Tag Archives: finance

How to Reduce Taxes on Your Investments

20 Nov

I was reading an article on reducing your 2012 taxes at Fidelity this morning. A lot of it was already familiar to me, such as this bit about investing in municipals:

If generating income is one of your investment goals, you may want to consider using a taxable account to invest in tax-free municipal bond and money market funds—especially if you’re in a high tax bracket. These funds typically invest in bonds issued by municipalities and their earnings are generally not subject to federal tax. You may also be able to avoid or reduce state income tax on your earnings if you invest in a municipal bond or money market fund that holds bonds issued by entities within your state. Interest income generated by most state and local municipal bonds is generally exempt from federal income and/or alternative minimum taxes.

But I would venture to say not a lot of investors may be familiar with tax-loss harvesting:

Use ongoing tax-loss harvesting. Tax-loss harvesting is the practice of selling investments that have lost value to offset current- and future-year capital gains. Unlike one-time or occasional loss sales, however, a systematic tax-loss harvesting strategy requires diligent investment tracking and detailed tax accounting. That means continuous analysis of every tax lot (shares purchased at a given price and time) to determine when the tax-loss benefit warrants selling appreciated positions. Trading a specific tax lot with a specific cost basis is different than selling all of your shares in a particular fund or stock, which may have been purchased at different times over many years and could have significantly different tax implications as a whole than they would individually.

I also found the below table very useful. Especially notable, if nothing changes before end of the year, is that all dividends will be taxed at your income level in 2013:

Your tax rate schedule in 2012 and 2013.

Read the full post on Fidelity here.

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The Rise and Fall of Medbox

16 Nov

Earlier this week, WSJ/MarketWatch published a piece “How to Invest in Legalized Marijuana.” One of the suggested stocks mentioned was Medbox ($MDBX), a company that creates medical-marijuana dispensing machines:

For regular investors looking to get in on the action — and without having to actually grow or sell drugs — there are several small-cap stocks that stand to gain from marijuana’s growing acceptance. Medbox , an OTC stock with a $45 million market cap, for example, sells its patented dispensing machines to licensed medical-marijuana dispensaries. The machines, which dispense set doses of the drug, after verifying patients’ identities via fingerprint, could potentially be used in ordinary drugstores too, says Medbox founder Vincent Mehdizadeh. Based in Hollywood, Calif., the company already has 130 machines in the field, and it expects to install an additional 40 in the next quarter…

That article propelled the stock to a meteoric rise from roughly $4/share to a whopping $215/share in a matter of two days (thereby increasing Medbox’s market capitalization from $45 million at the start of the week to a staggering $2.3 billion by Friday). So much interest was expressed in the stock that company executives had to go on record to “dampen investor enthusiasm.” It seems to have worked: the stock traded in a wide range today, ultimately finishing at $20/share.

Pretty wild stuff.

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How Wall Street Bankers Handled Sandy

31 Oct

This Bloomberg piece details how those on Wall Street handled Hurricane (Superstorm) Sandy. It’s slightly (perhaps very) disconcerting, as these people turned to $1,000 wine, delivered sushi, and Monopoly games:

“I had to go to the wine cellar and find a good bottle of wine and drink it before it goes bad,” Murry Stegelmann, 50, a founder of investment-management firm Kilimanjaro Advisors LLC, wrote in an e-mail after he lost power at 6 p.m. on Oct. 29 in Darien, Connecticut.

The bottle he chose, a 2005 Chateau Margaux, was given 98 points by wine critic Robert Parker and is on sale at the Westchester Wine Warehouse for $999.99.

“Outstanding,” Stegelmann said. He started the day with green tea at Starbucks, talking with neighbors about the New York Yankees’ future and moving boats to the parking lot of Darien’s Middlesex Middle School.

You have to click to read the rest. Using fax machines? No dumpling bar at JP Morgan? Wall Street had it rough.

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Profiting from Hurricane Sandy

29 Oct

Mark Gimein has a short post on Bloomberg, explaining that a typical investor doesn’t really have a chance to profit on Hurricane Sandy:

Another way to take advantage of the downside risk might be to put buy put options on the S&P 500 index. If a lot of folks were doing that, you might expect November put options with a strike price of 1350 or 1375 — that would represent a three or four percent decline in the S&P 500 — to spike upwards. They haven’t.

Recent years have been blockbusters for catastrophically deadly and expensive extreme weather events; Munich Re has some very useful data on this, which show 2011 as a record-setting year for costs of natural disasters (this includes Japan’s Tohoku quake). While a lot of ink has been spilled about the possibility of hedge funds betting on high-impact, low-but-meaningful-probability events like the storm, that’s easier said than done. It’s possible to make a fairly general bet against the insurance industry, or to bet on a sharp drop in the markets.

In practice, however, making a specific bet that would hedge against — or profit from — a weather disaster, is a lot more difficult. There’s not a substantial market for, say, put options on the insurance companies with exposure to Sandy.

If you want to hedge the financial risks of a hurricane, there are not a lot of market tools at your disposal. The main hurricane option for investors, whether ordinary stock pickers or hedge fund traders is the same as for other New Yorkers: shut the windows, turn on the news, and watch the storm’s progress on TV.

Not mentioned: even if you wanted to trade stocks or options, the entire stock market (NYSE, NASDAQ) is closed today and tomorrow. Good luck with that.

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How Financial Crises are Like Hurricanes

29 Oct

Felix Salmon opines on how financial crises are similar to huge storms, such as the impending Hurricane Sandy barreling down on New York and the rest of the East Coast:

Financial crises are similar to storms: they require humility, not hubris. Being prepared can be helpful at the margin, but ultimately it doesn’t matter how good your liquidity management teams and risk ledgers and counterparty hedging operations are: if everybody else is blown over by forces beyond their control, then you will be too.

That’s why skyscrapers always used to be built well above the water level, and that’s why we used to have dumb regulations like Glass-Steagal and Basel I, which weren’t very sophisticated, but which generally did the trick. Buildings like 200 West are a bit like Basel III: they’re built with models, so that they can withstand certain forces. But if an unprecedented storm arises, they’re still more at risk than, say, Trinity Church, built more than 150 years earlier. Sometimes, simple common sense (high ground is safer, huge books of complex derivatives can blow up in unpredictable ways) does a lot more good than any amount of sophisticated preparation.

The gist of Felix’s post relates to how Goldman Sachs is protecting its multi-millionaire dollar headquarters with sandstorms, but the analogy can be expanded to all the big banks.

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Investing Gangnam Style

3 Oct

This is a really interesting piece in The Economist that underscores investor confidence and stock mania:

A MID-SIZED sized Korean semiconductor firm named DI makes products with distinctly un-sexy names like “Monitoring Burn-in Tester” and “Wafer Test Board”. It has lost money in each of the past four quarters. And there have been no changes to its fundamentals that might explain why its share price should shoot up from 2,000 to 5,700 won (from $1.80 to $5.12) in the space of just three weeks—including another 15% gain today.

But DI’s chairman and main shareholder, Park Won-ho is no ordinary mortal. He is the father of Park Jae-sang, better known as PSY (as in “psycho”). “Gangnam Style”, if you haven’t heard, is now number one in Britain’s pop charts and number two in America. Local retail investors—referred with the derogatory gaemi-deul (“ants”) by professionals—are piling into DI shares because of it.

Quite how they expect the horse-dancing YouTube phenomenon of 2012 to help DI sell more of its Wafer Test Boards is a mystery. But convoluted investor logic is of course not a new thing. DI is merely the latest example of Korea’s “theme stock”—the local equivalent of the 17th-century Dutch tulip, Pets.com and the like going into 1999, or the Chinese walnut.

Wikipedia has almost 200 (!) references for the article on Gangnam Style. My favorite section is the song’s presence in academia:

According to a blog post published on the Harvard Business Review by Dae Ryun Chang, Professor of Marketing at Yonsei University, one primary factor that has contributed to “Gangnam Style”s international success is the song’s intentional lack of a copyright. This allows people to easily adopt, re-stylize and then spread the song.[6] Brian Gozun, Dean of the Ramon V. del Rosario College of Business at De La Salle University, writes that the absence of a copyright and the use of crowd-sourcing are just some of the more innovative ways that Psy has marketed his song.

Dan Freeman, Marketing professor at the University of Delaware, remarks that Psy’s achievement is an anomaly which counters the typical trend of successful international artists, because foreign music poses a difficult challenge due to language issues, making it unlikely for a song to catch on “when you don’t even understand the words”. Freeman asserts that Psy owes his success in the United States to YouTube, because of YouTube’s effectiveness in reaching a broad market.

David Bell, marketing professor at the Wharton School of the University of Pennsylvania, suggests that “Gangnam Style” lacks a certain aggressive attitude that many find offensive in the rap genre, and “Gangnam Style” is like a classic rap video from a few years ago with girls and cars—”not as offensive and in your face, but with a humorous edge”. Bell argues that it is Psy’s accessible image, not his message, that has made the song so popular.

As per The Economist piece, this entry would be incomplete without the video:

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Mark Cuban on the Business of Wall Street

21 Sep

Mark Cuban dishes out a lot of questions in his latest blog post:

The important issue is recognizing that Wall Street is no longer serving the purpose  what it was designed to. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings.  What percentage of the market is driven by investors these days ?

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past 5 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

This was the most important reasoning from Cuban, I thought:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades (hit every trade on a stock held less than 1 hour with a 10c tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 1 year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. 

Full post here.

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The Surprising Business of Life Insurance Policies

15 Aug

Are you worth more dead than alive? That’s the premise behind this fascinating New York Times Magazine piece, which goes into depth behind life insurance policies.

First, the author drives one point home:

Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of how much longer the seller has to live.

There are many, many reasons why selling your own policy can be a bad idea:

For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.

The investors who buy policies from others must be diligent (even if what they are doing is unsympathetic):

Life-settlement investors, like those in other sectors, crave timely information about their holdings, and the key metric for predicting portfolio performance is the health status of the policyholders. To acquire this sensitive information, Fred says a Vespers representative would call and question the policyholders — or their adult children, nurses and doctors — as often as quarterly. He would then receive tracking reports summarizing what the company learned.

Much of what I’ve read in the NYT piece I’ve read previously, in different concoctions, at other sites. So the biggest takeaway from the piece, for me, was near the end:

Back in 1921, a Stanford University psychologist, Lewis Terman, selected 1,528 kids for a study on what demographic and psychological factors enabled students to excel, in both their early years and later in life. The children were regularly assessed even as they grew into adults, got jobs and had families. After Terman’s death in 1956, the project was taken up by other researchers, who continued tracking the participants all the way into the 21st century. That the study hadn’t been designed to analyze longevity scarcely mattered to Friedman: here was a large group of people who had undergone standardized assessments from age 11 till death. Friedman and his colleagues exhaustively mined the Terman data for statistically valid correlations between the “psychosocial” profiles of the participants and how long they lived. “Surprisingly, the long-lived among them did not find the secret to health in broccoli, medical tests, vitamins or jogging,” Friedman wrote in his 2011 book “The Longevity Project.” “Rather, they were individuals with certain constellations of habits and patterns of living.”

Friedman’s findings buck much of the conventional wisdom on longevity. For instance, the cheerful study participants were less likely, on average, to live to a ripe old age than the more serious ones, in part because happy-go-lucky people are prone to “illusory optimism,” meaning they underestimate health risks and are less likely to follow medical advice. Highly sociable people, on average, did not live longer than less gregarious ones as is commonly believed, because they tended to drink, smoke and party more. Over all, Friedman found a longevity edge for the successful nerds of the world, the scientist types over lawyers and businesspeople. “The findings clearly revealed that the best childhood personality predictor of longevity was conscientiousness — the qualities of a prudent, persistent, well-organized person — somewhat obsessive and not at all carefree,” Friedman wrote.

Sounds like it’s good to be a nerd!

But really, if this topic is new to you, I suggest reading the entire piece. The topic is macabre, but it’s quite fascinating.

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A Brief History of Trading on Wall Street

15 Aug

You don’t get to read about history in the Dealbook blog, but we get a great one today about the history of trading on Wall Street. It’s pretty crazy to think that in the early days of Wall Street, stock prices were communicated by runners:

Even after the introduction of the trans-Atlantic cable in 1865 and the telephone in 1878, brokers still relied on manpower over gadgetry. Market prices were listed on slips of paper, and runners, most younger than 17, would deliver letters between brokerage houses, according to a report by Alexandru Preda at the University of Edinburgh. The new technologies were not seen as reliable. Problems ranged from typographical errors in the closing stock prices listed by newspapers to outright forgery.

In the days after the Civil War ended, traders seeking a timely edge still relied upon foot speed. The fastest man on Wall Street was William Heath, a celebrated runner with a huge drooping mustache, who was nicknamed “the American Deer.” Standing an inch taller than the Olympic sprinter Usain Bolt of Jamaica, Mr. Heath was reported by The New York Times to have been “as quick in his locomotion as in his operation.”

On the invention of the first ticker symbol, which was unreliable:

In 1867, Edward A. Calahan, a draftsman with the American Telegraph Company who previously worked as a messenger on Wall Street, unveiled the first stock ticker. The device, which earned its name from the unique sound it created, featured two wheels of type placed under a glass jar. The ticker printed off company names and stock prices on a narrow strip of paper, which was read aloud by a clerk.

Mr. Calahan’s machine was the first step in a major technological revolution of Wall Street, but it was also slow and unreliable. Twice a week, the batteries had to be filled with sulfuric acid, which was carried around in buckets. More important, the wheels of type would not always print in unison resulting in a mash of letters and numbers.

Catch up on the rest of the history lesson here.

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Why Facebook Stock Will Continue Its Decline

13 Aug

From this excellent New York Times piece detailing the woes of the Facebook stock, I wanted to highlight these two paragraph:

The next test for the stock could come soon. Over 1.6 billion shares will be eligible to come on the market in several waves, starting on Thursday, when a number of shareholders are allowed to sell. Investors may fear that an influx of shares could cause prices to fall even more.

One former Facebook employee, who did not want to be named because he did not want to damage his relationship with onetime co-workers, said he expected other employees to cash in their stock options as soon as they could, and predicted that the stock’s woes could make it difficult to retain and hire talent. He no longer owns Facebook stock.

My prediction? A lot of insiders are going to unwind Facebook stock, and the effect will be a further decrease in the stock price. I am staying far away. I wouldn’t be surprised if the stock price is trading below $10/share by the beginning of 2013.

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