Investing 102

[GregWeld]

This is a name that has been discussed many times - as usual used as an EXAMPLE - which is not or ever intended to be a recommendation to buy or sell... because that's not what this thread is about. It has been discussed because it's a MASTER LIMITED PARTNERSHIP - which is different and taxed differently that a normal stock.


In full disclosure I own 22,000 shares of it.


Barron's came out with a negative article about it this week. And the shares are getting hammered. I'm writing about this because SOMETIMES this is what happens to a name you might own. What to do about it is what you need to think about it.


Some times it creates a wonderful opportunity to buy... either average down or just add to a position. Think about NETFLIX when the CEO came out with a big public gaffe and the stock absolutely plummeted. That was a HUGE opportunity to step in -- and if you did - you've gotten a 4 bagger (400%)...

Some times the negativity might have a real basis - and might very well be just the prick of a pin in a balloon.... and that's when you WOULD NOT want to try to catch a falling knife! I've tried to catch a falling knife... it doesn't buff out.

What you should do before taking any action - buying more or selling - is to try to dig deeper and read as much as you can PRO and CON.... and then maybe choose to do NOTHING... or choose to take your loss and sell... or back the truck up and buy.


Here is how Richard Kinder (CEO and Founder) responds to the article...



" Like now, back in 2006, we had an enormous backlog of projects. And like now, many experts will find that we were too big to be able to continue to grow at an acceptable rate. We proved the doubters wrong the first time around, and I anticipate the same result this time. Reflecting this belief in the Kinder Morgan companies, as many of you know, I’ve been a buyer of KMI shares. I’ve purchased over 800,000 shares in December alone. So I guess my message to those who saw the story less positively was you sell, I’ll buy, and we see who comes out the best in the long run."
-- Richard Kinder, CEO on the Jan 15, 2014 Q413 conference call

On Feb 20, Kinder revealed that he bought 100,000 more shares at a cost of around $3.3 million.

[SSLance]

I've been watching this Greg for a while, but am a bit confused on one thing. Since I'm assuming you are in tune with the companies better than I, can you expound a bit on the difference between KMI and KMP please?

I've owned limited partnerships in the past and am aware of the tax consequences, for simplicities sake would rather avoid that aspect of it but at the same time, it doesn't totally scare me away.

On the same hand though, if one could dip into the same pool with KMI without the LP aspect that might be interesting as well.

[GregWeld]

Lance ---

I never want to turn this thread into a stock pickers platform... but your question is the difference of how a stock is handled -- tax wise and therefore fits this thread because it is an important aspect.

KMI -- OWNS KMP (actually I think MANAGING PARTNER) is the correct description. As such KMI gets its "income" via an agreement with KMP. It is therefore a "stock" - with normal capital gains and dividend treatment.


KMP -- Is an MLP (Master Limited Partnership) -- and as such spins off it's income/profit back to the "partners". The "distributions" (not dividends) are treated as a RETURN OF CAPITAL. So this is a special tax treatment. And therefore are TAX ADVANTAGED.

I've said it here before - that there's no reason to own tax advantaged stocks or investments inside an IRA or ROTH etc.


Most "Limited Partnerships" are not very liquid. For instance - I own apartment complexes that are set up as partnerships. The Managing Partner is the operator - the "investors" have little control of how things are run or when the buildings might be sold and so on. I would have a hard time getting my money out of this type of investment. The MP might sell in next week - or maybe 20 years from now. Even as the largest investor - I would have little say so. I'm in for the ride.

An MLP traded on the stock market is LIQUID - since they're publicly traded and you can get in and out. But the tax advantage remains the same.

[SSLance]

Thanks Greg, I'm assuming that KMI has other "investments" that it owns besides just KMP?

We've set up Limited Partnerships up before as a way to create Passive Income to offset Passive Losses...so I'm well aware of the structure and why it is used. If you know who the managing partner is and you are all on the same page, it can be a real nice tool. Owning one can certainly add some additional Tax Return calculations though.

In fact, the very first shares of stock my wife and I ever owned were of a LP. She worked at the time for ChemLawn who was owned by ServiceMaster at the time. She received shares of ServiceMaster in her 401K as contributions that eventually rolled into her current IRA. Helluva way to dip ones toes into the stock market for the first time.

[67GOAT]

Greg first of all thanks for all the information you share in this thread. It is very enlightning for me. You mentioned that having a MLP in an IRA or Roth provides no advantage but what if any disadvantages do they have?

Brian

[chr2002ca]

Originally Posted by SSLance

can you expound a bit on the difference between KMI and KMP please?

Google "KMI vs KMP" and the first link in the results is an article from Seeking Alpha which pretty much answers that question:

http://seekingalpha.com/article/1901...vs-kmp-and-epb

[chr2002ca]

Greg,

It always seems much harder to know when to sell than when to buy. Using your KMP for example...You own 22K shares of KMP, and the stock has been trending downwards for the past year when the market's been going straight up, and this latest news brings it back to early 2011 levels. You're still making 6.x% on the distributions which is great, but what exactly would you be looking for to convince you to sell and reallocate to something that might be a better performer moving forward? Is it a specific level, or specific news, or a downward trend of X number of years that under performs market or similar stocks' trends? Of course, if you bought KMP back in 2000, or even 2005, you're doing great on both growth and distributions, but I'm just curious about the triggering event to sell. In this case, it appears you're not bothered by the recent news and will hold, but what would bother you?

Thanks for all your input.

-Chris

[GregWeld]

Originally Posted by chr2002ca

Greg,

It always seems much harder to know when to sell than when to buy. Using your KMP for example...You own 22K shares of KMP, and the stock has been trending downwards for the past year when the market's been going straight up, and this latest news brings it back to early 2011 levels. You're still making 6.x% on the distributions which is great, but what exactly would you be looking for to convince you to sell and reallocate to something that might be a better performer moving forward? Is it a specific level, or specific news, or a downward trend of X number of years that under performs market or similar stocks' trends? Of course, if you bought KMP back in 2000, or even 2005, you're doing great on both growth and distributions, but I'm just curious about the triggering event to sell. In this case, it appears you're not bothered by the recent news and will hold, but what would bother you?

Thanks for all your input.

-Chris

Great question --- Not sure I have a perfectly direct answer. I sold my position in McDonalds because I don't eat there anymore - rarely - and when I did - I wasn't happy with the places or the food....


Kinder Morgan is about a 100 BILLION dollar "entity" if you factor in all their businesses. Energy prices are often volatile... and as we all know - you have risk from a pipeline break - or some environmental issue etc.

So here's why this is hard to answer. Because it all depends. Depends on why someone is holding the issue. I'm holding it because it pays me $30K PER QUARTER (29,500 actually)... which is very nice cash flow on one single holding. I have added to the position as it's slipped down. I'm currently underwater on the holding - but not by very much. Given the cash flow it represents to my portfolio... that's the trade off. If I sold it I'd have a LOSS -- and then would need to find a replacement for $120K per year. So for me - that would be a MAJOR factor. What else can I buy at todays prices - with that cash flow - that I would TRUST to not only make up for the loss - but also not go down (EVER? like that would happen). So until there is some FUNDAMENTAL reason -- I'm a holder. At the value of this position - I'm not going to ADD any more to my position. I have plenty of it.

In other words -- the CEO is a major holder - he's putting his money where his mouth is. Fundamentally the company and the way it operates hasn't changed. What changed is somebody wrote an unfavorable article. The company will still be there 6 months and 6 years from now - when the article is forgotten next week.

This is a long term holding for me - and todays or tomorrows price isn't a consideration for me and I don't see an issue with the company that currently affects my thinking. I've been wrong before - and might be this time but I'll stay the course in this one.

[gearheads78]

I have about 5% in KMI. I saw the article and knew what would happen today. At this time I plan to ride side car with Richard Kinder.
On a different note my CVX was up more than KMI was down today.

[chr2002ca]

Thanks Greg. I really appreciate you taking the time to share your insights on that. I was actually going to buy some late today right before close, but got a little nervous when I saw the trend for the past year. I already own some ETP so I want to be sure not to get too heavy in that field. I was thinking of maybe something like NYCB as a substitute for KMP with a similar dividend and decent track record with their dividends. KMP might be a better value though given what you just mentioned(down on basically old news). Will see what happens. Have learned a lot from you. Thanks again.