Patrick’s Rants

As the last hours of 2009 fade into memory, the pundits are talking about the stock market recovery from the Great Recession. And to hear them tell it 2009 was remarkable in the 64% bounce from the market bottom in early March. As I look over what I’ve done in my own retirement account I see that I managed to do better than the markets as a whole. And that’s the way it should be; managed accounts should do better than unmanaged accounts or the index. If you didn’t do at least better than the market overall (or your portfolio didn’t double in value like mine if you want to get really daring) it might be time to take over management of your account. I’m considering a newsletter of sorts for investors who might be interested in what I’m looking at or investing in. Actually it’s far more like trading but it’s not day trading – I’ve only had one trade that took place in one day. I know. Everybody and his brother has a newsletter or a financial blog. I’m not really trying to compete with that. I suppose that I can just get feedback here to see how many of my regular readers think I might have something valuable to add. Anyone can write they had a great idea and made a bunch of money. Just look at Madoff or Enron. And to write that I bought several stocks and sold them for an average of 10% return per trade – some of them more than once – is easy. I could very well fake a great hindsight history so that’s no proof either. An email newsletter, another blog perhaps, text message updates?

Let me know and see you in 2010.

I wrote about using the low stock prices at the beginning of this year to lower your taxes a little and to lower how much you have “at risk” in Intel (INTC). If you had followed the 100 share strategy I mentioned in March here’s what would have happened.
First, let me arbitrarily pick June 1, 2007 as your original purchase date. INTC closed at $22.36. For simplicity I’m going to use the close price of the day. I’m also going to ignore the August 3, 2007 dividend (simply because I haven’t checked the ex-dividend date. I will count the intervening dividends)

• Purchase 100 shares of INTC June 1, 2007 = $2,236.00 (plus commissions, discount brokers will run around $10, others will run as high as $50-$75)
• November 5, 2007 dividends of $0.113 = $11.30 added to your account (using the discount broker you just made back your commissions)
• February 5, 2008 dividend $0.128 = $12.80
• May 5, 2008 $0.14 = $14.00
• August 5, 2008 $0.14 = $14.00
• November 5, 2008 $0.14 = $14.00
• February 4, 2009 $0.14 = $14.00
• May 5, 2009 $0.14 = $14.00 (only counting 100 shares worth of dividends, the ex-date timing could have doubled that)

If you had read the article on March 4, and decided that I wasn’t crazy, you could have bought your new 100 shares for $12.31 = $1,231.00. Holding the shares for around 35 days, you would have sold your “first in” shares on June 5, at $15.92 at the close $1,592.00. This gives you a $644.00 loss based upon the original purchase price on June 1, 2007. In a couple of transactions you have lowered your basis – or purchase price – in INTC, thrown off some beneficial tax losses and kept the same number of shares in your account. The long term capital loss over $3,000.00 can be applied to gains if you had them or carried forward for when you do have them.

Plus there’s almost $700.00 of dividends up there, so if you are using that cash for your new purchase your new shares only cost around $600.00.

Investment tips really. Here’s how to save a little bit of money on your taxes if you hold stocks in a taxable investment account (not a retirement account) First you have to have a little bit of cash, a little bit of patience and a belief that the stocks you own are worth owning. It also helps to use First In First Out(FIFO) accounting or sell specific shares but that’s not required.

I’m going to use Intel (INTC) as an example. Intel is trading at or near a 5 year low at $12.65 (at the very moment that I’m writing this). If you own INTC that was purchased at any time before the middle of 2007, you’re in the red. I want to add that you haven’t lost anything, that is unless you have sold. You only lose when the stock becomes worthless or you sell. Back to INTC. If you held it through the downturn, you probably like it – or you got caught off guard by the near free fall in the price and aren’t sure what to do next.

What you can do depends on how much cash you have. If you have enough cash to purchase an equal number of shares of INTC, then that’s what you do. If you had 100 shares, buy another 100 shares. That’s around $1265.00 plus commissions. Now you leave those 200 shares alone for the next 30 days – to be safe give it 35. Then you sell 100 shares using the cash for the next stock in your portfolio. Because you sell shares using FIFO or designate specific shares (this usually requires talking to a human broker and might cost you more in trading costs, but it’s worth it if you don’t use FIFO) the shares you sell are the ones that cost $25.00 giving you a per share loss of $12.00 to $13.00. I’m assuming that the price stays the same as today. But even if it moves around a bit the reason you owned INTC in the first place was because you liked the stock, right? In a taxable account you have a $1200.00 to $1300.00 loss to use against any gains you might have. $3000.00 can be applied to other income on a yearly basis and carries forward until used up.

If you don’t have enough cash you are almost betting that the stock stays around where it is now, or even goes down. Without the extra cash in your account you will have to look over your holdings a little more closely. Sell the 100 shares INTC today and sit on the cash for the 35 days and maybe earn a touch of interest. Then you buy 100 shares INTC. You still get the same loss as above, but with less certainty about your new purchase price.

The reason I give the 35 day figure is due to what the IRS calls the Wash Sale Rule. This basically means that you can’t claim you lost money on a capital transaction (the most familiar of which is stocks) if you buy the same or “substantially similar” stocks within a 30 window before and after the sale at a loss (this means approximately 62 days)

Of course, if you have many holdings this is a technique that can be “cascaded” over your entire holdings. If you hold five or six stocks you might look over them to see which companies look the “worst” to you ie. what will take the longest to recover? If you have no cash in your account, sell the “worst” of your holdings to purchase the stocks you eventually want to have. Sale of stock a gives you the cash to double up on stock b, then the sale of stock c gives you the cash to double up on stock d. You still have to watch the wash sale clock, but once the time is up, lather, rinse repeat until you have banked a decent carry-over.

Oh, and whatever you do talk to your Enrolled Agent, CPA, and stock broker if you have any questions about how this will and can affect you. And whatever you do, don’t leave your tax preparer in the dark unless you really understand what this does for your 2009 taxes.