Why Individual Stocks are Riskier than Other Investments

I could summarize this post with one sentence, seriously, you don't need read further after this,

Individual stocks present company specific risk.

Really, that's it, that's the biggest downside. I'm not saying one should NOT own any individual stocks, but if you do, realize that your entire investment could be completely wiped out. It does not matter how great or well known the company is, the whole "buy what you know" philosophy is just a clever catch phrase due to Lynch. 

Nobody knows what the future will bring.

Nobody is bulletproof.

A Tax Free Closed-end Fund at a Discount Yielding 7.05%

The ticker symbol is NMZ, here is a rundown.

NMZ

• The fund provider here is Nuveen, which has a strong reputation for delivering solid municipal bond closed-end funds. 
• The expense ratio of 1.28% is considered low when compared to most other municipal bond funds.
• The dividend is $.076 per share, paid monthly, tax free, with roughly 6.49% being subject to AMT. 
• At Friday's closing price of $12.94, for every 100 shares, you receive $7.60 a month.
• For every $10,000 invested you could expect about $58.75 of tax free income every single month, not bad at all.

I do not hold a position in NMZ and have no plans to initiate one in the near future.

As always, make sure to do your own research and make your own decisions before investing.

I hope this post has been helpful to someone out there!

How to get 5.24% Interest Compounded Monthly

Yes, it's true, and all it will take is about $41 to get started.

Step 1
Go to tdameritrade and open an account. There is no fee to open nor maintain an account.

Step 2
Link your bank account and deposit some money. Note for this to work you will need about $41.

Step 3
The next time the market is open, buy 1 share of JNK. There are no commissions to buy JNK through TDAmeritrade.

Step 4
Send them an email through their secure message center and ask that your entire account be enrolled in DRIP.

That's it, every single month about 18-21 cents will be deposited into your account, and then immediately be used to purchase fractional shares. Shares are purchased usually 1-3 days after the dividend pay date.

Warnings

• JNK is a junk bond fund, so it suffers from both interest rate risk and credit risk.
• The dividend income from JNK is treated as ordinary income and it is not considered a qualified dividend.
• You can lose a lot of your principal as the price fluctuates up and down everyday.

Make sure to do your own homework and make your own decisions when investing.

I hope this post has been helpful to someone out there!

Why Money Management and Commissions Matter

The most important thing in trading is money management.

Take for example our fictional trader Joey.

          \O_ ... {I want to be a trader!}
       ,/\/
        /
        \
                

Joey has a decent job and has been saving his pennies to invest. He has finally  accumulated enough wealth to open a $5000 account at a popular brokerage he saw advertised on CNBC.

Joey is paying $7 per trade.

After spending months paper trading, reading popular financial websites and books Joey feels ready.

When the market opens on Monday Joey goes out and buys 100 shares of stock XYZ at $10. What's the problem here?

Well it's pretty simple, Joey invested 100x10 = $1000 in one position. That accounts for 20% of his portfolio. Furthermore Joey is automatically down $14 which may not seem like a lot but it is 1.4% of his current position.

Hence our fictional trader Joey is already a loser on his first real trade ever and has invested 20% of his portfolio in one particular position.

I used to be like Joey several years ago, and I think most traders are.

What is a Closed-End Fund?

I absolutely love these. These are extremely unpopular and the issuance of new closed-end funds this year is at a multi-year low.


What are they?

•  Closed-end funds trade on stock exchanges. You can buy and sell them like stocks. 

• Closed-end funds have a NAV, which stands for Net Asset Value. Closed-end funds selling below their NAV are considered to be at a discount, and those above are considered to be at a premium.

• Their shares at issued at the IPO, then the fund is "closed"; i.e., no new shares are issued, whence the prefix "closed". Note with ETF's shares are created and redeemed.

How can they be beneficial?

•  They let you buy things at a discount. For example a closed-end fund may have an ask price of $10 and a NAV of $9, meaning it is selling at a 10% discount. This basically means you get $1 for free of actual securities whether it be stocks, bonds, or preferred shares.

• They provide leverage. The word leverage instills fear especially after the distant yet recent memory of of the 2009 financial collapse but worry not, it has been proven that closed-end funds with leverage perform better over the long run than those without. 

•  The bond funds provide a high dividend income, especially the leveraged ones.

 What is the downside?

•  Leveraged closed-end funds have much more volatility than non-leveraged funds.

• They generally have high expense ratios. For example the average expense of a leveraged municipal bond is roughly 1.60%. At the same time such a fund usually yields 6% to 7% tax free! Remember they are volatile, if rates rise they collapse.

 Other Remarks

• I would be weary of closed-end funds that distribute any sort of return of capital. One could make a positive argument for this but it reduces the NAV, and I personally don't care for anything that returns capital. It reduces the NAV and thus reduces the value of your investment in the long run.  

• Most municipal bond closed-end funds do not return capital but many taxable high yield bond funds do. Keep in mind the leveraged funds perform better over the long run but they have much more volatility.

• People "say" closed-end fund prices are heavily influenced by individual investors. I can see why this might be true, for example last year Barron's released an article on closed-end fund premiums and they tanked for a few days. Some of the PIMCO funds lost like 20%.

There is a lot more to learn about closed-end funds before buying in my opinion, but I have provided the most important stuff I think. I would recommend that anyone who is considering these check out www.cefconnect.com first.

Remember you don't have to be an expert. There are enough self-proclaimed experts in the world, and when it comes to investing nobody has a crystal ball, nobody knows the future. Use your own judgement and make your own decisions, do not follow the crowd, pick your own!

I hope this post has been helpful to someone out there!

Passive Income Sources

For the last few years I have been researching ways to generate passive income. Here is what I have discovered and what works best for me.


Commission Free ETFS
The holy grail? ZERO commissions are involved. This is not a get rich quick scheme, but you can buy lots of high paying dividend ETF's via various brokerages.

Closed End Funds
These are just NOT popular, but I absolutely love these. Check out cefconnect.com for a nice screener. The only forum I have found that discusses these is on morningstar and apparently everything I own is not popular. People seem to love PIMCO and I don't get it. I don't care how great Bill Gross is, all his Muni CEF's sell at premiums and I refuse to buy.


Individual Stocks
Ok so I did the unpopular thing and sold all of mine a few weeks ago, terrible I know. I just cannot accept the company specific risk involved. Also despite knowing a little mathematics and finance I don't feel like I know enough to invest in individual companies.

Blogging
Ok so it's not really passive because it takes time to post stuff. I'm relatively new to this to be honest and I'm not even a good writer. I read somewhere you can make money by blogging so I started a blog yesterday. It's fun, I like posting, although I have no idea how to draw traffic and be good at it. Everyone says wordpress is better but I don't care. Blogger is easy:)

How to Buy an Entire Country for $11.73

As of posting this, that is the current ask price on iShares MSCI Japan ETF, ticker symbol EWJ.

This ETF holds 308 positions in various companies located in Japan. By spending $11.73 you are essentially investing in all of Japan, or as much as you reasonably can by buying a single product.

What about commissions? This ETF is available commission free at both TdAmeritrade and Fidelity.

Should you buy it? I don't know, but it cost less than ordering pizza and it pays you a dividend twice a year.

Will you lose money? Maybe yes, but in theory it should never go to zero unless Japan implodes, which I feel is unlikely.

Just a thought:)

Why Simple Moving Averages Move Less Than Stock Prices

Most traders use simple moving averages as part of their trading techniques. They buy when the stock price is above a certain moving average, or sell when it is below. Some traders also look at moving average crossovers for buy and sell signals. All of this information is found in the plethora of trading books available. Some are better than others, but we'll discuss that later.

Now go and look at your favorite stock chart, and plot several moving averages, 5, 10, 20, 50, 100, 200, etc. If you look at the percent increase and percent decrease for the stock price on a given day and compare it to the moving average, you will notice the moving average moves less than the stock price;i.e., it has a smaller percent increase/decrease. This is one of the main reasons to use moving averages, because they give you a better picture of what the stock price is doing by removing some of the "noise".

This should all be somewhat intuitively true, but why is true mathematically?  Let's start first with the following.

Define X_m = (x_1 + x_2 + ... + x_m)/m to be the arithmetic mean of the closing price of the last m trading days. This is the m-day Simple Moving Average. Once a new day passes, X_m changes, more precisely,
x_1 becomes x_2
x_2 becomes x_3
.
.
.
x_m becomes x_(m + 1),

where x_(m + 1) is the last days closing price.


Now if you remember any statistics, X_m is a random variable, therefore it actually has a standard deviation.

Now let SIGMA = standard deviation of the closing prices of the stock.

Then the standard deviation of X_m is  SIGMA/Sqrt(m).

Note that SIGMA is always smaller than(or equal to in the case where m = 1) than SIGMA/sqrt(m). More precisely

SIGMA <= SIGMA/Sqrt(m), always, no matter what, even if it snows in Puerto Rico.

This means that simple moving averages, on average, move less than stock prices.

Oh and as far as books, the best one I have read is linked below. Yes it is expensive but if you are going to buy a book on TA, buy this one, it is worth owning. The methods described in this book work, the problem is that most people don't follow those methods.

The First Investing Book You Should Buy

When you are first getting started with investing you need to find some source of practical advice that you can at least count on with some reliability. Going online and searching for investing is going to bring up thousands of hits, most of which give the same advice over and over again or just give bad advice.

One book that sticks out from the rest is The Intelligent Investor by Benjamin Graham.

This book is not perfect, and at times I feel it reads like a Vanguard commercial, but it is the best book out there I think for someone that is just starting out. Even if you have been investing and/or trading for a while, if you have not looked at this book I really think it's worth a read.

I could write a lot about this book as it gives so much useful information. Sadly I have found that most people on the internet which praise this book rarely follow it's advice. As with anything read it critically, and then make your own decisions after reading it.