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Todd Renfro
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36 year old part time investor and trader. I concentrate on finding inefficiencies in the market resulting from behavioral biases that distort the decision making of individual and institutional investors. I still consider myself to be a novice trader, as my experience spans a over a decade.... More
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  • Everyone Loves Tactics, But Basic Investment Strategy Is The First Step

    When I talk with my friends and family who are considering their financial future, they frequently ask the same questions. What stocks do I recommend? How do I screen for my stocks, and will I share the screen with them? Should they buy gold/silver/land? I don't have a crystal ball with which to answer many of these questions, and if I did, there would be little chance the information would be useful to them. My brokerage rules, personal resources, goals, skillsets, and timeline differ drastically from any other person's collection of circumstances. But that doesn't mean every person is an island to oneself. There are questions each individual can answer, which will help them to choose appropriate tactics, and I can help them answer those questions. To determine the best tactics, one must first develop a strategy.

    Establishing your Strategy

    An effective investment strategy, in my opinion, should consist of a stated end state, a method of achieving that end state, and a timeline. Furthermore, the investment strategy can and probably should be part of a greater holistic financial strategy which focuses on all of your life goals. After all, funding a retirement is hopefully not the end all-be all of your existence. Maybe you want to travel, fund your children's education or fund your wife's vast shoe collection. All such decisions are interrelated, and require tradeoffs. Having a solid, well defined investment strategy will not only help you to achieve your goals, but will help you evaluate when to shift efforts towards other goals.

    But, to do so, you must first determine what your desired end state is. For me, and I imagine most people, it is eventual financial freedom. I define financial freedom as the ability to fund my lifestyle without working, though I will continue to work while it is still enjoyable to me. This is a fairly straightforward, and some may say obvious definition. Still, as you read through this article, it may be beneficial for you to be just as specific with your definitions, even though they seem obvious. Exact and well developed definitions help to highlight your particular wants and needs and help delineate them from other people's very similar goals.

    You also need to determine a realistic execution plan. You must evaluate your particular skillsets and personality type and determine a road map to achieve your end-state.

    I am comfortable with financial statements, I feel I have an intuitive sense of value, I'm somewhat resistant to crowd emotions, and I'm willing to make decisions when I don't have all the answers (just as many as I can get in a reasonable amount of time). My personality leads me to fundamental analysis, long term positions which are often counter to the rest of the market.

    Those who are less comfortable bucking the trend, but more sensitive to changes in market sentiment may prefer following trends. Those who feel they have a strong sense of how technology will impact society, and which companies are likely to benefit from those changes may prefer investing in "growth" stocks, which often don't make my valuation cuts.

    Finally, you must develop a realistic timeline. When do you want your end state to be realized? Of course, I would like to be financially independent as soon as possible. However, I'm not willing to commit every hour of the day earning money, and I'm not willing to subsist entirely off of cat food and recaptured rain water from the storm drains. I've set 62 as my formal goal. If I can complete my goal early, that's even better. But if I can build a roadmap, than I can determine whether I'm on track to meet the goal, and make decisions to correct course, divert funds from elsewhere, or shift efforts into other areas of life.

    Now armed with a desired end-state, a methodology, and a timeline, I can state my strategy as follows:

    I will grow a sustainable income by retirement by purchasing any asset selling at a significant discount to its "inherent value". I derive value guestimates by determining how much free cash flow an asset produces and discounting estimates of future free cash flow to present value. Since calculating future cash flow is a dicey business, I demand as much of a "buffer" as I can get, often determined by how confident I am of my measurements. I will experiment on the fringe with other measurements of value, but free cash flow remains my core methodology. I prefer to hold on to investments for longer periods of time to reduce tax liabilities, trading costs, and the burden of replacing the investment, but I will not be a slave to timeline rules. When an investment becomes overvalued, and can be replaced by better prospects, it's time to sell them. I would like to complete this process by the time I am 62 years old. (You can see an example of how I evaluate stocks here)

    Testing the Strategy's validity

    Now you need to determine if your timeline and your desired end-state are realistic and attainable. If your goal involves simply amassing a certain amount of cash, the process is fairly straightforward.

    1. Take the current investable amount, and calculate a growth rate which achieves your goal over the desired length of time.

    For instance, if you currently have $10,000, and want to have $50,000 in 10 years, your formula should look like this: 50000= 10000*(1.x^10). With a calculator, we can substitute guesses in for x rather quickly, in a sort of numerical 20 questions. Here we learn that you would need right around 17.5% growth in your money each year to achieve your goal. This could come from growth and external funds if need be.

    In my strategy, however I am not simply looking for a sum of money, but a series of income streams which would provide me financial independence. Since most people are like to be (hopefully) planning for retirement, this is the problem set I will spell out in detail.

    1. First, we must determine what we would like to earn in today's dollars, and project that out to future dollars.

    I would like roughly $85,000 a year. While I'd be thrilled to make more, this should be sufficiently conservative, as I SHOULD have my house paid off, and my children out of college.

    But $85,000 today is not 85K of buying power in 26 years. We need to account for the dollar's loss of value over the next 26 years. Since it's an unpredictable and surprisingly contentious number, I'm going to have to settle for a rough guess based on historic numbers and accept its far from perfect. I'm going to project an average of 3% annual inflation. The math should look like this:

    $85,000 X (1.03)^26 = $183,310.26

    At 62, to have roughly the buying power of $85K today, I need to earn $183,400.

    1. Now you must account for any income you have already earned or will have in the future without contributing through your investment funds. Examples include pensions, annuities, and rental income.

    I only include those assets I already have in my possession (except for Social Security). Furthermore, to be conservative, I calculate social security using current income for all future incomes. I underestimate my future income because I can't accurately estimate how much more I will make over the next 25 years, nor can I guess how much the government will allow inflation to eat Social Security buying power. You can find a calculator here. Adjust your numbers based on assumptions you find tolerable.

    My calculations come out to an estimated $1853 a month at 62.

    I also have a monthly rental payment which would pay about $770 a month, if my mortgage was paid off. I need to know the future value of this payment at 62, but I'm not willing to assume it will grow at the inflation rate, so I will discount it by a percent a year. This is based on my somewhat conservative notion that rental costs may rise faster than rents as families start to purchase their own homes again. My math is as follows:

    770 X (1.02)^26 = $1288.00 X 12 = $15,456

    With my rental and my social security benefit, I've already solved $37,692 of the $183,400 problem. Now I just need to get the last $145,708.

    I've already stated I intend to earn it with additional investments. I am fairly confident I can earn 6% off of my money in the future from dividends and option sales. My earnings from such activities are already quite a bit higher, but I will want to scale back risk when I'm older.

    By dividing my required remaining income ($145,708) by 6%, I find I need $2,430,000 in cash to provide me with my required retirement income.

    I know I have around $175,000 currently, and I have 26 years to grow it to $2,430,000. By running the numbers just as I did with the first problem set (175,000 x (1+%)^26 = 2430000), I find that I need to increase my pool of money by 10.65% a year, every year.

    If this percentage was what I needed to earn a year, I would be highly skeptical. I'd need to readjust my expectations, or invest aggressively. Fortunately, this percentage includes contributions. Because I'm confident my contributions in the near future will satisfy much of my requirements, I'm reasonably certain that I can meet or exceed my 10.65% requirement.

    While you may decide to adjust how you estimate and what incomes you include, this model should give you some idea of considerations you should make when determining your required rate of growth. You will drive yourself crazy if you recalculate this frequently, but I plan on recalculating from scratch every five years or so.

    Strategy to Tactics

    For most readers, these steps are going to seem pretty basic, maybe even unnecessary. But taking these steps has armed me with a lot of decision making power. Are my current returns and contributions enough to get me where I want to be at retirement? Can I spend more savings on vacations instead of saving it? Should I reduce current risk by paying off very low interest loans, thus decreasing cashflow requirements in the present? If I know I'm meeting or exceeding my cash growth requirements in my portfolio, I can improve my life in other areas.

    Furthermore, I can now determine appropriate tactics to achieve the required growth rate. For instance, I need to grow my money at 10.65% a year. Currently, I have $175,000. If I know I can contribute (including 401K matching contributions) $15,000 a year, than I can work out what I need for a required rate of return. In my case, with the numbers given, I need an average rate of return of 7.87%. I can use that number to build a passive portfolio with an appropriate amount of risk, or I can use that number as a gauge to determine whether I need to take more risks or less risks with an actively managed portfolio.

    I can also evaluate common tactics offered up here on SeekingAlpha. One such strategy is the Dividend Growth strategy. Popular authors you may want to read up include David Van Knapp and Chuck Carnevale. After building a quick spreadsheet with the numbers above, I learn that I could achieve my required portfolio value with a dividend growth rate of 5% (assuming share prices also reflect the growth rate over the long run). I've written a detailed article on evaluating dividend growth rate requirements here.


    In order to effectively develop tactics to meet your goals, you need to have an intimate knowledge of what you are actually trying to accomplish. Spelling that goal out, and fleshing it out with a timeline, broad roadmap should provide you with the information required to decide just how much money and risk (in the form of required return) you will need to accomplish your goals. Once you know how much money and risk is, tactical decisions will soon become obvious.

    Tags: retirement
    Sep 12 7:40 AM | Link | Comment!
  • Save Tax Money By Selling Your Capital Gains

    Time is running out and I have to make a difficult decision… whether to sell my long term capital gains for a potential tax savings down the road or not. Yes, you read that right. I'm considering selling my winners to save tax money down the road. And for those of you in roughly the same situation as me, it may be an option you have not considered.

    This article isn't going to be for everyone. If you don't live in the United States, you aren't going to give two toenail clippings on how to take advantage U.S. federal tax laws. If you aren't in the 15% tax bracket or have taxable assets, this won't be immediately applicable to you either. Still, it may serve you well down the road.

    But enough with the disclaimer. The article will be short and sweet. Just take the time to read it already.

    Bottom Line up Front

    Currently, I have two upcoming developments which may shift me out of the 15% tax bracket and into the 25% tax bracket in 2014. I have several equity positions which I've held for several years, and which have netted me capital gains. If I stick with a few of them, I could sell them and book long term capital gains without raising my federal income above 15%. By remaining within the 15% tax bracket, I can immediately re buy my positions, and reset my taxable cost basis on these positions. My total federal tax on those positions would be a whopping $0.00.


    Yes. That's right. Wash Sale rules do not apply to profits. And for some of you (maybe many of you), I'm sure this is completely obvious. But for me, it was somewhat a revelation, when I thought about it one day. I have always been focused on culling through my losers to find those I want to shed to lower my tax base. I never thought about instantly resetting my tax base to take advantage of my current tax bracket. For more information, please review IRS publication 550 here, or read this simplified version here.

    So here's a concrete example. If things develop as I hope in 2014, I will be in the 25% tax bracket. Three potential candidates are Microsoft (NASDAQ:MSFT), Finish Line (NASDAQ:FINL), and Silver Wheaton Corp (NYSE:SLW). The combined positions would net me $3735.16 in capital gains if I sold right now. My total in and out costs would be $30 in trading fees. But by buying and selling right now, I could save (potentially) $560.27 in federal taxes. Since long term capital gains rates are 0% for those in the 15% tax bracket, I'll pay nothing on current gains. Moreover, if any of these positions move south after today, I could take a tax loss down the road while pocketing a return on my investment. I like the sound of that… but as always, it isn't so simple.

    Federal Tax isn't the only Tax

    I have the (sometimes dubious) honor of being a California resident. For those of you in states without income taxes, this technique is almost without penalty. For me, there is a 4% tax I will be incurring on these positions, and I like to put off paying taxes as long as possible. So, I look to pay $178.80 (that's $3735.16- $15.00 in brokerage fees x 4% +$30 in commissions) for a potential savings of $560.27. Not a bad tradeoff at all, if I end up with the new job. But there are a couple of other considerations we should keep in mind:

    1. Slippage costs. The bid/ask spread on these stocks should be about a penny difference, but you may pay substantial amounts to move shares in less liquid positions.
    2. There is always a danger that the markets will move substantially (and disadvantageously) between the time your sell and buy orders are executed.
    3. By selling now, you are converting a long term position into a short term position. If the price suddenly shoots to the moon over the next few months, and you feel you need to sell the position because it's unreasonably overpriced, your attempt to save money down the road may actually raise your future tax liability. For instance, if my three stock positions were to gain an additional $4000 in value, they would almost certainly be overpriced, and I'd be very tempted to sell them, or at the very least issue rolling stops on them. But if the positions were liquidated, and I was in the next higher tax bracket (25%), I'd now have the privilege of paying $1000 of short term capital gains taxes. Add in the $178.80 I spent to refresh the taxable cost basis, and I'm out $1178.80 vs. the alternative of paying long term capital gains of $1160.27 if I hadn't rolled the cost basis.


    Despite the costs and risks, rolling my cost basis up may be well worth it for me in the long run. The most important thing to do when making this decision and any investment decision really, is to chart out your specific risks and costs and determine if the course of action is still worth taking. For me, the biggest risk is that I will remain in the 15% tax bracket, and may even move out of California. I will have spent the $178.80 needlessly, and if I sell in 2014, my decision may cost me even more money.

    I hope some of you are able to take advantage of this article to save on your taxes in the coming years. Happy New Year.

    Disclosure: I am long MSFT, FINL, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I am not a tax professional. The article is meant to step through logical steps I'm taking in my own tax planning. If you have any doubts or concerns with the discussed strategy, you should discuss it with a licensed tax professional.

    Dec 31 9:57 AM | Link | Comment!
  • Minimum Wage Hike Unlikely To Help The Poor, But It Can Help You (Background)

    "It seems clear to me that we need a guaranteed minimum income to address the structural unemployment and falling demand automation is already causing, which may get exponentially worse in the next two decades." Rev. Joe Zarro, a commenter on this article.

    This comment stood out to me for two reasons. First, the comment seemed directly related to another instablog. I was preparing to publish in regards to value. The second reason the comment stood out was that it was a perfect illustration that most people are learning the wrong lessons from technological innovations. With all due respect to Mr. Zarro and those who think like him, he could not be more wrong. "Guaranteed" minimum income will not address falling demand [for labor] due to will prompt it. Fortunately, this provides investment opportunities for those willing to exploit them.

    Bottom Line Up Front

    Let me first admit that the premise is contentious and difficult to prove. Even as we speak, policy makers, under the guise of "helping" lower class employees are pushing both a raise in federal unemployment wages, as well as many significant wage raises in various states. It is far out of the scope of this article to discuss whether these proposals are ultimately good for society, and frankly, there are too many issues to address to be able to do so intelligently. I will limit my scope to the idea that substantial raises in minimum wage should spur innovations in automation, which, of course, would benefit companies marketing automation solutions, and, in the long run, lead to greater profitability in those companies who heavily employ minimum wage employees. Unfortunately, this will come at the price of fewer employees needed in minimum wage positions, at least positions that currently exist.

    Current Situation

    I thought a summary of the current situation might be helpful. As I'm writing this, President Obama is proposing raising federal minimum wage to $9.00 an hour from its current place at $7.25. Adjusted for inflation, this would be a somewhat below its peak in 1968 (roughly 16% lower). However, this rate would be in line with most of the other rates of the 1960s and 1970s, and well above what was paid in the past 3 decades. Progressive states such as California and Washington state have proposed raising minimum wage to anywhere from $10.00-$15.00. The higher proposed figures far outpace any minimum wage rate mandated in U.S. history. Perhaps a graph might by illustrative at this point:

    (click to enlarge)

    I built the graph from data provided by here.

    The graph is somewhat biased towards expectation of higher wages. There was a minimum wage prior to 1955, with origins dating back to 1933 (the wage successfully surviving the courts in 1938). Buying power was significantly lower than any point depicted on the graph (about $2.81 in 1996 dollars) and did not rise significantly until the mid 50's.

    Gather 'Round the Good Stuff

    Let's get back to the point. Will a guaranteed minimum income address structural unemployment due to innovation as Mr. Zarro insists? History seems to have a different story.

    (click to enlarge)

    While one can't necessarily draw the conclusion that higher minimum wage laws prompted innovation in automation, we can conclude that higher wages (much higher than now) did NOT result in a reduction of automation (which should be intuitive). In fact, the years, and decades following record highs in minimum wage led to huge drops in minimum and low wage jobs for bank tellers, low wage factory workers, and gas station attendants, amongst others. Perhaps, as some insist, higher minimum wages filtered through the economy, creating more jobs at higher levels allowing upward mobility. But, a quick look at U.S. unemployment rate history shows us that the highest rates of unemployment followed the highest minimum wage rates.

    (click to enlarge)

    (Graph provided on us politics here)

    Only the most simplistic amongst us would claim that high minimum wages caused follow-on high unemployment. Still, it's interesting to note that unemployment, whether correlated or not, was highest in the decades (and just after the decades) when minimum wages were the highest on record, and unemployment dropped coinciding with a drop in minimum wage real purchasing power.

    To be fair, most proponents aren't claiming that minimum wage hikes will cut unemployment. The ultimate stated goal is to reduce income inequality (and thereby, wealth inequality). Fortunately, we have estimates of that as well provided by business here.

    (click to enlarge)

    Hmm… it seems like the giant minimum wage hikes in the late 50's and early 60's had little if any impact on the growth of wage disparity.

    As investors, we need often need to make predictions of complex situations by using empirical evidence when possible, and theory when necessary. Let's see what the empirical evidence presented today says:

    1. Minimum wage raises in the 50's and 60's may or may not have spurred existing innovations in automation by making them more cost efficient alternatives to maintaining low skilled employees
    2. Minimum wage raises in the 50's and 60's did not seem to affect unemployment in a positive way
    3. Minimum wage raises in the 50's and 60's did not meet their stated goals: reducing the growing income inequality gap.

    Yes, the charts I presented offer a pretty simplistic view. At this point, examining the opinions of scholars, and economists is our next best step. Unfortunately, the issue is so politicized that we are unlikely to find consensus amongst either parties. For instance, a Cato Institute article presents several peer reviewed studies showing an increase in unemployment following minimum wage increases along with a few that contradict the findings. The Economist presents findings that show no increase in unemployment. Yet their analysis is still not counter to my central thesis:

    "…suggests that the minimum wage does not primarily boost pay by reallocating the surplus generated by a hire. Instead, employees seem to respond by working harder while employers invest in training and other workplace productivity boosters. That's a lovely thing to have happen, but also reason for caution. Technological progress seems to be boosting opportunities for automation all the time, and at some point firms will cross the threshold beyond which it makes sense to replace labour with capital rather than invest in more productive labour. Amazon's fulfillment centres generate tens of thousands of jobs, many at or near minimum wage. Maybe a higher minimum wage will lead to better pay without much of an employment effect. Or maybe Amazon will accelerate the deployment of warehouse robots. Maybe a higher minimum wage will boost pay at fast-food restaurants. Or maybe it will lead the restaurants to get serious about automation." (

    Ok. Here's the problem as I see it. Proponents of raising minimum wage, and the populace in general, see it as a clear cut decision. People in those jobs are suffering. Company profits are at an all time high. Mandating a boost in wages seem like an easy and effective way to "level the playing field". But if you truly care about reducing poverty, or reducing the income disparity, than you should care about results. And those who propose to take out of one group's pocket, should declare their intent, and show some kind of historical proof that that intent can be met. Voters should demand accountability for policies passed.

    As investors we need to determine how policies like those described above will impact us. In addition, we need to determine whether such policies open up any particular opportunities for us. This argument was supposed to be part of a larger discussion focusing on avoiding macro predictions and looking at opportunities increased spending in automation would have. However, laying what I felt was the necessary framework (the material above), also bathed in contentious political material. If you found this article and found it interesting. I'd like to invite you to view my article on the subject matter here (coming soon).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: Macro
    Dec 13 5:53 PM | Link | Comment!
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