Retirement Ready Income Programs

Glossary of Brainwashing Concepts and Terms:

The purpose of the definitions, explanations, and descriptions provided below is to facilitate your use of The Working Capital Model Trading Strategy, and Investment Management Methodology as it is presented in this book. You will find that they are most often not in total agreement with the definitions and explanations you would obtain either from financial professionals or within Search Engine findings. many are totally different.

Many of the terms and comments discussed here are not dealt with in depth (or at all) in the text. and the version in the book is better.

ADR: Acronym for American Depositary Receipt.

ADV II: When dealing with a Registered Investment Advisor, always ask to see the ADV II and the Schedule F that goes with it.This is the primary Disclosure Document that the SEC requires to be delivered to all of a RIA's clients. If the person has no ADV II or Schedule F, he or she is not a RIA.

Aging: The process of monitoring how long equity positions have been held in a portfolio. Since the objective is to trade quickly, stocks held more than a year should be looked at for sale at any profit, particlarly when buying oppertunities are plentiful.

American Depositary Receipts: American Depositary Receipts represent ownership in the shares of a foreign company trading on US financial markets. Although ADRs are generally unrated by S & P, those that represent well known, profitable, dividend paying companies are welcome in the selection universe.

Analysis Paralysis This is a portfolio threatening ailment developed by investors who tend to over-analyze things, impairing their ability to make timely decisions.

Annuity: An annuity is a regular recurring series of payments, typically guaranteed by some form of benefactor.

Annuity Contract: This is a contract where an insurance or annuity company guarantees a fixed and regular recurring series of payments for the lifetime of the annuitant. It may have many actuarially sound variations, but stock market investments and variable benefits are not involved in any of them.

Asked Price: One of the three prices your broker should give you when you ask for a security price quotation. The Asked Price is the lowest price sellers are willing to accept for their positions. This is the price we will sell at, so long as it is at or above our planned selling price.

Asset Allocation: The planning process that determines the division of Investment Portfolio assets between Equity and Income Securities, based on the personal financial situation, goals, and objectives of one individual or family. The cost basis of the securities held in the portfolio is used in all calculations. Asset allocation cannot be done properly with products.

ATH: Acronym for All Time High.

ATH Decision: When a portfolio is at an ATH Profit Level, an examination of all positions should be made to identify the weakest issues-–starting with S & P downgraded equities—and to consider them for loss taking. Downgraded issues must be sold eventually, but doing so all at once is unnecessary. Income securities with lower than normal payouts qualify for ATH loss taking. Fundamentally strong companies may be given years to produce a profit.

Averaging Down: This is the act of buying more of a security that has fallen in price since the original purchase. It facilitates profit taking at a lower level. Not to be confused with dollar cost averaging, which just buys more shares on a regular basis without regard to price.

Average Pricing: The buying strategy used within the Working Capital model results in multiple purchase lots at different prices. Sell decisions are based on the average price of the position, so avoid any accountant advice with regard to loss taking on portions of such positions, or at all, for that matter.

Base Income: This refers to the income derived from Dividends and Interest only, without including that received from Capital gains. One of the key working capital model portfolio management objectives is to produce annual increases in base income--- and at a rate that beats inflation.

Benchmark: This is an Average, Index of other number that Wall Street firms want you to select so that the rate of change in your portfolio Market Value can be compared with something. Relevance to your portfolio Asset Allocation, goals, or objectives are not a factor. The use of such a benchmark assures that you will be unhappy most of the time, and this is precisely what they are after.

Best Execution: Best execution is best achieved with day-limit orders, assuring the best price for the security at the time the order is placed. But, price is only one factor in this vaguely defined concept. Advisors must consider the full range and quality of a broker's services, including research provided, execution capabilities, commission rates, financial responsibility, and responsiveness. To provide best execution, a professional must know what you are trying to accomplish and be supportive of the methodology you choose to use.

Bid Price: This is the low end of a security price quotation. The Bid Price is the price buyers are willing to pay for the security. This is the price we will normally buy at, so long as it is at or below our planned buying price.

Borrowing Power: The standard Wall Street euphemism for the amount of additional margin debt available to you, based on the market value of the securities in your portfolio. What happens when securities' prices fall? See margin Call.

Breadth Statistics: See Issue Breadth.

Bull Pen: A mental folder where we place the names of our favorite trading stocks of the past, when we notice that their prices are approaching buying range. In deep dark corrections, I often leave space in the initial buy list, just in case.

Buy and Hold: An early 20th Century Investment Strategy Dinosaur, which held that, left alone, a diversified portfolio of high quality companies would grow in value at a rate that would exceed the rate of inflation. All income would be reinvested in the same companies. It died many years ago, but Wall Street has created the Core Portfolio strategy, which is much easier to manipulate.

Buy More Target: This price is typically at least 25% or fourteen dollars, if less than 25%, below the cost basis of an individual equity security now in the portfolio. There are several rules, but the most important is not to allow the new purchase to bring the total investment (cost basis) above 5% of the portfolio working capital.

Buy List: The two or three equity securities you will attempt to purchase today, but only if their prices fall to, or below, the pre-determined price. The more portfolios you are managing, the more stocks you will need to include in the daily buy list. but never more than 20, once your portfolio exceeds, say, $100 million.

Buy Target: This is the price that we are willing to pay for a security that makes it to our daily buy list. The calculation varies, but we never place an order at a price above this number. This price needs to be recalculated daily.

Buzzword: Buzzwords are typically intended to impress one's audience with the pretense of knowledge. They typically make statements difficult to dispute because of their cloudy meaning. Wall Street loves them! See Coverage, Leverage, Pro-Active.

Calendar Year: The length of time for the Earth to orbit the Sun. Interest and dividend rates are expressed as yields per year; working capital growth can be expressed as an annual rate; realized income and return on invested capital also lend themselves well to calendar year analysis. The investment gods wanted you to you use Peak-to-Peak analysis for market value performance comparisons, but the wizards broke the DJIA.

Call Center: This is where the arrogant big brokerage firms send their small customers. They want the big relationships, and don't allow their retail brokers to waste their time with small portfolios.

Callable Securities: Many Bond and Preferred Stock Issues have Call Dates when the issuer can redeem the securities. Most are redeemed at face value, but some may involve a premium.Your best income producers will always be called first when interest rates fall.

Capital Gain Transaction: A Capital Gain occurs when a security, or other asset, is sold for a profit. The IRC inappropriately distinguishes between short-and long-term gains and taxes them differently. You should do all that you can to change this discriminatory confiscation of your assets.

Capital Loss Transaction: The IRC treats long-and short-term capital losses differently also, causing billions of wasted dollars annually as it encourages loss taking on perfectly good securities.

Capitalization: Corporations obtain Investment Capital by selling ownership shares (Common Stock) to the public and by borrowing money through the use of Bonds and Preferred Stock. The value of stocks and bonds (theoretically) is a function of: 1) fundamental business and economic numbers and 2) the resultant credit rating of the company. Market Capitalization is a whole 'nuther animal, used by Wall Street to create new classes of securities.

CEF: An acronym for Closed End Fund.

Certainty: This is something that really doesn't exist with regard to buy-sell-hold decision-making in the securities markets--a financial fairy-tale.

Chronic Commission Fixation Syndrome: A very real investor ailment that will always include an aversion to paying exit fees. Sufferers would rather continue to lose money or actually prefer not to take profits than to pay commissions. These misguided souls are slowly growing tails, and using them to assure that their portfolios fail.

Churning: This is clearly one of the most well misunderstood terms in the investment world. Trading could fit most definitions, particularly if it is successful! An arbitrary number of trades, or the total commissions compared with the size of the account is just inappropriate, hindsightful, and typical of a lawsuit mentality. In Discretionary Accounts only, churning is simply excessive commission generating trading that is not in line with the strategy or objectives agreed upon between client and broker.

Closed End Fund: A managed Mutual Fund whose limited number of shares represent ownership in the investment company that owns and manages the fund. The shares trade on the stock exchanges like other equities do, but the manager of the fund is insulated from the investment decisions and emotions of the shareholders. I use the term CEF in an effort to distinguish these working-capital-model friendly, managed funds, from ETFs, which are generally unmanaged index funds.

Confirmation Notice: Brokerage firms are required to provide customers with written confirmation of all trades that take place in their accounts. Investors may check the accuracy of their brokerage account statements using the confirmations. All interested parties receive duplicates of confirmations and most save them for years, even though they duplicate information on the statements—which also have to be saved for many years by brokers and financial advisors.

Conventional Wisdom: The mythology of Wall Street, including: The sanctity of the DJIA, the safety of Mutual Funds, the buy and hold strategy, quarterly performance analysis, and nearly everything else that savvy investors think they know about the markets.

Core Portfolio: Stocks that you simply must own because they are best, or most popular, companies and should be held indefinitely as your core portfolio. They will always perform well and keep your portfolio Market Value rising. until they don't. This is total nonsense, but it sure sounds sexier than buy 'n hold.

Correction: A period of generally falling prices in a market (stock, bond, real estate, etc.) identified by more securities moving lower in price than are moving higher, and by more securities striking new 52-week lows than 52-week highs. Wall Street doesn't care about such things.

Cost Basis: The total amount invested in a security, normally the purchase price plus commissions and fees, and the number used in determining the Working Capital Model 10% sell target. Where a flat trading fee in lieu of commissions is paid, the cost basis is always slightly understated, and the 10% target is slightly overstated because the exact cost per trade is unknown.

Coverage: A Buzzword used by Institutional cold callers who are trying to sell something to Investment Management professionals.

CPI: Acronym for Consumer Price Index

Cycles: See Market and Interest Rate Cycles.

Day-Limit Order: The day-limit is the only method of submitting buy and sell orders to brokers using the Working Capital model trading strategy. It specifically limits the duration the order is valid and the price at which the trade may be executed. Better prices are acceptable but worse prices are not, and must be busted at your broker's expense. Strange, if a broker makes an error that costs the firm money, it comes out of his pocket. If the firm makes a profit, the firm keeps the money.

Day Trading: Day trading refers to the practice of buying and selling financial instruments within the same trading day. All positions are usually closed before the market is. This is a highly speculative endeavor that should be avoided by working capital model users. A trade that is accomplished within one trading day using this methodolgy is rare but entirely possible, but more a function of luck than anything else.

Debt Securities: These are negotiable securities, issued by Municipalities, Corporations, Government Bodies, and other entities which represent contractual obligations (of varying durations) to pay periodic interest at a specific rate and to repay principal at the end of a specific, but varing, period of time. Wall Street loves to package these securities into various types of financial products.

Deli: New Jerseyese for Convenience Store.

Discount: Debt securities, all of them, will trade at a discount to par value when prevailing IRE are above par value, and at a Premium when prevailing IRE are below par. A bond selling below $1,000 per bond or a preferred stock selling (most often) below $25 per share is selling at a discount. You will make a profit if you hold to maturity.

Diversification: One of The Big Three principles of investing, diversification is a investment management technique that controls the amount invested in any one security at a level below 5% of the total portfolio. It is not a Market Value performance smoothing technique. It is a risk minimization effort that will fail if not coupled with a seriously monitored commitment to high quality levels in all securities selected. It cannot be accomplished properly with products for a myriad of reasons. The 5% rule is not the only type of diversification you need to consider.

DJIA: Acronym for the Dow Jones Industrial Average.

Dollar Cost Averaging: A robotic exercise designed to create poor diversification while it generates a constant flow of commissions. Don't do it. What dangerous emotion does it foster?

Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average was originally designed to be an indicator of the direction of the overall economy, but past more than future. When people refer to the performance of The Market, most mean the DJIA, which is made up of just 30 Companies. Until recently, only NYSE companies were considered for inclusion in this elite Economic Indicator. Since there are only 30 stocks in the average, it is very susceptible to the artificial demand created by Index Funds, as are the other popular averages.

DRIPs: A form of Dollar Cost Averaging that has the added downside of impossible record keeping, and purchases made under conditions of artificial demand. Don't do this either.

Enhanced Index Funds: Unmanaged index funds that are enhanced with management, hedging strategies and higher internal fees. Hedging strategies of many varieties used to be reserved to Hedge Funds. how things do change.

Equity Securities: Equity securities, generally Common and Preferred Corporate Stock, represent ownership in the issuing company. Many executive suite occupants lose site of the fact that their obscene salaries and perks come directly out of their shareholders' wallets.

Equity Bucket: See Securities buckets.

Equities: See Equity Securities

ETF: An acronym for Exchange Traded Fund.

Exchange Traded Fund: Both unmanaged Index Funds and managed Closed End Funds are Exchange Traded Mutual Funds. I use ETF to describe the unmanaged and totally speculative Index variety. What Wall Street knows, and what regulatory agencies ignore for some reason, is that these funds have a demand-pull impact on securities prices and the popular market averages. This adds additional risk and speculation to the investment environment.

Face Amount: The amount that is paid to the bond or preferred stock holder when the security either matures or is redeemed by the issuer. The call or redemption price of a preferred stock is usually the same as the issue price.

Fills: When large numbers of shares are traded, they may be filled in many different transactions and at many different prices, all at-or-below our limit on buys and at-or-above our limit on sells. Each is a partial fill until the final transaction, which "fills" the order. The fact that multiple fills are needed is evidence of the best execution efforts of your brokerage firm.

Financial Institutions: A catchall term that refers to all Brokerage Firms, Banks, Insurance Companies, etc. who market Securities and Investment Products and provide Investment Advice through various mediums.

Financial Risk: The risk of loss of the principal or capital that has been invested in some form of Real Property, such as securities and real estate, that is purchased with the primary objective of realizing a financial gain, or reward. The form of the gain is most often a combination of regular income and/or realized capital gains. In general, higher risk is associated with the prospect of higher reward, but the higher the risk, the less likely that any reward at all will be obtained.

Fixed Income Securities: These are securities that pay a regular recurring, specific amount of income in the form of interest or dividends. Most bonds and preferred stocks are included in this sub-classification of income securities. See Variable income securities.

Float: See liquidity.

Fools: Wall Street term meaning clients or customers.

Fundamental Analysis: This method of assessing the quality of a company and its securities uses revenues, earnings, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. It focuses on the content of corporate financial statements. Two successful users of fundamental analysis are Warren Buffett and yours truly. One of us is a billionaire.

Futures: An extremely complicated, time sensitive business that should be left to seasoned professionals. I have never attempted any transactions in this area.

Gap Opening: A situation, usually the result of some form of corporate surprise, which causes a security to open well above or below the last trade of the prior session. Gaps may also occur during times of panic selling or buying in a security. You know what to do!

General Obligation Bonds: Bonds secured by the "full faith and credit" of the issuer, and generally considered to be the safest of all the debt of that issuer. GO's are generally less prone to default than are Revenue Bonds.

GOs: CommonWall Streetese for General Obligation Bonds.

Gold: A commodity that becomes particularly popular in stressful economic or political environments, and in times of war. The logic is vague at best and the utility of ownership is non-existent. Gold is best owned in the form of jewelry or collectible coinage. I do not include gold in my managed portfolios, but qualifying companies whose business involves this and other commodities are welcome in the Selection Universe.

Group Dynamics: See Sector Dynamics.

Hedge Funds: Studies show that very few hedge fund managers use any of the principles and practices discussed in this book. Interestingly, many ex-edge fund participants have probably read this book.

High Yield Anything: High Yield is a result of some form of higher risk, and is often used on The Street as a euphemism for junk bonds.

Hindsight: You must learn to ban hindsight from your investment efforts. Hindsight is evidenced by terms like: shoulda, woulda, and coulda, and are often used by accountants and salespeople who are trying to move you to the dark side.

Hydra: A mythical beast that could grow back two heads for every one a hero would chop off. Wall Street is no myth, and Joe DiMaggio has departed.

Income:One of The Big Three principles of investing; all securities owned by working capital model users must provide some form of income. With regard to equities, the ability to pay regular dividends, irrespective of size, is an indicator of fundamental strength.

Income Bucket: See Securities buckets.

Index Fund: A Mutual Fund comprised of the stocks in a particular Index, or more recently, a fund comprised of some of the stocks in an index, a Market Sector or Industry Group, or Grocery Store Pet Food Aisle. Index funds create artificial demand for the stocks or groups of stocks involved, and are potentially, even more dangerous than Variable Annuities.

Inflation: A measure of changing purchasing power, but rarely downward because, in strictly economic terms, prices are "sticky" downward. (You can look that one up yourself.) Market value growth does nothing to increase purchasing power. Only rising income can keep pace with rising inflation.

Invasion of Principal: This is not a Sci-Fi flick title. When you withdraw more from your investment portfolio than the realized income that it generates, you are withdrawing part of the principle. The portfolio market value is likely to fall over time, but there is no one-to-one relationship. The working capital will fall on a one-to-one basis, absolutely.

Inverted Yield Curve: Simply put, this is a situation where short-term interest rates exceed long-term rates. Something you really need not be too concerned about.

Investment Account: An investment account is usually housed at a brokerage firm that acts as a custodian for the individual's cash and securities. The firms will provide one of a variety of non-standardized account formats that list, categorize, and often ineffectually analyze the assets in the account. An investment portfolio may include several accounts, but it is easier to manage the smallest number possible. Having accounts at many different firms is diversification gone mad.

Investment gods: A figment of my imagination. they do not reside on Wall Street.

Investment Grade Equities: Equities that are rated B + or better by Standard & Poor's Corporation are considered to be investment grade, or less speculative than those of lower ratings. The working capital methodology expands the definition to include a history of profitability, regular dividend payments, and (preferably) listing on the NYSE.

Investment Management: The planning, organizing, controlling, and decision-making involved in implementing the Investment Plan.

Investment Opportunities: Investment opportunities areSecurities that meet our price, income, quality and diversification standards. No news, no we-thinks, no predictions.

Investment Portfolio: The total package of liquid assets, in the form of securities and cash, which we consider in our asset allocation formula and in our diversification decisions. Most non-security assets are illiquid.

Investment Products: Pre-packaged portfolios of various types of securities, commodities, derivatives, etc., managed or unmanaged by professionals, and designed to meet some specific or general consumer need in every possible area of Investment or Speculation. They include all Mutual funds, closed or open end. We do not use Open End mutual funds, annuities, and most other products in our portfolios.

Investment Strategy: An approach to portfolio design and management that is applied consistently over an extended period of time. To be effective, it must be flexible enough to service a vast array of individual goal and objective combinations, and time tested for effectiveness under varying conditions in both equity and income investment markets. The working capital model is a construct of strategies applicable to all phases of portfolio design and management. The author (me) developed the approach between 1970 and 1975.

IPO: An Initial Public Offering of either an Individual Security or a Mutual Fund of either variety. Incredibly few become Microsofts or Googles. way up there on the list of speculations to avoid. Unfortunately, IPOs come with intentionally incomprehensible prospectuses that could easily be written in English, but that would eliminate the public market and put the things back to the venture capitalists, where they belong.

IRC: An acronym for an Internal Revenue Code greatly in need of reform.

IRA: Acronym for Individual Retirement Account and Irish Republican Army. There are too many forms of IRAs. and armies.

IRE: An acronym for Interest Rate Expectations. You will learn that IREs are far more important than actual rate changes, especially with regard to the Income Securities in your portfolio. IREs are doubly sensitive to inflation expectations. Ironically, interest rates are a factor in calculating the rate of inflation and are raised in attempts to dampen it. Go figure.

Issue Breadth: One of the few statistics you really need to keep track of to get a feel for what has been going on in the Stock Market, particularly the NYSE. On a daily basis, track the number of stocks advancing vs. the number that are declining. Look at the names as well as the numbers to get a feel for the impact of IRE and other factors that affect market direction. Without this information, you won't know what to expect from the numbers on your monthly portfolio statements. The directional change in market value should never be a surprise.

K.I.S.S. Principle: Keep It Simple, Stupid. Don't make things more complicated than they need to be, particularly with respect to research, statistics considered, analysis intervals used, and theories included in your strategies and selection techniques.

Laddered Maturities: A technique used by professionals to create an income portfolio with regularly maturing securities. Investment products are available that do the same thing. This is fine where disbursements are being funded at the same intervals as the maturities, and where an upward interest rate environment is expected to last for an extended period of time. It is ridiculous as a strategic effort to flatten the market value pain occasioned by rising interest rates, which are actually better for investors than lower rates.

Last Trade: One of the three prices your broker should give you when you ask for a security price quotation. The Last Trade price is normally between the Bid and Asked, but it doesn't have to be. This price should help you decide exactly what price to use for your day-limit order.

Leavenworth: A Federal Penitentiary where too few Wall Street Con Creators wind up.

Leverage: Simply, leveraging isa strategy that involves borrowing money at X percent and investing it at X + percent. This strategy is used regularly by CEF managers, and by most business entities. Financial institutions will use it with both sides of the operational mouth: either 1) euphemistically to refer to the excessive borrowing of companies whose securities they are marketing, or 2) as a four-letter-word when describing the drawbacks of investment products that are far better than the ones they prefer to sell.

Liquid Assets: Liquid assets include cash and securities that can be converted to cash almost immediately, without any penalty other than the possibility of capital loss on the sale. Real estate, many open end mutual Funds, Annuities, etc., are not liquid assets.

Liquidity: This is a measure of the ability to buy or sell positions in a security without impacting the price. It is also called float, and good liquidity is evidenced by high daily trading volume. Preferred stocks, and CEFs are likely to be less liquid than most investment grade equities, and individual bonds are very illiquid. Larger positions of CEFs may have to be purchased or sold in multiple trades to attain the best prices. High liquidity is a positive factor in determining a security's quality.

Managed by the Mob: Open End Mutual Fund managers, since the development of self directed retirement plans, have been forced to make investment decisions merely to implement the wishes of unit holding non-professionals. Thus, when panic strikes in either direction, managers cannot initiate any actions or decisions of their own. When the going gets tough, the manager gets fired. CEFs are not affected by shareholder emotions.

Margin Call: This is something you never want to experience. If the market value of your securities falls below a certain level you must: 1) sell securities to generate enough cash to satisfy the amount of the call, or 2) deposit additional cash or marginable securities. If you don't respond personally with instructions, the custodian is required to sell something to satisfy the call. (See borrowing power.)

Market and Interest Rate Cycles: Cycles are a fact of life in both markets, and are measured in terms of the time from one significant peak to the next, but with at least a year in between. Wall Street has brainwashed nearly everyone to think in terms of calendar quarters and years instead, which is really preposterous. Interest rate cycles are normally longer and flatter than stock market cycles. The stock market cycle is difficult to measure using any of the averages or indices that exist today because of the influence of index funds. Breadth and New 52 week high/low numbers are better, but there is no such thing as a pure stock market average or index.

Market Capitalization: Market capitalization is a mathematical concept that ignores the fundamentals of a company and focuses only on the value of its outstanding common stock. Many large-cap companies of the late nineties were small-cap just a few years earlier and cap-less just a few years later.

Market Order: A purchase or sell order that could not exist in any economic venue other than Wall Street. It is the act of buying or selling something at whatever price the next buyer is willing to pay or the next seller is willing to accept. If it's me, you'll pay more or get less than you deserve.

Market Statistics: Daily lists, available for all the major stock exchanges, which show the most active securities by share volume, those advancing by the most dollars and percentage points, and those declining by the same numbers. These are great tools to use to see what's going on daily and to spot both buying and selling opportunities. Years ago, they were broadcasted regularly in the media. Hmmm.

Market Timing: Technical analysis gone mad.

Market Value: .The amount that buyers would be willing to pay for the securities in your portfolio at any point in time if you were to choose to sell them. The transaction costs involved are not included. Non-security assets such as cars, boats, houses, non-public businesses, loans to relatives, etc., also have market values. Funny how differently people react to changes in the two types.

Masters of the Universe: The Financial Institutions of Wall Street.

Model Record Keeping: Performance statistics based on a hypothetical or model portfolio that does not change throughout the reporting period. Genuinely useless, and precisely what is done with the market averages and indices.

Money Streams: If you couldcolor code strings of transactions, a money stream could be identified and analyzed. I've used this approach to describe the power of a series of trades with an average profit per trade of about 10%. It's certainly not something you should worry about while managing a portfolio. You'll know how you're doing.

Mutual Fund: The safe way to invest - you know better, right?

NYSE Highs and Lows: In combination with Issue Breadth, the two most useful numbers for determining what is happening in the market now, and what has happened in the past.

Net/Net: Usually used to describe the terms of a lease or the results of a securities transaction. In a lease, it means that the tenant is responsible for all expenses except structural repairs. In a completed securities trade, it means that the reported gain is net, after all expenses and fees.

New 52-Week Highs and Lows: See NYSE Highs and Lows.

New York Stock Exchange: Nicknamed "The Big Board", and based in New York City, the NYSE is the largest stock exchange in the world by dollar volume. It is where investors hang out.

NASDAQ Market: Although there are certainly some notable exceptions, the NASDAQ Market is the refuge of most unrated and less profitable companies. This is the home turf of many more speculators than investors.

NYSE: Acronym for New York Stock Exchange.

NYSE Index: A generally ignored Market Index, which is best positioned for use as a benchmark for portfolios designed and managed using the Working Capital Model. But no index deals only with Investment Grade Securities. The NYSE includes most of the CEFs used in our model, but it also has Index funds and preferred stocks in its numbers.

Odd Lot: Less than the normal trading amount of a stock or bond. Either $50,000 or $100,000 is considered a round lot for an individual bond compared with 100 shares of a common or preferred stock, or a CEF. I strongly recommend trading only in round lots.

Open End Mutual Fund: A Mutual Fund whose unlimited number of shares represent ownership of an undeterminable fraction of the actual shares of stock held within the fund. The ownership shares do not trade on the stock exchanges like other equities do, and the fund manager's decision-making is totally influenced by the investment decisions of the shareholders. There is no place for Open-end funds in the working capital model.

Open Order: An order that makes its home on the brokerage firm's computer until the price indicated on the order is reached, at which time it is filled at the indicated price, or better.

Options: An extremely complicated, time sensitive business that should be left to seasoned professionals. I have never attempted any transactions in this area, and I suggest that you don't either. Many of my clients have described their negative experiences to me.

Order Log: A worksheet, completed in pencil, and used to control the orders you plan to place each trading day if market prices cooperate. Buy order prices must never be moved up inter-day, and only bull pen items can be ordered instead of (or in addition to) the planned purchases. Sell orders are entered as soon as the noted price is achieved.

P/E Ratio: The Price to Earnings Ratio describes the relationship between a company's earnings-per-common-share and its market price. The majority of stocks that users of The Working Capital Model would own are Lower P/E stocks. Index Finds are forcing all P/Es higher because.

Par Value: The face amount of a bond or preferred stock, representing the amount that will be received by the holder at call or redemption. Some common stocks have par values, but little use is made of them in modern times.

Peak-to-Peak Analysis: A much more meaningful way of comparing your portfolios Market Value performance with that of a stock market average or index over a relevant time period that normally exceeds 12 months. If from one Peak to the next, your portfolio rises in value more than the index, you should know why. If not, there should be a clear explanation. The key issue is the understanding of the reasons for the differences. Working Capital model portfolios differ in many ways from all Market averages and indices.

Penny Stocks: You get what you pay for.

Personal Wealth Executive: One of the many creative and impressive euphemisms for Stock Broker or Financial Planner/Advisor.

Portfolio Profit or Loss Level: This figure is simply the difference between the net/net total of cash and securities deposited by the investor and the Market Value of the portfolio. An ATH Profit Level should cause a review of the portfolio for elimination of weak or non-productive holdings.

Preferred Stocks:

Premium: Debt securities, all of them, will trade at a premium to par value when prevailing IRE are below par value, and at a discount when prevailing IRE are above par. A bond selling above $1,000 per bond or a preferred stock selling (most often) above $25 per share is selling at a premium. You will take a loss if you hold to maturity.

Principal: The amount invested in a security or securities. Also the amount of the remaining debt owed to someone. It has nothing to do with market value, although investors often fail to make this distinction. See Invasion of Principal.

Pro-Active: An example of a Buzzword.

Product: See Financial Product

QDI: An acronym for: quality, diversification, and income.

Quality: Absolutely the single most important selection criteria of the big three. If you never violate the code of quality, you will rarely.

Quality and/or Value Stock: Stocks of historically profitable companies that are rated B+ or better by Standard & Poor's Corporation, Dividend Paying, and Traded on the NYSE. Wall Street's definition is not nearly as conservative, and is purely subjective and frequently based on guesswork about future market performance.

Rally: A period of generally rising prices in a market (stock, bond, real estate, etc.) identified by more securities moving higher in price than are moving lower.

Reasonable Expectations: Investment portfolios don't exist in a vacuum. But if you track Issue Breadth, new high and new low statistics, you will learn how to develop reasonable expectations about the direction of your equity bucket market value. The income bucket market value is easy; it will move in the opposite direction of IRE.

Redemptions: Normally, IncomeSecurities are redeemed on the stated security maturity date. Once the redemption is announced, you can expect the face value of the security to hit your account in a reasonable period of time.

REIT: A Real Estate Investment Trust, that is generally available in the form of a Closed End Fund and purchased primarily as an Income Security. REITs that specialize in trading real estate could be looked at as equities if they meet all of the standard quality requirements. Private real estate investment trusts and REITs are fairly common, but also quite illiquid. Be very careful if you must, but I'd stay clear of these.

Research Material: This information is simply sales promotional propaganda prepared by Wall Street firms to rationalize speculative investment behavior.

Revenue Bonds: Revenue bonds are secured by the revenue received from a particular project or system of a municipality, such as a bridge and tunnel authority, turnpike tolls, and hydroelectric plants. They are considered slightly more risky than GOs.

RIA: Acronym for Registered Investment Advisor

Risk: (See Financial Risk.)

S & P: Abbreviation for Standard & Poor's Corporation.

S & P 500: One of the popular Market Averages, broader and more accurate now than the DJIA, but with no content similarity to a Working Capital Model influenced portfolio.

S & P Guide: A monthly publication used to: select potential investment opportunities, keep up to date on rating changes, and to study company fundamentals. The guide also has listings of CEFs and Preferred Stocks.

Savvy Investor: What Wall Street wants you to think you are. A knowledgeable investor knows what he cannot know. A savvy investor is a speculator who thinks that he knows a lot about investing. There is no "know" in investing.

Schedule F: See ADV II

SEC: An acronym for The United States Securities and Exchange Commission, watchdog of the Securities Industry.

Sector Dynamics: See Group Dynamics.

Securities Buckets: The Asset allocation formula that we use with the working capital model has just two Securities Buckets: Equity and Income. Uninvested cash is destined for one or the other as soon as acceptable investment opportunities can be found.

Selection Universe: The hundreds of stocks that meet all of the working capital model equity selection criteria: (1) rated B+ or better by S & P, (2) dividend paying, (3) profitable, and (4) traded on the NYSE.

Sell Target: A price that would produce a net/net profit of 10%. This is a target, not a set-in-concrete rule, and a smaller profit is always acceptable. Holding out for a larger profit is unacceptable, ever. Less is better than none at all because there's no such thing as - --- ------.

Smart Cash: Cash accumulated in an Investment Portfolio from dividends, interest, and profit taking activities. It is held awaiting the identification of new opportunities for investment based on Asset Allocation considerations only. It is absolutely not an attempt at market timing.

Social Conscious Investing: Don't play politics with your investment dollars. Corporations are generally much better citizens than the media allows us to believe. probably the biggest philanthropists on the planet. Similarly most corporations insist that executives, even at lower levels in the organization, participate in their communities. You'll make more money if you invest normally, and vote for the right politicians, if there is such a thing.

Spin Off: When a company spins-off a subsidiary or unit of its organization, shares of stock in the new entity are given to existing shareholders to evidence their interest in the new company. It is not uncommon for: 1) the new company to offer to buy up the odd lot holdings of its shareholders, or 2) for the spun-off entity to be all or a portion of an earlier acquisition by the larger company. The value of the spun off stock becomes its cost basis, and the same amount is deducted from the cost basis of the original shares. Spin off price adjustments are sometimes not immediately reflected in market quotation systems.

Spread: Many factors of supply and demand are involved in determining the spread between the Bid and the Asked price of a security. Less liquid securities generally have bigger spreads than the most widely held issues. The tighter the spread, the more likely it is that an order placed outside the limits will be executed.

Squeezes: Wall Street term meaning clients or customers.

Standard & Poor's Corporation: See S & P.

Stock Dividend: See stock Split.

Stock of the Week: Salespersons of Brokerage Firms, particularly new recruits, are given new issue securities or products to sell to their few existing clients and to people they cold call. Every week or so, they will be instructed to push a new name.

Stock Quotation: A complete equity quotation will include: the bid price, asked price, last trade and an indication of the difference between the last trade and the prior day's closing price. You should know that you need all of this information. Most brokers will ask if you are buying or selling before they provide a quote. Don't fall for it; tell them you want what you're paying them for.

Stock Selection Universe: See Selection Universe.

Stock Split: A decision by a company's management to increase the number of its outstanding shares by some multiple or ratio such as two for one, or 40%, etc. The stock price is reduced proportionately. A falling stock price and a new buying opportunity often follows such actions. You should always take your profits normally if a slit candidate is kind enough to go up in price before the split. A stock dividend is a stock split on a much smaller level, typically 5% or so.

Stock Watchlist: The collection of all stocks in the Selection Universe that are either at or within striking distance of our buy target.

Stock Worksheet: A listing used to track both securities owned and a reasonable number of others that are in the selection universe. It is used to identify both purchase and sale opportunities and must be updated daily.

Stop Loss Order: An order that is unnecessary in a working capital model portfolio because we are only buying the highest quality securities. We expect continued downward movement and save room for additional purchases of the security at a later date.

Suckers: Wall Street term meaning clients or customers.

Tax Exempt Securities: Interest on Municipal securities is exempt from Federal income taxes, but may be taxed by other states. Tax-exempt income is absolutely the best kind of income, including all forms of deferred income.

Tax Lots: The IRC allows taxpayers to track their security purchase dates and to specify which ones are being sold when a sale is made. Some brokerage statements keep track of this information for you. This is the AICPA lobby at work, helping increase the billing hours of its members. To run a portfolio wisely, you have to use average pricing---find yourself a CPA who agrees.

Technical Analysis: Technical Analysis refers to the study of past financial data in a hopeless effort to predict the future movement of general and specific security prices. This is investment fantasy in its purest form, but it has become more popular than Fundamental Analysis.

The Beast The Financial Institutions of Wall Street.

The DOW: Short form for The Dow Jones Industrial Average.

The Fair Tax: Some pretty good tax reform ideas that you should familiarize yourself with. Its congressional backers could use your support.

The FED: See Federal Reserve.

The Investor's Creed: You need to know this by heart.

The Street The Financial Institutions of Wall Street.

The Working Capital Model: A complete methodology for the design and management of investment portfolios created by Steve Selengut, the Author of this book, between 1970 and 1975. It includes techniques, rules, and guidelines for security selection, trading, and performance analysis.

Tick: Wall Street terminology for a change in price of a security during the trading day; there are upticks, downticks, and deer ticks. Avoid the latter, and look at the tick indicator stats occasionally. Interday changes in direction could be interesting.

Total Return Analysis: Total return on an investment is the total realized income in your pocket. Wall Street tries to brainwash you into thinking that changes in Market Value are of equal importance. Funny, they won't let you pay them with a change in market value.

Trough-to-Trough Analysis: Similar to peak-to-peak analysis, but it examines performance between market low points.

Uncertainty: The normal environment for investment and management decision-making. The more variables (economics, politics, meteorology, astrology, etc.) that are active in media reports, the more uncertain the future becomes. Wow.

Unit Trusts: An Investment Product that is generally suitable for fixed income investing within the Working Capital Model framework. Trustees hold a portfolio of income producing securities and distribute interest and principal returns to unit holders until all the securities within the trust mature. They assure diversification and a steady cash flow, but are expensive in small quantities. Investors must avoid spending the principal portion.

Unsuitable: Investment salespersons are required to "know their clients" to the extent that they do not recommend (or allow them to purchase) securities and/or products that don't suit client circumstances. A Zero Coupon Security for a person who needs income would be a good example.

Variable Annuity: An oxymoron.

Variable Income Securities: Some securities, such as Royalty Trusts, REITs, Unit Trusts, and GNMAs will produce slightly different amounts of income from month to month. This may be caused by the economics of an industry, or the diminishing principal on which interest is being paid.

Verbal Confirmation: Most brokerage firms train their representatives to verbally confirm that a trade has been executed. I find it annoying when a broker doesn't provide this kind of simple service, just not the sign of a dedicated professional.

Window Dressing: Afraudulent, but legal, activity undertaken by institutional investment managers every quarter, in anticipation of preparing reports of their securities holdings. They will systematically unload weaker and unpopular issues and accumulate stronger ones to present the appearance of brilliance in their Quarterly and annual reports. In August 2007, probably after reading my book, the SEC has now started to investigate this practice in the industry.

Wire House: A Wire House is simply a brokerage firm. This outdated term comes from the use of an employee called a wire operator, whose job was to send orders to the floor of the stock exchange over the wire.

Wizards of Wall Street: The Financial Institutions of Wall Street.

Working Capital: The total cost basis of the securities and cash in an investment portfolio. Working Capital is increased by all forms of income and deposits and decreased by capital losses and any form of withdrawal.

Wrap Account Programs: A sham program offered by most Wall Street Institutions that pretends to provide personal investment management when, in fact, every portfolio is identical. One fee is charged that pays for brokerage charges and investment management; yet another of the fraudulent product ideas now coming under SEC scrutiny.

Year End Rebalancing: Give me a break!

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Risk Management: Income, 401k, and IRA Programs

Take a tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:


In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.

At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.

The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.

Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,

Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.

Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side...  while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.

To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.

Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.

Total income is 6.5% of capital and more than covers the RMD.

Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds. 

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Please read this disclaimer:
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.