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Capital account vs income account and business structure


cloud

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Hi oddballstocks,

I won't put 100% in one stock. I avoid two side of extremes.  I have 30 stocks but I am willing to increase the positions size because of lower valuation.

 

I gave up searching a job related to my degree but I did not give up hope.  I won't feel I am entitled to a high paying job because I have x,y,z degree.

You know what people do when they give up hope?  They blame the 1%. I don't blame the 1%.

 

I do have a job as a purchaser earning just 30k. Also I am working 10 minutes drive from my house so no incentive to find another job which I will stuck in traffic for 1 hour.

I also do not want to get back into hightech world. 

 

I've improved a lot since 2007. I made mistakes and learned from them.  Now my target annual return is 15% to 20%.

Thanks for your kind words.

 

Cloud,

 

You should talk to the guy who was posting around here recently about putting 100% of their portfolio into one stock.

 

Here's my advice.  Stop worrying about the investment returns and get a job and save.

 

The biggest predictor to investment success is consistency of investing process.  I'd do a deep look inside and ask yourself if you have it.  You said you tried to get a job and gave up.  If you give up that easily over a job what will happen to your investing process when it hits a bump in the road?

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Example trade:

TSE:STN,  100 shares,  bought Dec, 2014, sold  Feb, 2015 for 6.6% gain.  Annualized : 40%/y. Interest cost: 4%/y.  I am still holding 50 shares in my non leveraged account. In just two months, I created a 13% margin of safety for my 50 shares positions. 

 

You know, the private equity industry is all obsessed about annualized returns - they call it IRR. However in the industry there's a saying - "You can't eat IRR!". That means that your annualized returns on a small short term investment doesn't mean much. You're richer when you make a lower "annualized rate" consistently over a long period. BRK shareholders aren't so rich because WB made 40% in one year or 6.6% on one trade. They are so rich because he made 20% compound continuously over 50 years.

 

Also I think you got the concept of margin of safety wrong. I recommend "The Intelligent Investor" (see chapter 20) instead of "Rich Dad Poor Dad".

 

I am not relying on a single stock. I can in no way to say I can get x % per month consistently for each value trade. They vary. I trade as the opportunities show up. Interestingly, most of time they meet my target return of 3% to 10% per month.  It's amazing how much a stock can move in just a couple months when they have strong balance sheet and durable product/services. If the value stock has potential to go up 60% per year, I am willing to make only 30% and have a higher probability of reaching that target.

 

The annualized return is important because I need to compare it to my interest cost. That's opportunity cost.  Remember, my value trades are just bonus. If there are no opportunities show up, The margin will just sit there dormant costing me nothing and earning me nothing.  Meanwhile my buy and hold positions generates ~15% per year return over the long term.

The results from the past 8 years tell me that my current strategy is working for me.

Compounding is truly wonderful. My gain from 2015, that's almost 2 months of gain equals my total gain from the first 3 years of investing. 

 

I don't know why so many people hate the book rich dad poor dad.  It's my early inspiration to investing in early stage. Maybe his attitude is bad but I believe we can learn something useful from everybody.

 

I've read "The Intelligent Investor". I've also read ideas from many great investors: Charlie Munger, John Templeton, Peter Lynch, John Maynard Keynes. I know what margin of safety is: a low price/value ratio.    what I said is another version of margin of safety I came up with:In newly established positions, the amount of drop the share can withstand that I can still break even. 

Benjamin Graham is too academic. His selection method is too stubborn in someway. The biggest idea I learned from Benjamin Graham is to face the market as Mr.Market.  This idea is the most useful. Investing is not an exact science. I think price/value is relative. It's dynamic.

 

 

 

 

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I don't know why so many people hate the book rich dad poor dad.  Maybe his attitude is bad but I believe we can learn something useful from everybody.

 

I think some people (Taleb) criticize it because it might be describing cases of survivorship bias

 

Survivorship bias? Not sure where that's coming from, but interested to hear your thoughts.

 

Rich Dad, Poor Dad, by all indications, was fictionalized to the point it should probably be considered a novel. It recommends illegal or questionably legal activity and promotes reckless behavior. It's one of the first finance-related books I read when I was a teen, and I thought it was great at the time.

 

In hindsight, it may be the worst mainstream book on finance ever written. It doesn't surprise me that it's so popular; it's targeted at people who want to get rich quickly and easily. The advice doesn't have to be useful because its marks don't know anything about the subject anyway.

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I think I might be confusing it with the millionaire next door.  I didn't actually read rich dad but I bet just from the title that taleb's criticism would still apply.

 

 

Rich Dad, Poor Dad, by all indications, was fictionalized to the point it should probably be considered a novel. It recommends illegal or questionably legal activity and promotes reckless behavior. It's one of the first finance-related books I read when I was a teen, and I thought it was great at the time.

 

 

That reminds me of a herman hesse quote: "History's third dimension is always fiction."  And he was talking about serious history, so it can get a lot worse than that

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I don't know why so many people hate the book rich dad poor dad.  It's my early inspiration to investing in early stage. Maybe his attitude is bad but I believe we can learn something useful from everybody.

Maybe because the guy is a hack who doesn't care how many peoples lives he ruins as long as he sells a couple of extra books?

Always upselling. How many books, board games, and seminars do you need to convey a set of ideas? I don't think than anyone who stood the time as a great mind ever uttered the words and if you want more detail buy my other book, and my board game, and drop by one of my seminars.

Shilling for real estate during the bubble.

Promoting irresponsible and reckless financial behavior that is sure to leave the practitioners worse off....

The list goes on and on!

 

And no, you can't learn something from everybody. Some people are just wrong and even worse, some are crooks.

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I don't know why so many people hate the book rich dad poor dad.  It's my early inspiration to investing in early stage. Maybe his attitude is bad but I believe we can learn something useful from everybody.

Maybe because the guy is a hack who doesn't care how many peoples lives he ruins as long as he sells a couple of extra books?

Always upselling. How many books, board games, and seminars do you need to convey a set of ideas? I don't think than anyone who stood the time as a great mind ever uttered the words and if you want more detail buy my other book, and my board game, and drop by one of my seminars.

Shilling for real estate during the bubble.

Promoting irresponsible and reckless financial behavior that is sure to leave the practitioners worse off....

The list goes on and on!

 

And no, you can't learn something from everybody. Some people are just wrong and even worse, some are crooks.

 

This documentary is relevant.  I don't like the fact that most of these guys incomes come from selling get rich products rather than practicing what they're preaching.  But I guess there's always someone out there who wants to make a quick buck and someone is ready to sell them that "magic formula".  And wasn't the rich dad poor dad story all made up? 

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holy sh*t this topic... Wouldn't have read this a few years ago. Can we expect one of these topics weekly in a few years?

 

Everybody makes mistakes when they start out. You and I invested in Fortress Paper if I recall. We learn from experience. Some things you can be told, and some things you have to find out (painfully) for yourself. There's a normal cycle of learning where you don't know anything, then you think you know everything, then you realize you didn't know much after all, etc.

 

If I have a recommendation for our new member, it is to stop posting for a bit and read the forum's archive (yes, go back to the beginning thread by thread and read -- or at least skim the less insightful ones. Go through the investing section, the general section, the berkshire section, the fairfax one, the books, strategies..). When I joined in 2010 I did this, and it made me learn a lot. Take a few months to do this, as well as to read more books recommended in the books section, that'll be worth it. You'll find out soon enough if you have the investing gene or not. Some people are just gamblers down to their DNA...

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holy sh*t this topic... Wouldn't have read this a few years ago. Can we expect one of these topics weekly in a few years?

 

Everybody makes mistakes when they start out. You and I invested in Fortress Paper if I recall. We learn from experience. Some things you can be told, and some things you have to find out (painfully) for yourself. There's a normal cycle of learning where you don't know anything, then you think you know everything, then you realize you didn't know much after all, etc.

 

If I have a recommendation for our new member, it is to stop posting for a bit and read the forum's archive (yes, go back to the beginning thread by thread and read -- or at least skim the less insightful ones. Go through the investing section, the general section, the berkshire section, the fairfax one, the books, strategies..). When I joined in 2010 I did this, and it made me learn a lot. Take a few months to do this, as well as to read more books recommended in the books section, that'll be worth it. You'll find out soon enough if you have the investing gene or not. Some people are just gamblers down to their DNA...

 

sure I get that but come on. He read 'rich dad poor dad' 8 years ago and still believes it has value after all that time? My first book was Rule number 1 by phil town. It was probably a lot better and I still thought it was shit after doing some other reading. I was 20 and knew absolutely nothing tbh... I still know next to nothing btw.

 

I don't see how someone like that can grow to be a decent critical and independent thinker, sorry.. .Taking terms like MOS and making up your own bs definitions doesn't make you an investor either.

Not to mention his "process" and hubris. He had a few ok years and starts thinking about retirement? his first 30%+ down year will be fun... Just read his posts. You have people that learn and you have people that don't.

 

He is welcome to prove me wrong.

 

Oh and the early 2009 topics here are the best reading material of the crisis that are available to us. Our memory of history is flawed. Real time postings of intelligent and experienced forum members at the height of market fear show us what it really was like.

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Here's a good generalization: all generalizations are liable to exceptions.

 

Is 240 trades a year bad? Maybe, unless you are trying to establish a long term position and lowering your cost basis - a sort of dollar cost averaging. Not the same as changing your mind every 4 minutes.

 

Is it wrong to put 100% in one stock? Maybe, unless that stock is so diversified vertically that it represents a mini-Universe of many businesses. Doesn't Buffett have all his money in Berkshire? Is it not reasonable that it is a slightly better proxy than the S&P500 for diversification?

 

As an aside, the rules for cap gain vs income treatment is a matter of fact determination based on several factors listed in CRAs docs. See if you can make an argument to yourself based on this criteria. Everything can be cap gain or income, even naked option transactions. There is a document on that, option transactions on acccount of capital gains OR on account of income. I love the way CRA says 'matter of fact' when in fact it's as grey and subjective as you can get.

 

Like in school, it all boils down to how well you justify your position in the debate. As an anarchist I don't really think the government or anyone should be the teacher passing verdict on your argument and your money, but this is the world we live in - in Canada anyway.

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Sounds like it is getting pretty frothy up there in the great white north.  I though you guys were mostly sober, restrained, Jim Carey types.  :D  Anyone sort of looking forward to the next bear market, a little?

Yes, we were the adults in the English speaking world. We were fiscally conservative, had strong, healthy and profitable banks and jobs and all that. But c'mon, that was boring as hell and you yanks were having such a party! So we though why should they have all the fun, we can party too! So we went and got ourselves some credit and bought a bunch of expensive houses with 5% down and rate reset mortgages. And now we got our own housing bubble yay! :D.

 

Now since we were such brilliant real estate investors and our house price now are higher we went back to the bank and slapped some lines of credit on those babies and we can use the lines to trade stocks where of course we can make 15-20% per year - no particular reason why esp after the market had such a huge run.... just because we're awesome! And of course we're gonna buy those stocks on heavy margin, I mean it worked so great when bought the houses... what could possibly go wrong?

 

So now unemployment is a bit high, our banks may be a bit shaky, and we levered up to our eyeballs but man.... the music is bumpin and the booze is flowin!

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And no, you can't learn something from everybody. Some people are just wrong and even worse, some are crooks.

 

Yes you can.

There' re two modes of learning: #1. Learn from others about what to do and #2 Learn from others about what not to do.  Most learn from what to do. I learn from both.

For example, I gave up eating meat which 95% of people do because I saw the suffering it causes. It's also an application of walking the path of least traveled. It's  a sure way to have a result(good or bad) different than most people. As a result, I will suffer less in my old age and causing less suffering to animals and environment.

 

If there's nothing to learn from: there's still one thing:  Don't be ignorant.  :)

 

 

 

 

 

sure I get that but come on. He read 'rich dad poor dad' 8 years ago and still believes it has value after all that time?

 

I don't see how someone like that can grow to be a decent critical and independent thinker, sorry.. .

 

He had a few ok years and starts thinking about retirement? his first 30%+ down year will be fun... Just read his posts. You have people that learn and you have people that don't.

 

He is welcome to prove me wrong.

 

Oh and the early 2009 topics here are the best reading material of the crisis that are available to us. Our memory of history is flawed. Real time postings of intelligent and experienced forum members at the height of market fear show us what it really was like.

 

Yes, I think "Rich dad poor dad" still provides value, at least for me for the rest of my life. I don't agree with everything Robert does and teaches or like him as a person, just as i don't agree with everything Buffettt says or does. e.g. I own 20% profitable tech stocks and he doesn't like tech stocks. I don't eat meat and he eats meat. I also don't support abortion which he supports. Just because Buffett is admired by many people doesn't mean he's right in everything.

 

It's irrational and emotional to think everything a person teaches is bad just because he/she's done something wrong.    The good thing about studying engineering is that we use logical thinking rather than emotional thinking.  Many people here express dislike for Robert as a person so they dislike everything he says.

 

"Rich dad poor dad" taught me the basic of balance sheet, cash flow and the way to get rich is by owning more real asset and less liability. That's the universal method for getting rich explained simply.  That provides me solid foundation for my investing process in the stock market.  His definition of assets and liabilities are not defined in conventional way but I agree with him on his definitions for getting rich. A  house costing you money or a car costing your money every month are not true assets but are liabilities.  Consequently,I didn't buy a car until it's absolutely necessary because my dad's health was deteriorating and I need a car to take him to hospital frequently. That's 5 years after graduation. My dad asked me to get a car right after graduation and promised to help me to buy it. I refused. when i bought the car, I had no car loan.  I used LOC and paid it off within 1 year.  I also bought the smallest house possible and close to my work so I save gas and time and I have the ability to pay off the mortgage less than 10 years. I was thinking about buying a X1 Carbon the other day but changed my mind thinking: "Hey that's a doodad. It's better to buy more asset and not being a slave to money."  If "Rich dad, poor dad"  was the first place I learned about basic financial literacy, I don't feel shameful. This idea of balance sheet, cash flow , assets and liability, has been hardwired into my brain and I am very selective about stocks I buy based on their balance sheet strength.

 

Another powerful idea I learned from Robert Kiyosaki is: It's better to be street smart than school smart.    School smart means knowledgeable about ideas that work in theory but doesn't work in the real world.  Street smart means knowledgeable about ideas that work in real world but sounds scary to the school smart.

School smart learned the the market is efficient and unbeatable so they surrender to the idea of indexing getting market average or below average return. This is what most people do.

Street smart thinks market is efficient in the long term but inefficient in the short term.  Even it's 100% efficient at all time, it's still possible to beat the market by holding a basket of highest quality stocks. Because the whole market contains both bad and good businesses. By picking out the gold from a pile of sands, the result is above average.

 

 

 

 

If ask me to choose a living person as a role model for worldly wisdom or about investing, I will say that's Charlie Munger. 

 

I am very positive my investment can exceed my job income within 10 more years.  I can  retire from a job from then on but I probably will continue investing till a very old age. It doesn't take a lot of effort to allocate capital. I am also into spiritual and charitable stuff.

 

My 30%+ down year ?    The worst was 2008: -20%  and I bought XRE, VNQ all the way to the bottom...  I won't let emotions get into the way.

 

 

 

 

Yes, we were the adults in the English speaking world. We were fiscally conservative, had strong, healthy and profitable banks and jobs and all that. But c'mon, that was boring as hell and you yanks were having such a party! So we though why should they have all the fun, we can party too! So we went and got ourselves some credit and bought a bunch of expensive houses with 5% down and rate reset mortgages. And now we got our own housing bubble yay! :D.

 

Now since we were such brilliant real estate investors and our house price now are higher we went back to the bank and slapped some lines of credit on those babies and we can use the lines to trade stocks where of course we can make 15-20% per year - no particular reason why esp after the market had such a huge run.... just because we're awesome! And of course we're gonna buy those stocks on heavy margin, I mean it worked so great when bought the houses... what could possibly go wrong?

 

So now unemployment is a bit high, our banks may be a bit shaky, and we levered up to our eyeballs but man.... the music is bumpin and the booze is flowin!

 

lol.. Good one.

If a blackbox contains a complicated and unique algorithm, it's hard to to conclude what's inside the blackbox by observing its outputs. Only the designer truthly know what's inside.

Here're couple points:

#1. My margin account is only a portion of my liquid networth.

#2. The longer I invest, the more cushion I have against severe bear market because the difference in return I made compared to the market average especially to the TSX index average accumulates every year.

#3.  Again, my margin call risk is the market dropping of 50% or more  in a short period of time without considerations of dividend and option premiums and additional funding. 

#4. My income can replenish the margin account very quickly.  My margin account is not small but a decent size.

 

With all variables considered, my margin account can withstand drop of  almost 90%.  If there's no margin call, I don't worry about how much the market drops. In fact, if the market drops 30%+, I'll happy to buy more!  My stocks positions are top 1% in terms of quality, potential for future growth. I am happy to buy more at a cheaper price!

 

As my portfolio grows bigger, I'll reduce my leverage ratio because my job income to portfolio net value ratio will shrink in the future. So my ability to add more fund  to reduce leverage risk will diminish. As a result, I'll adjust. I estimate the tipping point for change will be at $300k net liquid asset.(5 more years to reach). Right now I am at 100k net liquid asset.  Adapt always adapt, that is the key to survive for long term. 

There's risk driving a car but without driving a car we don't get far.

 

 

 

Lastly,

Here's a good article for the young and brave:  http://content.time.com/time/business/article/0,8599,1982327,00.html

The most important thing about using leverage is don't allow it to force you to sell your investment at the most unfavorable valuation. That's the key to use leverage successfully.

 

And some simple math about leverage:  -10  X 100 = -1000,  0  x  100 = 0,  +10 x 100 = +1000. 

So don't use leverage blindly. Only use it on something that goes up in value.

 

 

 

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I'll keep an open mind, wish good luck to cloud... and hope that this thread is revisited in 3-5 years to see how it went for him.  8)

 

Peace brothers. :)

 

Thanks!

Whoever has an open mind ,be a  life long learner, and critical thinker will do fine in life.  It's rare to find people with open mind.

Wish you best of luck too , luck as in "preparation meeting opportunities". :)

 

 

Threads like this mean it's time to raise cash and/or hedge.

 

 

While you wait,  you are missing out. The profitable companies continue to earn more profit or expand, the price will follow.

 

Don't get me wrong. Cash is important. I have significant cash position in non-leveraged account.

 

This is a very valuable quote:

"A great business at a fair price is superior to a fair business at a great price."

Charlie Munger

 

It's the core method of how I select stocks now. Because this method is so boring, I spend my spare time to find some volatile stocks and have some fun.  Vitamin Shoppe Inc(NYSE:VSI) share price went nowhere for 2 years but I made 30% to 50% per year from this stock between 2013 and 2015.

 

 

 

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From what I read about your situation you are ok to claim your capital gains and losses as capital gains and losses. Also you should go ahead and claim the interest paid on margin loans - nothing wrong with that. It goes on the "Carrying Charges" line. A few things to keep in mind that may apply to you though:

-gains and losses from short sales are always income

-gains and losses from naked options are always income

-gains and losses from covered options normally get the same treatment as the underlying shares do

-if you hold a security for less than (I think it's 30 days - double check) then the gain or loss is income

-if you hold a security, sell it, and the buy back into it after less then 30 days (again check), then you must claim the capital gain if it was a gain, but you cannot claim the loss if it was a capital loss. In that case you go back and adjust

 

rb

 

rb, To clarify, When you buy call options or put options on an underlying security it is treated as capital gains or loss, as the case may be, not income.  Line 127 of T1

 

 

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I think I might be confusing it with the millionaire next door.  I didn't actually read rich dad but I bet just from the title that taleb's criticism would still apply.

 

 

Rich Dad, Poor Dad, by all indications, was fictionalized to the point it should probably be considered a novel. It recommends illegal or questionably legal activity and promotes reckless behavior. It's one of the first finance-related books I read when I was a teen, and I thought it was great at the time.

 

 

That reminds me of a herman hesse quote: "History's third dimension is always fiction."  And he was talking about serious history, so it can get a lot worse than that

 

The Millionaire Next Door is in no way like Rich Dad Poor Dad. Actually, the underlying ideologies are completely different.

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