CoMagz sanserve's column

Stock Market Window Dressing: The Art of Looking Smart!

Mon, 31 Jul 2006 09:05:21 -0700

As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of the Stock Market pricing data we use to help us in our decision making efforts. On Wall Street, investing can be a minefield for those who don't take the time to appreciate why securities prices are at the levels that appear on quarterly account statements. At least four times per year, security prices are more a function of institutional marketing practices than they are a reflection of the economic forces that we would like to think are their primary determining factors. Not even close... Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities" are in full swing. But that is as far, and as deep, as it ever goes. What are they talking about, and just what does it mean to you as an investor?

There are at least three forms of Window Dressing, none of which should make you particularly happy and all of which should make you question the integrity of organizations that either authorize, implement, or condone their use. The better-known variety involves the culling from portfolios of stocks with significant losses and replacing them with shares of companies whose shares have been the most popular during recent months. Not only does this practice make the managers look smarter on reports sent to major clients, it also makes Mutual Fund performance numbers appear significantly more attractive to prospective "fund switchers". On the sell side of the ledger, prices of the weakest performing stocks are pushed down even further. Obviously, all fund managements will take part in the ritual if they choose to survive. This form of window dressing is, by most definitions, neither investing nor speculating. But no one seems to care about the ethics, the legality, or the fact that this "Buy High, Sell Low" picture is being painted with your Mutual Fund palette.

A more subtle form of Window Dressing takes place throughout the calendar quarter, but is "unwound" before the portfolio's Quarterly Reports reach the glossies. In this less prevalent (but even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the fund's published investment policy during a period when their particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country issues to a Large Cap Value Fund, etc. Profits are taken before the Quarter Ends so that the fund's holdings report remains uncompromised, but with enhanced quarterly results. A third form of Window Dressing is referred to as "survivorship", but it impacts Mutual Fund investors alone while the others undermine the information used by (and the market performance of) individual security investors. You may want to research it.

I cannot understand why the media reports so superficially on these "business as usual" practices. Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem to be more concerned with politics and marketing than they are with investing. They are trying to impress their major clients with their brilliance by reporting ownership of all the hot tickets and none of the major losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They have made "Buy High, Sell Low" the accepted investment strategy of the Mutual Fund industry. Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the wrong direction.

From an analytical point of view, this quarterly market value reality (artificially created demand for some stocks and unwarranted weakness in others) throws almost any individual security or market sector statistic totally out of wack with the underlying company fundamentals. But it gets even more fuzzy, and not in the lovable sense. Just for the fun of it, think about the "demand pull" impact of an ever-growing list of ETFs. I don't think that I'm alone in thinking that the real meaning of security prices has less and less to do with corporate economics than it does with the morning betting line on ETF ponies... the dot-coms of the new millennium. [Do you remember the "Circle of Gold" from the seventies? Isn't GLD, or IAU, about the same thing?]

As if all of these institutional forces weren't enough, you need also consider the impact of tax code motivated transactions during the always-entertaining final quarter of the year. One would never suspect (after watching millions of CPA directed taxpayers gleefully lose billions of dollars) that the purpose of investing is to make money! The net impact of these (euphemistically labeled) "year end tax saving strategies" is pretty much the same as that of the Type One Window Dressing described above. But here's an off-quarter buying opportunity that you really shouldn't pass up. Simply put, get out there and buy the November 52-week lows, wait for the periodic and mysterious "January Effect" to be reported by the media with eyes wide shut amazement, and pocket some easy profits.

There just may not be a method to actually decipher the true value of a share of common stock. Is market price a function of company fundamentals, artificial demand for "derivative" securities, or various forms of Institutional Window Dressing? But this is a condition that can be used to great financial advantage. With security prices less closely related to those old fashioned fundamental issues such as dividends, projected profits, and unfunded pension liabilities and perhaps more closely related to artificial demand factors, the only operational alternative appears to be trading! Buy the downtrodden (but still fundamentally investment grade) issues and take your profits on those that have risen to inappropriately high levels based on basic measures of quality... and try to get it done before the big players do. To over simplify, a recipe for success would involve shopping for investment grade stocks at bargain prices, allowing them to simmer until a reasonable, pre-defined, profit target is reached, and seasoning the portfolio brew with the discipline to actually implement the profit taking plan.

Just call me old fashioned, but I miss the days when there were just stocks and bonds... interesting place Wall Street.

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Relax, A Volatile Stock Market Is Your Dearest Friend

Wed, 21 Jun 2006 10:51:03 -0700

Most people never forget their first love. I'll never forget my first trading profit! But the $600 (1970 dollars) I pocketed on Royal Dutch Petroleum was not nearly as significant as the conceptual realization it signaled! I was amazed that someone would pay me that much more for my stock than the newspaper said it was worth just a few weeks earlier! What had changed? What had happened to make the stock go up, and why had it been down in the first place? Without ever needing to know the answers, I've been trading RD for thirty-six years!

      Looking at scores of similarly profitable, high quality companies in this manner, you would find that: (1) most move up and down regularly (if not predictably) with an upward long-term bias, and (2) that there is little if any similarity in the timing of the movements between the stocks themselves. This is the "Volatility" that most people fear and that Wall Street loves them to fear. It can be narrowly confined to certain sectors, or much broader, encompassing practically everything. The broader it becomes, the more likely it is to be categorized as either a rally or a correction. Most years will feature one or two of each. This is the natural condition of things in the stock market, Mother Nature, Inc. if you will. Don't take her for granted when she gets high, and never ignore her when she feels low. Embrace her volatile moods, work with them in whatever direction they travel, and she will become your love as well!

      Ironically, it is this natural volatility (caused by hundreds of variables human, economic, political, natural, etc.) that is the only real "certainty" existent in the financial markets. And, as absurd as this may sound until you experience the reality of it all, it is this one and only certainty that makes Mutual Funds in general (and Index Funds in particular) totally unsuitable as investment vehicles for anyone within seven to ten years of retirement! How many Mutual Fund investors have retired recently with more liquid financial assets than they had seven years ago, way back in 1999? There will always be rallies and corrections. In fact, it is worthwhile to "go back to the future" to establish a realistic Investment Strategy. In the last forty years, there have been no less than ten 20% or greater corrections followed by rallies that brought the market to significantly higher levels. The DJIA peaked at 2700 before its record 40% crash in 1987. But at 1700, it was still 70% above the 1000 barrier that it danced around with for decades before... always a higher high, rarely a lower low. The '87 debacle was followed by several slightly less exciting corrections, but the case was being made for a more flexible, and realistic, Investment Strategy. Mutual Funds were spawned by a Buy and Hold Mentality; Mother Nature, Inc is a much more complicated enterprise.

      Call it foresight, or hindsight if you want to be argumentative, but a long-term view of the Investment Process eliminates the guesswork and points pretty clearly toward a trading mentality that keys on the natural volatility of hundreds of Investment Grade Equities. During corrections, consider these simple truths: 1) although there are more sellers than buyers, the buyers intend to make money on their purchases, 2) so long as everything is down, don't worry so much about the price of individual holdings, 3) fast and steep corrections are better than the slow attrition variety, 4) always accept even half your normal profit target while buying opportunities are plentiful, 5) don't be in a rush to fill your portfolio, but if cash dries up before it's over, you are doing it "correctly".

      Most of the problems with Mutual Funds and much of the increased opportunity in Individual Stock trading are functions of growing non-professional Equity ownership. Everyone is in the stock market these days whether they like it or not, and when the media fans the emotions of the masses, the masses create volatility that rarely under-reacts to market conditions! Rarely will unit owners take profits, particularly if they have to pay withdrawal penalties or taxes. Even more unusual are expert advisors who encourage investors to move into the markets when prices are falling.

      A volatile market creates opportunities with every gyration, but you have to be willing to transact to reap the benefits. A necessary first step is to recognize that both "up" and "down" markets are forces of nature with abundant potential. The proper attitude toward the latter, will make you much more appreciative of the former. Most investment strategies require answers to unanswerable questions, in an effort to be in the right place at the right time. Indecisiveness doesn't cut it with Mamma... in or out too soon is not an issue with her. But wasting the opportunities she provides really ticks her off! Successful investment strategies require an understanding of the forces of nature, and disciplined rules of portfolio management. If you can transition back to individual securities, you will do better at moving toward your goals, most of the time, because the opportunities are out there... all of the time.

      So let's adopt some new rules for this investment game and learn to live with them for a few cycles: Let's buy good stocks new and old at lower prices during corrections. Let's take reasonable profits on those that go up in price, whenever they are kind enough to do so. Let's examine our performance based on the results of these trading transactions alone and at market cycle examination points for a smiley faced change of pace. And one other thing...

      Let's drink a toast to Mother Nature, her uncertainty, her volatility, and, of course, to our first loves.

Steve Selengut
http://www.sancoservices.com/
http://www.valuestockbuylistprogram.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

In Value Stock Investing, Quality is Job One

Wed, 07 Jun 2006 09:04:20 -0700

How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic Investment Strategy... an ongoing security selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines. If you are thinking of trying a strategy for a year to see if it works, you're due for another smack up alongside the head! Viable Investment Strategies transcend cycles, not years, and viable Equity Investment Strategies consider three disciplined activities, the first of which is Selection. Most familiar strategies ignore one of the others.

      How should an investor determine what stocks to buy, and when to buy them? Will Rogers summed it up: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have misread this tongue-in-cheek observation and joined the "Buy (anything) High" club. I've found that the "Buy Value Stocks Low (er)" approach works better. A Google search produces a variety of criteria that help to identify Value Stocks, the standards being low Price to Book Value, low P/E ratios, and other "fundamentals". But you would be surprised how the definitions can vary, and how few include the word "Quality". In the late 90's, it was rumored that a well-known Value Fund Manager was asked why he wasn't buying dot-coms, IPOs, etc. When he said that they didn't qualify as Value Stocks, he was told to change his definition... or else.

      How do we create a confidence building Stock Selection Universe? Simply operating on blind faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies. Also, some of the figures may be difficult to obtain quickly, and it is essential not to get bogged down in endless research. Here are five filters you can use to come up with a selection universe of higher quality companies, and you can obtain all of the data inexpensively from the same source:

1.    An S & P Rating of B+ or Better. Standard & Poor's is a major financial data provider to the investment community, and its "Earnings and Dividend Rankings for Common Stocks" combine many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the rated companies. Potential market performance (a guessing game anyway) is not a consideration. B+ and above ratings are considered Investment Grade. Anything rated lower adds an element of unnecessary speculation to your portfolio. A staff of thousands does your research for you.

2.    A History of Profitability. Although it should seem obvious, buying stock in a company that has a history of profitable operations is less risky than acquiring shares in an unproven, or start-up entity. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. They are more likely to produce profit opportunities for you quickly.

3.    A History of Regular Dividend Payments. The payment of regular dividends, and periodic increases in rate paid, are sure signs of economic viability. Companies will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. There is no need to focus on the size of the dividend itself; Equities should not be purchased as income producers. A further benefit of using dividend payment as one of your selection criteria is the clear indication of financial stress that a cut communicates.

4.    A Reasonable Price Range. You will find that most Investment Grade stocks are priced above $10 per share and that only a few trade at levels above $100. If you have a seven-figure portfolio, price may not matter from a diversification standpoint, but in smaller portfolios, a round lot of a $50 stock may be too much to risk in one position. An unusually high price may be caused by an unusually high degree of sector or company specific speculation while an inordinately low price may be a good warning signal. With no real structural size limitations, I feel comfortable with a range between $10 and $90 per share... but I would avoid most issues at the higher level.

5.    A NYSE Listed Security. I'm not sure that the listing requirements for the NYSE are still more restrictive than elsewhere, but it is helpful to be able to focus on just one set of statistics since most of the information you need regularly is reported by Exchange (Market Stats, Issue Breadth, and New Highs vs. New Lows).

      Your Selection Universe will become the backbone of your Equity Investment Program, so there is no room for creative adjustments to the rules and guidelines you've established... no matter how strongly you feel about recent news or rumor. Now you can focus on operating procedures that will help you diversify properly by position size, industry, etc., and on guidelines that will help you identify which stocks should be watched closely for purchase when the price is right. Keeping in mind that you want to sell each Equity Position at a target profit ASAP, you'll want to establish appropriate buying (and selling) rules. For example, I never consider buying a stock until it has fallen at least 20% from its highest level of the past 52 weeks, so I include those that are close or at this price level on a "Daily Watch List". Then, I select those that I would be willing to add to equity portfolios if they fall a bit more during the trading day. Your actual "Buy List" changes every day in both symbol and limit price.

      You will need to apply consistent and disciplined judgment to your final selection process, but you can be confidant that you are choosing from a select group of higher quality, well-established companies, with a proven track record of profitability and owner awareness. Additionally, as these companies gyrate above and below your purchase price (as they absolutely will), you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster... and that should help you sleep nights.

      By the way, never say no to a profit when the upward movement equals 10%, and you'll be able to do it again, and again, and again.

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Ten Common Investment Errors: Stocks, Bonds, & Management

Thu, 27 Apr 2006 06:03:29 -0700

Investment mistakes happen for a multitude of reasons, including the fact that decisions are made under conditions of uncertainty that are irresponsibly downplayed by market gurus and institutional spokespersons. Losing money on an investment may not be the result of a mistake, and not all mistakes result in monetary losses. But errors occur when judgment is unduly influenced by emotions, when the basic principles of investing are misunderstood, and when misconceptions exist about how securities react to varying economic, political, and hysterical circumstances. Avoid these ten common errors to improve your performance:

1. Investment decisions should be made within a clearly defined Investment Plan. Investing is a goal-orientated activity that should include considerations of time, risk-tolerance, and future income... think about where you are going before you start moving in what may be the wrong direction. A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy, speculations.

2. The distinction between Asset Allocation and Diversification is often clouded.   Asset Allocation is the planned division of the portfolio between Equity and Income securities. Diversification is a risk minimization strategy used to assure that the size of individual portfolio positions does not become excessive in terms of various measurements. Neither are "hedges" against anything or Market Timing devices. Neither can be done with Mutual Funds or within a single Mutual Fund. Both are handled most easily using Cost Basis analysis as defined in the Working Capital Model.

3. Investors become bored with their Plan too quickly, change direction too frequently, and make drastic rather than gradual adjustments. Although investing is always referred to as "long term", it is rarely dealt with as such by investors who would be hard pressed to explain simple peak-to-peak analysis. Short-term Market Value movements are routinely compared with various un-portfolio related indices and averages to evaluate performance. There is no index that compares with your portfolio, and calendar divisions have no relationship whatever to market or interest rate cycles.

4. Investors tend to fall in love with securities that rise in price and forget to take profits, particularly when the company was once their employer. It's alarming how often accounting and other professionals refuse to fix these single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to the Schedule D as a realized loss. Diversification rules, like Mother Nature, must not be messed with.

5. Investors often overdose on information, causing a constant state of "analysis paralysis". Such investors are likely to be confused and tend to become hindsightful and indecisive. Neither portends well for the portfolio. Compounding this issue is the inability to distinguish between research and sales materials... quite often the same document. A somewhat narrow focus on information that supports a logical and well-documented investment strategy will be more productive in the long run. But do avoid future predictors.

6. Investors are constantly in search of a short cut or gimmick that will provide instant success with minimum effort. Consequently, they initiate a feeding frenzy for every new, product and service that the Institutions produce. Their portfolios become a hodgepodge of Mutual Funds, iShares, Index Funds, Partnerships, Penny Stocks, Hedge Funds, Funds of Funds, Commodities, Options, etc. This obsession with Product underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: Consumers buy products; Investors select securities.

7. Investors just don't understand the nature of Interest Rate Sensitive Securities and can't deal appropriately with changes in Market Value... in either direction. Operationally, the income portion of a portfolio must be looked at separately from the growth portion. A simple assessment of bottom line Market Value for structural and/or directional decision-making is one of the most far-reaching errors that investors make. Fixed Income must not connote Fixed Value and most investors rarely experience the full benefit of this portion of their portfolio.

8. Many investors either ignore or discount the cyclical nature of the investment markets and wind up buying the most popular securities/sectors/funds at their highest ever prices. Illogically, they interpret a current trend in such areas as a new dynamic and tend to overdo their involvement. At the same time, they quickly abandon whatever their previous hot spot happened to be, not realizing that they are creating a Buy High, Sell Low cycle all their own.

9. Many investment errors will involve some form of unrealistic time horizon, or Apples to Oranges form of performance comparison. Somehow, somewhere, the get rich slowly path to investment success has become overgrown and abandoned. Successful portfolio development is rarely a straight up arrow and comparisons with dissimilar products, commodities, or strategies simply produce detours that speed progress away from original portfolio goals.

10. The "cheaper is better" mentality weakens decision making capabilities and leads investors to dangerous assumptions and short cuts that only appear to be effective. Do discount brokers seek "best execution"? Can new issue preferred stocks be purchased without cost? Is a no load fund a freebie? Is a WRAP Account individually managed? When cheap is an investor's primary concern, what he gets will generally be worth the price.

      Compounding the problems that investors have managing their investment portfolios is the sideshowesque sensationalism that the media brings to the process. Investing has become a competitive event for service providers and investors alike. This development alone will lead many of you to the self-destructive decision making errors that are described above. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. Is it difficult to manage a portfolio in an environment that encourages instant gratification, supports all forms of "uncaveated" speculation, and that rewards short term and shortsighted reports, reactions, and achievements?

      Yup, it sure is.

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Ishares and ETFs: Indexed Investment Illusions

Thu, 13 Apr 2006 10:48:53 -0700

How many of you remember the immortal words of P. T. Barnum? Of Yogi Berra? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a lopsided, greed-driven, gold rush toward financial disaster. The dot.com melt down spawned the index mutual funds, and their dismal failure gave life to "enhanced" index funds, a wide variety of speculative hedge funds, and finally, a rapidly growing number of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs. How far will we allow Wall Street to move us away from the basic building blocks of investing? What ever happened to stocks and bonds? The Investment Gods are not happy.

A market or sector index is a statistical measuring device that tracks the movement of price changes in a portfolio of securities that are selected to represent a portion of the overall market. Index ETF creators: a) select a sampling of the market that they expect to be representative of the whole, b) purchase the securities, and then c) issue the ishares, SPDRS, CUBEs, etc. that you can trade on the normal exchanges just like ordinary stocks. Unlike ordinary index funds, ETF shares are not handled directly by the fund, and as a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the movements of the index they were selected to track. Confused? There's more… these things are designed for manipulation!

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund. These activities create demand in order to minimize the gap between the fund net-asset-value and the fund price. Clearly, these arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low… and why there are now hundreds of the things to choose from.

Two other ishare/ETF idiosyncrasies need to be appreciated: a) performance return statistics for index funds typically do not include fund expenses… it should be fairly obvious that an index fund will always under-perform its market, and b) some index funds, ishares in particular, publish P/E numbers that only include the profitable companies in the portfolio. How do you feel about that?

So, in addition to the normal risks associated with investing in general, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies. We then call this hodge-podge of speculations a diversified, passively managed, inexpensive approach to 21^st Century Asset Management! How this differs from how the dot.com mess started is a mystery to me. Once upon a time, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their excellent diversification. Does diversified junk become un-junk? Isn't "Passive Management" as much of an oxymoron as "Variable Annuity"? What ever happened to the KISS Principle?

But let's not dwell upon the three or more levels of speculation that are the very foundation of all index funds. Let's move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management. Mutual Funds were a monumental breakthrough that changed the Investment World. Hands on investing (without the self-centered assistance of the banks and insurance companies) became possible for absolutely everyone. Self directed retirement programs and cheap to administer employee benefit programs became doable. The investment markets, once the domain of an elite group of wealthy entrepreneurs, became the savings accounts of choice for the employed masses. But only because the Funds were relatively safe with their guarantees of diversification and professional management! ETFs are just not the answer to the problems we've experienced lately with traditional Mutual Funds. (Those problems are a function of Fund Manager Compensation, conflicts of interest within Fund Sponsor Organizations, the delivery and pricing system for the funds, and believe it or don't, the self directed retirement programs themselves.)

Here's a thumbnail sketch of how well the major Passively Managed Indices have done since the turn of the century: For those six years, the DJIA growth rate averaged Zero % per year, the S & P 500 averaged Minus 2% per year, and the NASDAQ Composite averaged Minus 8% per year! How many positive sectors, technologies, commodities, or capitalization categories could there have been? Go ahead, add in 1999 just to make yourself feel better and you'll come up with +2% per year for the DJIA, Zero % annually for the S & P, and a stellar –1.5% per year for the NASDAQ. Now subtract the fees… hmmmm. Again, how would those ishares have fared? Hey, when you buy cheap and easy, it's usually worth it. Now if you want performance, I suggest you try management. Any management is better than no management, so long as you are receptive to the strategies or disciplines employed by the manager. If you can't understand or accept the strategy, don't hire the manager. During the past six years, there have been more advancing issues than declining ones on the NYSE, more stocks achieving new highs than new lows. Why did you lose money?

Sure, you might find some smiles in an ishare or two, particularly if you have the courage to take your profits, and there may be times when it makes good business sense to use these products as a hedge against a specific risk. But please, stop kidding yourself every time Wall Street comes up with a new short cut to investment success. Don't underestimate the value of experienced management, even if you have to pay a little extra for it. Actually, there is no reason why you (and I mean every one of you) can't learn either to run your own investment portfolio, or to instruct someone how you want it done. Every guess, every estimate, every hedge, and every shortcut increases risk, because none of the crystal balls used by those creative product hucksters works very well over the long haul. Products and gimmicks are never the answer. ETFs, a combination of the two, don't even address the question properly. What's in your portfolio?

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

An Investor's View of The Fair Tax: A Resolution

Mon, 13 Mar 2006 06:49:00 -0800

The vast majority of Americans are investors, although many don't realize it. The vast majority of Americans are creative with their 1040 numbers, although most won't admit it. The majority of Americans would agree that investing, retirement planning, and estate preservation would be easier to manage if the Internal Revenue Code was comprehensible. A landslide of American voters would elect any candidate championing IRC replacement surgery.

All of us aspire to some degree of economic security and none of us would be so critical of the wealthy if we had a shot at joining their ranks. One side of the legislative mouth encourages savings and investment while the other treats it with totally "unearned" disrespect. One wealthy political party wants us to hate anyone with indoor plumbing while the other (wealthier) one spends most of its time trying to protect its diminishing turf and powerful cronies. All levels of government view businesses small and large as their all-purpose Reserve Accounts and, as a result, both prices and taxes suffer from a terminal case of "downward stickiness". Not surprisingly, in a DC crowded with 10,000 combative fiefdoms, nowhere can a PhD in dot connecting be found. We can change this!

& ;nbs p; It is likely that most of you are more familiar with the controversial Fair Tax Legislation than I am, but what I have found most shocking is just how thoroughly The Act's refreshingly new ideas have been swept under the congressional carpet. Neither political party really wants to change the sacred IRC, and why are our media heroes keeping their heads in the sand on this one? Let's squeeze some meaningful change out of the next administration. From an Investor's point of view, implementation of just three elements of the Fair Tax would be an outstanding starting point, even without the more sweeping changes that the Bill addresses.

[The Fair Tax Act of 2003 was authored by Representative John Lindner and co-sponsored by 54 others. Its purpose is: To promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.]

Now this is pretty heady stuff, for sure, but every bit as easy to implement as real Social Security reform would be. The three changes reviewed briefly below would be an excellent Phase One.

1) Eliminate the Corporate Income Tax, and all other nuisance fees and taxes that businesses must pay just for existing. Whatever any business is charged in fees, taxes, and mandatory assessments is translated into higher prices for goods and services… and at more than a 1/1 ratio. Governments need to look at businesses as employers and wealth generators, not as rateables. Lower expenses should result in lower prices and higher profits, and this would be comparatively easy to monitor for compliance.

Corporations would have more incentive to control their general expenses if such savings would actually make it to a bottom line that could be used to grow the business, compensate owners, and reward employees. More, higher paid, employees and more spendable (untaxed) corporate dividends are good for the economy. How many billions in lobbyist fees would be removed from corporate pricing formulae? With no income taxes or mandated charges to fork over, corporations could focus on growth and innovation. Investors would own more viable companies, selling more competitive products, to a more affluent population. Additionally, fewer jobs would be exported, more foreign companies would invest in the US of A, and GNP would rise at a faster pace. Rising profits would increase dividend payouts, stock repurchases, debt retirement, and employment opportunities.

2) Eliminate the Capital Gains Tax: I've often referred to taxes (or tax avoidance decisions) as one of two "Tails" that "Wag the Investment Dog". Every year, millions of people go out of their way (with professional encouragement) to lose money on perfectly good securities. Those who take profits too soon are punished severely and those whose behavior is tax-wise may severely damage their investment portfolios' future. Although it is clear that the Capital Gains Tax was originally designed to pick the pockets of those terrible folk wealthy enough to play the stock market for profit, it now inflicts considerable pain on all of us… particularly those who foolishly subscribe to the archaic Buy 'n Hold investment (mismanagement) strategy. Times have changed, and the average investor is now a pretty average guy indeed, willing to build a future if Uncle will let him.

A Government that bemoans the population's low savings and investment rates has only itself to blame, and Wall Street Institutions are happy to exacerbate the problem with their own financial pandemic of products, strategies, and tax deferral/avoidance schemes. Fair Tax advocates estimate that Billions of Dollars, Hours, and Antacids could be allocated more productively every year, just from eliminating this portion of the tax form preparation process… not to mention the trees.

3) Eliminate taxation on all forms of investment and Retirement income: Dividends, Interest, Rents, Royalties, Social Security, Pension, IRA, 401(k), etc. It just makes abundant sense, doesn't it? Without taxation, interest rates, rents, and professional's fees, just to name a few, could fall. Personal disposable income would rise and a much larger number of retirees would be able to live comfortably. Isn't this what periodic IRC tinkering is all about? Wouldn't it be cool if all of those different IRAs and self directed plans could be combined and relabeled: "My Untouchable Retirement Plan"? We would all save more and spend more if we had more to deal with.

No one expects a hundred million taxpayers to agree 100% on the final plan. I have problems with taxing education and health care spending, for example, and there is no doubt that displaced IRS bureaucrats will populate new compliance entities that monitor corporate operations. And most would agree that three separate sales taxes would be unacceptable. But real win/win/win change is in sight. We just need a positive leader with some…

Here's my proposed 2006 (and beyond) Voting Resolution for anyone with even the smallest start-up IRA account: "I promise to never, ever, cast my vote for any incumbent, at any level of government and from any political party, that has not clearly demonstrated that the repeal and replacement of the existing IRC is at the very top of his or her political agenda." It's time to reinvent this wheel!

& ;nbs p;

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"