Janet Schlarbaum, Mark Schlarbaum Articles

What Stocks Are and How Stock Market Investments Work

By Mark Schlarbaum | March 7, 2008

People hear about the stock market every day. Each time the stock market hits a high, or a low, people hear about them. Daily statements are also issued about the activities of the stock market and its relevant economic implications. But what really is a stock market? What are stocks? And why is it that people want to do stock market investments?

The stock market is the marketplace where the trading of company stocks happen. These stocks may either be the securities which are listed on the stock exchange or those which are traded in a private manner. Stock market investments allow companies and private individuals to get a share of ownership in large corporations. It is also a way of gathering large sums of investment capital which is difficult to produce if the business is solely-owned. The large capital then comes from the stock market investments.

Stocks are shares of a company or business which gets on sale in the stock market. Stock market investment happens when a person buys a share of a company’s stocks that were put on sale in the stock market. For example, a businessman decides to sell his business in the stock market. Each stock market investment is represented by the person who buys his share of stocks. When this happens, any person who buys stocks in the businessman’s company will have an equal share of profits by the end of the year, and an equal vote in the company’s business decisions.

In the past, stock market investments were done by individual buyers and sellers. Through time, however, this has changed and the market participants evolved from individual investors to large corporations. This change in the activities of stock market investment has also helped to control movements in the market.

To encourage stock market investments, a business that wishes to sell its stocks to individuals and corporations could only do so if it becomes a corporation. Individual capital investors and big corporations who buy a number of shares of a business or a corporation are then called shareholders. Shareholders are the owners of the new incorporated business. Their stock market investments gave them the authority to claim ownership of the business. These people can now decide whether to privately or publicly hold their corporation.

In a privately held company, the shareholders are few and probably know one another. Their stock market investments are known to each other. The publicly held company, however, is owned by a large number of people who do stock market investments on the public stock exchange.

Author: Pilkster

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Portfolio Management - Let The Professionals Take The Load

By Mark Schlarbaum | February 27, 2008

Author: Wanda Cortez

Do you have a lot of shares in different companies?
Do you have a large sum that you are looking to invest in the stock market?
Are you finding that doing the essential research too time consuming?

You might want to consider a portfolio management company.

Share Portfolio management is an option for those with a high value portfolio of shares, or a large amount of capital to invest in shares and commodity futures. Portfolio managers have various minimum values that they require to actively manage your investments.

The reason large minimum values are in place is because of the high commission charges that these companies make. It would not be worth a small investor, with $10,000 employing a company to manage his portfolio of shares in one or two companies.

Having a professional Portfolio Manager does remove a lot of anxiety from the individual. The manager’s role is to ensure that your portfolio is a balanced one, without excess exposure to currency fluctuations or to any one sector of the market.

It is part of the managing company’s role to conduct research, so that they can advise you on the best options. Research is an area that many individual investors find difficult, unless they spend hours every day watching share prices. The professional advisor employs people to conduct research into specific companies or market sectors, allowing you access to better research than you would have otherwise.

Your Portfolio Manager will also ascertain the degree of risk that you are happy with and ensure that your portfolio of shares is not at odds with your risk acceptance.

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Investment - Can You Do Without It

By Mark Schlarbaum | February 24, 2008

Author: Namsing Then

It is hard to imagine if anyone is living without money and it is equally hard to imagine if humans are living without investing in someway or the other. In plain language, investment means the act of investing or laying out money or capital in an enterprise with the expectation of profit. But at the same time the term investment also means money that is invested with an expectation of profit.

Investment is closely related with earning money and employing it to earn more by its virtue of its inherent multiplication factor. It is this character of money (read investment) which drives people invest in various asset types in which they are comfortable with. As a general rule, it is not quite natural for the novice investors to pursue high return investment categories as they perceive the high element of associated risk is beyond their control.

The Big Question: Could You Do Without Investment?
The answer is rather simple as everyone from top down has wanted to invest in one asset or the other. The more conventional the asset type is more the investors and thus investment. Let me detail this out for you.

Traditional investments like investment on gold and land have never let down the investors although rate at which they appreciated was below par till recently. But come to think of it; the simplicity of prediction matrix and non volatile nature of their class made them the darlings of one and all.

Current Investment Scenario
The current investment arena is extremely wide and intricately interdependent. The simplest investment by far, the savings account, contributes to the pool which bank draws from, for advancing loans to a variety investors. Thus the return on your investment (savings) is connected to the return the bank expects. Floating rate of interest is one of the manifestations of this interdependence.

Investment Options for You

It is impractical to attempt to list out all investment types. However the following are the representative types which apply to all economies.

1. Investment on stocks and securities
2. Investment in money market instruments
3. Investment in mutual funds
4. Investment in ventures
5. Investment in insurance

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The Investment Management Guide to Business Management

By Mark Schlarbaum | February 13, 2008

Author: Hans Bool

Investment is about allocating different investment instruments into a portfolio in such a way that this portfolio is aligned with your personal profile. Banks and financial advisors could help you achieving this alignment by offering a certain modelportfolio. This is a sort of benchmark that corresponds to a certain (risk-return) profile. By a series of questions, you can find out about your investment profile and having done that you can select the appropriate model portfolio.

Another question the financial advisor will ask you is the purpose (or long term goal) of your investments. Your goal and your investment profile together serve as a personal investment strategy. The model(portfolio) serves as a benchmark; if your portfolio grows, the distributions of the different assets will change. You are then to take (operational) actions in order to re-establish the alignment of the portfolio with you profile.

If you translate this to business management, you will end up with a performance management approach.

First you need to find out your business goal, which we could say is growth (growth of the business portfolio). This can also be a departmental figure. Than you need of profile of your business. This profile could be compared with the investment profile. Although not exactly the same, the business profile is also about risk-and-return characteristics. One company is different than the other. Risk-and-return is part of this; imagine that a cyclical (trading) company is much more prone to (business) risk than a ‘normal’ producer.

Companies need a strategy in order to achieve future growth. This strategy could be the same as the current business profile, but normally it is not; not seldom, strategy implies new business development and growth but not necessarily in the same direction that is indicated by the current profile.

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The Investment Management Guide to Business Management

By Mark Schlarbaum | February 7, 2008

Author: Hans Bool

If you translate this to business management, you will end up with a performance management approach.

Performance management is a next step. Performance management is about measuring where you stand in the process of achieving the strategy. Or put differently using the investment jargon; how does your strategic profile match with the profile of your current organization? Aligning these is you objective in achieving the business strategy.

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Mutual Fund Short Comings - 7 Reasons To Invest Elsewhere

By Mark Schlarbaum | February 7, 2008

Author: John O’byrne

The Mutual Fund industry has been a marketing juggernaut since the mid-1980’s. Billions of dollars have been deposited into mutual funds, but that decision by many investors may have cost them more than they realized. There are many reasons why mutual funds are not everything they market themselves to be.

Underperformance.

From 1992 through 2002, growth-orientated mutual funds averaged 8.5% returns compared to an average annual return of 9.68% for the S&P 500 Index. Certainly, in any given year, some mutual funds outperform the market; however, the vast majority do not. Further, the average mutual fund investor will frequently sell an underperforming fund in an attempt to find that elusive ‘best performing’ fund which only incurs redemption fees, sales charges, and taxes which, in turn, drags their returns even lower.

Transparency.

Currently, mutual funds only report their holdings on annual, semi-annual, or quarterly basis. By the time, the fund owner is in possession of those reports, the fund’s holdings have likely changed dramatically. Further, it is a common practice for funds to ‘window dress’ their holding just prior to the release of a report.Transparency of fees and expenses is also a problem with mutual funds. While management fees and sales charges are widely accessible, other fees, such as 12b-1 and trading fees are often difficult to uncover. Most fund owners are not aware that each investment trade a mutual fund makes incurs a trading fee which is paid by the fund and further pulls downs the investors’ returns.

Lack of Access to Your Money Manger.

Most mutual fund investors know their broker or financial planner and regularly speak with them. However, these professionals have no control or influence over the underlying securities held by a mutual fund. The fund manager is ultimately in control of the investment selection, and the average investor has no access to this individual.

Over-Diversification.

Mutual funds are required by law to ‘diversify’ 75% of their assets. Diversification is defined as having no more than 5% of the portfolio in any single security and having no more than 10% of the outstanding shares of that security. Due to the size of some funds, many fund managers are forced to invest in more than 100 different stocks with the largest funds having positions in well over 175 stocks. Does that mean that the fund manager has 175 stocks that he thinks are ‘great buy opportunities’? Unlikely. The fund manager is often forced to buy lesser quality stocks in order to keep the fund ‘diversified’.

Fund Overlap.

Many mutual fund investors will place assets in several different funds. Perhaps the investor has bought a growth fund, a balanced fund and a small-cap stock. The investor would be surprised to find that many stocks held by one fund are also held by the other funds. However, this is often the case. The investor may have attempted to diversify across several funds only to find that he owns the same stocks over and over.

Cash Requirements.

The prospectus of a mutual fund will establish a minimum and maximum cash position the fund can take. The fund must adhere to this self-imposed requirement. This limits the fund managers investment options during market downturns. In longer ‘bear’ markets, most prudent investors would move their investments into greater cash positions.At the height of the market in the year 2000, the average mutual fund had only 4% of their portfolio in cash. This figure exceeded 6% only once for any given month during the following two-year bear market. The S&P 500 lost nearly half its value, but fund managers were forced to either keep a position in a stock that was plummeting in value or sell that stock and buy another stock that would likely lose value as well.

To compound the problem, many of the stocks that were sold off by funds during the bear market, were sold at a net profit from their original purchase price even though they had declined in value that year. At the end of the year, investors had not only watched their portfolios decline in value rather dramatically, but they were also handed a capital gains tax liability. Speaking of taxes.

Taxes.

With Mutual Funds, an investor exposes themselves to two different tax situations. The first is capital gains tax on the increase in price of the fund above the investors cost basis in the fund. If an investor purchases a fund at $10 per share and then later sells the fund at $11 per share, the investor will pay capitals gains taxes on $1 per share.The second tax, often overlooked by investors, is the capital gains distributions that a mutual fund places upon its shareholders once a year. These distributions are not given to the shareholders that owned the fund at the time the capital gains was incurred, but rather to the shareholders at the time of distribution. When an investor purchases a fund, the investor is also assuming the tax liability for all capitals gains incurred since the last distribution.

For example, ABC Mutual Fund sells a holding on May 1st for a gain. Jane Investor purchases 100 shares of ABC Mutual Fund on July 1st. John Investor, who originally purchased 100 shares of ABC Mutual Fund on January 1st, sells all of his shares on August 1st. Guess who gets to pay for that capital gain incurred on May 1st? Jane does when the distributions of capital gains are made later in the year.

According to a release by the SEC in 2006, mutual fund investors lose 2.5% of their returns to taxes on embedded capital gains each year. While these taxes must be disclosed in a mutual fund’s prospectus, these taxes are often excluded from the returns the funds highlight in brochures and advertisements.

What alternatives do investors have to mutual funds?

For investors with over $100,000 of investable assets, separate accounts are an excellent alternative. These accounts are managed by professional money managers with whom the investor will often have direct access. In a separate account, the investor owns the underlying security; has greater control over when taxes are incurred; and has complete transparency of investments. Further, separate accounts have management fees that are often lower than mutual funds and have little to no expenses or additional fees which may affect portfolio performance.

Mutual funds are wildly popular and undoubtedly can make investors a profit. However, for the informed investor, separate accounts can achieve the diversification often sought in mutual funds while avoiding the inherent short-comings of mutual funds.

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Year End Investment Ideas and Tax Strategies

By Mark Schlarbaum | February 7, 2008

Author: Steve Selengut

“First thing Monday morning I’m going to march into my boss’s office and demand a pay cut so that I’ll be in a lower tax bracket next year.”

Of course that’s ridiculous, but isn’t it about the same as the financial community’s “Conventional Wisdom” (CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that investment they felt so strongly about in July? What are their motivations, and what discipline thought up these strategies in the first place?

Clearly there are many questions that require answers, but as investors, it should be crystal clear that the object of the investment exercise is to make money… just as much as possible, quickly, legally, and within a low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise, wouldn’t the “CW” be to find as many downers as uppers so that there are no tax consequences? Wouldn’t Zero Taxable Gain Investing be the only “smart” investment strategy? A December, 2004 New York Times Money Section article actually suggested that Investment Professionals had an obligation to lose money for clients in order to reduce the tax burden.

Your Financial Professional’s perspective may produce smart tax advice but only professional investors (not accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go too far with a calendar year focus that ignores the realities of an emotional and cyclical investment environment. Take last year’s Merck for example. It has nearly doubled in Market Value since you were told to sell it last November… who’da thunk it! Why didn’t you buy more (of this and many high quality losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had taken your dot.com profits in ‘99, purchased the downtrodden profit making companies of the time, and paid the ugly taxes. The value companies didn’t crash. They’ve rallied for nearly seven years!

The key issue in considering a capital loss is the economic viability of the investment… not your tax situation! A key element of The Working Capital Model (for investment portfolio management) is to eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a significantly new “All Time High” profit level (an ATH). My definitions may be different than those you are used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A “weak” security is a stock that is no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying, or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to lovingly as “Investment Opportunities”. This is what you look for while trying to reinvest your profits… like last year’s MRK. By the way, switching from the strong asset class to the weaker one as a “hedging strategy” or vice versa (as a greed motivated speculation) is simply an attempt at “market timing”, not a “sophisticated” or “savvy” adjustment to your asset allocation. Asset Allocation is always a function of personal factors and never a function of asset class (Equities and Income Generators) directional speculation.

So what happens if a new portfolio ATH is achieved in February or August instead of in November or December? (Note that the financial community only preaches tax loss strategies during the last calendar quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines, and every manager will develop his or her own style. But in a high quality, properly diversified, income generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there’s no such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a fundamental.) If there are none, good job!

Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction. (Like gamblers retuning from Vegas… no one ever seems to lose!) Similarly, most financial professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speaketh the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked real well at year-end ‘99, you’ll recall.) Don’t think for a moment that anyone knows what will happen this time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can’t get poor that way!

First thing Monday morning I’m going to: (1) Call my accountant to tell him that I’m going to help him reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all investment and retirement income.

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