I Don't Know Either
This is a good time to be in the market and it is the worst time to be in the market. It is too late to get into gold and it's a good time to buying gold. We have seen the worst of this global sovereign debts crisis and the worst is yet to come. Buying PUT options right now is the best strategy you can have, but you could make a fortune buying call options. The US Congress and Senate will resolve the debt crisis issue but they will never agree on anything. Warren Buffet is a genius for buying his own stock back today and his an idiot if that is the best thing he can come up with to spend 28 Billion dollars on. The VIX (CBOE volatility index) will be dropping in the next week or two and the VIX could explode at any moment if the debt crisis in Europe is not resolved and Washington DC does not solve its debt issues. Today rally was real but it's not really real. Crude oil's correction is done and over with and it will be dropping again soon. Copper is dropping like crazy but world inventories are at a two year low.
There ya go. Now you know how to play the market for the next few weeks and months. Clear as mud.
Seriously what are you supposed to do? I really don't know and I (or we depending upon the number of voices in my head at the moment) would be lying if I said I did.
Friday morning I was thinking about selling everything and now I am wishing I had more cash to add to my core holdings. (As a reminder SMTC, CMG, WY, AMZN, UN, GLW, GLD, XOM, AAPL, HON, PNC, SSN, TRP, and ZION.) This kind of market has triggered some questions from readers and closet readers. Welcome Doug a new reader and welcome Don (my brother in-law, musician extraordinaire, scuba guy, and great dad.) who had been reading on the sidelines so we got them on the official list today. Don is a great seasoned entertainer who has a group called the Roping Dummies
(see link of to the right). He also worked with my daughter for a great Christmas present in 2004 where The Don Miller Big Band (or parts of it) helped me pump out 8 tracks during a marathon studio session at a once famous recording studio called Radio Recorders. (Presley recordered 122 songs there including Jailhouse Rock, Bobby Darin recorded Mack The Knife, and Governor Reagan used to record his weekly radio messages there. (I got to use on of the Presley old GE/RCA Pill Mics when we did our cd.)
So hear a re a couple of questions we have seen in the last few days. Sorry if I am behind in getting to you, but we been busy.
"Hi Brian,
Well I got a tax problem. Other people have more they have lost in their couch, than my tax problem. But to me I hate paying Uncle Sam.
I'm still XXX bucks up for the year, even after last week!
But I have 11% Realized Gains and 10.75% in unrealized losses. (ouch) So the tax man is going to like me next year if I don't sell. But most of my holdings right now are paying 10% or more in dividends. So should I sell now before the world comes to an end and tell the tax man go take a jump in the lake. Or don't sell collect even more dividends and get a tax bill.
Got a lot to think about."
Great question. This is how we would approach this, but remember all those disclaimers off to the right. We are not financial advisors and we are not tax people either. We are one of those greedy selfish self absorbed bad people who are being targeted for not paying enough taxes. I understand that McDonalds is having a special menu for those people making more than $200,000 a year so they pay 20% more for a "Big Mac". Dave, you should start asking for W2s and jack up prices for the uber rich greedy folk like me. But I digress.
First off we would suggest you don't plan your investment decisions around short term/long term realized/unrealized gains and resulting taxes. Especially if you are talking about small quantities of capital (Under $10,000 in principal). Before you commit any money to a holding, have three things in mind. At what price point is a good price point to get into the stock. How much of a loss from that point is acceptable? Keep in mind if you buy a stock at $10.00 and it goes down $1.00 that is a 10% unrealized loss. In order for you to get back to $10.00 that stock must move up 11.1%. So know how far you are comfortable with the stock falling before you will pull the plug and then pull the plug. Use a stop limit order if you think you will procrastinate or your ego will get in the way, just have your account automatically execute the trade. I have found the more I take m out of the equation the better I do. Then, and again before you do the trade, know where you want to get out on the topside. If you have done the homework and you looked are future earnings potential and have read all the SEC filings and reviewed the analysts expectations and know the target prices, then peg your exit before you buy. Let's say that ten dollar stock has the potential of seeing a 20% increase in 6 months, then set a limit order to sell the stock when it hits $12.00. OK there are a bunch of you out there right now saying he is crazy. (You are right by the way.) By setting that limit order to sell at 12 does not mean you have to execute the trade. If in two days that stock goes to $11.00, just move your limit order up. (Don't for get to move your stop order up as well. Instead of stopping out at $9.00 stop out at $10.00. You'll notice this guarantees you NO LOSS from that point forward. If you do that, your investment decision will take care of themselves and your taxes will take care of themselves.
Now the reader brings up the dividend question. Dividends are a by-product of owning a good company. (A general statement and not always true.) Dividends do provide a nice income stream and currently have a nice tax preference as they are treated as capital gains meaning the max tax is 15%. (That will be gone soon I assure you, because us uber rich greedy folk shouldn't be taxed so low on corporate income even though the corporation has already paid taxes on the income it is providing back to its investors. But I digress.)
Bringing dividends into question makes the answer to the original question a bit cloudy. Dividends are a great reason to buy a stock but should never be the sole reason. Again, if your stock idea is not a speculative wager, go through a complete value analysis. We have done that here many time before so we will not bore you again today, but the review should include a revenue analysis, and income analysis, a debt analysis, an understanding how the company has made money and how it will make money and profits in the future and reading the last couple of quarters earnings reports and know who is in the C suite (CEO, COO, CFO etc.) and how they got there and how much they are paid.
When determining whether a dividend is good or bad, you have to keep in mind your overall goal for your portfolio. Let's say your goal is a 5% annual return (realized and unrealized) then some of that gain will typically come from an increase in value in the actual stock holdings and any income from holding those stocks (dividend). Know what the yield is for your stock and know that not all stocks issue dividends. Young growth stocks don't usually throw a dividend so don't be surprised to find you latest and greatest tech stock does not have a dividend. Theoretically they are reinvesting their profits into innovation or growing they're market share so they are in a position to reward their shareholder for holding their stock.
If a company is throwing a 5% dividend then it is stock you should own right? Not necessarily. Check a little thing called the payout ratio. It will tell you how hard that company is working to pay out that dividend. When we evaluate a dividend as a reason to support our overall investment choice we like to see a dividend at or above the 10 Year Treasury Yield (currently at 1.9%).
So to answer the question should you sell or not? Answer all of the above and you will have figured it out yourself. Because I don't know either.
Ok here is question 2:
"I won't bog you down with too many questions, but I do have one for you...
Right now I'm almost 30, and very new to trading. With the market the way that it is right now, should I be looking for stocks with high dividends (not that I'm putting enough money in to have a high return) or look for an undervalued stock, buy it, and wait? (or is there a stock that fulfills both criteria) And do you think I should be spreading them out over multiple stocks or just stick to one or two?
(I now realize that is 3 questions)."
There are three questions there, but we have already answered the dividend one up above. I'll take on the other two and send you a bill. (Just kidding I AM NOT A PROFESSIONAL)
First off NEVER apologize for not have enough money to start investing. I started in 1986 with 300 dollars worth of DIS. The fact you are "In The Game" should be applauded. We happen to know this reader just started a portfolio with BAC. The fact you are so young (I think I have a skin tag coming up on its 27th birthday) is a very very good thing.
I rode to the airport yesterday with a young lady who is a good friend of the family and the daughter of a couple of readers and all I could think about was what our portfolio would be worth if I had just started when I was 18 or 19. The number gets scary even if you start with just few bucks, but let's get on with your question. The question is how to find stocks and should be diversified. We have answered that here many times, but basic simple questions like that are important and need revisiting. Here are our simple rules.
Only buy what you know.
If you are watching CNBC and they tell you about a company that engages in developing therapies targeting the molecular mechanisms causing cancer in the United States and internationally, are you going to understand how that company makes a profit and if it is cyclical stock or secular stock and if it's a good time to buying it? Or are you going to buy it because of the nice people on CNBC.
Well go to McDonlad's and ponder that question then look around. You know how they (MCD) make money? You can do the homework and understand where the money goes. The SEC filings will tell you how much money is generated in the US versus Internationally and the impact of foreign exchange issues. Then when you finish lunch and check how many calories you just ate on your "My Fitness Pal" app on you iPhone, think OMG I know how Apple makes money and there are tons of people in the Apple Store and the homework will tell you what they might make next year and as you ponder that and you stop a Chevron to pump more foreign oil into your car, you can say, "Hey. I know how CVX makes money." You get it. Only buy what you know.
Know when to get in.
Know when to get out.
We discussed that earlier, just learn how to determine a good value and don't cheat yourself on the buying by saying this stock is really only worth $9.00 a share but its selling at $9.50 but you think it might go to 11.00 a share in a year. Do you buy it at $9.50. Heck no. If you have done your homework and you really think the right entry point is $9.00, wait for the price. If it never hits it, then go back and figure out what you missed. If it hits your buy point you just made yourself 5.5% on that stock. When it hits $11.00 you will have made 22% instead of 15.8%.
Use the BOATS acronyms to diversify your account. BOATS was a tool Cramer used to pitch and we still like it. B=Banks and Financials. O=Oil and Energy. A=Aerospace and big industrials. T=Tech and internet. S=service or speculative or almost anything else. So in any portfolio our suggestion would be to have at least 5 holdings in each of those sectors and not more than 10 balanced into those sectors. The reason not go beyond the 10 is that the required homework to do well in the game requires at least an hour a week per holding.
Don't get greedy.
If your risk tolerance sets your goal at twice the Ten Year Treasury Yield, just under 4% at the moment than when you have a stock up 8% for the year, you have to consider taking some profit. It is double your goal. You might consider selling half of your holdings and look for another good company to buy. There is a famous saying in the market. Bulls make Money. Bears Make Money. Pigs get slaughtered. Don't be a fraid to take a profit and don't be afraid to sell a loser. YOU WILL LOSE MONEY. We all do. It is part of the game.
We were going to tell you about a cool website that can save you thousands of dollars, but its late and I got dogs that need milking.
Salve Lucrum
