What was the 1986 Federal tax law change called that took away depreciation and killed the commercial real estate market for years and years? In one fail swoop everything changed and many got caught with their pants down.

I was pretty young then but watched my now business partner struggle to stay afloat through those years, eventually losing all of his real estate partnerships except 2 that he still owns today. One never has broke even, the other one is a strip mall that is 100% paid for and hasn't been below 90% occupied for the last 15 years.

Great on site management is key...

This is a great discussion -- because for "newbs" it raises the specter of LOSSES... Losses occur for many reasons and can occur in ANYTHING at ANYTIME.

The only money I've ever lost - would be in the sure deals I couldn't possibly loose on. They were going to make fortunes. Easy money.

When you think that way. You're going to get your ass handed to you!

So let's use this discussion to revisit INVESTING 102.

When people tell you to never invest money you're going to need... there's a very good reason for that! You may never see that money again! It might also bring with it DEBT the gift that keeps on giving... that you may be on the hook for.

It's also why "rules" such as the 5% rule should be adhered to. That way - you'll still have 95% left when an investment goes south. Even a complete idiot should be able to pick some winners in a portfolio which will cover the couple of complete losers... We ALL have losers. Get used to it. This isn't a perfect science... and things beyond your control change.

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Why do I invest with a "company" (actually it was ONE guy - that is now Two guys) that picks/prospects/manages/controlling partner when it comes to commercial real estate?? Because I don't know what I'm doing! I want to be "diversified" --- therefore this is another way to diversify. It's NOT in the stock market - therefore it's diversifying my total investment portfolio. I have stocks - commercial real estate - mortgages - and properties I own outright (non commercial and non income producing but that are still assets).

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I will share this info - even though it's not really a rule or whatever..... it's just how MAYBE you all may want to come about in your "thinking".

I didn't suddenly put a couple million dollars into a real estate deal with ONE guy! Hell no! My tax accountant and I had discussed diversifying and "other" income YEARS AGO -- like 20+ -- and he had another client that did these apartments LLC's. He had been the accountant for the guy for quite awhile - and had invested his own money into a couple of these "deals". When a new acquisition came up -- I bought into it -- I think it was maybe 100 grand. A couple years later I bought into another one -- that was 250 grand - I upped the amount because the first one had proven successful. I also now had a better understanding of how these things worked... and had built trust with "the group". My next investment wasn't with this same group ---- hell no ---- I don't want all my eggs in one basket -- and there are MANY companies that do these kinds of deals -- and having been in the first two -- I became aware of others doing this - so I invested with another company. What if the first group became a bunch of crooks? What if they died? What if they weren't as lucky going forward as they had been in the past..... So I diversified with a different group.

You read all the time about people "loosing it all". Generally it was because ALL of their investments were in ONE thing - or with ONE outfit - or with ONE "investment advisor". Don't be the Rob Lowe of investing!

Investing isn't all about hitting a home run. It isn't all about being "lucky". It IS about patience... it is about CONTROLLING RISK... it is about controlling being GREEDY... it is about taking SOME risk while also trying to avoid losses. The losses WILL be there... but you need to control those losses so they don't take you down. Read this again. YOU WILL LOOSE MONEY at some point in something and it will never be the thing you thought you'd lose in. It always comes out of left field. The key is to have that loss not be a big deal. Hurtful - sure - but losses - when you survive them - make you a better investor. Why? Because they teach you not to be so f'n greedy - they teach you to not invest in stuff you know nothing about - they teach you to do better research.... They teach you to say NO to your neighbor/buddy/cousin who has a "can't loose" investment...

You had to bring up Bank of America again didn't you... ugly, painful... at one point I just cut it loose. Overall it was about 5% of my total, so with everything else doing good I was fine.

My other, maybe not so painful, was Annaly Capital. I think I broke even, but that means for two years that money made zero net. Great dividends, but the stock was essentially consuming itself to pay for those dividends. The stock price was dropping to match the dividend payout more or less.

Both of those stocks had me watching the market too much. Now I just check in on it every month or so.

The hardest part of BUYING --- is Selling. Knowing when to sell -- when the LOSS is eating you up mentally. Nobody likes to take a hit.... we all keep thinking / hoping / wishing / willing "it" to turn around and make us whole. Once in awhile that actually happens. Most of the time -- the "market" has spoken and that market is bigger than "us". There's DIPS --- and then there's "broken". Dips are fun and make you look really smart... Broken -- that beats you down and picks your pocket. Hard to know when it's a dip and when it's broken.

Owning INTEREST sensitive stocks in what we KNOW will be an interest rising market is DEATH. Old saying -- when interest rates rise... the stock market dies... Now. That's a really broad brush and frankly is only true for parts of the market. The key is to understand WHAT stocks might be hurt with a balance sheet of low interest rate bonds/stocks/mortgages.... Annaly (NLY) will be one of those hurt by being caught in the crossfire. I sold my NLY a LONG time ago.

The "mortgage REITS" may be some of the others caught with a book of low yields in a rising market. Really - it depends on how quickly and how far the rates rise.

BTW -- you know I've said it a million times -- the stock you sell at a loss - will climb to the moon half an hour after you push the button. I hate that damn little man on Wall Street. It's okay! Let it go.

Let me know when you - or anyone else - get's it 100% right. I'll give you all my money to invest.

I just discovered one of these that I'm researching, New Residential Investment (NRZ). They claim that their portfolio will go up in value if interests rise. I'm still trying to figure out how that will happen and I don't know if I'll ever understand it enough to buy the stock but it pays a 10% dividend right now. I think they buy a lot of mortgages at less than par and then either service it or pool them together and sell them off at a profit once they clean up the pool somehow. They also do a lot of loan servicing, which apparently is a pretty profitable business in itself.

How many of you listen to the company conference call? I've listened to several here recently, COST, KR, HD, NRZ, SNA, LUV and you can learn a lot about the company that way. I heard Cramer recently say that if you own a stock you have to listen to the conference calls. I don't understand all of what they say but I also learn a lot too and get a sense of the attitude of the company heads. I think he might be right. They're not exactly riveting entertainment though.

One of the many reasons I suggest only buying companies you like and use - and or "understand" - and to NOT have too many names in a portfolio. #1 You have to be interested enough in the business to want to be a partner/owner. #2 You have to like the business enough to want to "keep in touch".

Once people understand that a lot of this is purely a mental state... and they realize that they need to have a "connection" with where their money is. They'll fret less and enjoy more.

Great posts fella's... Like reading the new material, thoughts, etc. :)

Some of you have many years left to work - and some are creeping up to retirement age. Funny - it really doesn't seem to take as long as you think it would... I have no idea where the time has gone. Seems like just a couple years ago we were spending the weekends at Toys R Us.... now my kids are 28 and 24. Hardly what you'd call "kids" anymore. It's part of the reason I continue to prod - poke - urge - everyone to start to take part and prepare for what's surely coming!

Since we've moved to Sun Valley Idaho to enjoy the final part of this journey they call "life".... I've noticed a few things, and thought about a few things, that I never did in the "big city". Time moves slower here... relationships move faster! It's a "wealthy" playground... Seems there's three kinds of economies here. The Young - "I just want to <name the fun> Ski... Bike... hunt...get laid" folks... and they wait tables and bartend or fix your skis/bikes. And the uber wealthy that fly their jets in on Friday and boogie back to "wherever" on Sunday evening. And there's those of us that have taken up permanent residence - seeking to enjoy the twilight - doing exactly what the young want to do but can't really afford. Laughing at this thought - but it's mostly true! The young struggle working 3 part time jobs living with 3 others in a 2 bedroom rental, so they might catch some runs when they can... while the "more mature" ski / hike / bike / eat out daily at a far more leisurely pace.

The reason for the long lead in -- is because while we're what most might describe as "quite well off" or some other absurd description... what we really are is "comfortable". I drive by the little airport daily (my shop is just south of it) and I look at the beautiful private Jets and think... WOW! What it must be like to own one of those bad boys! Then I quickly kill that thought with "yeah but it sucks to be them because they came Friday and went back to work on Monday!". It helps to keep me from denigrating myself with "why didn't I do better!". And I guess that's the point of why I'm typing. We're all of different cloth. We have different levels of satisfaction. We have different levels of income. What do we have in common?? All of us WILL at some point need or want to retire.

So what do you want that to look like? You plan to sell "the big house" and move somewhere more affordable? Sounds good... usually doesn't happen. Too many "anchors" - kids - grandkids - friends... Do you see yourself just loading up the motorhome and "heading out" somewhere - only to come back when you're good and ready? I have friends doing that now... So far they've covered most of the western U.S. They have a nice new diesel truck and an Airstream... and they spend a week or so "camping" here and there in "parks" in the cities they want to see. They figure they have to live somewhere - so food is food etc - and the only extra cost are the nightly parking fees. Still - those fees add up! They're $40 or so a night - X's 7 days a week - that's $1100 a month in "extra" expenses!

The trailer friends? They have a SEVEN FIGURE nest egg... and yet they aren't living anywhere near what I'd think someone with that kind of dough would live like! Why? Because ONE MILLION DOLLARS will GROSS them 50 grand a year - which at 20% tax rate will NET them 40 grand a year. Sounds like a lot.... but it's $3,333 per month. With Social Security benefits they're probably NET NET $5,000 a month. House and cars all paid for, no debt. HEALTH INSURANCE is a huge monthly burden! Oh - and then property taxes... and heat and water and groceries... So you can see how that lousy $1100 "extra" for camping fees is starting to take a bite.

So what's my point? My point is, you better figure out what you want those "golden years" to look like... and start doing something about it. It's never too late -- and it's never "enough". But I'll tell ya right now that if you think it's tough to make it every month NOW... Think about what that's going to look like when you're retirement is $60 grand a year and you "only" have a million dollars invested to live on. Pretty daunting - but doable!

Very well said Greg. Understandable and practical. Realistic.

My dad used to have a saying on his refridgerator that said.

"Dreamers build castles in the sky,
"Optimist's live there,
"Realists collect rent from both of them"

It always kinda stuck, the "save a little, spend a little" way. I look back and say the same thing " i coulda done better", but these first world problems jade our minds with greed. I think thats why we call it "managing" our money right?

Awesome post to both Greg and Glassman. Good quote. Great reminders!

I've got 30 years before retirement. It seems so far away, but I can imagine it will come quick!

What Greg describes above is precisely why there is no right answer when someone asks how or what they should be invested in. Everyone's situation is different.

My situation is way different than most because of a couple of factors. First off, we don't have any children...or any heirs at all to speak of besides our furkids. So not only am I not worried about saving for college educations like a lot of my friends, I'm also not worried about leaving anything behind for anyone either.

Second, my wife and I worked very hard, were pretty successful at earning, made what I think are pretty wise economical and investment choices and lived pretty frugally for a lot of our younger years, enough so to build ourselves what I think is a decent little nest egg.

Now, what is hard for us to decipher (and anyone that I have asked for help) is...the nestegg is not large enough to provide enough income to live off of in our current state for the rest of our retirement years without dipping into the principal, especially when invested in safer, more steady eddie type of investments. But some sort of income off of the nest egg while dipping into the principal a bit at a time, while still earning a bit on side jobs, and having a little bit of passive income from our farm...and still living frugally...just might be enough for us to retire on sooner than later.

I have yet to find the person that can put that actuarial together for me though as it is a unique situation, different than most. Especially when nobody can accurately predict what Mr Market is going to be doing at the same time...

All we can do is the best we can do and try to enjoy ourselves at the same time.

Lance --- you lucky dog you!! I like the name FurKids!! LOL - Perfect description.


I just went thru this discussion with one of my buddies. He has extremely modest needs... was doing "fine" on just a union pension / SS / Savings account. House had a very small mortgage that he'd taken out to make some upgrades.... no other debt. Overall a really nice condition financially. Then came some new dough. That needed to be invested... he's single. One kid. So far so good. But he's very active - and finally wanted to be more like "me" (that's what he kept telling me). He also wanted to help "the kid" pay off his house etc.... which I advised AGAINST.

So let me tell you what I told him.

Let's make a plan to invest "X" dollars (seven figures) and see what that looks like on paper - using just dividend paying stocks.... And then figuring that you'll have 20% dividend taxes.... So we did all that - and Schwab now transfers automatically $6,000 a month. HE THINKS HE'S RICH NOW!! And frankly - compared to most people - he is doing pretty dang well!!! Since he was doing fine with what he had coming in -- this is all play money... that that play money is being played with I tell ya!!

A couple of things -- he's too old to want to travel anymore... so that expense is not part of his planning. People kind to fail to think about "trips" (they're no longer vacations cause you don't work!). Hotels and all that are expensive!!

Anyway let's get back on track....

What I told him to do is what I do. On a good year -- I skim some of the big fat gains... in the bad or down or flat years - I don't take anything extra other than just the income. So what's that look like?? On a million bucks invested - on a good year maybe 12 or 15% growth. Dude! That's like 120 grand!! So if you take HALF that - that's 60 grand gross. That's an extra 5 grand a month gross... There's the new car -- or a month in Hawaii... or the fishing boat.... or major home repairs.

Now -- if you really do the math -- and calc how long a guy is going to live.... a guy that's 65 maybe lives 30 more years?? IDK... that's the hard part!! You can't drain the bank and you MUST leave some growth in there -- otherwise you're going to run out of money. But not really..... because you won't buy a new car when you're 85 -- and who cares about going anywhere when you're 90.... so really -- expenses like that kind of dwindle. But what you will have is increases medical expenses! Even with good insurance - medical is going to play a MAJOR role in your expenses.

The "pros" will tell you that you can plan to take out 4% of your capital each year... so on a million bucks - that's 40 grand... and it should replenish that with "growth" in the good years. If you're in decent dividend stocks - they should also be increasing the dividend payout percentage - so your income should be keeping abreast of inflation.

Here's what worries me.... I look back at what I paid for stuff 30 years ago -- and it was OMG cheap! Meals - movies - cars - clothing.... it cost NOTHING compared to what that stuff costs today.... so we have to fast forward 30 years of retirement -- and we know stuff is going to go up. What I think happens is we just use LESS STUFF as we get older. We just won't want stuff.... we'll have been there and done that.

I think it's the FIRST 10 years of retirement that might prove to be the greatest challenge. I know that at 61 -- I have LOTS of things I plan to do or I am doing. So those that say it costs less to be retired - I say BS!! Costs more to be retired because you have all this time on your hands and you want to go do things! A round of golf here is $135 -- play that twice a week and you've blown a grand just on the golf -- add lunches - beer -- and a bucket of balls... it ain't cheap!

I think this is a fundamental reason people plan to MOVE in retirement to somewhere that costs less to live. A resident of Indian Wells for example - plays golf for $35 !!! But then - if I lived there and it was that cheap - I might play every day!!

Lance -- there is NO ANSWER which is why nobody can tell you what the magic number is. I think you play it as it comes. In a good year you do some extra - in a bad year you suck it up and live within your means. At least - that's the way I've done it for the past 23 years.

Hell, that sounds like the last 40 years for me... :D

I agree, just gotta keep doing the best one can and try to live a little at the same time.

It's a delicate balance. Many Americans are a slave to money and their careers. They wake up 65 ready to retire with poor health and not much life left to live. That's when money doesn't mean much. As I approach 40 I'm quickly learning that life is a short adventure. You sure as hell better make the best of it, today. That doesn't mean you should live like a drunken sailor. I've over corrected and made life no fun working towards financial independence not so long ago. We need a solid plan and wise choices. But I have to say, live it up because the wick is short and their are no guarantees you are crapping in depends.

Lance, like you, we have fur kids. No college savings. No weddings. But also leaves us reliant on "other" resources to assist in our care when age and health requires it. Unlike our parents, we don't have 4 children to bail us out when we have a need or cannot afford our lifestyle choices.

The greatest challenge we face is the intermediate funds required to bridge our financial freedom over the next 20 years when we can obtain access to our IRAs and long term retirement accounts is quite the challenge, even at higher than average earnings. We work extremely hard, sometimes to a fault of fun and life enjoyment, requiring us to remind ourselves to not take ourselves too seriously and get out there with friends, family and our hobbies. It is amazing how a great laugh with friends makes you feel "richer" than any gains in a stock portfolio. Greg's $1M/$60k = $40k after taxes income calculation is a killer. To pay yourself $10k per month one needs around $3M in the bank. Thinking forward 20 years. $10k per month is going to go quickly with inflation and rising costs of everything. Healthcare will require an inequitable share of the available funds.

So this leads me to why we got so hooked on this thread, Investing 102, to begin with. Dividend investing offers us a tool to generate income when we hit our target number to be what we consider financially free. Greg described it as comfortable.

So after the diatribe, here is a question...what is better? A stock with a higher dividend %, higher potential growth rate, riskier investment profile or a proven player. Take PM vs VGR. I lean towards PM but the 7.29% yield of VGR is really attractive. 40% greater revenue on every dollar invested if it stays price neutral but the risk of loss makes me somewhat uncomfortable. What is the best way to evaluate the stock beyond the surface metrics? Curious how you look at this and what lens to add in an evaluation of peers in a group such as "sin" stocks?

The "best" metric IMHO is TOTAL RETURN. It is - after all - what we seek. TR is the measurement of dividend (if any) and growth. The combination - regardless of the % of either (dividend or growth) is how you make money on your money.



Total Return for 5 years on Philip Morris (PM) is 90%


Total Return for 5 years on Vector Group (VGR) is 270%


Would you rather make triple or merely double on your money in the same timeframe? LOL



The key to ALL investments is DIVERSIFICATION -- you balance some risk with some "steady eddies". And what you'll always see is a horse race... if someone was calling it out at the track - it would be one horse leading - then falling behind or being passed by some other horse -- and suddenly (over long time periods) the horse in the way back starts pulling and passing.... THAT is why we want some diversity - some risk - some growth - some "sure things" in the mix.

Forgot to respond to your other question - about measuring stocks in a group against each other.

This is a "research" question - which I tell people to use... look up the name you're interested - and then (say on Google Finance) see the list of what they consider 'peers'.... start researching those... start with the names you are familiar with but didn't come to mind... look at their dividend - look at their TOTAL RETURN numbers... did their TR come from a great dividend or growth or some combination... is the company diversified.... is one pure tobacco or are they into other stuff... how do you feel about that? What's the risk / reward... a company with a single horse vs a company with a team of horses....

Depending on your investable resources --- you might end up splitting your SIN STOCK investment between two or three names... rather than one - or maybe this year you buy one name -- and pay attention to a couple others moving forward... get familiar with them - watch them - get comfortable (or not)... So when you have your next buy to put in - maybe you put some in the same one or maybe you add a name.

Wow! I've never looked at life as a ticking time bomb.... My plan is to live forever!! And have fun the entire f'n time!

In order to do that -- I need a plan!


Life is a gamble - with risks just like everything else we do. Had a buddy retire early @ 58 -- he died 4 months later from a rare form a pancreatic cancer. But on the other hand - my MIL is 89 and has mostly outlived her "decent" retirement stash when my FIL passed away when he was 60. So she's lived basically 30 years -- READ THAT AGAIN -- THIRTY YEARS in retirement. What's happened to her is INFLATION has eaten into her really nice retirement cash flow.... WHY?? Because despite my wanting to put her into some dividend payers -- she wanted a strategy that avoided paying taxes... Meaning Muni Bonds... Guess what -- Bonds SUCK as a retirement strategy. What do you get when you roll your 10 years muni bond that was paying 6% tax free - into a new muni that's paying 3% tax free?? A cut in income by 50%..... and when you hold a bond to maturity - you only just get your money back. ZERO growth. So after 30 years she has the same amount cash - earning about 1/3rd.

What did she need?? A strategy that had her money growing at 3 or 4% to stay even with inflation -- and an income strategy that had her income increasing so she could stay even with inflation. Yeah - she'd have paid taxes along the way -- very very minimal taxes.

I used to ask her -- do you want to earn 25,000 per year and pay zero taxes - or would it be smarter to earn 40,000 per year and pay 15% taxes and have 9,000 more to spend per year. Her answer was always "NO TAXES". Thus her current situation.

Funny --- 30 years ago - it cost maybe 3 grand to paint her house -- but the house has needed painting 3 times in 30 years - and it now costs 10 grand to paint her house. That's almost half her annual income. And that 30 year roof she put on back then - that needs replacing now... and the furnace... and property taxes have quadrupled... and insurance / medical costs. And you know what -- today -- "80's is the new 60's" -- People live a long time these days.

WORD!!!!


Like my buddy that just retired == guy never made squat - but retired nicely. He put a little away for 40 years.... He didn't wait 40 years and then try to make it all up. He used the POWER OF COMPOUNDING... Didn't keep him from owning a 32' Grand Banks... or going on nice vacations... or driving "decent yet used cars". He lived within his means and his means meant he also factored in that monthly payment towards retirement.


Love that statement - money is like air - it's only important when you don't have enough.

My FIL worked hard his whole life, Electrical Engineer by day that worked up to being President of a firm with over 500 employees...and ran a large retail store by night with his wife. Worked 70-80 hours every week...lived well also, but his main activity was always work of some sort. Two months before he was to retire from his day job at 69 years of age, he was diagnosed with Multiple Myeloma and was gone about 6 weeks later.

My Dad also worked hard his whole life, made it and lost it all at least 3 different times, but spent his last 20 years of his working life as a consultant and was able to stash away about 150k in his IRA before retiring in 2003 at age 65. For about 10 years after, he lived large...in his own way. Did what he wanted too...when he wanted too...and by 2012 his IRA was gone and he was down to living on $2,000 a month SS check. He was also in poor health, was diagnosed with COPD around 2005 and steadily declined in health over the years, basically spent the last 5 years of his life as a hermit, the last 3 living in an apartment I built for him in the back of my outbuilding. He passed away Feb 22 with just enough money in his checking account to take care of his arrangements.

Two stark contrasts...My FIL earned and saved a ton and never got to really enjoy the retirement he worked so hard for. He had just turned 69 when he passed. My Father earned okay, spent and lived as he pleased...and ran out of money 3-4 years before he passed basically because he ended up living longer than he really thought he would. He was 76 years old when he passed away. Both were what you might call in pretty good health when they turned 65 other than my Dad had smoked cigarettes his whole life.

You just don't know... 3 weeks before my FIL died, my wife lost both of her Grandmothers 5 days apart, they were 87 and 97 years old. That little stretch of time really had an affect on us...we scaled way back and started to do what WE wanted to do instead of busting our tail to make every dollar we could. Everyone is different and things you encounter along the way shape your view of the world. How you invest whatever you have saved up is just part of the whole picture. It is an important part for sure...but one has to look at the rest of the picture as well and just make the best decisions you can for yourself.

Interesting statistic for WHY "richer" people are richer.... Certainly makes perfect sense to me...

If you RENT a place - you have ZERO upside. If you OWN a home... you are far better off than the Renter... If you OWN a business or have some money to actually INVEST... you're better off than just the guy that owns a home as his only asset. DOH!!


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In 2003, the wealthiest 5% of Americans had a net worth 13 times that of the median household. By 2013, that disparity had nearly doubled, with these households holding 24 times that of the median.

The main reason for this increasing wealth gap: not only do the rich have more assets, but they have more of the assets that have performed better. More than half of a typical household’s wealth is in real estate. But a median household in the top 5% keeps only 16% of wealth in home equity. More of their assets are in businesses (49%) and financial investments like stocks and bonds (25%). So these households have gained far more from the recent equity bull market.

Think you can time the market?

Great chart Todd, thanks! Reality check...can't avoid the worst days without missing the best.

I have to admit, it's been very tempting to scale back my portfolio. The negative news and indicators seem to be creeping in, and I've been reading more wolfstreet.com which sees Oil as the trigger for the next collapse. But I suppose I'll just sit tight and ride it out.

Hmmm... and I've been wondering about putting more in....

Absolutely fantastic chart Todd! Thanks for posting it!!


It's HARD to hold when the market is going "south" -- thus my strategy of at least getting some income from the dividends and my "pays you to wait" statements. But if you sell -- and you won't sell until you're getting killed -- then you won't buy until the market is back up 50%... and that's why they (the pros) advise you to not try to "time" the market. It just doesn't work!

You miss 10 days in 20 years and you have HALF. :RunninDog:

Greg,

I have read most of the thread and at one point back around 2013 you mentioned several stocks:
Consolidated Edison Inc. (ED)
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
Johnson & Johnson (JNJ)
SPDR Barclays Capital High Yield Bond ETF (JNK)
Kimberly-Clark Corporation (KMB)
The Coca-Cola Company (KO)
McDonald's Corporation (MCD)
Altria Group, Inc. (MO)
Annaly Capital Management, Inc. (NLY)
PepsiCo Inc. (PEP)
The Procter & Gamble Company (PG)
Philip Morris International Inc. (PM)

saying that you felt that these stocks were worth investigating. Now that it is several years later how do you feel about the stocks? A lot has changed within the market with energy stocks. I was just curious of your input. Thanks again for taking the time to add your thought and advise to this thread.

Good question! I'll do my response in blue above.

Tnh
 

A stock I used to own - Terra Nitrogen (TNH) - is THE PERFECT example of the relationship of DIVIDEND to PRICE action. I'd like you all to go to GOOGLE FINANCE -- open up a chart of TNH - stretch it out to the FIVE YEAR (so you can see the dollar amount of dividend paid)..... This should be an eye opener.

Note that as they INCREASED the div - the price went accordingly - but look what happens when they start to cut it!!

What's my point? Be very careful when "chasing yield"!! There's a reason that the yield percentage is so "tantalizingly high"... that comes with RISK! Risk is okay when it works out in your favor. Painful when it doesn't!! And you can only buy RISK assets when you're very actively managing them. They're not buy and holders / sleep well at night investments. Learn the difference.

Nice post Greg.

P/E Ratios
 

We've talked about this "metric" (a way to measure things) in the past -- and I've said that I don't really look at it - because a fast growing company could have a sky high P/E (Price to Earnings ratio)... yet - isn't growth what you want in a stock?? Or there may be some other compelling story as to why the P/E is a little out of whack vs it's peers. It is ONLY ONE metric... useful yes - but not a sole criteria!

Here's a very good explanation of a whacked out P/E in a stock I own (20,000 shares)... So I thought I'd share it here.


http://www.fool.com/investing/genera...ok-pricey.aspx

I don't know about everyone else, but the market activity the last two months has been a great learning experience for me. In years past, when I had a Financial Advisor that set my portfolio up for me and didn't really understand the objective, watching my net asset value plummet like it has a couple of times recently used to set me off the edge and make me lose sleep. I'll admit to being guilty of asking him to pull at at times like these, sometimes he'd talk me out, other times he wouldn't.

This time around, after watching the investments that I personally chose (and knowing WHY I chose them) dip in value...my first thought was to pick up more of them while on sale instead of running for the hills. I've been reaping the rewards of those actions the past few weeks now.

Nobody can tell where Mr Market is going to go from here on out, but as long as we all just keep on building up shares of the companies we like...eventually we'll have the dividend paydays that we need to enjoy our retirement years.

Glad you're more at ease this time around, Lance. I'm in the same boat.

WOW!!! I think you're my most successful "convert".

One's view of the market must be in terms of years - not days.... it's a long slow up and down battle... which takes time to play out. But like houses - and commercial property - and many other assets - UP is the general long term result. Collecting cash payments (cash or re-invested) is so satisfying along the way!!!

Greg,
I recently was having a text conversation with a buddy of mine and we were briefly talking about investing. What sparked the conversation was in 2008 when we were in Iraq he had showed me some stocks he held at that time. He was only 18 and light years ahead of me when it came to investing apparently. I remembered he had AAPL shares and was showing me they had gone up and of course I told him to sell and he said I was crazy. I guess he was right! Regardless of that I asked him if he still held shares in anything and he said NLY. I looked at the chart and it has been on a steady decline for a while now. I said ouch and then he said "Its a yield play. Dividend is stong, share depreciation is a good entry. Its positive when it goes down."

Can somebody explain this to me?

Annaly Capital Management (NLY) is something that I used in the past to "park" cash and create a yield stream. For a long while it was a fairly constant price - so was relatively safe from a price standpoint. However, It is largely a "mortgage interest rate" play -- and as such -- I had warned LONG AGO that if interest rates were to rise.... this type of holding will get punished as the spreads on what they hold will be devalued (like holding a low % bond) and that can more than offset (decline) any yield you'll see.

So let me put this very simply. Money chases YIELD.... if the bond market was paying a tax free 10% -- that's where the big money would go. Where would the big money come from (there's a finite amount of investible cash)? From the Stock market! Why would you invest in the stock market with a yield of 5 or so percent - and pay taxes - when you could get 10% tax free on a bond? So the market would go DOWN as the BOND yield became more attractive. What holds the stock market "up" is it's yield -- because as the prices of dividend paying stocks declined - provided they're paying the same dividend rate - their yield would go UP. A stock that is valued at $10 - that pays a $1 dividend - has a 10% yield.... but if that stock price declined to $8... and it continues to pay the $1 dividend -- it's yield is now 12.5%.

Dividends are declared and paid in dollar terms - not percentages. As the price of the stock goes UP -- and the dividend payout stays the same -- the yield % goes down -- as the price declines -- the yield % rises.


If you're a long term holder of a stock that declines -- but has a sufficient yield -- then "eventually" you'll be made whole. That's not a smart way to think about it - but it might be the only way to think about it versus selling the shares at a big loss and taking the capital hit. This works especially well if you're having the dividend reinvested -- as the dividend is then buying more shares (you'd get more shares at $8 than you would at $10) and over time this will bring your average cost down. It's not as simple as that --- because there is a "cost" associated with money... and you're potentially losing out on capital growth etc.


So fundamentally what you have to be aware of is ----- is the stock price declining because there is a fundamental change in the business - or the perceived fundamental change in the business.... therefore rendering it a bad holding ------ or is there potential for the share price to recover? In NLY case -- it's a dangerous holding in a rising interest rate market. Perhaps your buddy just doesn't really understand what NLY is really all about. He could be "blinded" by chasing yield rather than understanding the relationships of what interest rates can do to an interest rate sensitive company.

Thanks. That helps me understand it better. Not sure if it's something I would chase. Its all about comfort and that seems like a lot of variables to consider.

If it's too complicated to understand the business you're thinking about being a partner in (as that is what buying the stock makes you - a partner).... stay away from it (whatever "it" is). There are far too many big great companies that you can invest in that are "easy" to click with. Why make life complicated.


I have used several companies over the years to "park" cash.... a couple ETF's (JNK and HYG and PFF)... GE.... NLY....KO... MO.... PM... AT&T and VZ. These are all "steady" shares that pay decent dividends. What I find about JNK and HYG and PFF is that they pay MONTHLY so I don't have to park for an entire quarter in order to pick up the dividend. But I'm talking about what would be quite large amounts of money for "most" folks reading this. As an example -- I hold over 1MM in EACH JNK and PFF currently (30,000 shares of each). Those two pay me over 10 grand per month... but --- big BUTT --- doesn't take much of a change when you're holding that many shares and you can lose way more than you're getting. This is okay for someone like me -- because I'm watching this stuff DAILY -- and perhaps multiple times per day. These are not buy and forget "investments"... they're "I have some cash I don't know what to do with right now and want to make some pocket money" buys.

This is why - throughout this thread I've preached to invest in best of breed stocks that a guy knows what the company does... That the average guy can buy with confidence and not need to check the price 8 times a day.... (I've got nothing better to do).

Hey Greg, great thread.

Ive got a generalized question. Tax on dividends goes to personal income rates, then what u see happening?

Thanks

Oh boy.... a loaded question that really is a tough one. For me personally -- it would change what I do to a certain degree as that would take a lot of disposable income away.

But, I need to make money on my money. How am I going to do that? Stocks? Bonds? Real estate?

The tax rate comes into play when BOND Yields have normalized returns (not the ultra low FED induced rates we have seen lately). That's when you look to tax free bonds - because you can calculate the tax free rate of return vs the taxable rate of some other investment. The problem with Bonds is you don't have the capital growth... so there is actual "risk" there that people fail to calculate.

Stocks have survived - and paid dividends - thru all manor of tax "schemes" by the government. Ditto real estate. Ditto bonds. So it's not a zero sum game regardless of what the tax scheme is. People still need to invest their money "somewhere".

Here's the way I look at it..... If I make 100,000 and I have to pay 35% - I still kept 65,000 for me. Obviously I like keeping 80,000 of the 100... and one can discuss the benefits (or not) of that free cash flowing back to the economy vs flowing back to Uncle Sam.

But the short response is -- I think it depends on how many other things are going in the economy. A big change would be a definite shock to the economy. Ala interest rates rising too quickly. It would really depend on how the change would roll in. If they gradually raised rates - people would have time to make the proper adjustments.

I remember when (1991) the Gov decided they were going to tax "luxury". So they put a 10% penalty tax on Boats and Furs and high dollar cars etc. It cost 60,000 jobs in the boat building industry in the US and put the fur industry virtually out of business (when was the last time you saw a woman wearing a fur or saw a fur store). But we know the "government" is not the best and brightest... That tax was repealed two years later because of the damage it did. Personally, I think raising the tax rate to ordinary income tax rates would do similar damage to the economy.

As usual -- it's a thorny issue. Many people believe the "rich" should be taxed - but what happens is that the man in the street pays a far heavier price when they loose their jobs.

On a personal note --- what people don't see is how many people make a living off the "rich" guy. The building of my home here in Sun Valley will keep some people employed for over two years. If I was taxed at ordinary rates - I'd have built a smaller project - or not built at all! I could have bought some other place (only the real estate agents would have gotten any income). That would have affected an awful lot of people here in the valley. The excavator - the cement guys - the framers - the plumbers - the electricians - the HVAC guys - the roofers - the sheet rockers - the painters... NONE of those guys would have made a dime off this project - and therefore neither would they pay ordinary income taxes on their earnings. So they can tax ONE guy (me) or they can collect taxes on a 100 people. I go out and have a meal regardless of the taxes I pay. But think about the 100 people. Do they go out or stay home? Do they buy some new equipment or not? Do they buy a new snow machine or have to sell the old one to pay the rent?


Like I said -- taxes are a thorny issue, and need careful consideration of the cause and effects. What sounds good on paper and in theory - can have debilitating effects down the chain.