"It is a tale told by an idiot, full of sound and fury, signifying nothing." -- William Shakespeare.
Okay everybody, take a deep breath and repeat after me:
Taxes are due today. Day trading is at record levels. Day traders have to pay short-term capital gains taxes. All in a lump sum. Right about now.
This is one reason we don't do a lot of trading in the Rule Maker portfolio. We do a lot of buying, but not much selling. In fact, our only sells to date were forced by share splits that caused us to have partial shares that were delivered to us in cash. We're lazy procrastinating sods who don't like to do the tax paperwork. Our tax bill for 1999 came to only $55.39. Most of that amount is due to the $188.08 of taxable dividends which we received this past year. And yes, here in the Rule Maker Portfolio, we actually deduct taxes from our reported returns. Since we started this gig over two years ago, our portfolio is handily beating the S&P 500 on an after-tax basis -- check out the numbers.
I feel sorry for day traders who had to fill out page after page of Schedule D's. It may only take a click of the mouse to trade these days, but every single trade still has to be reported to the IRS. And then to suddenly find out that those day-by-day gains they've been living off of for the past year add up to one big tax bill forcing them to sell a bunch of stock right when everybody ELSE had to sell too...
Tragic. Simply tragic. But all of this definitely falls under the broad category of "things that should not be news." Maybe a human interest story, but a business section headline?
How about the Saturday front-page headline in the Courier-Post in southern New Jersey? I pick on them merely because I happened to buy a copy. The story itself was from the Associated Press, and proclaimed a record breaking 6% drop in the Dow Jones Industrial Average. The first line reads, "The nation watched agape Friday as the stock market suffered a history-making collapse that shook professional and armchair investors alike." It was a "semi-panic," says the article, "almost a full cascading deterioration." (I don't know what that means, but I assume it would cause the markets to suspend trading until they could administer Valium to everybody on the trading floor.)
Why are people getting hysterical about a 6% drop? Because now that the Dow is 10,000 instead of 2,000, a 6% drop is 600 points rather than 120 points. That's a lot of points; a record number. But it's still 6%. Deal with it.
We have a record number of day traders, but hopefully they'll have learned something from this. Day trading is a zero-sum game, no matter how easy the Internet makes it and how many commercials Internet brokers run on television urging people to do it. Zero-sum means it's like poker, where all the players come to the table with money, and that's all the money there is in the game, and if anybody gains any money they win it off of one of the other players.
Except day trading is worse, because every trade costs you a commission that goes to the brokerage, and a spread that goes to the market makers. (If you don't know what those are, try the Fool's School Investing Concepts section.) And at the end of the year, of course, Uncle Sam gets his cut.
Here in Rule Makerdom, we're looking at the future earning potential of companies. We're looking at how growing companies can become more valuable and profitable and return cash to their investors through dividends and stock buybacks. And we revel in the fact that we don't have to pay taxes on unrecognized gains, so increases in stock price don't result in a tax bill until we sell stock.
The Associated Press article was by no means the only one. Reuters has a headline, "Stocks Suffer Historic Losses as Inflation Rises." Oooh. They're historic now. Hands up everybody who thinks this will go down in history along with the "Asia Scare." (Two years ago. Remember?) How about this headline, "Technicians See Further Damage in Nasdaq." It sounds like somebody spilled a Coke into it and shorted the electronics out. I love the first line of that article, too: "Technical analysts surveyed the bloodbath in the Nasdaq... Friday as key support levels were once again easily violated." Sounds like a Victorian horror novel involving vampires and scantily clad women. And here's another article looking for comments from the White House, Secretary of the Treasury, Federal Reserve, AND the Securities and Exchange Commission, and finding the fact that they collectively didn't really have anything to say -- in and of itself newsworthy! That's almost Zen.
The reality is, April's tax hit caused enough selling to trigger margin calls. People who borrowed money using their stock as collateral, and used that money to buy MORE stock, suddenly found that their collateral had shrunk to the point where their loans were being called in. Oh dear, you mean they have to sell some stock (to pay off the loans) at the worst possible time, AFTER the stock has gone down? Of course, that's how margin loans always work.
Will the market continue to go down? Entirely possible, the herd has been spooked into momentum trading. Is this a "justified market correction"? Maybe. Dunno. Will the market come back up at some point? Barring nuclear war or a comet crashing into the Earth, of course. When, exactly will this occur? Beats the heck out of me.
What I do know is that if I considered a stock to be worth buying at a higher price, and the company I'd be buying stock in hasn't changed, then the lower price is a good deal for me as a buyer. It's a fire sale on stocks. Does this mean I should buy something I wouldn't have wanted to own otherwise? Probably not.
But whether or not anything useful can be learned from the situation, you've got to admit the amusement value of all this for a long-term, buy-and-hold investor who isn't relying on margin is just awe inspiring.
Finally, if you're not sure what to make of all the recent market movement, check out the Fool's Market Craziness special.
- Oak
