THIS IS MY 142ND BLOG ON UNDERSTANDING MONEY
TOOLS
August, 2018
understandingmoneytools.blogspot.com
This is our 10th blog on America. At the end of the last blog I said we
would cover stocks, bonds, gold and currencies in this blog. Such a mundane topic. I will try to make it somewhat of
interest relating past stories and mostly covering areas that may be purposeful
or of interest for you. This is
like “putting perfume on a pig”, but I will try my best to make it fun.
(These 4 topics were covered in great length in previous
blogs. If you want more
information and in detail, please go to my blog-site above, and then scroll
down numerically until you come across headings that may be of interest.)
Even in brief, 4 topics is too much for one blog so let’s
only cover stocks in this blog and the rest in subsequent blogs. See how
quickly my mind changes!
HISTORY: Let’s
start out with the broadest of areas and the longest in America’s history.
Benjamin Franklin helped start our first American stock exchange; the
Philadelphia Stock Exchange in 1790.
Today, we mainly have the New York Stock Exchange, founded in 1792, and
the NASDAQ, founded in 1971 (the first electronic stock exchange). At one point we also had the American
Stock Exchange started in the 1800’s.
The Penny Stock Market or Over the Counter Market is an exchange for
lower priced capitalization stocks that have lower prices.
In addition to these exchanges there are other exchanges all
over the world. As for instance,
the London Stock exchange started in 1698, and the German Stock Exchange
started in 1585.
I find Americans quite uninformed as to stocks, the various
facets and the people who make a living representing them for the amount of
money they invest. As a point on
this, I addressed a close friend of mine on the issue that our markets are so
over priced that they are poised to come down 40-50%. My friend, retired and a successful businessman, replied
that he deals with a certified financial planner and he did not hold any
stocks, only mutual funds.
Unbelievable. Giving credit
to him you could possibly see this two different ways. He did not buy one individual stock,
but a mutual fund which is comprised of stocks. What is a mutual fund?
A mutual fund is a composite of many stocks put together through
analysis by an investment institution.
In my eyes you do own stocks when you hold mutual funds and if the stock
markets transition into a “Bear” market you are going to get hit. As you probably
heard or read, we just crossed over into the longest “Bull” market in
history. Paralleling this, we also
have the highest priced markets in history, with so little underlying tangible
value.
Let’s stay with representatives who might give you advice
and a bit of history. In the older
days, let’s say the 1960’s, when I went to college for business (5 years) we had “stock brokers”. As a stockbroker you had a license
(Series 1) and that license was held by a company having a “principal’s”
license, normally an investment banking firm. These stockbrokers were held in high esteem, and you can
picture them with their white shirts, suits and perhaps a bow tie. This was before computers so each
stockbroker did his own analysis based upon a company’s income statement and
balance sheet. His compensation paid to his principal could range 5-6% of a
transaction. In today’s world we
have gone to the term “Certified Financial Planner” and there is a
certification for this up and above a Series 7 and 63 License. There is also a “Certified Financial
Analyst” but we won’t go there. In
reality today, because of liabilities, a financial planner sticks with outside
money managers and mutual funds his/her investment firm has a signed agreement
with in regard to compensation; this is usually in the realm of 125 to 150
basis points. Did I lose you
there? What is a basis point? One
basis point is one, one hundredth of a point, therefore 150 basis points is
1.5%. This is the “speak” in the
financial world.
Sometimes you will find insurance people with a less
intensive licensing, the Series 6.
This permits them to sell mutual funds and insurance annuities.
STOCKS, A BRIEF SUMMARY:
- What
is a stock? A piece of ownership
in a company.
- What
is to buy long? To buy a stock
with the intent to hold or sell in the future.
- What
is to sell short? To sell the
stock today and buy it back in the future thinking the stock will go down.
- What
is an option call? This is the
right to purchase stock at a specific price within a certain time frame. If you don’t sell the option or exercise
your right to purchase before an expiration date you lose your money. One option equals 100 shares of that
stock.
- What
is an option put? Similar to
selling a stock short. You sell an
option at a certain price and need to buy that stock back at a set price within
a certain time frame, or lose your option money.
- What
is a mutual fund? To buy into a
group of stocks.
- What
is an index? A measurement of or
grouping of stocks in the same industry.
- What
is the DOW Jones Industrial Average?
A group of 30 large companies.
- What
is the S&P 500? 500 stocks
made up from the both the NYSE and NASDAQ.
- What
is margin? Borrowing money from an
investment banker rather than a commercial bank to leverage your stock
position. Borrowing on stocks can
be very dangerous if the market goes down as you will have a “margin call” to
cover the percentage of permitted loan to value.
Let’s look at stocks and various off-shoots. Holding various security licenses I had
to know all the intricacies of investing and hedging tools. Options are a separate market but
can be used nicely with stocks. To
further disturb your mind, you have sub-categories of options using “straddles”
and “spreads”. To further
sub-category “spreads” you have such strategies as “butterfly spreads”. Yes, I had to know when and how to apply
all, but only stuck to stocks and options for my own accounts.
Here is where I have used options. Let’s say I bought a stock this year. Assume my profit position is $100,000
on this stock. I think the market
may tank this year. If I sell the
stock within 12 months of purchase I pay Uncle Sam short-term gains, or
ordinary tax rate of 35%. Then I
pay short-term gain rate on state tax. If I lived in California I would lose
overall 50% of my profit. I don’t
like the looks of losing 50% of my profit (if you hold a stock or real estate
over 12 months it is long-term capital gains at a lower rate). Okay, here is what I do. I look at how much it would take me in
options to hedge my long stock profit position. Now, I am not looking at buying a call option, however
buying a put or sell option.
Therefore, I am mitigating losses if they should occur with my hedge and
not selling any stock. If the
market goes down I make money on my option to offset the loss on my stock. Got it?
Here is a kicker to be aware of. Options might not equate to the price movement of a stock.
As we have said, this is a different exchange and market. Traders may hold off on the like
movement of the stock. The other
negative is that commissions are higher than on stocks.
I don’t want this blog to go on too long so we will end it
with a little story, and then continue with investing in the next blog.
In my previous blogs I mentioned much of my professional
life was dealing with Wall Street and New York investment banking firms. At first, my thoughts were that I would
be dealing with elite gentlemen, but came to a rude awakening. What you think of in regard to people
behind the scenes and what is reality are most likely two different things. For one, I learned how the word “f…k”
and “f…king” could be used as a noun, verb, adverb and adjective, even in the
same sentence! These guys with the
firms are tough and out for one thing, money. The floor traders are mostly tough and rugged. Primadonna’s
don’t last. There were some
wonderful men and women in the trade and I made many friends. I tried to be more upstanding, even
though I’ve been called every name in the book! One wonderful older friend was Sidney Sternbach. I went to college with his son,
John. John lives in Denver and we
still talk several times a week.
The Sternbach’s owned 2 seats on the New York Stock Exchange and leased
those seats to Bear Stearns, an investment firm. Sidney at 82 years old would still work the floor trading on
the NYSE. I would call him up, go
over to Wall Street and we would have a wonderful lunch in the “member’s dining
room” of the Exchange. You had to own a seat to be able to eat there. Sidney “Stupot” Sternbach was awarded the oldest and longest member
of the NYSE working the floor every day.
Sidney lived life well and died exactly the way he wished. He went home from the Exchange on a
Friday, fell ill over a weekend and died the next Tuesday. We should all be so lucky! While working in NYC I had a most
privileged life. For night staying
when working on the Energetics’s oil deal and other endeavors I had the
Rothschild’s apartment to stay at or my wealthy friend who purchased a two
floor condominium at 54th Street and the East River. Everything was taken care of!
Another quick lesson I learned was insider trading. Way back
in the early 1970’s while working in Vail, Colorado, I went over for dinner at
a very wealthy Texas family’s home.
I asked the patriarch of the family and close friend what he thought of
a stock I was thinking of buying. His comment to me is so true even today, “don’t touch stocks unless you have an
in, by the time you are buying a good stock we have probably made our money,
and have gotten out”. Insider
trading with good knowledge of what was happening. All the wealthiest families
have many, many people working for them on both long and short selling. Many of the wealthiest are considered
“institutions” so they have a “one leg up” from you and me. They borrow at London InterBank
Overseas Rates not at the high bank rates you and I borrow at.
Here’s another fun little story before I leave this
blog. While working for another
wealthy family in New York around 1990, we started off each morning with a
conference call with the owners of about 6-8 of the top well- known stock
funds. It all had to deal with
what we currently knew on companies; insider information. Here’s another “pisser”! If I periodically had time at the
family office they had me speak to various companies to squeeze out insider
information. Here is how it
worked. We made a much higher annual return on investment in short selling,
than our long buying department….so that is what we aimed at. This made me feel quite
uncomfortable. I would be
given a false name, I represented a false investment company and was given a
phone number that would be answered by our employee stating that false
company. I needed to get the CEO,
CFO, President or Treasurer on the phone.
I would be “very interested” in buying a large block of their
stock. (In actuality I was trying
to find reason for us to short the hell out of the stock!) If I could not get through to the party
I gave them my false company phone number. A person on our phone lines would know how to answer and direct
that call to me. If a company
looked way overpriced our department head of short selling would fly to the
company and meet. When a decision
was made to buy a short position in a
company we took very large positions, mostly over $25 million and place
one of our people on the investment.
Did you know up until April 16, 2013 it was legal for
Congressmen to use insider information on trading stocks? On that date we passed the Stock Act
which supposedly put an end to it. Big laugh! Insider information is so pervasive throughout. You know if a Congressman has
information most of the 15,000 lobbyists have the information as they give
benefits and money to Congressmen for their “projects”.
We will continue in the next blog on America and stocks,
bonds, gold and currencies. I will
try to add in some of my personal stories you hopefully will find of interest.
In the meantime, if you want an older book on some of the corruption with some
humor dating into the 1980’s get your hands on a copy of “Liar’s Poker”
published in 1989 and written by Michael Lewis. It is a fun book for me as I knew and worked with several
people in the book, and brings back memories. The book is based largely around
Solomon Bros. which was the king of investment firms back then, and deals to a
great degree in mortgage backed bonds and their creation starting about
1983. The ups and downs. Billions
made and then the shit hit the fan taking down so many, including the Savings
and Loan industry.
If you read my background in the past blog you will note I
went through a month of training in Solomon Bros. mortgage backed securities
and bonds.
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