Tag Archives: portfolio-strategy

Consider Taking Tax Losses Now – Beat The Year-End Bounce Rush

Recent stock market volatility has resulted in portfolio losers. NOW is the time to consider tax-loss selling to beat the year-end bounce rush. There are several questions to ask when considering taking a stock tax loss. With all the volatility in the stock market this year, many investors probably find themselves holding some stocks in which they have sizable losses. By selling those losers and realizing those losses, you can use the losses to offset taxable gains that you may have realized during the year. Most individual investors think about this strategy in December, which means that this tax-loss selling could push the price of some of these stocks even lower. This means that you probably don’t want to be selling your losers then, and may in fact want to consider buying some of these beaten down stocks to take advantage of this tax-generated downward pressure that goes away on January first. I’ll discuss this in more detail in the December issue of my investment newsletter . Moreover, under the U.S. tax code you can buy a stock back 31 days or more after selling and still recognize the loss. (If you sell in 30 days or less, the IRS will not allow the loss). This way you can take the tax loss and still participate if the stock eventually rebounds. When considering taking a tax loss in a particular stock, there are several questions you need to ask yourself: “Do I really want to own this stock anymore?” If not, you should just sell it and move on to other stocks with better gain potential. If you do want to own the stock for the long haul, there are other considerations: “How likely it is to rebound sharply in the next 30 days?” If you think the likelihood is high, you probably should not take the tax loss. Similarly, if you have a sizable position, you need to consider whether there is enough trading volume in the stock to get out and then back in 31 days later without significantly affecting the stock price. If you are concerned about the volume in the stock, it may be better to look elsewhere for your losses. Read more of my most recent investing advice and turnaround stock picks . Share this article with a colleague

2015 Q3 Value Performance Update And How I Value Markets

Summary Proof that you shouldn’t follow “smart money”, as it’s herd mentality. A list of my 2015 Q3 value strategy performances. A look at how I value the market to know whether it’s expensive. The final quarter. The home stretch. If you took advantage of the small market correction, great job, because the market has “recovered” about 6% already. The last thing you should do is take advice from what you hear on TV or the radio, because that’s where the peak of herd mentality exists. The talking heads don’t provide any deep insight or outside views, as it’s their job to provide simple outer-layer analysis that any average Joe can understand. You actually come out smarter if you ignore everything they say. Here’s a look at what I mean. This is the performance of the top 20 stocks held by hedge funds, according to novus.com . (click to enlarge) How does this look in a chart? (click to enlarge) Not impressive. Especially when people running these funds are supposed to be Ivy League top 0.1% brains. It’s quite easy to avoid these “top 20” names. Ignore news and headlines. Ignore popular stocks. Ignore complicated stocks you don’t understand. Investing doesn’t have to be complicated. Most of the investments above have complicated stories. If you’re looking for a simple business and investment thesis to understand, don’t look at hedge fund holdings. This is GREAT news for people like us. After all, the advantage that small investors and fund managers have is that we don’t have to play by their rules. It’s perfectly within the rules to resist the steady drumbeat of calls to activity. So, how does it look on the value side? Value Investment Strategy Performances 2015 Q3 YTD Even though on I’m on the value side, it’s not easy. It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger At the end of each quarter, I take some time to see what’s working and what isn’t working with a list of predefined value stock screens I follow. Here’s how it looks at the end of Q3. These are YTD performances. A lot can happen in one quarter, as you can see in the following image. The tables are organized so that the best-performing screen is at the top of each quarter. (click to enlarge) Don’t Blindly Follow High-Performance Screeners Last quarter, I mentioned how you should ignore the NCAV (Net Current Asset Value) and NNWC (Net Net Working Capital) performances this year. On paper, the results are mind-blowing, given the conditions this year, but in reality, it’s not so great and shows how difficult net net investing can be in a bull market. What do I mean? NCAV and NNWC produced only 8 and 12 stocks in the results respectively. They both include VLTC, which has done this. The problem is that at the beginning of the year, you wouldn’t have been able to purchase enough of it in your real-world portfolio due to low liquidity. It’s only after a spike that volume increases as traders and momentum seekers join the party. Plus, holding only 8 or 12 net nets in a bull market is not a strategy I want to employ. The 2015 NNWC stocks look like this: Thanks to one stock, the NNWC stock performance is up 30%. You may say that it’s the outcome that’s important, but I call this one more luck than skill. Why Bother Tracking Net Nets Or Underperforming Screeners? So why do I bother tracking this or other underperforming screens? The easy answer is to say that that one year doesn’t signal long-term performance, and then show you this table of results. (click to enlarge) (Source: Old School Value Stock Screener Performances ) But the better answer is that it’s a very simple and effective way for me to track how expensive the market is. I don’t refer to market P/E or Market-to-GDP, as it only looks at the entire market. I’m only interested in finding pockets in the market that provide value – mainly on the value investing side – and this is how I try to track and find those pockets of opportunity. Here are some more observations. When Mr. Market falls, it doesn’t care who you are. In fact, Mr. Market will take quality, growth and value all down with him. Risk management should be at the top of your list day in and day out. Boring value stocks fall less hard, but also don’t rise as quickly. Net Nets Are Awesome Indicators Let me revisit another reason why I like net nets. Using the number of net nets available as an indicator is a great way to expand Graham’s “net net” concept into a market valuation idea. In 2013, I made the claim that Ben Graham was a closet market timer, and drew up the following chart and table. Even without a table or chart like this, it’s obvious when the market is cheap. But it’s also most scary, which is why you need a table or chart like this where the facts smack you in the face. I haven’t updated this table in a while, but 2014 and 2015 are similar to the 2011 levels. Summing Up Investing is hard. “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger Ignore herd mentality. Ignore what the top funds are holding. Don’t play by the same rules as the big boys. Make use of your advantage, like buying smaller stocks, illiquid stocks, out-of-favor stuff. Net nets are awesome indicators. Recommended Reading

What If Everyone Indexed?

People generally think that more indexing will make the markets function less efficiently. I don’t think this is true at all. The fact that most index funds and ETFs are more tax- and fee-efficient than mutual funds does not mean they are necessarily less “active”. Most passive investing means there will be greater demand for active managers in the form of market makers and arbitrageurs. If everyone indexed, then that much more active market making would be required. I see this question more and more as indexing grows in popularity. People generally think that more indexing will make the markets function less efficiently. I don’t think this is true at all. Unfortunately, the question and its answers are usually shrouded in misunderstandings about how assets are priced and myths about what it means to invest “passively”. So, let’s think about this from an operational perspective. An index fund is not really an “index”. They are portfolios managed every day trying to track an index. These funds are managed actively, and involve hundreds, if not thousands, of decisions every year. The simplest example is the modern-day ETF, which is essentially a real-time version of what most people think of as an index fund. When you buy shares in an ETF, there is someone who is actively managing the allocation of funds (the same is true for an index mutual fund, though it’s less apparent in real-time, since the fund is not traded on an exchange). For instance, if the market price of an ETF were to deviate from the intraday indicative value, then the market makers would either buy/sell the ETF or buy/sell the underlying securities. So, while there doesn’t appear to be much activity on the surface, the very act of buying an index fund could actually force some active management in the underlying securities markets. In other words, your “passive” investment is the other side of the active management of the market maker or fund administrator.¹ It’s not a coincidence that high-frequency trading firms and big banks are making huge gobs of money during the rise of passive indexing. After all, passive indexing means that there is a greater need for those alternative forms of what is nothing more than “active” management. Unfortunately, the studies blasting active management usually include mutual fund managers and not the most active managers of them all – market makers and HFT firms. And make no mistake – these “active” operations are hugely profitable because they are essentially making “passive” portfolios available.² The kicker here is that index funds really aren’t passive at all. When you look at the underlying components of how the funds are actually managed, you realize that there’s a lot of activity in all of this. The fact that most index funds and ETFs are more tax- and fee-efficient than mutual funds does not mean they are necessarily less “active”, though. People misuse the term “passive indexing” on a near-daily basis now. And it’s the result of this desire to create a black-and-white view of the world, which is usually nothing more than a marketing pitch (something along the lines of – “We’re passive, so invest with us, because the misleading academic studies show that ‘active’ managers are dopes.”). The reality, however, is that there is really only active management and its varying degrees. Literally no one replicates a pre-fee and pre-tax index. Not a single investor. And your purchase and maintenance of a “passive” strategy will require a good deal of active upkeep. The bottom line is, most passive investing means there will be greater demand for active managers in the form of market makers and arbitrageurs. The ease of passive investing is made possible thanks to these active underlying elements. And that’s great, because it’s a win-win. Indexers get a low-fee and easy way to access markets. But they also bear the cost of their laziness (in numerous unseen ways), which is why making markets in index funds is hugely profitable. So, if everyone indexed, then that much more active market making would be required. End of story. ¹ – Read this fun paper on how ETFs work. ² – E.g., ever wonder how a big bank like Bank of America (NYSE: BAC ) can be profitable on 100% of its trading days in a quarter ? It’s thanks, in part, to passive indexers like me! “During the three months ended March 31, 2013, positive trading-related revenue was recorded for 100 percent, or 60 trading days, of which 97 percent (58 days) were daily trading gains of over $25 million.” (click to enlarge) Related: The Myth of Passive Investing