after the halfway point. This was a tactic actually taught to me in a seminar by a 5 star salesman who used it to put off car salesman when he made his own purchases. He announced upfront, “I’ve done all the research. I know what I want. I’m in a hurry I only have 15 minutes. After that I’ll go somewhere else if you don’t give me a satisfactory deal.” Salesman use fatigue as a tactic. They drag out the sale and the close to wear people down. Thus the “let me go ask my manager” gag done several times before the manager finally comes in to do the close. By then you’re worn down and already beaten down by tie-downs. Don’t give them any time. Always be in a hurry.”

We did this right, though it only factored in on our trade-in evaluation visits. And oh, how they hated it.

RD: “I keep thinking of things. A technique is taught to turn objections into tie downs. The classic example is a price objection. Salesmen are taught to say “so what you’re telling me is that if I could get you this car for x$ you would buy this car today?” They attempt to put the affirmation in your head. The correct response is ALWAYS to say no and to reiterate your objection saying “I was only seeking an answer to the specific question. It does not infer anything further than a desire for information.” This also flummoxes the salesman because they know then you are onto the technique being used.”

We didn’t even let them get that far. They tried.

RD: “They use the same for options or features … “so what you’re telling me is if I had this car in hot pink with power windows and a V6, you’d buy it today?” The kicker is always “buy it today.” It’s a form of psychological warfare. The best defense for this is the hurry. I’ve only got 15 minutes and I have a LONG list of objections and questions. I’m NOT prepared to buy today, I’m only info gathering. If the salesman decides to blow you off because you’re holding your ground then you have the impetus to later to call the sales manager and complain. In turn the sales manager will force the salesman to call you repeatedly to try to make amends. It can be quite an amusing scenario. Always try to appear nonplussed and even a little pissed off with their performance or offerings when leaving. Also, always ask to use the restroom and complain about it’s cleanliness. This usually results in the salesman cleaning the restroom or being forced to do so when he’s being interrogated by the SM about why his contact with you didn’t result in a sale that day. Using the restroom is a good diversionary tactic if you are feeling overwhelmed by tiedowns and other high pressure gimmicks and it gives you an open opportunity to criticize. Also complain any car you sit in or test drive isn’t very clean and doesn’t have that “new car smell” you love so much. Ask if it’s been on the lot a long time, or has been used as a loaner by the service department and if it has been smoked in. This makes them manic.”

We used the hurry very effectively. And when some of their managers follow up, they will not like what they will hear.

RD: “…their system was researched and designed by psychologists. One must be very diligent and aware. Even those like myself who are aware of all these techniques can fall prey to a skilled operator. The best advice is to be obstreperous, hurried and constantly shake one’s head no. The very act of shaking your head no helps to allay the psychological pressures being brought against you.”

And it’s true. If you don’t realize that the whole tactical goal of what they do is to cause you to purchase something whether you want it or not, you can get maneuvered. You can’t play any game well unless you know its rules.

So. With that, our story.

A month beforehand, I wrote to about eight Toyota dealerships in the Portland, Oregon area requesting quotations on specific new vehicles, plus trade-in estimates. In my mail program, I coded their names with an abbreviation for the dealership and a number representing the order in which they responded, so that I could hold tardiness against the tardy. Thus, there was James RMT0, Julian RTT6, and so on. The result informed me that I wasn’t going to like the process.

Some took days to get back to me, and a couple never did at all. Some had communal e-mails, so you never really knew who you were dealing with. Some sent quotes from addresses one could not reply to. Many were semi-literate. Two put me on spam lists, and one actually failed to take me off their list upon the first request. No matter; I got a price spread, a rough idea of trade-in values, and a feel for which dealerships were pushiest, which were stupidest, and so on. All, of course, wanted me to phone them. Not a chance. The vast majority of the responses I got were garbage, irrelevant to what I’d asked.

The trip to Portland approached, and with the necessary funds on accessible deposit, it was time for us all to get serious. I explained our timeframe and the models that interested us, requesting quotes on three models, a quote on an option, a rough trade-in estimate subject to examination, and their work schedule for the upcoming weekend. Four responses came in, of which three were close to fully responsive: let’s call them Theater, Royal Baby, Mr. Wilson, and Witch Trial. (Samira, the rep at Theater, was perfectly responsive–strong props for a businesslike reply. Mr. Wilson’s rep refused to give even a range for the trade-in based on our very liberal parameters, immediately marking that dealership as a trouble spot. Royal Baby’s rep only remembered late in the game, just as I was leaving for the airport, that he wouldn’t be there on July 4, and sent me a colleague’s name. I didn’t bother to record it or ask for him. Let’s call him Walmart.)

Since we were doing the initial visits on July 4, Witch Trial wasn’t open that day, and it was out of the running unless all the rest failed, in which case we’d have to resort to Plan B–going in without some numbers beforehand. Had we found that necessary, we’d have had occasion to use far more of Russell’s good advice. Even so, it was of great value. In retrospect, where we didn’t do it his way, it was because the method we had chosen insulated us from the need to worry about that.

Before I left, I printed out all the quotation e-mails, and organized all the prices into a spreadsheet. The biggest remaining variable was trade-in value. Normally we’d sell the car ourselves, but I didn’t want my wife having to mess with that. Also, frankly, there were a few things about it that could stand to be serviced, and I felt more comfortable putting it into the used auto sausage machine than dealing with an individual coming back to complain that the gas mileage was lower than usual (normal on older vehicles of this model), or that a couple of the indicator lights wouldn’t shut off.

Thus, my logic: go to the three available dealerships and simply obtain a firm trade-in value. Nothing else. And see how they reacted to ‘nothing else’ as a concept.

First, off to Theater, where we met with Samira. She did precisely as we asked: obtained a firm trade-in value, and otherwise did not hassle us. Bear in mind that we already had her pricing, and in order to know what her cars would cost us, we needed only a firm trade-in. We advised her that we were in a hurry, and within twenty minutes we had what we’d come for. Overall, her pricing was second best not considering the trade-in.

We haled south to Mr. Wilson, which was an astonishing experience. Since the individual we’d spoken with was not present, we figured we were starting fresh (albeit with some reality check quotes to consider). Mr. Wilson was a shark tank, with plastic smiles converging on us before we got inside the front door. We asked to obtain a firm trade-in value for our vehicle, and were routed to the ‘sales manager.’ He began to deliver an oration on the dealership’s virtues and methods. I interrupted him, explaining that we didn’t need to hear any of that right now. Amazingly, he attempted to insist: “No, you do need to hear this.” I stood my ground. “No. We are not here for that. We are not going to buy on this visit. If you would like to be considered, we have fifteen minutes for you to evaluate our trade-in.” A frustrated, resentful employee finally undertook this task. While he did that, in a move that creeped us both out, the dealership looked us up in some database, presumably from our previous purchase, asking about us living at an address that was now obsolete.

While we sat in the lounge chairs, we watched another customer being strung along by another salesman as he waited, and he was blissfully vocal: “Goddamnit, I’ve been here three hours. If you guys don’t get it together, I’m leaving!” We enjoyed commiserating with him about the general suckage of car dealerships. I’d just about decided that Mr. Wilson would be at the bottom of our totem pole anyway, because their prices had been least competitive to begin with. The trade-in was reasonable, but not enough to overcome the poor pricing and ick factor overall.

As I was walking around the outside trying to find Deb, yet another salesman accosted me–let’s call him Potato. He’d seen the Idaho tags and wanted to talk, so we talked about Idaho and other meaningless things while I tried to spot my wife. He then switched to asking questions about our purchase. I explained that we were there for a trade-in value only. He persisted, asking rapid-fire questions about what we wanted to buy, and demanded to know why we did not buy today. I politely changed the subject. “You haven’t answered my question!” Potato said, polymer grin masking frustration. I said something else irrelevant. “You’re not even going to answer my question?” he demanded. Yes, demanded–and incredulously. I spotted Deb, said we needed to get going, and walked away. My last memory of Potato was his voice complaining: “I’ve never been treated this way before!”

So, I guess, in his universe, I was required to submit to any and all forms of inquiry, and if I declined politely, I was just a jerk. Nice job, Mr. Wilson.

Next it was off to Royal Baby, where Walmart had offered the best prices and most promising trade-in range. However, Walmart wasn’t working, so I figured I was on my own. I didn’t think that mattered much; surely they would price competitively, and if it was the best deal, we’d seriously consider it. That began with getting a firm trade-in value, and they didn’t give us too much grief about that. Their offer was very respectable, and we retired to Taco Time to eat lunch and consult. Over lunch, we decided to go back to Royal Baby and take the next step. Little did we know how much we were about to learn about the retail auto sales business, and that if we’d thought Mr. Wilson was a bag of foreskins, we hadn’t seen anything yet.

We sat down with a young salesman whom let’s call Julio, and began to talk about what we wanted–we had pretty well chosen one of the three original possibilities. Immediately another salesman let’s call Insurance Beard, supposedly a sales manager, sat down with him. The desk was by the front window, so I promptly turned my chair to put my back against that window. I looked askance at him: “Do you also have a role in this transaction?” Insurance Beard said something vague, which I interpreted to mean: ‘This is Julio’s first day and he doesn’t know beer from urine.’ We explained what we wanted and asked for a quotation. Julio and Insurance Beard left and came back with the list price minus the trade-in–which was much lower than the earlier value given, $1000 lower, in fact.

I kid you not.

I explained that I was very, very surprised, and that I’d expected a competitive quote. I gather that this caused them to think of Walmart, whom I hadn’t mentioned (why should I?). That set off some sort of alarm in Insurance Beard’s mind. He went in the back and dug through some emails, then came out with a look of patient disapproval on his face. “Did you get some quotations from Walmart?” Yes, I had, I said, but I figured he wasn’t here, so I had to start over. Insurance Beard went back, then came out with a hardcase let’s call Elijah. Elijah remonstrated with us for not telling them about Walmart in the first place. He talked over me, and I could tell he was mad as hell. Elijah began to lecture me about how Internet sales and floor sales were totally separate things, that good floor guys sold maybe twelve cars a month, but good Internet guys sold forty.

(As an aside: think about the implications of that. That means that they get a ton of online inquiries, and that those people get much better prices. Salespeople are evaluated on the profit they earn for the firm. That tells you that if you walk into the lot cold, you are getting the very worst pricing. The only way to buy new cars for a decent price is to contact them online, where you can keep a boundary between yourself and the ick.)

Next, Elijah accused me of trying to pit the departments against each other. When I tried to explain that I had no idea how his sales department worked, and didn’t care, he kept talking over me. He finished by presenting Wal-Mart’s original offer plus a couple hundred in movement on the trade–a very good offer, and one we would have accepted if presented by a non-jerk. “This offer is good right now only. If you want to do business, fine. If not, it’s been nice meeting you,” he said, in a tone that contradicted his words.

I wasn’t going to be bullied; I said we’d have to reconsider. I reached to take the paper with the offer. “You don’t get to keep that. That’s my property!” he snarled. At that point, Deb had had enough. My beautiful bride stood up and walked out, instructing Elijah to fuck himself. Brimming with marital pride, I followed her, commenting to Julio (who seemed very disappointed) that I’d never dealt with such an asshole before in my life, and that I was sorry he had to work for someone like that. We’d been told by locals that Royal Baby was a dump, and now we know just how truly awful it was. As we drove away, we marveled at the sort of stupidity that had a sale and destroyed it with bad attitude.

We also now had to think on our next move. While we’d made people uncomfortable at two dealerships, about which I felt zero guilt, we didn’t yet have forward movement on a purchase. I’m a believer that better people should get the business. I’m also a believer that once one identifies the better people, when it comes down to the firm process of making a deal, being forthright can get you places. Thus, I got on the phone to Samira. I explained that we’d just come out of two other dealerships and that we wanted to scrub ourselves off with brillo. I told her we’d like to stop by, if she’d still be there, even though she was a bit higher than the lowest competition. How much? asked she. I do poorly talking or calculating on cell phones while riding in the passenger seat, so I guessed at a gap of $1800 including trade-in, making very clear that it was just a guess. I suggested that if she could meet us in the middle, that would work. She called me back in a few minutes and told me she could come down $500, so that we wouldn’t be surprised when we got there. We still decided to proceed.

When we came in, I did the math in front of Samira. I labeled one column Samira and one Jerk, then put down honest figures as they stood at the moment. That got a laugh out of her. My estimate had been wide of the mark: they were $1261 apart, not $1800. “Samira, half the difference is $630, discounting the buck. Meet me there, and we’ll have a deal.” She checked, and did, as I was pretty sure she would. It was too late to go to the bank for a cashier’s check, so we picked out the specific vehicle and arranged to handle the transaction the next day.

Could we have beaten her up a little more on price? Perhaps, but I gave consideration to Samira’s overall presentation. She was the only one who had done only what we requested and neither pushed for more nor asked unwanted questions. She had done the best job by far. In fact, she was the only one who had done an acceptable job.

How’d we do on pricing? Per KBB, the fair market price is $25,916 out the door. We paid, let’s see: about $23,500. Not bad. However, if we’d been able to time it better, we could have improved that. It surely would have improved in another month. Unfortunately, greater considerations impacted us. I think we didn’t do too badly.

We learned a lot, though, especially about the difference between pre-shopping online and just bombulating into the front door. Let’s distill what we learned:

  1. If you just walk in the front door, you are a sheep awaiting shearing.
  2. Advance research and price comparison are crucial.
  3. Expect a good percentage of the dealerships you contact online to ignore everything you asked them, and to ‘follow up’ with you or put you on spam lists.
  4. They really do hate when you keep control of the sale, which is primarily accomplished by refusing to let them put you into their patented sales process.
  5. If they don’t get their way, they get borderline loutish. They may believe they are entitled to demand answers of you.
  6. They expect to hold all the information cards, and for you to hold and play none. When you play one, that’s cheating. When they play one, that’s smart business.
  7. You can’t trust Yelp or other online site reviews of any business. There are ‘reputation management’ companies out there busily creating spurious reviews loaded with bologna. In fact, my experience is you should go the opposite direction. Any business with massive amounts of loving reviews, especially with the same ‘customer service manager’ graciously returning all the oral sex in the comments, has quite probably bought them to swamp glaring deficiencies or simply render negative reviews harder to find.
  8. If you get a variety of offers online, you can use the best one to beat up (that’s sales jargon for negotiating aggressively) the floor salespeople anywhere but the dealership that gave you the online quote. Just don’t go to that same dealership’s floor people, that’s all.
  9. Trade-ins can vary widely–our lowest and highest offers were $2900 and $4500. You should learn in advance what is the acceptable range.
  10. Trade-ins are a shell game, and a silly one. Who cares whether they knock $1000 off the price, or give you $1000 more for the trade? It’s all the same unless sales tax is involved (which in Oregon it is not).
  11. Even if you don’t plan to trade your car in, you can still have them evaluate it, and see how they respond to your insistence that they do no more than that, and ask you no further questions.

It’s still as slimy a business as it has ever been. It has not gotten better at all. The more the dealership brags about how ‘different’ it is than the others, the more you should guard your wallet. You are still dealing with a fundamentally deceptive, dishonest business, and as such, you do not owe it honesty or candor unless someone earns these of you. And after studying Russell’s advice–which fortified us greatly, and in gratitude for which we can’t wait to buy him a decent dinner if life ever brings him our direction–I suggest that when shopping for cars, you consider the words of Anton LaVey (the carny who became a Satanist to shock people, then decided he liked it). I think he cribbed it from an Eastern proverb:

Lie to a liar for lies are his coin;

Steal from a thief, ’tis easy you’ll find;

Trick a trickster and win the first time —

But beware of the man who has no axe to grind.

Never as true as when dealing with auto dealerships.

Investing, Social comment, Sports

What happened to sports cards

2 Comments

I remember a time when sports cards were toys.

Then I remember a time when they were everywhere.

Now I see people unloading boxes and boxes of them for $30, or trying to.

What happened?

I grew up in the 1960s and 1970s. In those days, make no mistake: we were concerned with the value of cards, or at least the heaviest buyers were. But only one major company produced them. That was Topps, which had held an effective corner on the market since the mid-1950s. In those days, production was often sloppy. Cards came poorly centered, color overlays were messed up, and one card in every pack had waxy residue from vile-tasting gum that was so hard you could shatter it just by dropping it on the floor. Reverses were not glossy or white, most years, but the natural dirt brown of the basic cardboard.

Cards could be unintentionally hilarious. In addition to some pranks and errors (Billy Martin flipping the bird, Bob Cerv’s arm airbrushed out, Claude Raymond pictured two years in a row with his fly open), card manufacturers had to struggle to say something good about each player. When a guy hit .171 and fielded as if wearing oven mitts, that wasn’t easy. We would hear about his great performances in the minors, his tremendous potential, and if all else failed, his achievements outside sports. This was more of a problem in baseball because baseball players were more likely to get cards. With 40+ people on a football team and some 20+ professional teams, anyone could see there wasn’t going to be a card for every reserve offensive guard. Basketball was easier, because there are something like twelve people on a basketball squad. Hockey (about 18 per squad) just didn’t produce that many cards. In baseball, you could expect cards for about 75% of a 25-player roster, with full sets being 500-700+ cards. Which meant that the writers at Topps could end up trying to convince us that a washed-up 2-9 pitcher with a 5.58 ERA was, in fact, an important personage.

Through the 1970s, cards were still playthings for most kids. This meant that they became worn, creased, impaled, water-damaged (I’ll really never forgive our cat for peeing on my 1972 Roberto Clemente cards, even though the cat has been deceased since about 1985), and otherwise mutilated. Very savvy forward thinkers did protect their cards from wear, but many cards that avoided damage did so because someone forgot about them in a shoebox.

After a court ruling, the Topps monopoly broke in the 1980s. Around that time and shortly thereafter, now-adult collectors began to see small fortunes in those old shoeboxes. Some began to buy up others, transitioning from collecting to investing. Early birds got the best bargains. As non-Topps companies got into the game, production values improved. Bad centering became rarer; metallic decor began to show up; the photos improved. The mud-colored reverse became something of the past. Imagining value, kids and also some adults started to buy the flood of new cards–and they didn’t play games with them. Gum went away, an impediment to value. For the next twenty-five years, it was all about so-and-so’s rookie card, or stars, stars, stars. Price guides told everyone what the cards were supposed to be worth, and a grading system emerged. Guys even bought cases of unopened card packs, figuring to sell them for good money some day.

I didn’t collect during this period. It all looked like flashy garbage to me. But neither did I get rid of my own cards. Some were worn playthings, some were in pretty good shape, and they all represented one of the happier memories of an unhappy childhood. That quarter-century simply happened without me.

After 2000, in my estimation, enough buyers figured out that most of the money in cards was already made. The bubble burst. Nowadays, people sell boxes of them on Craigslist for bargain basement prices, usually trying to tell potential purchasers that these in fact are worth thousands. Few seem able to anticipate the obvious rejoinder: “If they’re worth that, then why are you dumping them for $20, which no one seems willing to pay you?”

Things seem to have come full circle. Last I saw, only two major producers were still making cards. Everyone who sank thousands into cards during the glut is hoping to get a bit of the money back. Sitting pat, I was unscathed. I found other ways to lose and waste money, but not on cards.

Got some old cards? With noteworthy exceptions, if they are post-1980, don’t expect much. Anything from the 1950s has some value just for showing up in decent condition. 1960s, less so, but there’s a little value. 1970s cards go cheaply.

I still remember when they were toys. And I still hate to think how much of my limited disposable income went into them, but what the hell. I had fun with them.

Investing

Other investments besides stocks, bonds and conventional mutual funds

2 Comments

Many months ago I did a piece trashing conventional open-end mutual funds. I have no regrets. I promised that if even one person asked, I’d explain about other investments that may be better alternatives for most people who want to make money (rather than pay it to people in return for losing them money). It took a very long time, but someone finally asked.

Disclaimer: I am not an investment professional, and none of this is to be taken as a recommendation to transact any particular security. Examples given are not recommendations, merely samples so that the reader may get a look at one as a starting point for broad-based research. I assume no responsibility for anyone’s independent investment choices, and urge everyone to do careful research before choosing to put money at risk. All investment entails risk, and it is wise to consult a fee-only professional advisor for actual investment guidance.

ETFs (exchange-traded funds) and CEFs (closed-end funds)

These are also mutual funds, and are more similar to one another than different. Both are pooled investments that do not regularly issue new shares, so once they sell off the full initial offering, they trade on the open market like stocks. Both have tickers that look like normal Nasdaq tickers, typically three letters, sometimes two or four, whereas conventional mutual funds have five-letter tickers ending in X. A given fund’s description should say whether it is a CEF or ETF on your brokerage’s website, and the prospectus certainly will.

You will, of course, read the prospectus? With nearly all of them in downloadable .pdfs, it’s pretty rash not to do so. I’d read the most recent annual report, too. You especially want to take a look at what it holds, because what it holds would be what you would own.

Here’s the salient difference: ETFs are designed never to trade too far from NAV (net asset value…the total value of assets owned by the fund, minus any liabilities, divided by number of shares; we might call it the ‘basic share value’). This is because big hitters can swap in their ETF shares for what’s called a ‘basket’ of the underlying shares, and the market has different rules for the big boys and girls. CEFs do not allow this swapping. It assures that ETFs will always trade close to NAV, which itself fluctuates based on the underlying securities’ value. By and large, most ETFs are invested in stocks, and many are indexed–they seek only to mimic a given index, owning that index’s components in exact proportion to it.

Since CEFs can trade at steep discounts or premiums to NAV (most are fixed income dividend payers), opportunities periodically occur to purchase their shares at steep discounts to NAV. This is because market fear or euphoria, as I see it, is priced in twice. Suppose the NAV is $10, and it pays $0.70 annually based on NAV. That’s a fairly typical yield relative to NAV of 7%. But you don’t give a damn about the NAV, because the yield you will receive is based on what you pay, not the NAV. So, suppose you waited until you could get it for $8 (or as you would tend to evaluate it, a 20% discount to NAV, assuming the NAV happened to remain at $10 just for the sake of the illustration), and you buy. Your yield will be 8.75%. The yield relative to NAV means little, since you didn’t pay NAV. The annual payout, divided by what you paid, is your yield in an income investment.

1.75% is a significant difference, and since most pay monthly, you get paid often. I believe that the divergence between NAV and market price is the impact of fear (or euphoria). If people are dogging fixed income, the NAV will drop because many people are selling the bonds. However, the market price will also drop because people are selling the fund. I believe that this can present buying opportunities for those with patience and discipline. It is also easy to take the market pulse on high-yield fixed income just by seeing whether a number of bond CEFs are trading at discounts or premiums to NAV. I have zero interest in shopping unless I get a ridiculous discount. The notion of paying NAV, or buying at a premium, isn’t for me. I want to buy when they’re jumping out the windows. Before they jump, if the price is cheap enough, they can sell me their shares if they like. Or not. Someone else will be along soon enough.

What’s the catch with CEFs? Most are invested in higher-risk high-yield bonds. There might be Kenyan government bonds, bonds from some outfit in Pakistan, whatever; depends on what the fund’s prospectus says they hold or can hold. Most are very well diversified, much more so than many stock funds, with issues spread around many sectors. It is possible that this bond or that bond might fail to perform, but it is unlikely that the whole portfolio will go bust. And over the years, you collect a steady yield. The better you bought, the better your yield, and if you bought cheap enough, you probably have an unrealized capital gain at any given time. Now, that yield can decline if the overall interest/dividends paid to the fund happen to decline. There’s no guarantee. However, in practice, it probably will not go too far in any direction. And of course, one must always consider one’s comfort zone. Not all CEFs buy more speculative bonds. If you’re willing to take less return, you can find funds that go with higher-grade stuff, which pays less.

Most of my stock-related investing is in index ETFs, and all my bond-related investing is in CEFs. It is boring and successful, just the way I like my investing. I don’t do this to be excited; I do it to make money, and if I get my money, I am satisfied.

VO is an ETF. KMM is a CEF.

PTPs (publicly traded partnerships)

These are weird creatures. One often hears them called LPs (limited partnerships). They look like stocks until it’s time to make out your income tax. Their shares are called units, and they make regular distributions. It is a mistake to confuse these with dividends, because with PTPs, the payouts are considered returns of capital. From a tax standpoint, RoCs go to reduce your cost basis (what it looks like you paid for the units), so you don’t pay tax on that money unless you hold the units long enough to reduce your cost basis to $0.

Not that you avoid tax. In fact, these complicate tax, because the partnership has to issue you a K-1, which says in essence: “here’s your share of the tax liability based on how we did.” Often the K-1s don’t become available until very close to April 15, and you can almost guarantee that they will issue a revised K-1 as soon as you file your taxes. And if you sell the units, of course, since the returns of capital lowered your tax basis, from the IRS standpoint you made a big taxable gain.

If you can tolerate the tax headache, PTPs can be a good way to invest in energy. They pay you regularly. Like shares of any company, it makes sense to research them. What is a bad idea: buying PTPs in a traditional tax-deferred retirement account. I don’t fully understand how it works, but evidently they can cause havoc leading to your IRA having to file a tax return as if it were a person. Best to just keep PTPs out of your IRA.

LGCY is a PTP.

ETBs (exchange-traded bonds)

Most corporate bonds aren’t sold on a market like stocks. Most are held in brokerage inventories after their issuance. For the individual investor, it’s a little difficult to just buy these bonds, and very difficult to buy them sensibly. Not impossible, but harder than just buying stocks. For one thing, most bonds are sold in multiples of $1000 par value, so non-rich people have a tough time diversifying. This is why bond funds exist, although I greatly dislike conventional open-end bond funds. All the flaws of a stock fund, all the limitations of bonds, and all the weaknesses of conventional mutual funds rolled into one unattractive little package. ETBs are another way to invest in the bond sector while avoiding the crappiness that is conventional bond funds.

Because most have a par value of $25, ETBs are more accessible. However, these aren’t pooled investments. They are individual securities. They can appreciate, deteriorate and fail entirely, in which case you will probably get nothing. If a bond is trading at a ridiculous discount to par, with a correspondingly incredible yield, I’d bet that there’s serious underlying trouble and the odds are high you won’t see that next payout.

PPX is an ETB.

REITs (real estate investment trusts)

These got a very bad name in 2008, and for good reason: some went to zero. They trade like stocks. They often pay nice yields, and if bought well, so much the better. This is because they might best be described as a pooled investment that is required to distribute most of its gains to shareholders.

The hangup is obvious to anyone who watched them bleed out in 2008-09: if their assets drop in value, or stop performing (sending money), the value and distributions will drop. To buy a REIT without a full understanding of where they invest their money is asking for trouble; hell, it’s prostrating oneself and pleading for trouble. For example, what if it turned out a REIT was mostly in outlet malls? How many outlet malls have you seen lately that are half empty, pathetic shells? That might be why it’s so cheap. But, you might rejoin, the yield is currently 17%? That’s literally incredible. People are dumping that because they do not believe they will be paid that 17%. They’re probably right.

SPG is a REIT.

Preferred stocks

In general, these are classified as fixed income securities (the insider way to say ‘bonds’), though they are neither bonds nor common stocks. I would describe them as stocks lacking some common stock characteristics and adding some bond-like characteristics.

While you might get some capital growth from preferreds if you buy well, the dividend is the main reason for the play. Preferred stock is also senior to common stock in the pecking order for dividend payouts if the issuer comes up short on money to distribute, though junior to bonds. You won’t get proxy ballots for preferred stock; the shares are non-voting, so you don’t get to annoy the company by voting in favor of goofy or quixotic shareholder initiatives. Preferreds come in many flavors, and if you do not check into a given issue to find out exactly how it works, you’re making a mistake.

My own drag with preferreds is that my brokerage, Fidelity, uses a different ticker convention than the NYSE (or at least it did the last time I futilely attempted to place a trade for a preferred). Very uncool.

AHT.PE is a preferred stock.

Investing, Privacy, Social comment, Technology

Why credit card fraudsters get to keep trying until they score

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I have just experienced one of the bizarrest, stupidest situations I could imagine.

Yesterday, we got a phone call about our Bank of America Visa card. It was from their Fraud Department. Like anyone with more brain cells than his shoe size, I hung up and called the number on the card. Yep, the real deal: someone at a branch of a specified bank (let’s call it Union Bank) had tried to jack a four-figure cash advance from our card, something we’d only do in the gravest emergency. Props to the fraud trigger system. Fair is fair: they agreed to Fedex new cards to Deb and I, in separate states no less. At this point in the story, naturally, I’m delighted with their handling.

After I let Deb know, she suggested I find out where the transaction originated, and what would be done to prosecute it. I hadn’t thought about that, but she was dead right. Where it originated might give us a clue as to where/how the information was stolen. And if it had happened at a Union Bank branch, well, that was investigative gold. Banks video everything, from ATM stuff to standing in line trying not to get caught scratching one’s privates. If I knew where this bank branch was, I could contact the relevant law enforcement, assist them with any evidence I could provide, and maybe we’d snag the crooks doing this. Great idea, dear; I will do it.

I had no idea what I was in for.

I called the BOA Fraud Department again. The first time, I got someone with such a heavy accent it was problematic to communicate. I asked politely to speak to someone easier to understand and was sent to Silenceland; they hate that, but I’m not going to piddle around trying to decipher an extremely heavy accent. I called back, got someone a little more conversant in American English, and was put through to the next level. After they validated that I was the real me, it went something like this:

“Hi. Yesterday there was a fraudulent cash advance attempt on my account. You closed it and are sending me new cards, which I appreciate. The attempt came from a Union Bank. Could you tell me which branch, so I can notify the police?”

“We don’t have that information, sir. Since the transaction was refused, we did not save it.”

“What? Did you provide it to the police, so they can actually catch the goon?”

“No, sir. Since no fraud occurred, we did not.”

“How am I supposed to notify the correct police department if you throw away the evidence of the origin of the crime?”

“There wasn’t a crime, sir, only an attempt which was defeated.”

“Attempted crimes are also a crime. How will you ever stop the sources of crime if you don’t report them to the police?”

“That isn’t the same, sir.”

“Oh, yes, it is the same. If you swung a baseball bat at me, that’d be attempted assault, and the police would consider it an offense. One is not allowed to attempt felonies.”

“It’s our policy, sir. When the transaction is refused, we do not preserve the information. Only our law enforcement department could get it, and you have to be a police officer to contact them.”

“I assume I am not allowed to talk to your law enforcement department?”

“Correct.”

“So let me get this straight. The information is available to your law enforcement department. I can’t talk to them. And since I have no idea whose police have jurisdiction, and your company won’t tell me even though it could, it is impossible for me to initiate an investigation. And you do not see the Catch-22 in this, evidently.”

“That’s our policy, sir.”

“Your bank is the best thing that ever happened to thieves. No wonder so few of them are ever caught. You simply don’t care. Okay, I have all the information I need. Thank you for your hel–”

“Sir, we do care, we just don’t reta–”

“Ma’am, I am trying to get off the phone while I can still be polite. I realize you personally didn’t set this ridiculous policy. Far and away the wisest thing you can do right now is to let me end this call.”

“Knock yourself out, sir, have a nice day.”

===

I don’t fault her for repeating back a stupid policy, nor for being a bit of a wiseass at the end–I was getting pretty frustrated, although it’s not like I was abusive or anything. My issue, as should be clear, is with Bank of America’s Fraud Perpetuation department (as I now choose to call them). Here we are with a recorded environment as the evident point of origin of the felony attempt. The amount was the sort of amount that looks like it was chosen on purpose, to slip below a certain threshold of detection and notification. There’s a chance this was done by a professional criminal who gets information from garbage cans or is an insider at a business.

And you cannot get Bank of America to help the police chase them down, nor will Bank of America give you the information you need in order to do it yourself, unless you are a police officer. And, obviously, since BoA will not tell you the location of the crime attempt, you cannot know which police to notify. How many branches does Union Bank have? Hundreds, probably, in many states. Good luck.

Thus, credit card crooks keep on crookin’, thanks to the benign neglect of Bank of America’s Fraud Perpetuation department. And they evidently know it. Evidently there’s little risk at all. This system practically invites fraud.

I’m so glad we are firing these people as our checking bank. The only reason we keep this card is for the Alaska Air miles, for Deb to take trips now and then to visit family. And I’m not sure it wouldn’t be better just to buy the plane tickets ourselves.

Investing

Stopping out

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When I talk about investing with people, it’s natural that most of them don’t understand there are a lot of different types of orders. Most people know that you can place an order to buy or sell when a stock hits a certain price, but it gets more sophisticated than that. One form of sophistication is the trailing stop-loss order, which is available from any fully equipped discount brokerage.

It works like this. Suppose your shares of Baloney, Inc. (BLNY) are way up. You’re not eager to sell, but you think the markets are high, and you really don’t want to ride BLNY down the chute of a big selloff. Okay. You place a trailing stop-loss order to sell all shares, good till canceled (at Fidelity they expire after a max of six months). The trigger condition is a percentage that you choose. If you pick 1%, you must really want out, because a 1% drop in value is typical on a down market day–and isn’t even remarkable over two days or more.  If you pick 5%, it would take a very big single day of loss to trigger that, or a loss of that size spread over multiple days.

The mechanics of this are a headache for the brokerage, but that’s why they get paid. Suppose BLNY is at 100 when you place a trailing stop-loss order to sell it, trigger 5%. As of right then, the trigger price is 95. However, if BLNY goes over 100, the trigger point is recalculated (each time it gets above the high) based upon a 5% drop from the new price. So if BLNY climbs to 120, without ever declining 5% from its highest price since the order, its trigger point will be 114. That is 5% less than 120. The brokerage keeps this stuff in a separate file so it can keep updating your trigger point. When it sells, we say that it ‘stopped out.’

Seems like cheating, doesn’t it? That’s what seasoned investors do any way they can legally or practically do: cheat. Of course, you have to realize what exactly occurs with this type of order. When your shares drop to the trigger point, your order converts to a market order (and it is not going back; the die is cast). You may not get your trigger price, though it should be close. There has to be someone wanting to buy the shares for that market price. A market order, the simplest form of order, simply says ‘sell this now at what the market will pay.’ No type of order can create liquidity (investor-speak for ‘someone wants this, so I can sell it’) if liquidity doesn’t exist.

Can this hurt you? Well, there is no crying in investing. Big kid tools are for big kid investors. Most people are thinking of crash protection, but remember that once a trigger point is established for the order, it will never go down. If you aren’t serious about protecting some form of profit (or avoiding further faceplant), better not place one of these, because the smaller your % loss specified in the order, the more likely it is that a moderate market shift could trigger your sale.

My own belief on stop-loss orders is that they are for times when you think the market is stupidly high, you’ve profited handsomely from it, and you’re ready to protect the profits. I’m at that point right now. There isn’t really a good reason for the markets to be as high as they are, at least not as far as I can see; banks still aren’t lending much, interest rates on savings are an insult, there’s no big job boom, and the economy is still fought over by the macaques, gibbons, chimpanzees and ourangoutangs in Congress, who are doing nothing to help it, being too distracted by ideological feces-flinging competitions. If there’s a big long market slide, I expect to buy these stocks back at discount prices. It’s not that I don’t like the companies’ prospects; it’s just that in investing, I don’t give a damn about anything but money. I gain no emotional satisfaction from holding Berkshire Hathaway (BRK.B) shares; I just think they are a good investment. However, I’m not stopping out of those, because I think they are such a good investment they will weather a market decline very well. I’m not stopping out of my dividend farms (closed-end bond funds), because I didn’t buy them for capital appreciation. I bought them so they’d pay me money every month. They will still do that, by and large, regardless of what their prices do.

We–you and I–didn’t invent this game. We have the right to play it for keeps, for our own reasons, using whatever tools are available to us. For me, one of those is the stop-loss order.

Investing, Social comment

Let’s share a victory

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Some of you might know that I’ve got serious knee trouble, for which I’m undergoing rather unpleasant but helpful physical therapy. We have GEHA as an insurance provider, and they contract with an outfit called Orthonet to review treatment programs and approve care. My PT set up a plan of eight visits, which seemed logical to me: let’s do this for a month and see where we are.

I soon got a letter from Orthonet: they approved only seven visits. This mystified me. What was the logic? I called GEHA, who basically said I’d have to call Orthonet. I did this. The minion could not provide a responsive answer to this question: “Okay. My PT says I need eight visits. Your case manager evidently disagrees, thinking seven are sufficient. Explain the logic, please. What about my case prompted this case manager, who–unlike my PT–has not actually seen either of my knees, to decide that seven were all that were necessary?”

Of course, the minion served up the standard vaguenesses and horse hockey that are designed to baffle, confuse and frustrate people into just giving up. Evidently that’s their job: to get people to give up and accept less care. I advised him that none of that had answered my question, and that if he couldn’t answer it, then I wanted to speak to the case manager. This evidently was a very irregular request: to speak to the actual individual who decided that his wisdom was superior to that of the medical professional. I insisted.

Somehow, they got a case manager–if not my own case manager–on the line. He spoke in the rapid “I’m way too busy for this sort of thing” tones of someone who also has the power to take action and needs not to be slathered in protracted conversation. I asked him the same question. He said it was a good one, and that he didn’t know why. Very quickly, he agreed to resubmit the review recommending the eighth visit. There was zero fight. I thanked him and the conversation ended, goal achieved.

Now let us deconstruct the reality of all this, because while it would seem I should be very happy with Orthonet for giving me what I wanted so quickly, that is really not so.

  • My PT recommended a course of treatment. The minion’s first response to my question had hinted that they basically always approved one less of whatever was requested.
  • As a reflex, on the logic that Orthonet is contracted by GEHA to save it GEHA money, they therefore approved one less visit. The average person, less obstinate or confrontational than myself, would simply accept the reduced care. One presumes that if my providers expected this, they’d request nine visits so that I’d get eight.
  • Orthonet’s first line of defense against pests of my ilk is to have their toll-free line answered by people with minimal power, whose work is to spout gobbledygook. Most people are nice and do not like to be confrontational, and also won’t ask such a blunt question; they also won’t insist on a real answer. This should get rid of most people. Money saved. They will get less care, of course, but that’s the whole idea.
  • If however one remains politely insistent (thus not giving the minion a valid excuse to hang up), one will be routed to someone with authentic power of decision. This person is extremely busy and will take the easiest route, which is to concede. Okay, we lost this one, but that’s okay, we expect to lose one out of twenty. Nineteen savings, one loss, duh, winning.

Why I’m not satisfied should be fairly obvious: in the first place, a lot of my time was wasted. In the second, the only logic in play was money-saving. If the physical therapist had asked for sixteen sessions, they’d have authorized perhaps fourteen or fifteen. Had the therapist requested four sessions, they’d authorize three. There was no medical value in play. So yeah, I won a victory of sorts.

Some situations are just designed to screw you. It’s not personal. They screw everyone.

A long time ago, in a small Washington county seat, I took my first driver’s test. I’d heard that everyone who went to this testing venue flunked the first time. It was so with me. For example, he directed me to parallel park in a space without markers and with a parked vehicle only on one side, and ordered me to treat the space as if there were a car behind. He could thus automatically fail me on that part, on the grounds that he could say that my parking effort required room that would not actually have been available. All he needed was to find a few other fails, and I’d have to come back later and pay for a new test. That was his racket: keeping his job by keeping testing volume and payments high. Of course, being sixteen, I didn’t really have options, which he also knew.

Our greatest social parasites are not those we support with our tax dollars. They are those who automatically put people to more trouble and expense than is necessary in the hope/belief/knowledge that most people will just swallow it. Some people wonder why I fight things like Facebook profiling, web trackers, debit cards and nearly anything Google comes up with. This is why. I can’t make anyone else fight it alongside me. I can only make sure that the fight with me–if only me–costs the other side something.

Well, that and I can make sure the world hears about this Orthonet outfit, and its actual impact.