Income Seekers: 4 Mistakes to Avoid

With today’s ultra-low yields, it’s safe to say that every income-producing rock has already been turned over. If there were a foolproof way to generate extra income without additional risk, investors would already be all over it, pushing up the security’s price and pushing its yield down. Instead, higher yields are invariably a signal that a security type entails more risk than its lower-yielding counterparts.

Source: Income Seekers: 4 Mistakes to Avoid

Picking Up Pennies in Front of a Steamroller

Below is a very sad tale from a newbie trader who didn’t understand that taking asymmetric risk can be fatal.   The trader shorted a $2.00 stock thinking it was going to go to zero, but then a news release was put out saying a group of influential investors had taken a position in the stock and the stock immediately zoomed up 600% in the after hours market.

The lesson here is that taking a short position where you have only $2.00 of upside and unlimited downside (in his case much more than he even had to lose) is like picking up pennies in front of a steamroller.  You could make a little, but if you’re wrong you’re going to be flattened.

This story is an absolute worst case scenario, but even so the risk is not commensurate with the reward.

A 32-year-old small-business owner from Gilbert, Arizona, posted this page after a huge loss on KaloBios Pharmaceuticals.

Hello to all you traders out there. I’m starting this page out of the recommendation of other traders in the community.

I hesitated on doing this but I literally owe Etrade $106,445.56 as of this moment what would you do if you were in my situation? I’ll do whats needed and sell what I have to get them paid but if someone feels my pain and is willing to help out—who am I to say no?

If you don’t want to donate I understand, at least read my story of what happened today and protect yourself from the same happening to you! This is a terrible lesson for me but if this helps just one person than I’m happy I wrote this.

I’m a fairly new trader, been trading since about March of this year. I have learned alot about the community and trading…well not enough about trading as you will soon hear.

I have a fairly small account, but its over PDT. As of this morning it was $37,000. I keep it small because I wanted to manage risk, the most I can afford to lose is what I have in the account….$37,000. When I get some profits I take them out of the account because I wouldn’t want to lose more than $37k.

I was holding KBIO short overnight for what I thought was a nice $2.00 fade coming. At the close of the bell I saw the quote montage clear out and figured today there was no action after hours in the stock. So I went to my office for a long meeting. I got out of the meeting and saw a message from one of my buddys, he asked if I was ok since I was short KBIO….my heart dropped. “Shoot did I blow up my account, everything I worked for? I don’t want to lose all $37,000 that would be terrible.” —It was much worse.

The stock was at $16 and my account was negative over 100k. I figured it was a mistake, Etrade would never let that happen, they must have cut the position when my account got to $0….nope. I immediately called them and they confirmed I still owned all the shares. He says that it got out of hand too fast for them to cover me, he says that all he can do right now is cover. I was devistated. I asked him to cover at $16 and he waited trying to find me a good exit. I told him to do it asap and the fill was around $18.50 avg.

At the moment not only is my $37k gone, but I now owe ETrade the negative balance of over $106k. I always knew I could blow up an account and I was financially able to “afford” to lose the $37k. Never in my wildest dreams did I imagine that Etrade would NOT have some sort of stop or circuit breaker in place that would automatically cut a position if the account went to $0… could they ever let it get to -$144k loss on a account that small! Also, why did I have to call them to find out what was going on, why did they not alert me or call me when it went neg???

Source: Joe Campbell GoFundMe page for E-Trade – Business Insider

NYSE Kills ‘Land Mine’ Order Type Some Blame for August Mayhem – Bloomberg Business

The New York Stock Exchange is eliminating an order type that investors including BlackRock Inc. blame for exacerbating extreme share-price swings on Aug. 24.

Source: NYSE Kills ‘Land Mine’ Order Type Some Blame for August Mayhem – Bloomberg Business

I’ll Pay You to Hold My Money

Why would an investor pay a central bank to hold their money?  There are only two reasons I can think of.  One, you are speculating that another investor will come along and pay a higher price to buy the bonds from you (current European Union Central Bank scenario) or two, you are seeking safety in a very unstable environment where your only concern is the return of your principal.

Today’s negative yields are the manifestation of central bank policy pushed to an extreme.

Germany sold two-year government debt at a record low yield of minus 0.38 per cent on Wednesday, in a move reflecting expectations of further monetary easing for the eurozone next month. The policy-sensitive two-year bond offers a coupon of zero,

Source: Germany sells debt at record low yield –

Hedge fund industry still not doing well – Bill Ackman Edition

I have nothing against Bill Ackman, but he has fallen prey to his own hubris on his Valeant Pharmaceuticals investment and is in danger of having the rug pulled out from under him.  Watch for an avalanche of redemption requests  from his fund eventually forcing him to sell at an inopportune time.

More pain across the investment management industry: Bill Ackman’s Pershing Square Holdings portfolio has lost 24.5% YTD, extending its fall this week as its biggest holding, Valeant Pharmaceuticals, declined further.

Source: Hedge fund industry still not doing well – Seeking Alpha

LinkedIn’s Hoffman: Half of Tech ‘Unicorns’ May Not Succeed

As hedge funds, mutual funds and other investors vie to put money into hot startups, pre-IPO valuations have soared. As a result, companies are waiting longer to go public and collecting on this glut of funding that’s inflating their values beyond what they can reach in an initial public offering. The latest example is Square Inc., the payments startup that is set to go public this week at a valuation of as much as $4.2 billion. That’s well below the $6 billion the company sought in its last funding round in 2014.

Source: LinkedIn’s Hoffman: Half of Tech ‘Unicorns’ May Not Succeed – Bloomberg Business

This is a classic FOMO (fear of missing out) scenario.  The fastest growing, most buzzworthy tech companies have been raising money in the private markets through a strategy of limiting access to their shares.

By not going public as early in their growth cycle as companies have historically, they are playing on the emotion of fear of missing out in the next great investment.  This is driving up the valuations of private companies, and only now are we starting to see some of the companies come public with lower valuations than they had in the private market.

Jeremy Siegel’s Case for Equities • Novel Investor

Jeremy Siegel has done more work on historical stock returns than pretty much anyone. He literally wrote the book on it, pulling stock data going back to 1802 for Stocks for the Long Run.

Source: Jeremy Siegel’s Case for Equities • Novel Investor

Cliff Asness on investment success

Investment success is about sticking to the plan.

Source: Cliff Asness on investment success – Business Insider

Long-term, being a successful investor comes down to taking a disciplined approach with the right amount of risk that will allow you to ride out the inevitable tough markets. It’s time in the market that matters, not timing the market.  

Most investors are not prescient enough to see every sell off or bear market, but by using an asset allocation approach that invests in assets that do well in times of growth (stocks), inflation (commodities), contractions (bonds), and the growth of other regions (emerging markets), the investor will be taking advantage of whatever is working in the current cycle and be set up to take advantage of the next part of the cycle.

Markets and economies experience cyclical moves from the flow of capital.  As one industry or country grows it attracts investment.  As it continues to grow, more and more capacity is added until eventually there is an overcapacity and the cycle begins to contract. (ex. the fracking industry currently)

An asset allocation strategy takes advantage of these cycles by exposing a portion of the investor’s portfolio to the asset class that is benefiting and being prepared to take advantage of the next leg in the cycle.

So make a plan and stick to it.  If you need help formulating an appropriate asset allocation, seek help from an advisor who can gauge your risk tolerance and help you stick to the plan in times of turbulent markets.


Only 1 in 10 Participants Contribute the Maximum to a 401(k)

According to the BlackRock Global Investor Pulse Survey, only 11% of 401(k) participants contribute the maximum allowed under the IRS limits.

The biggest fear clients facing retirement have is “am I going to run out of money?”  By the time clients get close to retirement it’s too late to do much about, other than delaying retirement, which never seems to be popular advice.

Today’s life expectancy in the US is approaching 80 years for both sexes (CDC website) so why do we think we can support 25 year retirements with only 30 year careers?   The answer is we can’t.  In order to support a 25 year retirement we need to put away a good portion of our income every year and take advantage of the power of compounding.

Tax advantaged savings plans, like the 401(k), offer the best vehicle for most people to save and invest for retirement.

  1. The deductions are automatic – You never even have a chance to spend the money because it’s deducted from your paycheck and deposited to your 401(k) account.
  2. Most plans have an employer match – FREE MONEY! (well not really, you are working for it ) The employer match is a guaranteed return on your investment.
  3. Tax deferred growth – Compounding and tax deferral is the an unbeatable combination, this means all your money is benefitting from the exponential power of compounding.

We all need to take charge of our own outcome in retirement.  In order to have the type of retirement we envision we will need to save and invest on our own behalf to make it a reality.  One of the best vehicles to do that is the 401(k), so automatically contribute as much as you can while your working and let the power of compounding work for you, to provide the type of retirement you want.

Be careful of pundits talking their book.

The Man Who Hates E.T.F.s – The New York Times

AllianceBernstein, or AB as the firm has recently rebranded itself, represents the opposite of this trend: It is an old-school money manager that offers, for a fee, a range of stock and bond funds that promise to beat benchmark stock or bond indexes. The problem is that since 2010 many of the so-called active funds offered by AB and its peers have trailed their benchmarks, not least offerings that invest in large American companies in the Standard & Poor’s 500-stock index.

Source: The Man Who Hates E.T.F.s – The New York Times