| It's likely that either curiosity or skepticism led | | | | speculative day trader becomes, whatever profit |
| you to this article, and I would agree that, for | | | | taking experience there has been is invaluable. |
| most individual investors, trading is approached in | | | | Once a trader/speculator is weaned off the |
| a totally speculative manner. Stock trading, in its | | | | gambling mentality that brought him to the "shock |
| more popular forms (Day Trading, Swing Trading, | | | | market" in the first place, he can apply his trading |
| Penny Stock Speculating, etc.) includes none of | | | | skills to investing and to portfolio management. |
| the elements that a conservative investment | | | | The transition from trader/speculator to trader |
| strategy would have at its very core: Little if any | | | | investor requires some education... education that |
| attention is given to the fundamental Quality of | | | | cannot be obtained from product salespersons. |
| the equities selected. Any Diversification that | | | | Step One is to gain an appreciation of the power |
| exists in the portfolio is determined by chance | | | | of Asset Allocation using the principles of The |
| alone and is, at best, a transient result of the | | | | Working Capital Model. Asset Allocation is the |
| selection guesswork. No attempt whatever is | | | | process of dividing the portfolio into two |
| made to develop an increasing and dependable | | | | conceptual "buckets". The first of these will |
| stream of Income. But stock trading by individual | | | | contain Equity Securities, whose primary purpose |
| investors doesn't deserve quite as bad a "rep" as | | | | is to produce growth in the form of Realized |
| it has earned. After all, its very foundation is Profit | | | | Capital Gains. The other bucket will contain various |
| Taking, probably the most important (and possibly | | | | securities whose primary purpose is to produce |
| the most often neglected) of the activities | | | | some form of regular income... dividends, interest, |
| required for successful investment portfolio | | | | rents, royalties, etc. The percentage allocated to |
| management. Unfortunately for most | | | | each is a function of a short list of personal facts, |
| non-professional equity traders, loss taking is a | | | | concerns, goals, and objectives. The cost basis of |
| more common occurrence. | | | | the securities, absolutely not their constantly |
| Bond, (and other Income Security) trading is | | | | changing Market Values, must be used in all Asset |
| generally avoided by most non-professional | | | | Allocation calculations. Asset Allocation is a critical |
| traders. Obviously, it takes more investment | | | | portfolio planning exercise that is: based on the |
| capital to establish positions in Corporate and | | | | purpose of the securities to be purchased, long |
| Municipal Bonds, Real Estate, or Government | | | | term in nature, and never "rebalanced' or altered |
| Securities than it does in Equities, and the volatility | | | | due either to current market circumstances, |
| that traders thrive upon is just not a standard | | | | hedging, or some form of market timing (which, |
| feature of the mundane world of debt securities. | | | | of course, is impossible). |
| Surprisingly, most investment advisors and stock | | | | Market Values are used in the selection process |
| brokers have not discovered that there is a more | | | | that identifies trading candidates that will fill the |
| exciting approach to Income Investing that is | | | | buckets... cash from all income sources, by the |
| actually safer for investors and less inflexible in | | | | way, is always "destined" for one bucket or the |
| the face of changing interest rate expectation | | | | other, and may be held unused if no proper |
| scenarios. Certainly, Wall Street financial institutions | | | | candidates exist. Selecting potential Equities must |
| pressure their representatives to push individual | | | | first be "fundamental", then "technical"... i.e. based |
| new issues and/or investment products, but I | | | | on the Quality of the security first, and the price |
| think that the Market Value fixation that stretches | | | | second. My experience is that higher quality |
| from Wall Street to Main Street is the real culprit. | | | | companies purchased at a 20% or more discount |
| Income securities need to be "valued" for | | | | from the 52-week high, with a profit target of |
| long-term income growth and traded with great | | | | approximately 10% (realized as quickly as |
| pleasure... albeit much less frequently. | | | | possible) is a very manageable approach. The |
| Consequently, most trading is done in an Equity | | | | proceeds find their way back into the "smart |
| only environment that, by its very nature, is too | | | | cash" pot for Asset Allocation according to |
| speculative for most mature (in whatever sense | | | | formula. There will be times when "smart cash" |
| you choose) investors. But this is not the way it | | | | grows quickly while the list of new trading |
| needs to be. Since stock prices are likely to | | | | candidates shrinks, but when trading candidates |
| remain volatile in the short run and cyclical in the | | | | are all over the place, "smart cash" is replenished |
| long run, there will always be opportunities for | | | | with a portion of every income dollar produced by |
| profit taking. [Note that it is the combination of | | | | both fully invested buckets! Thus, insistence upon |
| volatility, market accessibility, universal equity | | | | some form of income from all securities owned |
| ownership, and confiscatory taxation that have | | | | makes enormous sense! |
| made "Buy 'n Hold" a tar pit Investment strategy.] | | | | But what about trading the Income Bucket |
| Similarly, there are no rules against taking | | | | securities? Enter the Closed End Income Fund, in |
| advantage of the cyclical nature of interest rate | | | | the form of a common stock, and in a surprising |
| sensitive security prices. Trading is the world's | | | | variety of income producing specialties ranging |
| oldest form of commercial activity, and it is | | | | from Preferred Stocks to Oil Royalties, Treasury |
| unfortunate that it is treated with such disrespect | | | | Securities to Municipal Bonds, and REITs to |
| by our dysfunctional tax code. It is even more | | | | Mortgage Income. No more worries about liquidity |
| unfortunate that it is looked at askance by client | | | | and hidden markups. No more cash flow |
| attorneys and brokerage firm compliance officers... | | | | positioning or laddering of maturities. And best of |
| masters of hindsight that they are. | | | | all, no more calls of your highest yielding paper |
| Trading does not have to be done quickly to be | | | | when interest rates fall. Instead, you are taking |
| productive, and it doesn't have to focus on higher | | | | capital gains, compounding your yield, and paying |
| risk securities to be profitable. And perhaps most | | | | your dues to the Equity Bucket. And when |
| importantly, it doesn't have to avoid the interest | | | | interest rates move back up... you'll have the |
| rate sensitive income securities that are so | | | | luxury of reducing your cost basis by adding |
| important to the long-term success of any true | | | | additional shares. Of course its magic... that's what |
| investment portfolio. No matter how beaten up a | | | | we do here on Wall Street! |