Investing 102

[GregWeld]

There's not too much to write home about with this choppy market. Trust me - this is typical summer action. We didn't get the usual "sell in May and go away" - but we are getting the typical summer "death of a 1000 cuts"...

I ALWAYS ALWAYS ALWAYS build a cash position coming into summer. Remember that I use JNK - HYG - NLY as cash parking spots. Years ago it was MSFT - GE - DELL.... but you must change with the market... but I digress...


We're at kind of a weird place in the market these days. People KNOW - without a doubt - that INTEREST RATES ARE GOING TO RISE.... when and how much and more importantly HOW FAST.... that's the unknown.


My typical action is to pick away on the stocks I like -- when they dip a bit. I use LIMIT orders for these buys - setting a price below where the market is at the time I place the order. I don't get stupid -- I just go a penny or two below the current BID not the ASK.... and if it dips to there at some point during the day I get the order filled - if not - it expires (I use day only limit orders).

So if I want to build a position to 10,000 shares... I'll buy 2,000 at a time. But during the summer - I only buy more if it goes below my last buy. So if I paid 20.50.... I'll add more if it goes to 20.35 etc. All I'm trying to do is not go all in at 20.50. Why?? Because it feels better to do it this way -- and I've been doing this for some 30 years... and I fully understand the MENTAL part of the game. I EXPECT --- expectations are meant to get crushed --- the market to be better in the fall -- so by September or October I expect the market to be higher or more steady.

This strategy is for large buys not 50 or 100 share positions... a few dimes on 50 or 100 shares isn't going to affect your return. But this is a strategy to remember and use if you're buying 500 or 1000 share position. It's just a game -- it makes you pay attention -- it makes you understand where your heart and mind are and it teaches you to really get in touch with your investor side. Can you stand to buy when the market sucks.... it's very important to know whether or not you can. Some can't -- it's okay.... but you need to know that. It's like a good poker player -- if you start a bluff -- can you see it through til the other player folds or are you going to toss money in the pot a couple times = and then fold -- thereby just increasing your loss. You should have just folded after the first cards came around... If you're not a good bluffer -- it's okay -- just know it and fold early. It'll save you money. Same thing in the market -- if the market is going south and you start buying and it's just killing you mentally... so you buy more and then at the bottom you fold and sell... THAT'S DUMB! That is what MOST "retail" investors do. They sell at the bottom and buy at the top. DUMB - DUMB - DUMB.... Let's not be "that guy".

[Sieg]

Good points.

I just need to learn to sell when the market starts to turn..........as is, if I was a gunfighter, I just stand there and watch in slow-motion as the guy shoots me.

If I would just act on instinct and sell a portion of the holding verses my mindset of all or nothing I'd still be alive and engaged playing the game and learning.

[GregWeld]

Knowing when to SELL is far harder than when to buy.... I use the same resistance in selling as I do buying --- I sell slowly... because it never fails that the day after you sell -- the market goes up.

The hardest part to selling is to question why you bought in the first place.

Here's the deal... if you look at the chart of the stock -- and you check it's total return over a long period of time.... Are you selling because it's down this quarter? Are you selling because you have too large of a gain? Or is it just portfolio rebalancing?

Today --- I asked my broker to sell ALL my BONDS.... Why? Because I have nice gains in them --- I just got the June interest payment... and I'm relatively certain that going forward my gain is going to turn into a loss as interest rates rise. I'll probably be wrong - but nobody ever went broke taking a gain (profit). I've owned them all longer than one year and a day -- so will be taxed at long term capital gains... So this is purely a "plan" -- and the trade off is I will loose the TAX FREE income.... but most of this laddered bond portfolio is out 2 - 3 and 4 years from now... I'd rather NOT loose the capital appreciation and have to hold the lower interest rate return for that time period.

IF -- big IF -- The economy is doing as I feel it is -- which is MUCH better than the unemployment numbers tell -- then we'll have a good XMAS selling period for retailers -- housing is making huge gains -- cars are selling like hot cakes etc.... so I'd rather chase that than hold tax free munis at 4 and 5%. I've started to build a position in FORD (F) etc.... I'm late to that party but I think they're just getting started on the road to recovery. So I'll position accordingly.

[sik68]

Good info on selling, Greg, Thanks! I believe in the dollar cost averaging approach, so I will stay the course this summer & fall. I expect I will a few times that's for sure.


I've been doing more reading on gov't sponsored retirement plans like 401k's. The author makes a pretty compelling argument AGAINST shuffling money into these types of retirement plans, namely because of of the lack of investment control, and that income from the plans is taxed at normal income rates.

Unless you plan to be "poor" when you retire, you plan to be wealthy when you retire and your normal tax rate at retirement will likely be HIGHER than the capital gains rate. For example, if you are retired in a 35% income tax bracket, your 401k income is taxed at 35%. Whereas your income from dividends and sale of stock in your brokerage portfolio is only taxed at 18%. Something to consider when deciding whether or not to max out 401k's...is your expectation REALLY to have a low income when retired?

[JKnight]

Originally Posted by sik68

Something to consider when deciding whether or not to max out 401k's...is your expectation REALLY to have a low income when retired?

This is very true. I think it's very important to have diversification amongst your pre-tax and post-tax retirement savings. 401k's are great because you can get yourself a raise by maximizing the employer match, but we need to have savings where the taxes have already been paid at (hopefully) a lower rate! This is something I've been working towards myself during the past year.

[GregWeld]

These are good discussions --- and they really need to be evaluated on a case by case basis.... there is no one size fits all!


Most people will have Social Security --- and maybe a pension --- and then will have some dividend and interest income (hopefully!).... But for the most part your income should be lower when in retirement mode. Think about it just for a minute.... if you're 40 now --- you're going to work 25 more years -- SURELY your income will be higher 25 years from now...

So when they say -- withdrawals from a 401K should be taxed at a lower rate -- for the most part that is true. Remember that it takes a MILLION DOLLARS today to generate about a 5% taxable return. So that's only earning 50 grand a year taxable income. Dividends are only taxed at 20% maximum today..

How many folks out there retire with a million bucks? I don't know.

How many retire with 2 million?

My guess is most will be lucky to retire and have 750K in savings --- so maybe it's making 35K a year... that's not much "taxes" being generated... and considering some of it will be max tax rate of 20% -- Dividend income -- or Long Term Capital Gains @ 20%.... there's not much EARNED INCOME.

[WSSix]

When I was still in Georgia and had time, I listened to Clark Howard. He is a consumer advocate and in general tries to get people to be better with their money. He often addresses the pre- versus post-tax savings debate because people are always asking. His response is simple and maybe even too simple for this thread but it is no one knows what tax rates will be in the year whatever. Any savings you do now is going to help when retirement comes around. So stop putting a unnecessary factor in play and just start saving anyway you can.

Of course, then he will sometimes branch off into what Greg and Jeff mentioned and that is the other factors such as a 401k match coming into play etc.

You really do have to take into consideration your personal situation and available options. For me, I actually backed off my 401k percentage and put the difference into other accounts. I still get my full company match but I wanted more control over the dollars. I'm still saving the same total as before but I'm controlling it more. I'm also not worried about the tax implications for when I retire. It's a long way away and no one knows what taxes will be like then. For all we know, we'll go the way of Chile and everyone's retirement will be seized and divvied out by the government to be more fair

[GregWeld]

Originally Posted by WSSix

When I was still in Georgia and had time, I listened to Clark Howard. He is a consumer advocate and in general tries to get people to be better with their money. He often addresses the pre- versus post-tax savings debate because people are always asking. His response is simple and maybe even too simple for this thread but it is no one knows what tax rates will be in the year whatever. Any savings you do now is going to help when retirement comes around. So stop putting a unnecessary factor in play and just start saving anyway you can.

Of course, then he will sometimes branch off into what Greg and Jeff mentioned and that is the other factors such as a 401k match coming into play etc.

You really do have to take into consideration your personal situation and available options. For me, I actually backed off my 401k percentage and put the difference into other accounts. I still get my full company match but I wanted more control over the dollars. I'm still saving the same total as before but I'm controlling it more. I'm also not worried about the tax implications for when I retire. It's a long way away and no one knows what taxes will be like then. For all we know, we'll go the way of Chile and everyone's retirement will be seized and divvied out by the government to be more fair

Taxes are really an over rated item.... People with money really don't pay much attention to them. Here's how they think... if they make a big azz bunch of money and have to pay a big azz bunch of taxes --- then that's a good thing because it means they made a bunch of money!


Obviously -- you do what you can to minimize any taxes -- but you never make the choice to not make a profit or take a gain - or try to make money just because of the taxes.

I hope everyone here is in the maximum tax bracket when they retire!

So here's really what I'm saying.... I sold tax free munis today which give me a pretty nice tax free income ------ but my real concern is not the tax free part ---- my real concern is whether or not those investments are going to go UP from here --- or whether they're going DOWN from here.... Screw the taxes... If I'm making money -- I'm happy to pay them.

Totally serious here.

[GregWeld]

So here's why I like to use LIMIT orders.... and this is really probably only really useful for those buying larger amounts of shares -- but it is also something that all of you should know and understand.


This morning I put in some buy orders -- a couple for "DAY ONLY" -- in other words if the price I chose doesn't fill the order - then the order expires today...

Another one -- for Chevron (CVX) -- I chose "Good til expired" -- that is good for 60 days. The reason I chose that type of limit order is because I put a bid in way under where the shares are currently trading. CVX pays a dividend ($1.00) on MONDAY -- I hope the shares dip at least that $1.00 on Monday and therefore my order might get filled. If that works - then I effectively picked up the dividend even though I didn't own the shares on the EX date. Obviously I only pick up the dividend IF -- BIG IF -- the shares recover sometime within the next day or two.

I also like to scale into shares. I buy very large lots... and scaling in is important to my overall mental health -- as well as I can am "closer" to the market for the stock. Putting in a limit order helps me scale in --- and even though the shares might go below my purchase price -- I'm still closer in cost basis to where the shares are currently trading. Today I put in a limit order for Terra Nitrogen (TNH) -- I put that limit order in "day only" at $204.00 per share... for 1000 shares. So far I've bought a whopping 75 shares. But my point is -- once I put in that order - whenever their is a seller willing to match my price - I'm automatically buying. If it doesn't get filled completely -- who cares. Tomorrow is another day... and if the shares are going up -- then I've made some money on what I did buy... and if they're going down or staying steady -- then I'm at least closer (with my lower buy per share) that I would be if I just built a "market" order.


If I'm not in a hurry (rarely) to build the positions --- then I put in limit orders that are .50 or 1.00 LOWER than the "low" for the day. If it's a stock I just want to buy -- then I might be only .10 or .20 under the "market" price. That way when it dips just a bit during the day -- I'll most likely get a fill.

[GregWeld]

By the way -- please remember that just because I use examples naming names in here - doesn't mean that these names are appropriate investments for YOU. Please don't just copy what I'm doing. I do this EVERY DAY -- for YEARS... my holdings are bought and sold for completely different reasons than what you guys should be investing for.


So for example -- the limit order for Terra Nitrogen (TNH) was put in for $204.00 for 1000 shares ---- What I wanted to explain is that the high for the day so far is $205.21.... and the LOW for the day (most likely set by my whopping 75 share fill) is $204.00


When you're buying a 1000 shares ---- that $1.21 difference between the high and the low -- is a GRAND. How many of you make a grand that easy?? So to me -- that difference is important. Would I bother doing that for 100 shares?? No -- but I might just to use it as a way to learn --- and frankly -- that would be a hundred bucks if it gets filled....so maybe that's a good way for you guys to at least feel good about "gaming" the market just a bit.