<s> Winning with Stocks:The Smart Way to PickInvestments, Manage YourPortfolio, and MaximizeProfits
MICHAEL C. THOMSETT
AMACOM
Winningwith
Stocks
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Winningwith
StocksThe Smart Way toP i c k I n v e s t m e n t s , M a n a g e Yo u r P o r t f o l i o ,and Maximize Profits
Michael C. Thomsett
American Management AssociationNew York • Atlanta • Brussels • Chicago • Mexico City • San FranciscoShanghai • Tokyo • Toronto • Washington, D.C.
Special discounts on bulk quantities of AMACOM books areavailable to corporations, professional associations, andother organizations. For details, contact Special SalesDepartment, AMACOM, a division of AmericanManagement Association, 1601 Broadway, New York,NY 10019.Tel: 212-903-8316. Fax: 212-903-8083.E-mail: specialsls@amanet.orgWebsite: www.amacombooks.org/go/specialsalesTo view all AMACOM titles go to: www.amacombooks.orgThis publication is designed to provide accurate and authoritativeinformation in regard to the subject matter covered. It is sold withthe understanding that the publisher is not engaged in renderinglegal, accounting, or other professional service. If legal advice orother expert assistance is required, the services of a competentprofessional person should be sought.
Library of Congress Cataloging-in-Publication DataThomsett, Michael C.Winning with stocks : the smart way to pick investments, manage your portfolio, andmaximize proﬁts / Michael C. Thomsett.p. cm.Includes index.ISBN-13: 978-0-8144-0986-2ISBN-10: 0-8144-0986-51. Investments. 2. Stocks. 3. Speculation. I. Title.HG6041.T46 2008332.63'22—dc222008017989 Michael C. Thomsett.All rights reserved.Printed in the United States of America.This publication may not be reproduced, stored in a retrievalsystem, or transmitted in whole or in part, in any form or by anymeans, electronic, mechanical, photocopying, recording, orotherwise, without the prior written permission of AMACOM, adivision of American Management Association, 1601 Broadway,New York, NY 10019.Printing number10 9 8 7 6 5 4 3 2 1
CONTENTS
Preface: Creating Your Comprehensive Program
vii
Chapter 1
A Short History of the Stock Market
1
Chapter 2
The Bottom Line
23
Chapter 3
Yield and Yield History
47
Chapter 4
The ‘‘Practical’’ Dow Theory
65
Chapter 5
A Few Valuable Fundamentals
91
Chapter 6
Identifying the Risk
119
Chapter 7
The Egg-and-Basket Idea
137
Chapter 8
Liquidity in the Market
151
Chapter 9
Volatility and Leverage
165
Chapter 10 Alternatives to Direct Ownership of Stocks
181
Chapter 11 Market Timing
197
Chapter 12 Applying Your Comprehensive Program
209
Glossary
227
Index
237
v
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PREFACECreating Your Comprehensive Program
T
he market. The idea of people trading money in and out of stocks,whether $100 or $10 billion, is exciting. It represents the epitomeof the free market and of capitalism. While many people criticizethe free economy, it has become truly global in recent years, and themovement and exchange of capital fuels the world’s economy. Italways has and it always will. But the changes brought about byimproved information technology, the Internet, and the opening ofmany borders since the end of the Cold War have all expanded themarket so that today it is easy for anyone to invest virtually anywhere—instantly.This miracle brings with it many new risks. While in the pastinformation was expensive, difﬁcult to ﬁnd, and untimely, todaythere is too much information. The modern challenge is decidingwhich information is useful, and which is not. This book concentrates on speciﬁc investment tools that help you to develop themeans to control your individual portfolio, research, and decisionmaking process. These tools work together in forming your program for creating and managing proﬁts. Advice in the ﬁnancialpress is either too broad and general, focuses on one small part ofthe total picture, or distorts and exaggerates the importance of market developments. This book puts together a program for the invii
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formed study of stocks, to improve your overall performance in anever-changing market environment.The stock market in the United States is the most popular investment market in the world, used not only by millions of individuals, but also by institutional investors: mutual funds, pension plans,insurance companies. Just about everyone who invests, has a retirement plan, or works for a large company is in the market. But howmuch do they really know about picking stocks? That is the bigquestion answered by Winning with Stocks.An irony of how people invest is that—especially in the stockmarket—rumor, gossip, and opinion are given greater weight thanresearch. This is a widespread ﬂaw, with ‘‘the crowd’’ more oftenwrong than right (giving rise to contrarian strategies), and with themarket characterized more by emotion than by logic. It has beensaid that if the market were a person, he or she would probably bein therapy.Stocks can be selected by sector, reputation, or price. Somepeople like the fundamentals (ﬁnancial information), others prefertechnical analysis (charting patterns, price trends, and volume/pricestudy). Both fundamental and technical schools offer valuable ideas.In Winning with Stocks, the reader is going to ﬁnd a shortlist of the most valuable indicators (fundamental and technical) forpicking stocks. On the fundamental side are ratios designed toquantify ﬁnancial and working capital strength (current ratio, debtratio) and proﬁtability (revenue trend, net return). Technical indicators include price history, trading volatility, and trading rangetrends. Combination indicators include dividend yield, earnings pershare, and the all-important price/earnings (P/E) ratio. The authorprovides suggestions about picking stocks using these limited number of tests.This book is aimed at the novice or investor/trader with limitedexperience. The intention of this book is to explain the market in aspectrum of risks and opportunities, so that the reader will be ableto make an informed decision about how to make proﬁts while limiting risks in the stock market.
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C
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1
A SHORT HISTORY OFTHE STOCK MARKET
T
he stock market is a fascinating cultural and ﬁnancial place with arich history. Before the telephone, communication was virtuallyimpossible beyond the walls of the exchange or, in the case of theAmerican Stock Exchange (AMEX), out on the street, because theexchange could not afford a building, thus its nickname, ‘‘thecurb.’’ In those days, the Philadelphia Stock Exchange (PHX) wasat great disadvantage because traders in New York knew daysahead of others what goods were arriving by ship. So the PHX setup a series of men on hills with mirrors and telescopes, and messages were conveyed from New York to Philadelphia in less thanone hour.Because trading in the old days was limited to the exchange,only brokers and dealers were able to trade; the market simply wasnot available to the average person, an idea that is unthinkabletoday. Major advances included the telegraph, ticker tape, telephone, and of course, the computer. All of these changes havevastly improved the ability of people to communicate and to trade.This chapter introduces you to many of the most common errors1
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investors make; by knowing these you are better equipped to avoidfalling into the common market traps. This is followed by a briefhistory of the market itself, which is not only fascinating and interesting, but also demonstrates how we arrived at the system wehave today.The modern market is cheap, efﬁcient, and well regulated.Today, more than ever before, the market has become truly democratic. Anyone with a few hundred dollars can buy shares of anylisted company through a free online brokerage account, pay littleor nothing for opening that account, and trade for only a few dollars. You no longer need to rely on expensive stockbrokers offeringadvice you really don’t need. You can ﬁnd your own researchthrough books, the Internet, investment clubs, and associationmembership. In today’s market, anyone willing to research forthemselves and to study the market has a better chance than everbefore to create and manage a stock portfolio.Even so, caveat emptor continues to apply in the stock marketas it does elsewhere. You cannot trust other people to make decisions for you, tell you where to invest, or ensure proﬁtability. Onereason for studying the long history of the market is to come to anunderstanding of the many problems inherent in any venue where alot of money changes hands. Greed dominates the market, and thatfact is unavoidable. The market attracts not only millions of honest,hardworking people who want to build security for themselves andtheir families, but also a variety of con artists and outright thieves.Unfortunately, many of these ‘‘market lowlifes’’ exist and thriveamong all of us and often function as advisers, ﬁnancial planners,analysts, stockbrokers, and online marketing companies offering‘‘free’’ advice on how to get rich—they are everywhere.The experience most people are going to have in the market willbe largely positive, based not on any assurance of safety by government regulators, but by the simple fact that everyone is in control oftheir own destiny. This includes your portfolio. If you are realistic,willing to work and learn how the market functions, and you understand that proﬁt potential always comes with risk, there is nothingto prevent you from enjoying the amazing ‘‘freedom to invest andproﬁt’’ that you can have in the U.S. stock market.
A Short History of the Stock Market
3
A Starting Point: Avoiding the Mistakes of the PastA history usually begins at the oldest point and moves forward. Before going back in time, however, it makes sense to begin at the endto expose the most common errors people make when they invest inthe stock market. Knowing the history of the market is valuable andimportant, but even before you read about that, it is equally important to know what mistakes other people often make. History repeats itself. Everyone has heard this before, and it makes sense toknow that most people are prone to fall into the same traps as thosewho have gone before. Thus, studying common errors is valuableintelligence, because it helps you to avoid those same problems.One cynical point of view about this was expressed by GeorgeBernard Shaw, who mused, ‘‘If history repeats itself, and the unexpected always happens, how incapable must Man be of learningfrom experience.’’ This point of view is actually quite common inthe market, but it is fatalistic and assumes that no one can overcomethe errors of the past. If this is true, then you might as well turnover your money to a mutual fund and hope that its management isbetter than average. Contrary to that cynical point of view, it is possible for hardworking people to make informed decisions and tobeat market averages, simply by observing (a) what others havedone to lose money, (b) the mistakes that recur in the market, and(c) how speciﬁc indicators do, in fact, lead you to proﬁts consistently.Among the mistakes investors make are eight of the most important, listed below and also summarized in Table 1-1.
Mistake 1: Investing with More Risk ThanYou Can AffordRisk—the chance that you will lose rather than gain—is an inherent attribute in all investments; there are no risk-free investments. A fully insured, guaranteed savings account contains the riskthat income will not beat the combination of inﬂation and taxes, soeven that represents a speciﬁc risk.In the stock market, risk usually refers to market risk, or the risk
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TABLE 1-1. EIGHT COMMON INVESTOR MISTAKES
Mistake 1: Investing with more risk than you can affordMistake 2: Chasing income but forgetting cash ﬂowMistake 3: Limiting your investing horizonMistake 4: Overlooking the essential researchMistake 5: Buying and selling at the wrong timeMistake 6: Assuming the entry price is the starting pointMistake 7: Believing higher-priced stocks are always expensiveMistake 8: Worrying too much and being impatient
associated speciﬁcally with the price per share of stock. If you buy100 shares at $50 per share and pay $5,000 and the stock’s marketvalue then falls to $45, you lose $500. A worthwhile exercise is tobegin by deﬁning your risk tolerance, or your ability to take risksand to afford possible losses. Stock risk is often spotted by way ofvolatility, the tendency for prices to move around. High-volatilitystocks are often erratic and have a broad trading range, and lowvolatility stocks tend to trade within a narrower price range.Once you have identiﬁed what you can afford in terms of risk,it is easier to match your risk tolerance to companies whose stockhistories are a good ﬁt. Many people—including those who deﬁnetheir risk tolerance in advance—invest in inappropriate ways, taking risks they cannot afford. This is perhaps the most common mistake investors make. For example, many investors deﬁne themselvesas conservative and ‘‘in it for the long term,’’ and then trade likespeculators.
Mistake 2: Chasing Income but Forgetting Cash FlowThe emphasis of income in the market is easy to understand.Everyone wants to buy bargain-priced stocks and cash in on a bigprice run-up. To a lesser degree, dividends are also a form of income but the dividend rate is at times overlooked. Investors tend to
A Short History of the Stock Market
5
focus exclusively on proﬁt potential but overlook the equally important cash ﬂow, or the availability of cash when you need it.For example, if you invest in stock that does not go up in value,you might determine that you need to keep your money tied up forseveral months. This might be especially true in cyclical stocks,whose economic cycle is tied to the calendar or to the economy.However, if it turns out that you need those funds before the cyclegoes into an uptrend, you have to sell shares at a loss. This cashﬂow risk means that you cannot afford to hold onto positions aslong as necessary to create proﬁts. Because you have to take outfunds for other purposes, the timing is poor for some of those longterm investments.
Mistake 3: Limiting Your Investing HorizonIt is easy to become myopic in the stock market. Once you ﬁndsomething that works, the tendency is to stick with it. For example,if you buy shares of an energy company and make a proﬁt, youmight believe that this sector is a ‘‘sure thing.’’ But if your timing ispoor, that does not necessarily apply. This is why most people suggest that you diversify your investment capital among several different stocks, sectors, and markets.These different markets may include non-stock areas like bondmutual funds, real estate, options and futures, or precious metals.You can also diversify by buying shares of equity mutual funds orexchange-traded funds (ETFs). Effective diversiﬁcation protectsyou from a broad overall loss due to a failure in a single companyor sector. Those whose investing horizon is limited tend to be closeminded to the concept of diversiﬁcation, so they are at greater risk.As long as investment capital remains in too few stocks or markets,the risk remains. The more capital focused in singular stocks orsectors, the greater the risk.
Mistake 4: Overlooking the Essential ResearchThere are actually four distinct schools of thought about stockmarket research. First, those who believe in fundamental analysisrely on the ﬁnancial reports issued by companies and their auditors
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or reports ﬁled with the Securities and Exchange Commission(SEC), which regulates publicly traded corporations. A fundamental investor reads the balance sheet and income statement as well asnarrative sections of reports and then develops a series of usefulratio tests to compare companies and to follow trends that appearwithin the company itself.The second school of thought is technical analysis, which focuses on price movement of a stock and chart patterns. Technicalanalysts believe that speciﬁc chart patterns and short-term trendsanticipate future price movement, and that the shape of the tradingrange itself (the distance between high and low prices over a periodof time) deﬁnes volatility (safety) and anticipates near-term pricemovement.The third is a combination, and this is the most sensible approach. By using aspects of both fundamental and technical analysis, information is gathered from different sources and based on adifferent series of assumptions, you make informed decisions.Fourth is the largest group of all, containing investors who buyand sell stock with no valid information whatsoever. They watchprice movement, go on investment chat lines and exchange information or simply read what others have written, and make decisionsimpulsively, often with very ﬂawed information. For example, in2007, a comment on a Yahoo! (YHOO) message board about oneof the national home builders predicted that the stock would plummet and the company would go broke, speciﬁcally because with increased foreclosures, the company had to compete for a limitedmarket. In other words, home buyers would choose foreclosedhomes rather than buying a new home from the builder. This isinsane. There are really only a small number of foreclosed properties at any given time, and the market for purchasing foreclosedhomes is vastly different from the market for newly constructedproperties. Even so, this is typical of the nonsense that can be foundon Internet message boards—illogical, emotional, and at times selfserving (for example, if someone buys stock and the price falls, theymay perform a pump and dump, going online and talking up thestock hoping others will buy shares, a practice that is illegal).The point about comparing schools of investigation is this: You
A Short History of the Stock Market
7
should plan to gain insight from whatever valuable source you canﬁnd, including both fundamental and technical analysis. But whenit comes to opinions of people you do not know, unsolicited advice,or rumor and gossip, you will do well to avoid making any decisionsbased on those sources. They are the most common and the leastreliable.
Mistake 5: Buying and Selling at the Wrong TimeThe most famous maxim about investing is ‘‘Buy low and sellhigh.’’ As trite as this might sound, it is important to rememberbecause many people do exactly the opposite. It is useful to realizehow most people view what goes on in short-term price trends.They assume, quite often, that whatever has happened most recentlyis going to continue happening in the future. Of course, this is illogical, but the market is ruled by two primary emotions: greed andfear. In fact, you will be wise to replace ‘‘Buy low and sell high’’ witha different maxim: ‘‘Bulls and bears can both make money, but themarket is ruled by pigs and chickens.’’On the greed side, as prices rise it is easy to believe that thetrend will keep going in the same direction. Anyone owning stockholds onto it expecting further price growth and, in fact, they refuseto sell and miss out on more proﬁt. So the prudent idea of takingproﬁts—even when the value has doubled—is more often ignoredthan followed. An investor who does not already own stock will respond to price run-ups by buying shares, hoping to get in on thebonanza. This works sometimes, but it is also interesting to observethat buying activity in a stock is often at its greatest at the momentthat prices peak and a downtrend begins.On the fear side, as prices fall it is just as easy to believe that thewhole market is going to crash. In this mode, investors are likely tosell when prices fall, hoping to avoid further declines. That is prudent in some cases, but most of the time a steep decline actually isan opportunity to buy shares at a cheap price. When fear dominatesan investor’s mind, it is impossible to think clearly.When greed and fear dominate, people tend to buy high and selllow—the exact opposite of what they should be doing. For the astute, calm investor who is able to step back from these common
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emotional gut reactions, recognizing the timing opportunities ofprice run-up and steep decline are great opportunities in themarket.
Mistake 6: Assuming the Entry Price Is theStarting PointThis mistake is worth keeping in mind, because it is so common.Stock prices are constantly rising and falling as buyers and sellersvie for control and exchange the momentum with one another.Prices rise and investors sell to take proﬁts, which weakens demandand drives prices down; then investors buy at a bargain price, increasing demand and forcing prices up. There are dozens of possible inﬂuences on stock prices, and they are continually moving backand forth in response.The common assumption among investors is to treat their purchase price per share as a starting point, when in fact it is simplythe latest entry in the price continuum. For example, someone buysstock at $50 per share and immediately their assumption is that thestock is going to move upward. When it moves down instead or,more typically, ﬂoats up and down to prices on both sides of $50per share, the investor is disappointed. The stock was supposed torise, not fall or ﬂoat.This brings up an important concept: In the stock market, timing counts. Short- and long-term price momentum deﬁne how andwhy price trends come and go as they do. So if you happen to buyshares at the top of a price momentum swing, you are probablygoing to pay too much; and if you happen to buy at the bottom of amomentum swing, you will time your purchase well, at least untilthe momentum swings back in the other direction.
Mistake 7: Believing Higher-Priced Stocks AreAlways ExpensiveThe math of the stock market is often confusing and easy tomisread. A popular belief is that a $25 stock is worth half as muchas a $50 stock. This is a misleading assumption. The price per share
A Short History of the Stock Market
9
is not the deﬁnitive valuation point. For example, a company with20 million shares at $25 per share is worth exactly the same as onewith 10 million shares at $50 per share. In order to determine acompany’s ‘‘value’’ or whether its stock is a bargain, you need tolook at other criteria, such as the price-to-earnings ratio (P/Eratio), which is also called the multiple. The price of a share of stockis divided by earnings per share, and the answer tells you how manytimes earnings the stock is trading. A low P/E implies the stockis cheap, and as the P/E gets quite high, it becomes a higher-riskinvestment. A stock trading between a P/E of 8 and 20 is reasonablypriced, for example, compared to a stock with a P/E of 65.The math problems of the market are not limited to misperceptions about the meaning of the price per share. The way that dailychanges are reported can be misleading as well. For example, theﬁnancial news programs like to report the daily price change in thenumber of points. So two stocks, each rising by four points, havehad a very good day. But they are not necessarily the same. Forexample, a stock selling at $20 per share rising four points hasgrown by 20 percent, which is very impressive. But another stock,selling at $200 per share, has only risen 2 percent on the same day.Although the reporting might be the same—both stocks rose fourpoints—the $20 stock had 10 times more movement in value because its share price is lower.
Mistake 8: Worrying Too Much and Being ImpatientAn old saying tells us that ‘‘the market climbs a wall of worry.’’This refers to investor attitudes about all markets, including thosewhose prices are rising. Yes, they are rising today, but what abouttomorrow? Experienced investors understand that when you get sooverconﬁdent that you stop worrying, you have set yourself up fora fall. Smart investors worry continually. As markets move down,they worry about more downward movement. As markets move up,they worry about a reversal.The solution is patience. Inexperienced investors can easily gethooked on the action of the market, wanting to make a decisionevery day, take proﬁts, and expose themselves to ever greater oppor-
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tunities. But in the market, change does not always occur every dayfor every stock. An experienced investor knows that, as yet anotherold saying goes, ‘‘the market rewards patience.’’ This is practiced inmany forms, including waiting out short-term price movement (aspeculative point of view) to holding stock over many years (a moreconservative ‘‘value investing’’ point of view agreeing with peoplelike Warren Buffett).Your individual history as an investor is going to depend on howwell you observe these common mistakes and avoid repeating them.But in addition to every person’s individual history, the overall market is an interesting, colorful, and varied place where commerce hastaken place for hundreds of years. Every investor will appreciate abrief overview of the stock market’s history to demonstrate how ithas arrived where it is today. However, in addition to watching outfor the common mistakes other investors have made, it is equallyimportant to ask the right questions before proceeding with any investment plan.
Your Most Important QuestionsIf people are doomed to repeat the past, then there is no point intrying to anticipate the future. A less cynical point of view is that byunderstanding the mistakes of the past, you are likely to know whatto avoid. By taking that idea to the next level, if you understandwhat questions you should be asking yourself, you will probably bebetter equipped to create, manage, and later modify your portfolioto reduce losses and improve the chances for proﬁt in any marketcondition.The ﬁve most important questions every investor should ask include the following, which are also summarized in Table 1-2.
Question 1: How Much Risk, and What Kind, IsAppropriate for Me?Risk comes in several forms, and in the stock market awarenessof risk is essential. You cannot simply buy shares of stock because
A Short History of the Stock Market
11
TABLE 1-2. FIVE QUESTIONS EVERY INVESTOR SHOULD ASK
Question 1: How much risk, and what kind, is appropriate for me?Question 2: How much do I need to invest today to reach my future goals?Question 3: What affect will inﬂation and taxes have on my proﬁts?Question 4: What strategies are available and which should I use?Question 5: Should I hire a ﬁnancial planner or make my own decisions?
someone else does or because you hear a rumor; you need to evaluate market and liquidity risk as well.Market risk refers to price volatility. The risk that a stock’s pricewill remain ﬂat for a long period of time or worse, decline, is themost obvious and best-known risk for stockholders. It is overcomethrough diversiﬁcation and the selection of conservative stocks andby avoiding high-P/E stocks, those higher-risk and more volatilesectors, and unknown, new companies.Liquidity risk means cash will not be available when you need itor, as an alternative deﬁnition, there is no buyer available when youwant to sell. In the exchange market, you can always ﬁnd a buyerfor shares, but the price might not be what you want or expect. Insome other markets, such as real estate limited partnerships, you donot enjoy a public exchange arena for units you buy, so the only wayto sell shares is with a deep discount.
Question 2: How Much Do I Need to Invest Today toReach My Future Goals?If you listen to ﬁnancial advisers, you will hear that you needmuch more money to retire than you thought, or for college education, paying off your home, or any other future goal. But the estimated future needs analysis often assumes a low return oninvestments and unrealistically high inﬂation. Your investment portfolio will not experience the full inﬂationary rate as long as you don’thave to buy a new home and new car every year; a greater inﬂationary risk is found in the declining value of the dollar, and that iswhere you need to build your portfolio defensively. But when you
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consider the dollar amount needed, remember a few points thatmost ﬁnancial planners forget to mention: First, you should structure your mortgage so that you own your home free and clear byretirement. This requires careful preplanning and acceleration ofpayments, as well as the discipline to allow equity to grow and tonot reﬁnance.Second, when you retire you have to consider other sources ofincome including IRA, company-paid retirement, and social security. In addition, many people retire and reduce their income butcontinue to work, so don’t assume that your income stream willmove to zero just because you decide to retire.And third, any advice you receive from a ﬁnancial expert has tobe taken with one point in mind: The more you invest, the morecommission the ﬁnancial planner receives. (This assumes you workwith a commission-based planner, as opposed to one who works fora consulting fee.)
Question 3: What Affect Will Inflation and TaxesHave On My Profits?One invisible factor—overlooked by almost everyone—is thedouble effect of inﬂation and taxes. Even though the rate of inﬂationmay be small, the combined impact of these factors is signiﬁcant onyour actual investment return. In other words, it is not enough tobreak even and it is inadequate to settle for a conservative, safe,but very low return—especially if the after-inﬂation and after-taxoutcome is negative.To calculate the effect of inﬂation and taxes, ﬁrst ﬁnd the current rate of inﬂation. You may use the published Consumer PriceIndex (CPI) reported by the Bureau of Labor Statistics (www.bls.gov/cpi, or develop your own personal inﬂation assumption basedon what you believe inﬂation is going to be for the coming year. Therate you use, expressed as a percentage, is divided by your estimatedrate of after-tax income. To ﬁnd this subtract your effective tax ratefrom 100 percent. This effective rate is the actual percentage youpay in taxes, or your total tax liability divided by your taxable income. Be sure to include both federal and state tax liabilities. Theformula:
A Short History of the Stock Market
13
IB100Rwhere I  rate of inﬂationR  effective tax rate (federal and state)B  break-even return
For example, if the current rate of inﬂation is 3 percent per year andyour effective tax rate (federal and state combined) is 34 percent,your break-even return is:3 4.5%10034
This reveals that you need to earn 4.5 percent on your investmentsjust to break even and maintain your purchasing power. If you earnless than 4.5 percent, you are losing money on an after-tax basis.(This calculation is distorted somewhat by tax-free investment income such as qualiﬁed dividends and by lower tax rates on capitalgains. But the exercise does illustrate the point that a simple rate ofreturn is not always beneﬁcial when taxes and inﬂation are calculated.) Break-even returns are shown in Table 1-3.
Question 4: What Strategies Are Available and WhichShould I Use?If anything, the modern-day access via the Internet to free advice, strategies, and ideas is an embarrassment of riches.1 There isso much out there that it is quite difﬁcult to distinguish between thegood and the bad. So although there is a lot of free informationavailable today compared to even one decade earlier,