Friday, November 9, 2007

Don't try and catch a falling knife

Shoeshine boys were giving stock tips

Stay off the ledge, regardless of how high it is off the ground. In the 1930's when the stock markets crashed, some people jumped out of buildings because they lost everything speculating in the stock markets. Prior to the crash the shoeshine boy were giving stock tips.

Go out and do some Christmas shopping

I am not saying that we are in another 1930’s crash, but we are in a great deal of turmoil now with a bias to the downside. The best thing you can do now is go out and do some Christmas shopping. I do not believe that you should sell at this level or even if the markets goes down further, you should sell then, this is not the environment to make sell or for that matter, some buy decisions.

You have to look at what you own and make a decision as to the prospects of the company in a different economic environment. If the bulk of your money is in quality fixed income then spend a little more on Christmas. If on the other hand you have raised a significant amount of cash and you are looking for something to buy go out and do some Christmas shopping

Income tax of 15%

Tax qualified stocks, including preferred, offer a maximum income tax of 15% regardless of your tax rate on other income. Therefore, if you have to pay 38% on other income and only 15% on tax qualified investments you can see why tax qualified investments would be attractive.

Triple tax-free bond at an interest rate of 5.10%

I recently purchased some Puerto Rico triple tax-free bond at an interest rate of 5.10%. These are zero coupon bonds so they pay no current income but appreciate over time. You buy a zero coupon at discount, something less than face amount and then at maturity you get the face amount. In this example, I paid 9.5 cents on the dollar. If I hold the bond until maturity then I will get just over 10.5 times on my money.

If you look around you will find things to do with your money, even in difficult times like today. Picking what stocks to buy could be difficult, a friend of mine said he liked a stock and bought some last week, bought some more at a lower price early this week and today he can buy it at an even better price.

In turbulent times as we are experiencing now, sometimes the baby gets thrown out with the bath water. As I said above, look at what you own, if you still like it and you have the cash, then average down and take the reduced price as an early Christmas gift and buy more.

If you do not own a stock and do not know anything about it, then read the headline, and do not try to catch the falling knife of picking a stock to buy in today’s market. The cut could be deadly to your financial health.

Dan Perkins

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