The Trader's Little Black Book

2009-01-29T09:03:00.000-08:00

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The Art of The "Covered Call"---the "Grandmother's Option"---

2008-05-28T06:41:00.001-07:00

Covered Call Writing is called the Grandmother's Option, because it is so conservative---one is in the "Banker's positon" versus a gambler. The odds for the astute trader can be quite high for success. It does take practice to get the swing of it however.

Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.

You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.

So---you look at the call option table.: (May 22, 2008

You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.

The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.

As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.

Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.

"Cold Calling Cowboy"----The Wild West ; The Deregulation of Wall Street

2008-02-05T13:20:00.001-08:00

Over the past thirty years there has been a transition from a structured investment environment to one that is "deregulated"---it has been marked by the end of the era of salaried brokers with higher commissions and research, to a world of $7 trades and computer simulations. It has been a movement from wise older traders to young, churn and burn robots.

"Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry.

When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor.

Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss.
Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k.

In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.

"The Syndicate"---or why you never can get the hot issues; On Allocation Rules, Theory and Practice

2008-02-05T13:18:00.000-08:00

When a brokerage firm, through competitive bidding, has secured part of a "syndicate" to sell an IPO, it also secures for the firm, should it choose, to elect to keep some shares in lieu of commission, allocate shares to the preferred investors of the branch etc. These rules have been in some dispute over the years, and usually the dispute occurs on an initial public offering where the stock is a very popular offering that the public might bid up the stock right away and lots of money could be made quickly---the rules of allocation tend to favor those investors that have been the "best customers" of the firm, or have generated the most commissions. So. One way of testing this is to identify a public offering that you think will be very hot, and then try to get some of the stock. You might be frustrated with the fact that this might be very difficult to do, and you might be in line, and a very long line.

The IPO' or "Stop Reading and Start Selling" a true story

2008-02-05T13:17:00.000-08:00

One of the glorious days for a corporation is the day it begins trading on the New York Stock Exchange or the NASDAQ. All the years of private financing and struggle to succeed come to a high point---and a big payday for original founders hopefully.

The essential facts of the IPO, or Initial Public Offering can be found in a google search. However, on an initial offering, there is no specific commission charge listed----it is paid by the offeror and the customer sometimes thinks it is a special deal. Not so.

Because of the lack of history on the new company, the stock exchange has rules that a prospectus must be prepared that details all the risks to the investor of purchase. One might think that this would be pretty educational....reading all the prospectuses and such. It is. However, one could spend all day reading them. The brokerage business is 99.99 about selling and .01% about analysis and reflection. I always loved reading the tech stocks prospectuses since there was usually some interesting stuff revealed that was heretofore not public knowledge.

The group of brokerage firms that have bid to handle the IPO are called the "syndicate." I have always loved that little info bit. There are so many ways the word syndicate can be used. In fact, if there is a really, really hot stock, you as a customer will probably never get your hands on any of that stock...cause it has been secured by the "syndicate", s slightly different meaning. More on that later.

On Day Trading: The Football Game in Overtime

2008-02-05T13:16:00.001-08:00

Some years ago, there was a craze among middle aged men. The video ads promised a course available by cassettee or cds that would teach the art of day trading---and furthermore, the promise was held out that you too could be truly independent through day trading.

Remember. I said it was a craze. The reality as I see it is that the average American does three roundtrip (6) trades a year. The average active day trader does 3 roundtrip or six trades a DAY.

Whether you are a writer, a musician, or a surgeon, repetition is important, and there is a learning curve with day trading. One gets better with experience, hopefully. It is an art that requires dedication, skill, speed and intelligence.....oh yes and nerves of steel. And it requires one to be prepared to be wrong 50% of the time....or more.

The most I have daytraded is 300 trades in one year. These were very small trades and done for educational purposes. To test out the odds of being right, and the odds of being wrong. My conclusion is that options and day trading are for the very rare few. The notion in the popular media that both these strategies are appropriate for the masses seems to be wrongheaded in the least and misrepresentation at the worst.

On Investing; The football game

2008-02-05T13:15:00.000-08:00

Last week was the Super Bowl. (2008) The entire week was filled with analysis and speculation. Lots of statistics on past. Line play. Passes attempted and completed. Psychological analysis. And yes the usual hype. There was not too much dispute really. The New England Patriots were destined to win the game...very clearly.

The Giants won.

The reason was simple. The game was played in the future not the past. And on that night, the Giants were better.

The question I have. Why so much analysis on football, and so little analysis by most folks in investments? Investing has all the same elements. And. I would suggest that a little less fanaticism on football and a little more on trading...would produce dramatically better trading results.

"The Gap; or Why Traders hesitate to use "Sell Stops"

2008-02-05T13:14:00.000-08:00

Recently I have conversed with my younger brother, Denis, about the matter of "The GAP" ; We call him "the Northern Wolfman" because he lives in the cold Minnesota tundra. At first, Denis thought that "The GAP" was the store---and one he did not frequent much because the clothes did not fit real well.

"The GAP" is the when a stock opens trading up sharply or lower sharply and because the trading is not orderly, it gaps down leaving a blank spot in the "chart". This "gap" becomes visual notice that something is up. This would be like you noticing that your neighbor has 25 cars in the driveway. Something is up. It might be a party. Whatever.

The gap results from an inbalance in orders and by very definition this is where traders can make money. Volatility is opportunity.

The transition of the markets to being "global" has led to a problem-----if markets gap down overnight in Europe or Asia, if an investor has placed a "sell stop" order below the trading price of his investment, the sell order will execute, but not at the price intended, but at the "first trade" of the day on the exchange. Because that could only be a momentary plunge, many experienced brokers do not recommend use of sell stops, or at least resist the impulse to use "tight stops" because there might be an unintended result---the stock could plunge on opening, taking the investor out of the stock, and then go back up, leaving the investor a needless loss and needing to buy back in.

Technical traders who follow graphs and such ascribe all sorts of inferences to "gaps" and if one is interested in volatility, it is worthwhile reading up on this.

The Morning of Chernobyl

2008-02-03T07:02:00.000-08:00

One of my favorite memories in the investment business was the Morning of Chernobyl. I got into the office early and reviewed my senior citizen clients who had purchased some utility trusts. I wondered what would happen at the open. I then wandered over to my guru broker's office, Bruce, of whom I have written earlier. He never came into the office that early so I figured something was wrong.

"What are you going to do this morn," I asked. "Well," he responded, while everybody is pretty scared about the Chernobyl deal, I will probably buy some utilities that I like if they correct at the open. "

Then he went on, " This is just life, in that we have to figure out the meaning of it all, only in this business, we have to do it by 8:30am. There is an urgency here so just get used to it. "

One of the things that I do miss about the investment business is that if you had an idea, there was always one of your competitive peers that would think you were nuts and disagree with you. That was very helpful. Believe me, there are some crazy things I have done, but there are a whole bunch that I avoided cause I listened to someone argue with me that the idea was crazy....so.

In many ways, in the morning, I am still doing what I did back in the 80's. I am going over what is in the news, trying to see what it means and COUNTING ON the readers to pick out the ideas that are just crazy so I avoid them. The farmers always had the morning coffee in town to chat---I always wondered what they talked about. It was really whether October beans were too high at 1.55. They argued over the issue. Is it best to close the position or hold? Out of the talk they avoided some solo crazy ideas.

In many ways, this is what the Observer is all about. And it is ok to talk and argue about ideas before action. In fact, it is far preferable to acting and then dimly realizing several years later that the plan of action was very, very, very wrong.

P/E Matters

2008-02-02T16:16:00.000-08:00

About twenty years ago, one of the hallmark technical indicators that folks looked at was the P/E ratio, or the price/earnings ratio. It was one of the key things folks talked about. Then, as has happened in every boom since the 1920's, it became inconvenient to look at the number. People were in the frenzy. They needed a new thing to concentrate on. So---they looked at future PE ratio and made up dreams of future earnings to justify buying higher and higher, and higher.

One of the stocks that comes to mind in this regard is QCOM, or Qualcomm. They were manufacturing, or in the process of developing the technology for the current cell phones that could transmit video and pictures. The P/E as I recall was 85 times earnings. The pundits always said that that was no longer important.

When the tech stocks imploded, everyone learned the rest of the story. P/E does matter. In every mania, the tendency is for folks to deny what has always been accepted valuation, and in time, those very folks become shocked when they discover that the old rules do matter.

The Covered Call---the grandmother's option

2008-02-02T14:33:00.000-08:00

Ed.note: The following is just a reflection and not a recommendation or advice in any way.)

Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.

As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."

One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.

The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.

The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.

So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.

An Introduction to Power

2008-02-02T14:18:00.000-08:00

It was a hot Saturday night in New York in 1985. The young brokers in training were in second week of three, and mostly their money had run out---the suite of rooms at the swank mid town Manhatten hotel were paid for, but the real test of toughness was surviving on the small allowance. The very first day had been the eye opener. Flush at surviving the subway system returning from Battery Park, the brokers had ventured to have a quick cocktail at the Hyatt on the way home. After getting the bill, we realized.....at $10 a glass, the living allowance was going to last a week at that pace. So....beginning the third week, we were cooking spagetti in our room.

Hours afterward, as the brokers were getting ready for bed, the lone broker who had gone to the Broadway theatre came in----we all knew that somehow he had managed to pay the ticket price and now as he walked through the door, we noticed a stunning blond on his arm. He introduced her quickly as one of the actresses in the play he had seen. Then a quick hushed conversation with one of the brokers, and the two headed to the corner suite.

The broker was all smiles as he explained that this guy had given him $200 to sleep on the couch. Wow. What a windfall.

Just when I was about to ask who this guy thought he was, one of the guys told me.....he was the son of the owner of the World Trade Center. Over the years, the scene has made more and more sense to me.

The 5% Rule for Options; A distant memory? Enron as the Model for the Global Economy

2008-01-29T09:09:00.000-08:00

Twenty years ago, folks when they opened a stock market account, chose a cash account, called a type1 account, or a margin account, a type2 account. As the name suggests, the securities in the cash account were paid for, and the ones in the margin account were "Margined" or they may or may not have some of the equity in the account be borrowed funds. The rules of the stock exchange were quite specific on the opening margin amount, and the maintanance amount, respectively 50% and 20%. To use a simple example, if one had $3000 one could buy $6000 worth of stock. Then if the stock declined, the minimum amount of equity one would have to have on a daily basis was 20%.

The other element was that on the very top of each account opened was a PURPOSE. The purpose had to mirror the type of account. Normally, retired folks had cash accounts. They did not trade on options, or use margin. It was the duty of the manager of the office to supervise each broker to see that the details of each account matched the purpose on top.

If a person who had been quite conservative and was 60 for example, would want to simply dabble in options, a separate account would have to be opened, and there was a 5% Rule. If the investor was to lose everything in the option account----this "TOTAL" loss could not exceed 5% of the total liquid net worth of the investor, and this may have been 5% of the liquid net worth that the firm could verify or had under management.

Here is a story to illustrate the point. One day one of my old school chums called up and asked whether I could go for coffee. He was a very successful lawyer. I was a stockbroker at the time. After ordering a coffee, as usual in the Minnesota Viking mug with the extra sugar and whipped cream, I asked how things were going.

He said, "Not too well. One of my major clients just lost a million dollars." It seems that during a market swing, he had been invested in options and had simply lost his entire account at a major brokerage house in St. Paul.

I replied, "That simply cannot be so."

Then I explained the 5% Rule. After explaining that when each account on Wall Street is opened, the client is given a booklet with the rules in it, by law, and the 5% rule was in it. The broker in this firm had broken the rule and the investor should get his money back and be made whole for the excess over 5%.

After the coffee, he smiled. "I'll be happy to pick up the check", he said.

Later I passed him in the street and he laughed and said that the client had been made whole.

Over the past 20 plus years, with the blurring of cash and margin accounts, and with the relaxation of the barrier between banks and brokers, and with the global marketplace and the absence of supervision over both products and the brokers that sell them, not only the individual investor is at risk by complicated products that the banks and the investors and the regulators do not understand...entire nations are at risk. That is the lesson of the recent trader losing 7 Billion in the French Bank.

2008-01-29T09:05:00.000-08:00

2008-01-29T09:01:00.000-08:00

The Odds of Being Right: On Planning to Be Wrong;

2008-01-24T09:17:00.000-08:00

Some years ago, I worked as a registered representative for E.F. Hutton, in the Madison office. Yes, it was always reassuring to work for a company that had as its slogan, " When E.F. Hutton speaks, people listen."

In this office were competitive and hard working brokers. In fact, overworking brokers. It was hard not thinking of the business 24 hours a day. Mornings began about 7:30am with the telephone report from New York and ended after dinners of pizza, pizza and pizza, and cold calling new prospective clients about investment ideas.

There was one exception to all the brokers. His name was Bruce. Bruce came in when he pleased. He drove a BMW. He had a beautiful wife. He met his clients like a physician would a patient. Sometimes he would not come in to work at all! And when he did come back he would be all tan and tell us of a wonderful trip. He seemed very relaxed all the time. He seemed able to laugh at things that all of us did not think were too funny. All of the other brokers were not pleased with Bruce. It seemed totally unfair.

At this time, I had two young daughters, 5yr. and 3yr, and was working about 60 hrs a week and it occurred to me that Bruce knew something that I did not. So, one day I went in and simply asked him, " Bruce, how do you do it. I just don't understand?"

He smiled and said, " Well, you must understand that everyone here is very bright and has good ideas. But even so, if you honestly plot your ideas and hold the record for a month, you will discover that you will be right only 50% of the time. Try it and you will see. Being bright is not enough. My secret is that I plan on being wrong and use options to prepare for it. He then proceeded to show me on a $1,000,000 investment for his clients how he had protected the investment from the possiblity that he could be wrong. Then he smiled and laughed.

I have never forgot the lesson that Bruce taught me, nor the BMW, the model wife and the style of work that Bruce enjoyed. The crash of 1987 came. Bruce did just fine. His clients were protected. He went on to be a very successful mutual fund manager.

I tell this story for those on the comment line. The good news is that we keep the comments online for review for a year. The bad news is that we keep the comments online for a year.

E.F. Hutton thought it knew so much. In a heartbeat when the market plunged 500 points it was over. Instantly. On the phone from New York, senior staff were urging brokers not to jump from windows, but to get some perspective on what they valued in life. I was in Madison. On the first floor. No place to jump.

As you comment on the blog calculate the possiblity that you might be right? Might be wrong? What are the odds? Is it better than Babe Ruth? Is it better than 50%. Plan accordingly.

"On Losing Other People's Money----the advantages"---a true story

2008-01-24T08:15:00.000-08:00

Senior Partner in a New York brokerage firm addressing young broker trainees.

"Ladies and Gentlemen. One of the unfortunate things about this business is that you are going to take some people down."

(Silence in the room.)

"Yes. I am sure that you will make some folks a lot of money. Lots. But the unfortunate and ...something that you have to consider and come to terms with is that your advice will be wrong sometimes, and people will lose."

And....when you think about learning in general. You may have thought that in your life you learned best from your success.....In fact...I would propose that you in fact learn more....far more...from failure.....Failure builds champions.

The problem of course is that in this business, as I reckon, one has to lose about $100,000 just to become savvy.

And of course one of the reasons you are a broker....is that it is cheaper for you to lose the money of others....than your own money......."

(Nervous laughter......)

His words are something that every investor has to consider when one looks for a broker.

Whenever Possible,....buy from dead people

2008-01-24T07:49:00.000-08:00

One of the nice parts of buying in an estate sale, is the simple fact that the owner is not there to haggle with you about the price.

Even more attractive is the survivor principle----which says that wherever there is a man with extensive weight equipment, or auto equipment, or xxxx insert here) there is a spouse who, upon his death, says, "Get rid of this xxxx".

Your mission is to be there to pick up the bargains.

"Have A Nest Egg"---Mom's rule

2008-01-24T07:47:00.001-08:00

Mom always had a little nest egg of money that she stashed away and over her lifetime she made an obsessive task of using every trick in the book---coupons, special sales, senior discounts, etc. to get this nest egg. She always used to say to me," Dick, I wish you had a nest egg."

So did I.

"The Golden Rule"---the trader's version

2008-01-24T07:42:00.000-08:00

Years ago there was a series of books on "Thinking of Numero Uno"--or the benefits of self, self, self. Self obsession or greed was touted as in a nutshell a powerful economic tool.

Recently in an interview with one of the "Hedge Hunters" a group of super traders, there was a profile of T.Boon Pickins, one of the famous oil speculators of all time. The author of the book on these people stated that the key quality of T.Boone Pickins was that he was "SANGUINE" on the market at all time.

To be sanquine, is to be detached. Whether you use ZEN or whatever meditational technique, being sanquine is key. One must know one's position, but also know the position of everyone, and most importantly, the party who is in the opposite side of each trade. If you have a tremendous understanding of that person and the position, when the facts change, you can adjust in a heartbeat. If, on the other hand, one is emotionally invested in a position, one is destined to lose.

Thus the irony--when you are your brother's keeper....or at least have compassion....or maybe even knowledge of the opposite---one has the ability to be a great trader.

"Just Like Jesse James"

2008-01-24T07:28:00.000-08:00

In one of those old Cher crooning songs, she sings that she will shoot him down in flames, "Just like Jesse James." Yes. You would have to find an old Cher cassette to get that track, but I did have one for the trip to Northfield this weekend. And---it brought back memories of the fate of Jesse James----and why each year in Northfield, Mn., they celebrate "The Defeat of Jesse James Days" as the centerpiece of their historic heritage. Yes. They have the bricks. They have the historic homes. They celebrate the Defeat of Jesse James.

In the old days, the banks were not insured. You lose your savings and it is curtains for your family. Jesse James had made quite a name for himself as a bank robber. He was feared nationwide.

On that fateful morning as word spread that Jesse was robbing the bank, each man went and got his gun. They waded in and made a celebrated accounting of themselves. The Jesse James Gang was over.

Singlehanded, no one of them could have managed it. Together they got the job done.

We need to get back to the old days, when folks considered it THEIR money in the bank, and when folks did not just buy insurance and some complicated legal bundle of securitization, but rather felt a stake in their finanical institutions.

It seems we have just a whole lot of Jesse James look alikes these days. And it is true with concealed carry, folks could just protect their banks like in the old days.

"The Great Bank Robbery of 2005"

2008-01-24T07:27:00.001-08:00

The Great Robbery of 2005; Or, a modest proposal for the historical revision of the tales of armed robbery; OR, Book Review: “The best way to rob a bank is to own one.” By William K. Black.

Recently right in the midst of our local bank moving to its new location, a bold, young man strode in and robbed it in broad daylight. Because of the bank relocating, the cameras had been disabled and in the aftermath, the local rumor was that probably the robber would never be caught. Hopes faded for a solution to the crime.

As days passed, the rumor spread that this master of mischief had used such deceit as bandaids on his fingers to do the evil deed. He was rumored to change his clothes as fast as Superman and that he had a lot of tatoos on his back. The number of the tatoos seemed to grow as the days passed.

And then, just when the legend was starting to pick up speed, the robber was caught. By his own large mouth.

It seems that the robber, had spoken to another person while the FBI videotaped his discussion of robbing six banks in four states in seven months. In the process of these crimes, he netted $40,000. If convicted, he faces 20 years in prison for each robbery. Like 120 years in prison for $40,000.

I know what you are thinking----- that this guy just could not do the math. Robbers of earlier days in the 1930s were a lot smarter. Like Jesse James who the folks in Northfield, Minn still celebrate with Jesse James days. Those were the days! Those were the smartest of the smart! Wrong. Nothing has changed. The math was the same or worse in those days of yore. Who then ARE the “ GREATEST “of the bank robbers?…..Read on.

I am currently reading the book, “The Best Way to Rob a Bank is to Own One,” by William K. Black. Mr. Black was the lead regulator during the Savings and Loan Crisis of the 1980’s. In all, over 1000 individuals were convicted of felonies for what is called “control fraud.” This is essentially the white collar version of armed robbery. However, you might be interested to know that nobody counts it as robbery. Huh?

Mr. Black points out in his book that the lessons of the robbery of the S&L’s of the 1980’s has been lost on folks today, and today the same technique is being used to loot corporations. Mr. Black says ,” In 2003, the United States Department of Justice reported that property crimes had continued their trend and fallen to an all-time low. In fact, property crimes have surged to an all-time high since Enron collapsed in late 2001. The reason for the contradiction is that the Justice Department does not count serious crimes because it excludes white-collar crimes from its data keeping. A wave of frauds led by the men who control large corporations, what I term”control fraud,” caused the massive losses from property crimes.”(pp13)

So there you have it. All about the Great Robbery of 2005. Oh, by the way, it wasn’t the guy with the tatoos.

Begin at Zero

2008-01-23T09:49:00.001-08:00

A note for buyers----begin at ZERO.

My friend, Marvin, told me a story once to get the point across. A man wanted to buy a bed. He saw one advertised in the paper and went to look at it. It was a beautiful four poster bed in a very high attic.....and he noticed that the seller seemed anxious. The buyer said he would have to think it over further. About a month later, the buyer called and asked to see it again. Again the seller told him the selling price....but the buyer said he would have to think it over further.

Finally...the buyer stopped in to see the bed one more time and after going over the selling price again, the buyer asked why the seller was selling such a beautiful bed. the seller was exasperated and said, "Well, my lease is up tonight at midnight and I have to have everything out of here. I cannot imagine what else you need to know about this bed." ....To which, the seller replied that now he had the information he needed. He proceeded to offer a mere pittance for the bed and the seller accepted. He had no choice.

When you are the buyer....you wait till you have ALL the information. Secondly...you begin at ZERO...Yes...ZERO....

The Story of Marvin:or; When you are buying, buy; When you are selling, Sell; Never Confuse the two

2008-01-23T09:38:00.000-08:00

I have always loved books. But at one point, I was curious as to the BUSINESS of books. I knew little about the art of buying, so I asked my friend, Marvin, a liquidation specialist, to keep his eye out for an opportunity for me to learn something about and possibly purchase a book inventory.

On July 31st, it was one of the hottest days of the year, with temps well over 100 degrees. Marvin called. He said he had an opportunity I might be interested in and to meet him at the warehouse of a notable publisher downtown at 4:00PM sharp." O.K.", I said.

As I entered the warehouse, I noted that the temp inside was about 130 deg. and quickly discarded my suitcoat and tie. When I met Marvin, he said, "Just listen, and let me do the talking."

We met the warehouse manager and in his cramped office the temperature seemed to get even worse. He explained he had some "remainders" of computer books and gave us a list of titles and numbers. They totaled almost 20,000. When I saw the numbers, I thought that Marvin was nuts. No way did I have enough to purchase all these. But I remembered his words. I remained silent.

The meeting dragged on forever. Marvin had questions, and questions and questions. Finally, the warehouse staff came in and punched out and left. It was after 6PM. Frustrated, the manager said, "Well, Marvin, I need to do something with all these books. My lease expires on Sunday, and I really need to do something."

Then Marvin spoke. " I am pleased that Dick and I can be of help in this matter. We will see that all these books are removed at no charge to you by Monday morning. The Manager was stunned, but quickly agreed.

When we were outside the building, Marvin took me aside and said, " When you are buying, you are buying; When you are selling, you are selling; Never confuse the two. When you buy, you begin at zero. Now go and rent a truck. We have our work cut out for us. "

Posted by Evansville Observer at 1:39 PM

The Risky World of Bonds; or "With a Ginny Mae, You Lose in Every Way."---the story

2008-01-23T09:16:00.000-08:00

If you are an experienced investor, or simply older person, you know that there are many ways to lose money in this world. Life is simply about "risk" and "risk assessment". Usually in times of economic stress, folks rush to secure investments. Or, more precisely, what they "think" are secure investments. That rush can be dangersous if the risk is not viewed properly.

So, I wanted to share a little jingle I learned on Wall Street many years ago. The jingle goes, "With a GinnyMae, you lose in every way."

The jingle highlights the perils of investing in bonds in a rising interest rate environment. This may or may not be the world you face right now. Usually bond investors are folks like my father, who invested monthly in bonds, and had a bond guide next to the Bible on the night stand. A child of the depression and WWII years. Back in 1973, it became necessary to review these bonds as interest rates skyrocketed in the Jimmy Carter years. It was not a pretty picture. Bonds took huge losses. It was a lesson I have never forgotten. It is one you need to know.

If you buy a bond as interest rates rise, say at 7%. You are pleased. The rate seems high. The next day, the rate goes to 7.5% Now if you hold the bond to maturity, you will get your principal plus interest, if the company does not default. However, make a note of it, most people sell prior to maturity. So if you wanted to sell that bond on the following day you would lose. After all, who would buy one at 7% when the 7.5% were available.

You may wonder about the GinnyMae jingle. The phrase "every way". In a decreasing interest rate market, people refinance the underlying mortgages and the bond trust usually gets paid off early--just what you don't want. Now you have money to invest with rates lower. So you have investment rate risk. So either in rising or dropping rates you tend to lose..That was the point of the jingle.

The overall point of the jingle is that you CAN lose with bond investments. If you don't understand how this can happen, ask your investment advisor. The purpose of the jingle is just to get your attention.