When is a dividend not a dividend?

The latest thing “conservative” brokers are preaching these days is to buy stocks that pay dividends. Everyone likes dividends. I know I do, but when Wall Street tells me something I am automatically suspicious because they lie to me every day. Is this a new scam? Let’s take a look.

When you buy a bond or a CD at the bank it pays interest and is a real dividend. You might get a check every month, quarter or annually or receive a credit to your account. The amount of your principle (what you paid for it) remains the same. Yes, that is a true dividend.

Companies make big splashes about raising their dividend. It was 50 cents per share, but we have raised it to $1.00. Big deal. Yes, you will receive a check and at least you know the company has cash available to pay you. That is an indication the company is in good financial condition, but there have been many of the big names on the NYSE that have continued dividends even when they have lost money. How can that be?

Currently Microsoft has announced a dividend of $3.00 per share. The talking heads on CNBC-TV tell us they are loaded with cash and want to distribute it to their stockholders. Many people buy the stock in anticipation of the dividend as they think they will be getting an extra $3.00 per share. They are in for a big surprise.

The day that dividend is paid Microsoft stock (symbol MSFT) will automatically drop $3.00 per share. Today $27.00; tomorrow $24.00. Folks, this is NOT a dividend. This is a distribution of capital. You are being paid in your own asset. The fool that believes the Wall Street mumbo-jumbo will not have one extra penny after the dividend than he did before. In fact he will have less. Why?

The stockholder will now be allowed to pay income tax on the “dividend” distribution. To make that “dividend” seem even better the Bush administration has reduced dividend taxes from 38.6% to 15%. Thanks, Mr. Bush. Thanks for nothing. I can’t blame him for more Maul Street smoke and mirrors. He has just made it cost less to get back your own money.

Companies seldom pay large dividends and they are paid quarterly. A $30 stock that pays a 4% dividend ($1.20) on a quarterly basis shows a decrease in the stock price that day of 30 cents per share and is lost in the noise of trading. Few notice that part of the price change is due to the “dividend”.

When you own the stock of any company the most important criteria is to find one that is in a long term upward trend. Never buy a stock that is showing a decline no matter how “good” the company may be. Even sideways movements should be avoided. Keep in mind you are buying the stock to make money. Forget the dividends and all other “reasons” and remember if it isn’t going up, don’t buy it!

F*R*E*E investment letter. http://www.mutualfundmagic.com Copyright 2004 Albert W. Thomas All rights reserved. Author of "If It Doesn’t Go Up, Don’t Buy It!" Comments to al@mutualfundmagic.com Former 17-year exchange member, floor trader and brokerage company owner.

(1) Stock Market is Tough Place to Make Any Money Consistently

NASDAQ or SP&500 averaged about -6% per year for 5 years between 1999 and 2003. Many individual investors who made killing in the internet bubble period got wiped out during those 5 years. Many who trusted Wall Street experts by investing their life savings into mutual fund had rude awakening after the huge loss and scandals in many of the famous fund names.

Numerous academic studies have shown that more than 90% of mutual funds failed to beat market over the long run and that more than 90% of individual investors lost money in the stock market. Too many people and too many Wall Street experts or mutual fund managers are buying and selling stocks like madmen, with no sound strategy or any hope of long term success. Ironically, they’re the ones who create opportunities for prudent, long term oriented investors.

To be successful in stock market, you either have to become an expert yourself or to seek help from real successful experts. Stock market is such a brutal place that there is no room for half-expert or expert pretenders. The truth is that only a small percentage of disciplined and experienced people earn disproportionate huge amount of return, many times at the expense of the rest. It is an insult to "Wall Street expert" professional title when so many of such "expert pretenders" failed to beat index or merely stay break-even.

(2) Majority of huge performance claims in Ads by "Experts" are not real

Too many investment newsletters or hot mutual funds touted their huge past performance and went into disaster later on. Who do you believe? I have been in this stock market long enough to know that majority of their claims are not "real". I will tell you why below.

The first reason is simply due to "cheating". Let’s be honest about many Ads. Many of them do not tell the whole and true story of their performance. For example, they would tout huge percentage of gains for certain winning stocks and hide the losing stocks. If you look deeper into their whole portfolio performance, their portfolio performance was not impressive at all. Many investment newsletters will have multiple portfolios in publication. In their ads, they will only mention the performance of the winning portfolio and hide the losing portfolio. The problem with multiple portfolios is that when you subscribe to their newsletters, you would not easily know which portfolio out of many will have best performance in the long run. Which portfolio do you follow? Most important of all, which portfolio out of many does the newsletter author invests for his/her own money? If the newsletter author or the mutual fund manager does not invest into a portfolio himself or herself, how would you trust their services?

Even if past performance of a newsletter or a mutual fund was pretty good, it may not indicate good performance in the future. Many hot technology mutual funds jumped up 100% or more in the 90’s and dived to their death after 90% to 99% of loss. Certain investment methods such as growth stocks investing are known to be risky. Momentum investing or day trading methods are known to be extremely risky methods that can wipe out life savings over night. There is simply no free lunch. While a risky method can produce fabulous gain in relative short term, over the long run, a risky method is more likely to make people poorer rather than richer even if a short term gain was gigantic. Gigantic short term gain is just a dangerous stock market trap to lure the inexperienced people into the market. Dreaming for instant satisfaction of huge short term gain overnight with speculation is just a recipe for disaster ahead.

(3) Value Investing is the Only Proven Safe Method

Value mutual funds are well known to have lower volatility than growth mutual funds. Numerous industry and acedemic studies have shown that value stocks as a group performed far better than growth stocks in bear market. Many technology and internet so called "growth stocks" lost 90% to 99% of value in just a couple of years after 2000 while many value stocks went up during the same time frame.

In fact, the single most important element to obtain high investment performance over the long run is to maintain MARGIN OF SAFETY of a portfolio. That is why the greatest investor Warren Buffet once quote "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.".

(4) Value Investing is the Proven Method to Make Big Money in the Stock Market

I know that I’m going to catch a lot of flak for saying this, and that many people will misunderstand what I’m saying. There are certainly other methods of investing or trading, which made people rich. There are certainly many under- performing value mutual funds, which give people wrong impression that value investing is equivalent of low performance with less risk.

However, I want to emphasize that in fact value investing is investment style that can obtain high performance with less risk. I want to stand by my above statement for the following reasons:

* In the early years of my investment career, I have studied and tried all kinds of well known methods of famous investors or traders, Short term trading, Momentum trading, Technical Analysis, CANSLIM, growth stock long term buy and hold, Random Walk theory, etc. I have been there and I have done there. Evidenced by my past investment performance, value investing is the only method that delivered gigantic investment return consistently for me over past many years. In 2003, I have made more than $150,000 in stock market with value investing method. In 2004, I have made even more money than 2003 so far. With the power of compounding, there is really no upper limit for the investment profit with value investing.

* In 1984, Warren Buffet gave a speech titled The Superinvestors of Graham-and-Doddsville, which categorized performance of many famous value investors who beat market year in and year out. Many of people mentioned in this article are legendary multi-billionaire right now. It is true that only a small percentage of investors can beat market consistently. However, it is not by chance at all that so many of students of Benjamin Graham became super riches in America while other methods have not produced that many rich people. It is also not coincident at all that the second richest person in the world is a value investor named Warren Buffet, a student of Benjamin Graham as well.

(5) Value investing will not distract your regular job

The nicest thing about value investing is that it will not distract your regular job if you choose not to stare at the stock market frequently in your office. In fact, it is quite healthy to forget about stock market in your office and worry about that only at your home after work.

Many newbies in the stock market still believe that if they stare at stock price quote closely, they can obtain better chances of winning. It will not. Staring at the stock quote is least important part of this game. In fact, staring closely at the stock price quote is more likely to create a loser rather than a winner because of greed and fear in the stock market. The more one is unable to resist the mad mood of Mr. Market, the more likely one is unable to invest successfully with value investment method.

I am not saying that successful value investing does not require time. The time you will need in value investing depends on the investment vehicle you utilize. If you invest with a value mutual fund, you will not need much time in stock market and you only need to follow up quarterly with your fund’s performance. If you are a passive investor of my investment newsletter Blast Investor Real-time Plus and you follow my model portfolio passively, you will only need to pay attention to my infrequent trade alert closely and read my newsletter issues every 2 weeks. If you invest by yourself, you will certainly need hours of time every week to look at hundreds of value stock leads and do your own due diligence by reading 10Q or 10K SEC filling, or by listening to conference calls, or by talking to company’s management.

(6) Successful Value Investing is Hard, But You can Do It!

I certainly do not want to make you to believe that value investing is as easy as reading couple of books. Value investing not only requires tons of knowledge and expertise in financial analysis, accounting, US tax law, US bankruptcy law, etc., it also requires real life training of right psychology to fight against greed and fear in the stock market. It is hard to do.

However, successful investing certainly can be done and I have done it over past decade myself. You certainly want to look at my investing articles of this web site for more information.

(7) You need to start early in value investing

Let’s be honest about value investing, it is not a get-rich- quick scam and it takes time to really make living with value investing without need of your regular job. You need large starting principle if you want to make living from stock market investment than your salary.

By reading Warren Buffet’s article above, you can pretty much guess that successful value investors can achieve 20% to 30% per year performance consistently over the long run regardless of whether market is bear or bull although it is possible to obtain significantly higher performance in earlier investment years due to smaller fund size and luck. 20% or 30% more consistent investment return is already very high return over the long run. Since Peter Lynch retired from Fidelity, you can rarely find a mutual fund with that kind of performance over past many years.

The best approach is to treat stock market investment as side business in addition to your regular job. Your regular job help you pay your bills and help you earn the initial principle for value investing. Once your investment net worth surpasses $100,000, sooner or later you will realize that your regular job salary can hardly keep up with compounded rate of investment return. Too many people naively believe that they can get rich quick with speculative trading method in stock market rather than a hard work with a job and value investing at side. It is a lot easier to make your first $50,000 net worth with a job rather than speculation in stock market.

Even if you do not have large sum of money right now as principle to make really big profit out of value investing, you still want to start value investing early so that you can learn in and out of value investing in your earlier years of investing in the stock market. Successful investment is long term process. The earlier you start investing successfully, the better off your pocketbook will be, and the quicker you will reach your financial freedom. Let’s do a quick math, if your starting capital for investing is $50,000 and your annual compouned rate of return is 30%, you will need 9 years to surpass $500,000 net worth. However, to turn $500,000 net worth into 1 million, you only need 3 more years, think hard!

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* Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit http://www.BlastInvest.com/ for FREE "how-to" value investing assistance, web services and more.

This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don’t see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the "irrational exuberance" flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.

In the early 70’s I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy…or…. $10,000 I wanted to invest in a more aggressive "trading" strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.

First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.

We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.

Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to make the triple dip into the money - Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.

Here’s how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.

The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.

Now let’s apply the math on a hypothetical trade. Let’s say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let’s further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That’s $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That’s how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)

Seems pretty easy doesn’t it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.

Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.

Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and "yes" some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.

I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.

I was very fortunate that I had met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; your attorney; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic or anyone else in the world that you can think of before you try this or any method of investing. (Okay, I think that covers about everyone.)

To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990’s both as a trader and as the moderator of one of the Internet’s largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com

I have been trading for several decades and was an exchange member and floor trader for 17 years. You learn fast there or you go broke in a hurry. As you can see I managed to hold my own for a few years until I found the secret and started to become a successful trader. Every professional trader I know knows the one great secret and that is to keep your losses small.

We all learned that when we took a position – either long or short – that we better be able to jump out if the trade was not going our way. Many of my friends were scalpers. That means they were trading for just a few ticks and every night went home flat. Flat is no positions at all.

Others, myself included, took a longer look and planned to hold a position for a period of time. That could be several days or weeks. If you were right the longer you held on the more money you would make.

The general public seems think that exchange members know everything and always made money.Tain’t so. Many traders were wrong more than 50% of the time. Huh? Yes, fifty percent. My account had losses 40% of the time and 20% were scratch trades (neither winners nor losers).

You ask, “If you are out of the money 60% of your trades how can you make money?” This is what every professional knows: Keep your losses small and let your profits run. How many times have you heard that one? BUT how many times have you ignored that rule?

At the end of the year when you analyze your trades you find that you made $3.00 for each $1.00 you lost you will show a nice big profit.

I don’t care what business you are in you don’t put your whole wad on a single outcome and stick with it until it either works or go broke. That is what brokers and mutual fund managers want you to do. They want you to buy, but never sell.

It is a tragedy for the small investor today that mutual fund families are putting in selling restrictions to discourage investors from dumping funds that are headed down. Many require long holding periods and if you sell prior to that time they charge an extra fee of 2%. They give lame excuses that I know are not true for doing this. Never buy any fund or trade with any brokerage company that has that kind of rule.

It is cheaper to pay the 2% or whatever fee there is and get out than hang around and lose 20% to 40% of your equity. Look back at 2000 to 2003. This can happen again despite what your broker tells you.

Be wrong and run home with most of your money. You still have enough to invest in a better opportunity. If you are disciplined to get out of any bad situation early you will end up a rich person.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Should the market turn against you, it is important that you design a system that will produce as much loss as you are prepared to take. This loss, known as drawdown, is the maximum amount by which your trading float will temporarily drop at anytime. Doing this in advance, will help you avoid nasty surprises in the future. This gives you the confidence to continue trading when the good times start once more.

It is very unlikely that you will stop trading if your system is trading profitably. However, if you are in a trading year that takes too big a loss, you are likely to stop trading, even if your system has been tested and shown to make a profit over a longer time period. Therefore, design a system based on the risk you are prepared to take which includes a budget for your drawdown.

So how does one pick the best formula for your drawdown time? I will rephrase this question. How many losses in a row should you allow for?

First, I will use the simple example of tossing a coin. If I tossed a coin and it landed "Heads Up" 10 times in a row, are you surprised? However, if I tossed the coin 800 times, your outlook on the results are different.

Trading uses the same scenario. When testing your trading system over many years, you will find a run of 10 losers or 10 winners in a row. Mathematics provides some answers to the likelihood of this happening.

See the examples given in the table below:

 ----------------------------------------------- Probability of Losses in a Row ----------------------------------------------- System Win/Loss Ratio 60:40 50:50 40:60 ----------------------------------------------- 5 losses in a row 1% 3% 8% 6 losses in a row 0.4% 2% 5% 7 losses in a row 0.2% 1% 3% 8 losses in a row 0.1% 0.4% 2% 9 losses in a row 0.03% 0.2% 1% 10 losses in a row 0.01% 0.1% 0.6% ----------------------------------------------- 

A typical trend following a system has a 50:50 win: loss ratio. That is, half of the trades are winners and half losers. This is not a problem, because winning trades will make a larger profit than losing trades will make a loss.

A 50:50 system has a 1% chance of seeing seven losses in a row. Therefore, most trend following systems should budget between five and nine losses in a row. The good news is that there is the same chance of getting between five and nine winners in a row!

I hope you see the importance of making these decisions before you begin trading. Making the proper decisions before you start is what successful trading is all about.

David Jenyns is recognized as the leading expert
when it comes to designing profitable trading
systems. His most recent course Trading Secrets
Revealed is a step-by-step trading roadmap to
having excellent money management.

Learn how *you* can become one of his students.
Click Here ==> http://www.trading-secrets-revealed.com
Receive David’s free trading tips by signing up for his eZine at:
==> http://www.trading-secrets-revealed.com/pop.html

What account size do I need?

How much money can I make with trading?

First of all, let’s clarify a common misunderstanding: You never risk your full account size. You always have a “catastrophic stop”, and it is important to define the “ruin” before you start trading. Let’s say you start with a $10,000 account, and you decide to stop trading if you lost $2,000. In this example you are “ruined” if your account decreases to $8,000. Though you invest $10,000, you only risk $2,000.

Back to the first question: “What account size do I need?”

The first factor is the margin required by the exchanges. The margin is the “security deposit” that you need to have in your account if you want to trade. This margin varies depending on the contract you want to trade, e.g. $3,938 for the e-mini S&P and $1,688 for the 30 year Treasury Bonds. Many brokers offer a 50% deposit? on this margin requirement if you daytrade, i.e. you open and close the position on the same day.

If your trading system requires trading 1 contract of the e-mini S&P, and you hold the position overnight, then you need at least $4,000 in your trading account.

The next factor is the expected drawdown. If you would only deposit $4,000 in your trading account, the first trade moves against you by more than $62, and the value of your account falls below the margin requirement of $3,938, then you receive a “margin call”. Many electronic platforms automatically liquidate your open positions, and don’t let you trade any longer. Therefore, you need to know the maximum drawdown of your trading system in the past. Let’s say your trading system had a maximum drawdown of $2,200 in the past, then you need at least $6,200 in your trading account: $4,000 margin requirement plus $2,200 “buffer” for a possible drawdown. A safe approach is to double the maximum drawdown, because usually the worst drawdown is still to come.

Let’s say that based on these calculations you decide to fund your account with $8,000, and you define your “ruin” as $6,000, i.e. you are willing to risk $2,000 for your trading adventure. How likely is it that you lose the $2,000 you are willing to risk?

Assuming you have a well tested and robust trading system that is likely to achieve similar results in the future as in the past, then you can use the log-normal distribution to calculate the risk of ruin. In the following example we will use the values of our e-mini S&P Trading System “Coin Collector”.

The profit factor of this system is 1.42, i.e. for every dollar you lose you earn $1.42. The winning percentage is 70.5%, and the average winner is $129. Using these figures and the results of the past trades, you can calculate the “risk of ruin” for our system:

The probability of losing the whole $2,000 that you are willing to risk in the next 30 trades only is 1.4%. That’s very low. If you decide to risk $3,000, then the probability of losing all the money in the next 30 trades decreases to 0.07%.

Let’s talk about the next question: “How much money can I make”? You first need to calculate the average profit per trade by dividing the overall profit by the amount of trades you made. In our example the “Coin Collector” produces an average profit of $37. Next you need to multiply this number by the trading frequency. The “Coin Collector” produces in average three trading signals per day, i.e. you can expect $111 per day per contract.

An average week produces 15 trades and $555 profits. Deducting commissions and slippage you can expect $842 in two weeks (=30 trades).

If you catch a lucky streak you could even make more. So how likely is it to MAKE $2,000 within the next 30 trades? The probability of making $2,000 is 20.4%.

Trading is about risk and reward: you want to get a decent reward for your risk. In our example the probability of losing $2,000 is 1.4%, and the probability of making $2,000 is 20.4%. That’s an excellent ratio!

Conclusion:

Your account size is determined by the margin requirement set by the exchanges and the “buffer” you should have for an expected drawdown.

The question “How much money can I make?” can be answered using the performance report of the past results of a trading system. Keep in mind that these figures are only valid if you developed a robust (and not a curve-fitted) trading system.

Using some statistical functions, you can then determine the “risk of ruin” and the probability of making a certain amount of money. That’s what trading is all about: risk and reward.

———————————————————————-

The author, Ben Millane, is a recognized author on the subject of trading systems. His website, http://www.rockwelltrading.com, provides a wealth of informative articles and free information on how to achieve your financial goals through trading.

When is a dividend not a dividend?

The latest thing "conservative" brokers are preaching these days is to buy stocks that pay dividends. Everyone likes dividends. I know I do, but when Wall Street tells me something I am automatically suspicious because they lie to me every day. Is this a new scam? Let’s take a look.

When you buy a bond or a CD at the bank it pays interest and is a real dividend. You might get a check every month, quarter or annually or receive a credit to your account. The amount of your principle (what you paid for it) remains the same. Yes, that is a true dividend.

Companies make big splashes about raising their dividend. It was 50 cents per share, but we have raised it to $1.00. Big deal. Yes, you will receive a check and at least you know the company has cash available to pay you. That is an indication the company is in good financial condition, but there have been many of the big names on the NYSE that have continued dividends even when they have lost money. How can that be?

Currently Microsoft has announced a dividend of $3.00 per share. The talking heads on CNBC-TV tell us they are loaded with cash and want to distribute it to their stockholders. Many people buy the stock in anticipation of the dividend as they think they will be getting an extra $3.00 per share. They are in for a big surprise.

The day that dividend is paid Microsoft stock (symbol MSFT) will automatically drop $3.00 per share. Today $27.00; tomorrow $24.00. Folks, this is NOT a dividend. This is a distribution of capital. You are being paid in your own asset. The fool that believes the Wall Street mumbo-jumbo will not have one extra penny after the dividend than he did before. In fact he will have less. Why?

The stockholder will now be allowed to pay income tax on the "dividend" distribution. To make that "dividend" seem even better the Bush administration has reduced dividend taxes from 38.6% to 15%. Thanks, Mr. Bush. Thanks for nothing. I can’t blame him for more Maul Street smoke and mirrors. He has just made it cost less to get back your own money.

Companies seldom pay large dividends and they are paid quarterly. A $30 stock that pays a 4% dividend ($1.20) on a quarterly basis shows a decrease in the stock price that day of 30 cents per share and is lost in the noise of trading. Few notice that part of the price change is due to the "dividend".

When you own the stock of any company the most important criteria is to find one that is in a long term upward trend. Never buy a stock that is showing a decline no matter how "good" the company may be. Even sideways movements should be avoided. Keep in mind you are buying the stock to make money. Forget the dividends and all other "reasons" and remember if it isn’t going up, don’t buy it!

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

It looks like we have now entered a new bull phase in the stock market and I have a question for you. Will you give back the profits that you make this time as you did in 2000? You sure don’t want to, but you are not going to get any help from your broker.

The investors (Not really the right term. They were gamblers.) had bought stocks and mutual funds during the 90’s and seen them have huge advances. They thought they were going to retire early, buy an island in the Caribbean and drink rum and coke all day with no hassels. All of a sudden the bull was attacked and eaten by a grizzly bear. Dreams of comfortable early retirement went up in smoke as the bull was barbequed.

We saw the technology stocks and many mutual funds lose about 80% of their value. Many people did not want to open their monthly brokerage statements and I couldn’t blame them. Were there any way those losses could have been avoided? You betcha, but you won’t hear that from your broker.

There is what I call portfolio insurance. It doesn’t cost any thing and anyone can have it at no charge. Brokerage companies don’t want you to use it much less even find out about it. It is a way of protecting your cash from being eaten by that nasty bear.

While the market is going up you don’t even think about any financial calamity, but history has shown as far back as you want to look that the stock market goes up and it also goes DOWN. Over long periods of time it does increase at about 6% per year (including dividends and the inflation factor). During the 90’s everyone was a financial genius and saw their accounts going up about 12% per year or more. That is not a sustainable pattern. Those periods do occur and are followed by years of declining prices. You don’t want to own stock then, do you?

What you have to decide is how much are you willing to give up before you decide to sell. How much of your money are you willing to risk from here where you are right now. Is it 2%, 5%, 10%, 20% or more? In 2000 we saw $200 stocks go down to $5.00. You sure don’t want to take that ride again.

After you make your decision you call your broker and tell (not ask) him you want to place a trailing stop loss order of 7% (whatever) on your position. Most assuredly he will try to talk you out of doing it. That 7% (?) is your insurance that you won’t have to sit through a 20%, 40% or more down draught.

He will not “watch your account”. That is your money not his. If you care about it you are the only one who will watch it. Place your open stop-loss order and keep your profits.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

During the day I watch CNBC-TV, the stock market channel. Fortunately, I keep the sound muted or I would be hollering at the dumb "experts" being interviewed. The experts seem to know all about the market except they don’t know how to protect their capital.

Every few minutes there is a chart in bright yellow of some stock showing its price performance during the past year. Lately it seems that most of the stocks have lost from 50% to 80 or 90% of their value.

Oh yes, this beauty did go up from 20 to 120, but is now back to 20 or some number very close to erasing almost all of last years profits, many going to a loss. The commentators give a nice running explanation of the "reasons" this stock did what it did. All hindsight and we know hindsight is 20/20.

Not once have I heard one these mavens ever suggest that a trailing stop would have sold out the stockowner at a nice profit within 10 or 20% of the top of the move. Microsoft went to $120 and proceeded to lose 50% of its value, dropping to $60. If you had had a distant trailing stop you might have been sold out about $90 or better. If you are still in love with MSFT you may now buy many more shares than you had before. Make sense?

There is a correct way to use stops, but the best is a mechanical method. Just set an amount you are willing to give back. Some traders recommend an 8% stop, others 15% to 20% of the low of the previous week placed with your brokerage firm each Monday morning as a Good-Til-Cancelled sell order. There is also the simple close below the 20-day moving average computed weekly. And many others. If you care anything about your money you might want to do some study to see the type of stop you might wish to employ to protect your capital.

Most professional traders, and I know most people are not professional enough to do this, will place their sell stops below what they consider to be critical support. This is a matter of interpretation and requires experience. I can almost guarantee your broker doesn’t know how to do this so you should adopt one of the mechanical methods. When your stock or mutual fund is making that loud swishing noise going down the porcelain container your broker always comes up with the sage advice, "You are in for the long term" or "The market always comes back". In your lifetime?

Take a look at some of the dogs you are carrying in your portfolio right now. Figure out what would have happened if you had put in a trailing stop. My experience of trading for more than 30years has shown that if you had been stopped out that within 60 days that stock will be trading lower than your sell price about 80% of the time.

The first rule of investing is to protect your capital. Use stops.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

It has fallen upon the consumer to make our economy strong. All the politicians, economists and talking heads on TV are telling him (that’s you and me) to get out there and spend your money. Buy that new car, build a new house and fly off to some remote place for an expensive vacation.

Where did the idea that consumer borrowing is a recipe for prosperity? As I recall when I was a kid my Dad told me to work hard, save my money and invest wisely. That still seems like a good idea. Where have I gone wrong to want to live within my means and save some of what I earn?

Corporations have also taken on huge amounts of debt. Many businesses were happy with a net, net profit of 5% to 10% yet today the real cost of company debt is running about 10% which doesn’t leave much for the bottom line. Fewer and fewer companies are paying dividends because they don’t have enough money left over for their investors. Now many have such poor cash flow that they do not have the cash for new equipment and the banks are not in a lending mood. Profit margins are at their lowest in the past 50 years. The talking heads on CNBC-TV mention capital appreciation as the way to make your profit. Pick a good stock and watch it go up.

We have had an 18-year bull market that ended in 2000. All you needed was a dartboard to be able to choose a stock that was going up. Everyone was weaned away from dividends. As long as it was going up who cares if you get a little check at the end of the year? Here is an interesting statistic that may shock you as it did me. From 1871 to 1997, 126 years, common stocks went up about 7% per year, BUT only 1.6% of the increase was due to price appreciation. The balance of 5.4% came from dividends. And today, for all practical purposes, there aren’t any.

No one, including Mr. Greenspan, is encouraging you to save money. Why? Because for every one percent increase in the national savings rate it stops the spending of $75 billion (yes, that’s a B). That would slow the economic recovery and our Washington politicians don’t want that. Debt has become the "in" thing. People brag about how much they owe.

If you want prosperity now and when you retire you must create it for yourself. Don’t figure that Uncle Sam is going to maintain your current life style after you quit working.

Saving money, paying your bills and smart investing have not gone out of style.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005