The wealth-building thread

[bachatero]

Anybody here do futures trading?

 

[Timcognito]

I basically agree, but sometimes there's "friction" in the system that sways a decision, like taxes. I hold a large (for me) position in Apple in a taxable account. The brokerage firm web page says I'm up about 1200%. That means if I sell, about 90% of whatever I sell is a capital gain. I assume my overall capital gains tax rate is ~30%, so that's a lot of friction. Selling is really betting against Apple. That makes me keep holding it, unless I think the sky is about to fall. That hasn't happened yet, so here I sit.

That's another problem with holding individual stocks, you end up in frequent mental wrestling matches with yourself. Sell, keep holding, buy more, just hide your head in the sand. A lot of people I know don't have the stomach for it. They usually think they do, but they really don't, and then they have a panic attack, sell at the wrong time, or worse. This is why a lot of my otherwise brilliant friends pay an advisor a lot of money (1-2% of the account value per year) just to have them invest in a bunch of index and bond funds.

This is all true but the market has made many gains. It is time to take profits, and buy and hold is good if you are middle aged. My money managers charge 0.7% and have written options on my startup stocks after the company went public when there were none on the public market. If you are looking at a big sum of money its nice to get some help. Again, anything done in a US IRA can be conducted without tax consequences and used to hedge.

 

[blueone]

This is all true but the market has made many gains. It is time to take profits, and buy and hold is good if you are middle aged. My money managers charge 0.7% and have written options on my startup stocks after the company went public when there were none on the public market. If you are looking at a big sum of money its nice to get some help.

Ugh. No thanks.

Again, anything done in a US IRA can be conducted without tax consequences and used to hedge.

True, but the sharpest tool is a Roth IRA, assuming you can start young enough.

 

[dtaylo1066]

If you employer offers a Roth IRA run don't walk to sign up. Put in 20% or the annual maximum from day one in your 20's or 30's, the sooner the better and you will be more than fine when you hang it up. Up until age 55 you can just slap 100% in the S&P 500 and don't bother looking very often. In your 50s go for the catch up higher limit each year.

Other than that, I would suggest marrying a wealthy spouse.

 

[Timcognito]

Ugh. No thanks.

That's fine but all the gambling I wanted to do was in startups and when I saw how much I need know when my company went public I did not have time. For me, I never would have gotten into an exchange fund or leveraged options or gotten loans below prime interest rate but the advisors got me there at very low cost.

 

[blueone]

That's fine but all the gambling I wanted to do was in startups and when I saw how much I need know when my company went public I did not have time. For me, I never would have gotten into an exchange fund or leveraged options or gotten loans below prime interest rate but the advisors got me there at very low cost.

I know. My advice to most people is to do what allows you to sleep soundly. It looks like you found a sweet spot.

 

[levimax]

I basically agree, but sometimes there's "friction" in the system that sways a decision, like taxes. I hold a large (for me) position in Apple in a taxable account. The brokerage firm web page says I'm up about 1200%. That means if I sell, about 90% of whatever I sell is a capital gain. I assume my overall capital gains tax rate is ~30%, so that's a lot of friction. Selling is really betting against Apple. That makes me keep holding it, unless I think the sky is about to fall.

Having more than ~12% of your wealth in any one stock is quite risky and while being tax effecient is important, you should not let it dictate your portfolio management strategy.

I had a close friend lucky enough to be an early employee in an internet start up company. He had a window to sell and he asked me my advice. I told him the 12% rule and he sold most of his stock for ~$12,000,000 and 2 years later the company was out of business and he had to find a new job. His friends who listented to their fancy accountants about not selling to save on taxes were wiped out.

 

[Mort]

Having more than ~12% of your wealth in any one stock is quite risky and while being tax effecient is important, you should not let it dictate your portfolio management strategy.

100%, but it usually falls on deaf ears. Cisco and AOL were unstoppable 25 years ago... until they weren't.

Taxes are just a convenience fee compared to concentration and unsystemic company risk.

 

[Mort]

Selling is really betting against Apple.

It's better to think of selling as a bet against the market's ultra high expectations of future Apple performance, not against Apple itself.

This is a subtle but crucial difference that might help if you are trying to diversify.

 

[JeffS7444]

If you employer offers a Roth IRA run don't walk to sign up. Put in 20% or the annual maximum from day one in your 20's or 30's, the sooner the better and you will be more than fine when you hang it up. Up until age 55 you can just slap 100% in the S&P 500 and don't bother looking very often. In your 50s go for the catch up higher limit each year.

And if your employer contributes matching funds up to a certain percentage, aim for that percentage as a minimum, because that's free money.

My last employer did so, and I'll be forever grateful. But the firm they picked wasn't great, because the person tasked with setting up retirement accounts had no particular qualifications or aptitude for the task, so she chose a firm which seemed easy to deal with. And you guessed it, this firm's portfolio of stock funds for employees to choose from were actively-managed mutual funds, and management fees were substantial. Not only that, one day I checked into my holdings, and recognized none of the funds listed! Somewhere, I must have agreed to a clause allowing the retirement account administrator to trade at will, and trade they did. Had I been paying closer attention, I might have periodically rolled $$ out of the company-sponsored IRA into my personal IRA.

 

[blueone]

Having more than ~12% of your wealth in any one stock is quite risky and while being tax effecient is important, you should not let it dictate your portfolio management strategy.

I had a close friend lucky enough to be an early employee in an internet start up company. He had a window to sell and he asked me my advice. I told him the 12% rule and he sold most of his stock for ~$12,000,000 and 2 years later the company was out of business and he had to find a new job. His friends who listented to their fancy accountants about not selling to save on taxes were wiped out.

Interesting. What's the origin of the 12% rule? I did an internet search, and didn't see a mention of it. Also, is this 12% of investible assets or 12% of net worth? I assumed the former.

 

[dtaylo1066]

Interesting. What's the origin of the 12% rule? I did an internet search, and didn't see a mention of it. Also, is this 12% of investible assets or 12% of net worth? I assumed the former.

Having more than ~12% of your wealth in any one stock is quite risky and while being tax effecient is important, you should not let it dictate your portfolio management strategy.

I had a close friend lucky enough to be an early employee in an internet start up company. He had a window to sell and he asked me my advice. I told him the 12% rule and he sold most of his stock for ~$12,000,000 and 2 years later the company was out of business and he had to find a new job. His friends who listented to their fancy accountants about not selling to save on taxes were wiped out.

If I sold stock for a $12 million profit my next and final job would be fishing for 40 years.

My Fortune 500 company capped the pension plan halfway through my career but moved to a 9% match in its 401(k), then later added a Roth 401(k) option, the latter too late in my career to jump on. The 401(k) plan had a ton of investment options and was managed by Fidelity. Upon retirement I just rolled the 401(k) over into an IRA, with which the investment options are about endless. At this point a 5-8% return makes me a very happy boy. But I take a few fliers now and then. Made a bunch on chip stocks but got my ass kicked on an EV startup that went bust, thankfully I only put a small amount in it.

It is all about one's risk tolerance. At age 68 I need a good night's sleep if I am going to fish the next day.

 

[dtaylo1066]

I want to invest in high end audio company stock! Said no one ever.

 

[blueone]

If I sold stock for a $12 million profit my next and final job would be fishing for 40 years.

Assuming the person in question lived in California, I calculate the $12M windfall would be worth about $7.558M after federal and state income taxes. $7.56M is still a lot of money to most people, but a lot less than $12M. (Assuming I got the calculation correct.)

 

[stoneeh]

- unrealized profits aren't profits

- "buy low, sell high" is a pleasant sounding concept, except you don't know what's the low and what's the high. As far as the lows are concerned, "never try to catch a falling knife" is also sage investment advice.

- you can have loooong streaks of luck, and loooong streaks of bad luck, and it's easy to interpret both as either your achievement or fault

- major market crashes tend to happen at least once or twice a century, and nobody but a couple of insiders and full-time pros catch them in advance. As rare as they are, only one can suffice to wipe our a lifetime of achievement.

- profit always derives from another person's loss. Investing is a zero sum game.

- HFT is not a myth. The bank's / hedge fund's datacenter-powered algorithm is a better trader than you - fact.

- a few percent of participants leave a Ponzi scheme, the scheme collapses. A few percent of traders dump their holdings, the stock crashes. Not too much difference between the two, except for legality.

(subjective / opinion: - it's hard to see things you can hold in your hands, which you can use, and/or that make you happy, as a bad investment)


Good luck everyone.

 

[Blumlein 88]

- unrealized profits aren't profits

- "buy low, sell high" is a pleasant sounding concept, except you don't know what's the low and what's the high. As far as the lows are concerned, "never try to catch a falling knife" is also sage investment advice.

- you can have loooong streaks of luck, and loooong streaks of bad luck, and it's easy to interpret both as either your achievement or fault

- major market crashes tend to happen at least once or twice a century, and nobody but a couple of insiders and full-time pros catch them in advance. As rare as they are, only one can suffice to wipe our a lifetime of achievement.

- profit always derives from another person's loss. Investing is a zero sum game.

- HFT is not a myth. The bank's / hedge fund's datacenter-powered algorithm is a better trader than you - fact.

- a few percent of participants leave a Ponzi scheme, the scheme collapses. A few percent of traders dump their holdings, the stock crashes. Not too much difference between the two, except for legality.

(subjective / opinion: - it's hard to see things you can hold in your hands, which you can use, and/or that make you happy, as a bad investment)


Good luck everyone.

I don't agree it is a zero sum game. The economy and services generally expand over time. If you invest in the companies doing that, the size of things grow, the value of your investment grows and you haven't taken anything from anyone else. So no profit does not always derive from another person's loss.

You like things you can see and hold. Maybe I build houses. I can do it quicker, better, cheaper and at higher quality than you can. You make pianos. You can do it quicker, better, cheaper and higher quality than I can. If you need some house construction and I need or can use some pianos we both profit without anyone losing. The sum is greater than the parts. Economically and otherwise.

Of course I don't consider high frequency trading investing. It is somewhere around speculating or more like gambling.

 

[levimax]

Interesting. What's the origin of the 12% rule? I did an internet search, and didn't see a mention of it. Also, is this 12% of investible assets or 12% of net worth? I assumed the former.

I had a portfolio class in college and the text book said you could have a reasonably diversified portfolio with a minimum of 8 carefully chosen stocks which is ~12% max per stock. Technically probably investible assets but practically net worth is fine as this is not an exact science.

The goal of a diversified portfolio is to maximise risk adjusted returns. A portfolio overweight in one stock may well have a higher return but also will have higher risk than is justified by the higher return. There is no reason to sell all of a stock that becomes "too large" a part of your portfolio but "adjusting" by selling some of the big winner and investing it in other assets should help increase your risk adjusted returns.

 

[levimax]

I don't agree it is a zero sum game. The economy and services generally expand over time. If you invest in the companies doing that, the size of things grow, the value of your investment grows and you haven't taken anything from anyone else. So no profit does not always derive from another person's loss.

You like things you can see and hold. Maybe I build houses. I can do it quicker, better, cheaper and at higher quality than you can. You make pianos. You can do it quicker, better, cheaper and higher quality than I can. If you need some house construction and I need or can use some pianos we both profit without anyone losing. The sum is greater than the parts. Economically and otherwise.

Of course I don't consider high frequency trading investing. It is somewhere around speculating or more like gambling.

I agree on zero sums. While options and commodity contracts are by definition zero sum, stocks are not as you are an owner of a company that can grow sales and earnings and all the owners can win.

Speculation has a bad name amoung some people but in a healthy market speculation has an impotant function. One of the most important funtions of a market is to provide liquidity so participants can buy and sell their investment with as tight a bid / ask spread as possible. Speculators add liquidity to markets as they buy and sell when other participants may not be active. High frequency also has a bad name but also adds liquidity.

 

[blueone]

- unrealized profits aren't profits

Please tell that to the advocates of taxing unrealized capital gains.

- "buy low, sell high" is a pleasant sounding concept, except you don't know what's the low and what's the high. As far as the lows are concerned, "never try to catch a falling knife" is also sage investment advice.

You can buy low and sell high without having to achieve the lowest low or the highest high. Avoiding the temptation to catch a falling knife is sage advice.

- you can have loooong streaks of luck, and loooong streaks of bad luck, and it's easy to interpret both as either your achievement or fault

- major market crashes tend to happen at least once or twice a century, and nobody but a couple of insiders and full-time pros catch them in advance. As rare as they are, only one can suffice to wipe our a lifetime of achievement.

Yup

- profit always derives from another person's loss. Investing is a zero sum game.

Complete nonsense.

- HFT is not a myth. The bank's / hedge fund's datacenter-powered algorithm is a better trader than you - fact.

You don't have any proof to support your assertion on an individual basis, so why bother asserting it?

- a few percent of participants leave a Ponzi scheme, the scheme collapses. A few percent of traders dump their holdings, the stock crashes. Not too much difference between the two, except for legality.

More nonsense. For example, Berkshire Hathaway sold a huge amount of Apple stock, and the stock went up afterward. And because a lot of people follow B-H's moves, there were many stockholders who sold Apple stock.

 

[levimax]

Assuming the person in question lived in California, I calculate the $12M windfall would be worth about $7.558M after federal and state income taxes. $7.56M is still a lot of money to most people, but a lot less than $12M. (Assuming I got the calculation correct.)

Unfortunately not long after my friends monetary windfall he was diagnosed with stage 4 Melanoma. It actually went into remission for about 5 years and he traveled the world with his family during this time. When the cancer came back it came back with a vengeance and he passed away. In addition to having 5 good years he was able the leave his wife and family well off financially but we all miss him. Finding a balance between spending / enjoying wealth and the deferred gratification investing requires is not easy and there are a lot of unknowables.