The Death of Capital Gains Investing pdf

The Death of Capital Gains Investing And What to Replace It With A free report by Richard Stooker author of Income Investing Secrets, Master Limited Partnerships, Bring on the Crash, REI

The Death of Capital Gains Investing (And What to Replace It With)

A free report by Richard Stooker (author of Income Investing Secrets, Master Limited Partnerships, Bring on the Crash, REITs Around the World, and Stock Market Investing

for Beginners) SMASHWORDS EDITION Published by Richard Stooker on Smashwords Copyright © 2012 by Richard Stooker and Gold Egg Investing LLC.

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Table of Contents Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 1

Any Happy Investors in the House?

Look at the bottom line of your 401(K), IRA, Roth IRA or other brokerage account

Like what you see?

When was the last time you liked what you saw there?

If you're like most people, it was late in 2007, when the Dow Jones Industrial Average broke 14,000

As I write this, on December 3, 2011, over four years later, it's 12,019 and THAT only after a major post-Thanksgiving rally Not long ago it under 11,000 (and it first reached 11,000 around April 2000)

It's down 2,000 points from that 14,000 record

And nobody knows where it's going next

Yet people keep trying to make money this way

When they fail, they're quick to label "Wall Street" a scam or a conspiracy

The stock market itself is not a scam

The trouble comes from how people are brainwashed into trying to make money from the stock market

That is Wall Street's fault

Now it's time to lay bare the truth, so you can position your investments to give you ongoing streams of income to reinvest, to build yourself a fortune by the time you retire But first, let's define terms

What is Capital Gains Investing?

It's what the vast majority of people call simply "investing."

It's buying a stock now in the hope you'll be able to sell it for a profit in the future

If you're like most people, you're now confused

That IS investing, you might be thinking What else?

There IS an "else," and I'll get to that in a minute

But first

Chapter 2

What's Wrong With Investing to Sell at a Higher Price

1 The simple answer is that, once you sell, you no longer own the stock

You ever hear the old saying, "You can't have your cake and eat it too"?

Duh, huh?

You can't sell a stock and own it too

And then you no longer benefit from the stock going higher in price

How many times have you heard of somebody selling a stock at its highest price, then happily counting their cash as the stock's price goes down?

Not often, I bet Most of the time, the stock keeps going up in price while you kick yourself

Or it goes down, then goes back up

Look at the long term graph of any great stock, whether it's Wal-Mart or Microsoft

They all trend up in the long term, but have many sharp downward jags, and periods where the price went virtually nowhere

The overall stock market is the same

How many people over the years have bought, then sold such stocks as Wal-Mart and Microsoft, then kicked themselves, because they spent the cash they received, so it's gone, but the stock keeps going up

Sometimes you need cash Hey, it happens to all of us

But sometimes you sell one stock because it's been going down and you think another company will do better

Sometimes you're right, but often you're not

2 Finding stocks that go up more than the stock market as a whole is not as easy as brokers, fund managers and stock pickers want you to believe

In fact, it's hard as Hell to succeed in stock picking and market timing on a long-term basis

Hundreds of studies since the Cowles Commission examined why none of the stock pickers and timers of that era predicted the 1929 crash have statistically analyzed the claims of fund managers and stock pundits of all kinds

The universal result?

In the long run, almost nobody has successfully picked stocks that beat the market

"Hot" mutual fund managers turn cold or have to invest so much more money that their funds are forced to mirror the market as a whole

Stock pickers edit their records They tell you about their winners, not their losers

Sure Warren Buffett has done a terrific job, but he's the exception that proves the rule Besides, you and I can't buy up entire businesses (Berkshire Hathaway owns See's Candys and Geico Car Insurance 100%) If you and I go visit a company's headquarters,

we don't get the red carpet treatment You and I don't get a seat on the Board of Directors And we can't get the same favorable terms he negotiates And many of his stock picks pay generous dividends And his favorite holding time is "forever," indicating

he recognizes the perils of selling one company just to buy another company

Besides, this stock market's woes have limited even Berkshire Hathaway's record run

Chapter 3

Trying to Find Undervalued Stocks is Like Trying to Outsmart the World

Do you know how many people are trying to find the next Microsoft or Wal-Mart?

Are you smarter than all of them?

Do you have access to some special knowledge they don't? If not, how do you expect to beat them all? If you do, trading on insider information is illegal, so if you get caught you're still screwed Don't believe me, just ask Martha Stewart

Around this world there are people mutual fund managers, private management firms, pension fund managers, hedge funds, and others seeking to make trades to beat the market

What do you have that they don't?

They have:

Banks of powerful computers with real time access to market quotes around the world And databases of prices going back a century

Proprietary software that finds opportunities and executes the orders automatically Access to all the financial documents filed by publicly listed companies around the world, along with the programs to screen them

Teams of analysts flying around the world to visit factories and company headquarters

of companies on every continent except Antarctica

Not to mention networks of contacts in institutions, businesses and governments around the globe By the time you see or read the story on Fox, CNN, Reuters or the BBC, it's old news to them

And even THOSE guys fail to beat the market, long term

The "Lost Decade" is Becoming the "Lost Dozen Years"

The 1990s bubble bull market peaked in March 2000 with the Dow at 11,700 As I wrote above, it's now just barely over 12,000

So in the past nearly twelve years it's gone up a grand total of 400 points Wow Whoopee

Small wonder people who measure their investment results this way are crying

Small wonder people who in 1999 were planning their early retirements are now delaying leaving the workforce

Small wonder many otherwise intelligent people are joining the Occupy Wall Street protests

Stock Indexing is Maximizing a Dysfunctional Strategy

Their brokers and the mass media promised them the stock market would go up an average of 10% per year

Where is that? In your dreams?

Because stock picking is so risky and liable to fail, according to many intelligent stock market writers, such as Burton Malkiel author of A Random Walk Down Wall Street, the solution is to invest in the market as a whole Buy into Vanguard's S&P 500 Index mutual fund or Exchange Traded Fund

This eliminates the risk of relying on picking individual companies to invest in.

Invest in them all, and profit from the rising wealth of the market

Maybe that 10% per year average will show up soon

After all, responsible investment advisors have always stressed that an average is just an average, and the stock market can have many down years

It's just that after the 25 year bull market from 1982 to 2007, nobody expected to ever see such down years ago

Yet here they are

Chapter 4

Where's the Silver Lining?

We're facing a host of major economic problems:

1 The US economy is in a sluggish, minimal "recovery" that shows few signs of strengthening any time soon Unemployment is still close to 9%

2 A few months ago S&P downgraded the credit worthiness of the United States government, something which would have been almost unimaginable just a few years ago This was caused by the huge amount of debt the government took on to prevent a major depression in the wake of the 2008 financial crisis

3 Democrats and Republicans are at loggerheads over how to reduce this budget deficit

A bipartisan "super committee" failed to agree on how to reduce the budget by $1.1 trillion (to nobody's surprise) This sets the country up for wide, sweeping across the board cuts as of January 2013 (conveniently after the next election is over), which will hurt many and satisfy nobody

Although in theory the government could come up with an alternative budget before then, President Obama has said he won't approve that

As 2012 is an election year, we can expect a lot more rhetoric than action from all sides

4 Besides the on the books debt, the US government faces the prospect of paying trillions of dollars of unfunded liabilities in the next few years: Social Security, Medicare, Medicaid, and other welfare programs

5 State and local governments also have to pay millions of dollars of pensions for which they don't have the funds

6 Many corporations are in the same boat

7 80 million baby boomers have started to retire That's a lot of experience and expertise leaving the workplace It's also a lot of people who are no longer buying stocks through payroll deduction, but selling them to supplement their inadequate Social Security and pension checks

Less buying and more selling of stocks reduces their price

8 Leftwing activists have managed to capitalize on the nation's fears and frustration with the economy, to attract thousands of young people to camp out in big cities as a protest against Wall Street Most Occupy Wall Street participants are well-meaning, naive young people who will be yuppies when they get a job However, OWS threatens to disrupt law and order, and is draining the coffers of already-desperate cities

9 Soon the healthcare "reform" law will go into effect, draining more money from the

US taxpayers

10 The Eurozone is threatening to come apart Greece is close to defaulting on its government bonds So are Spain, Ireland, Italy and Portugal There's a lot of pressure on Germany to back up the excess spending of rest of the continent, but German taxpayers have their limits Pundits around the world are predicting a huge financial disaster if the euro fails

Meanwhile, people around Europe are protesting the budget cutbacks Like OWS, they're contributing to the financial problems, though without offering any solutions, and often even more violently

11 In Asia, Japan's recession has entered its third decade, with no relief in sight The Japanese people are growing older and dying faster than they're reproducing

Thanks to the one family, one child policy decreed sixty years ago, the Chinese people are also getting old Although it's not well-known, in 2008 China enacted its own version of a stimulus bill, propping up many businesses around the country They've built several cities which are currently empty Yes - empty They're trying not to be so export-dependent, but if Europe falls they'll be in trouble Inflation in China is on the rise So is civil disorder Many experts believe there are many protests throughout the country on a daily basis, but usually not allowed on the news The government wants to keep dissatisfied citizens from organizing into another Tiananmen Square revolt Part of their strategy is to keep young people working, so they don't have time to take to the streets

Chapter 5

Financial Experts are Divided About the Future

Some believe the huge amounts of debt in the world, together with the slowing of business due to baby boomers retiring (and Europe has its own baby boomers who plan

to retire with government pensions and paid health care plans) is going to cause a deflationary spiral which will drag down the market prices of everybody assets (including houses and stocks), raise unemployment and slow down the entire world's economy

If this happens, the Dow Jones Average could plummet to levels we haven't seen in decades That may not happen, but it's not likely to break that 14,000 record any time soon

Other experts believe the US Federal Reserve's policies of injecting liquidity into the system to prevent a depression are going to overload the world with US dollars

If the Fed doesn't do the job, they argue, one of our major creditors probably China

is going to get tired of holding Treasury bonds and sell them

Either way, the world will be flooded with US dollars, causing a hyperinflation that may remind us of Germany in 1924 or even Zimbabwe a few years back

The good news is that your stock portfolio will go up in value The bad news is that it may not go up as fast as inflation does, and it still won't buy any more than it does now

Perhaps we'll keep muddling through as we are now, though the idea that more of the

"same" is the good news, is itself frightening

Maybe everybody is wrong, and the next booming stock market will start up next year Are you ready to bet your retirement on that?

Chapter 6

How Long Can a Stock Market Stay Down?

It took over twenty-five years until November 1954 for the Dow Jones to break the record it set in August 1929 Ten years of a Great Depression, four years of world war, four years of a "police action" in Korea, and building a nuclear arsenal to defend the country against the threat of world communism

Japan's stock market reached its peak of 49,000 in 1989 The Nikkei Index is now at 8,643 The country is now in its third decade of slow to no growth and near-zero interest rates

How much longer can the current US bear market last?

The truth is, nobody knows

However, someday stocks will go up again, whether it's next year or 2032

When Stocks Go Up, You're Happy, Right?

The truth is, capital gains investors have no way of winning the war against their emotions

Many stock and investing writers tell you, don't trade on your emotions Use your intellect

Unfortunately, our intellects are no better at predicting the future than our emotions And studies have proven that few people can use their brains (or even their electronic brains computers) to beat the market long term

One thing conventional financial writers tell you that I agree with is stock market investing (for capital gains) is a war between fear and greed

In a bull market, greed prevails

In a bear market, fear rules

But both emotions are present in the individual investor with a decent profit in their stock

A capital gains investor's heart is as volatile as the stock market itself, because they know the market is fickle

Today the market gives you a 5% gain It may take it away tomorrow

Knowing this, stock investors are tempted to sell before the price goes back down That's the fear of loss

Old Wall Street maxim: You can't lose money by taking a profit

Ah, but greed plays a part too

Remember, if you sell a stock you don't participate in its later price rises

If your stock went up 5% today, maybe it'll go up 10% tomorrow Who knows? But you don't want to miss out on that

Another Old Wall Street maxim: Cut your losses short but let your winners run

Here is where responsible mainstream financial writers tell you to invest for the long run Buy many good stocks, or an index fund, and hang on for 20 to 30 years, and you're guaranteed to be ahead

But when you retire, you're still faced with the sell or hold dilemma

What if a bear market starts up right after you retire? (Ask people who retired in 2007.)

So if it's impossible to find the super winning stocks (without the benefit of hindsight, when it's too late) and the prospects for the immediate future seem dim, and even when you have a winner you'll have emotional unrest instead of happiness, what's an investor

to do?

Abandon the hope of reselling for a profit?

Yes

Chapter 7

Invest for Income

Buy and hold forever but get a continuous stream of ever-increasing income, starting almost right away

Money you can use to buy new shares with, thus growing your portfolio or if you're retired live on

If the price of the stock goes up, who cares? You don't need to sell it to put cash money back into your pocket, because you're getting quarterly dividends

If the price of the stock goes down, who cares? You're getting your quarterly dividends

If the price of the stock goes nowhere, who cares? You're getting your quarterly dividends

Poof! There goes the conflict between your fear and greed Suddenly, fear and greed are

on the same side

Greed tells you not to sell stocks, because greed wants those quarterly dividends

Fear tells you not to sell stocks, because you're afraid of losing those quarterly dividends

There goes the need to find stocks that go up more than the market, or even as much as the market You're after dividends

Real Businesses Demand Current Income

It always amuses me when I read a mainstream financial writer advise people to buy stocks as though they're buying a business, because shares of stocks are shares of ownership in the business