Posterous theme by Cory Watilo

The Undertrader


Laying to rest the Myths of Wall Street

$$ What a great year for gains...

Figured today was as good a day as any to post an update.  Here's where the Undertrader is currently sitting:

Apple (AAPL) +67.66%
Barnes & Noble (BKS) +3.78%
Berkshire Hathaway (BRK-B) +22.11%
Chesapeake Energy (CHK) +13.43%
Home Depot (HD) +22.0%
Kellogs (K) +2.91%
Coca Cola (KO) +23.69%
World Wrestling Entertainment -10.44%

Almost all up, but I think WWE will come back into the + side around Wrestlemania time.  It usually does.

Hope everyone else is pulling in some great gains this year.  Try to hold some cash on the side because the first week or two of January is the BEST time to buy stocks, in my opinion.  People are going to be dumping losses before the years end and dumping gains after the years end to defer those taxes for 16 months, so there is usually an artificial drop that's a good place to jump in!

Invest in peace...

$$ MikeMay1969 makes a great comment and wins $10...my reply...

User MikeMay1969 replied to my comment about how I pay less taxes with the following:

I'm trying to understand this but having a hard time. Lets take your Home Depot example... Say the stock dips back to your original entry price of roughly $29 and you reinvest your profits. The first trader has $3282 in cash and purchases 113 shares. The second trader has $524 and purchases 18 shares which added to the 84 shares they held comes to 102 shares. Forgive my ignorance, but it would seem to me that if the goal is to accumulate shares the edge would go to the first trader even though they are paying more taxes.

A great comment!  Thanks for looking at the math so closely.  You are correct.  In the scenario that you were thinking of, this is absolutely true.  If a stock is flat, sort of like this:

/\/\/\/\/\/\ 

It's better to sell at the top and repurchase at the bottom, building up more shares.  You are absolutely correct.

However, I was thinking of stocks that have more upward movement to them.  So, up 2, down 1, up 3 down 1, up 4, down 2.  That upward movement is where I'd have you beat with my strategy.  Since I always buy stocks that are below both their 50 and 200 day moving averages, those are the stocks I see.  Ones that have upside with some dips.  Disney went from $20 to the $35 range for me.  Apple went from $90 to $350.

Obviously, you could buy and hold these examples and do very well, but by selling off some shares on the gain said to have extra cash on the dips the stock takes, you can get more and more shares while the stock is moving upward.

Side stepping the taxes a second, I think the strategy I use is designed to take thinking out of the equation.  If I'm up $1000, that's awesome.  Pocket that.  Don't think about if I'm going to dump a stock or what my stop loss should be or what trigger I'm looking for.  Go up $1000, take $1000 off the board and let the rest sit.  When I feel a stock is at it's high plateau, I jump out and go find another beaten down stock.

I think overall, people don't sell at the high and buy at the low because there is no way of knowing what those are until hindsight tells you.  So, your comment is correct, but I think the ability to hit that type of stock consistently is very, very difficult and a lot of work.  In my strategy, buying stocks below their averages, I usually have that upward momentum, along with some dips, that make selling partial shares a better overall strategy.  I'll whip up some math at some point to show that, just don't have time at the moment, but you could do it yourself pretty easily, or grab the amazing book, "How to make $1,000,000 in the stock market automatically" by Robert Lichello.  It will make you look at the market differently.

Invest in peace...

$$ How I pay way less taxes on stock gains than most people, legally...

Ok, so this is about tax management on stock trades.  It's really simple, so I hope you can follow some basic math.  

A few weeks ago I bought Home Depot (HD) for $29.02 and I bought Coke (KO) for 52.91.  They both went way up.

we'll say I bought 100 shares of each, just to make the math easier.

So, let's start with Home Depot.  
$29.02 * 100 shares = $2902 invested

Today I sold some shares at $34.46, but lets say you sold all 100 shares:
$3446 (Todays stock value) - $2902 (the amount you invested) = $544 profit.  * 30% short-term tax = $164 in taxes

Lets say instead of selling all of the shares, you just take out the profit.

$544 (profit) / $34.36 (current stock price) = 16 shares (rounded up)

Sell 16 shares at $34.36 = $549.76 in cash and I still have 84 shares left.  Here's the best part though, I only pay taxes on the amount those 16 shares gained.  So:

$34.46 (todays price) - $29.02 (purchase price) = $5.44 a share gain.  Multiply by the 16 shares we sold = $87.04 taxable * 30% (tax rate) = $26.11 in taxes.

So, both ways you took the profit, however the first way is going to kill you in long-term investing.  The first trader has $3282 cash and no stock after taxes.  The second trader has 84 shares left at $34.36, plus the roughly $524 cash they cashed out after taxes, for a total of $3410.24 roughly.  Quite a big difference, and this is with only 100 shares.  You could see how it would become a huge difference if you had a lot of shares.

With Coke I did even better.  
Selling all shares $6460 (todays value) - $5291 (amount invested) = $1169 taxable * 30% = $350.70 in taxes.

Selling partial shares $6460 (today's value) - $5291 (original value) = $1169 (profit) / $64.60 (todays share price) = 18 shares to sell.
$64.50 (today's price) - $52.91 (original price) = $11.59 profit a share taxable
18 shares * $11.59 (gain) = $208.62 taxable gains * 30% = $62.59 in taxes, not to mention I still have 82 shares of Coke remaining invested.

The best strategy from here is keep those gains and buy more shares on dips of the same company.  You can amass huge numbers of shares this way, without using your own cash.  Remember, the key to making money in the stock market, IMO, is the NUMBER OF SHARES you have, not the amount a stock moves!  Amass shares, sit on good companies with name monopolies and you'll automatically be in the money.

Invest in peace...

$$ Someone asked what a 'moat' is...

It's a body of water around a castle!  

You're welcome...

Oh, you mean when it comes to stocks?  A moat is the amount of defense your product or company has from other companies taking over your business.  Coke has a huge moat, which is it's secret recipe.  No one has been able to duplicate that taste, and many, many have tried.  Apple has OSX.  Microsoft has Windows.  Walmart has so many stores that no one can complete with their prices.  Etc.

You want to invest in companies with large moats.  Groupon has no moat.  As a matter of fact, I was reading that they are taking 50% of the deals!  That's outrageous!  Any company can swoop in and offer to take 5 or 10% on the deal and put Groupon right out of business. All they have is a name and registered users.  If Facebook decided today that they wanted to add a local coupon feature, Groupon would be dead.  Instantly.

If you're going to invest in a company without a moat, it's best to run it short term.  Warner Brothers has a moat called Harry Potter.  That's gone after the next movie.  Scholastic Books had a Harry Potter moat too.  Gone.  Hot Topic had the whole goth fad.  Dying out.

Disney has Mickey Mouse and Disneyland.  Huge moat there.

Find companies with large moats (which I call companies with Name Monopolies.  Companies that you instantly think of when you think of a business or product.)  Buy them on sale and hold them, or flip partial shares and you'll do just fine.

Invest in peace...

$$ Purchasing Groupon for more than $20 is moronic...here's why... $GOOG

So, the rumor going around is that Google offered to buy Groupon for between $4-6 BILLION, with a B, dollars and Groupon said no.  So, that elicits two WTF's from me.

1) Is Groupon stupid?  Their business has a limited time frame at best.  They have NO MOAT whatsoever.  Anyone can create a group coupon website instantly and be competition from them and the cost of starting said business is rediculously small.  There is nothing to keep Groupon from being killed by competition.  Especially when you consider all of their customers are people who actively search out the best deal at the lowest cost.  If ANY site comes along and has better, cheaper deals, their customers will leave.

 

2) Is Google f'n nuts?  It's a NAME.  Groupon?  Seriously?  That's worth a few billion?  It's a freakin' coupon site people.  It's not Facebook!  There is nothing special about Groupon at all, other than name recognition.  If you're throwing around Billions to buy out a name, you're stupid.  You don't see Apple doing things like that.

In any event, invest in what you want, but I think it's stupid to be plopping that much money into a business with no moat and stupid to turn down billions for any business.  How much do you need Groupon people?  Take the f'n millions and go buy an NFL team or something.

Warren Buffett wouldn't touch Groupon with your 10 foot pole and you shouldn't either.  Unfortunately, things suck so much that people are grasping at straws for something to latch onto.  What are you going to do with that gold bar you just bought?  Eat it?  Wipe your ass with it?  Just silliness in the markets today.

Find a good company, put money into it, sit and wait.  It's that easy.


Invest in peace...

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