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
Acronym for American Depositary Receipt.
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.
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
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.
This is a portfolio threatening ailment developed
by investors who tend to over-analyze things, impairing their ability to make
An annuity is a regular recurring series of payments, typically guaranteed by
some form of benefactor.
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.
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.
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.
Acronym for All Time High.
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.
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.
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
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.
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
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.
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
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
See Issue Breadth.
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
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.
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.
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
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.
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.
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.
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.
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.
An acronym for Closed End Fund.
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.
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.
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
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.
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.
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.
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
A Buzzword used by Institutional cold callers who are trying to sell something to
Investment Management professionals.
Acronym for Consumer Price Index
See Market and Interest Rate Cycles.
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.
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
These are negotiable securities, issued by
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.
Jerseyese for Convenience Store.
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.
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.
Acronym for the Dow Jones Industrial Average.
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?
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.
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
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, 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.
See Securities buckets.
See Equity Securities
An acronym for 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.
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
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.
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.
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.
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.
Wall Street term meaning clients or customers.
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.
An extremely complicated, time sensitive business that should be
left to seasoned professionals. I have never attempted any transactions in this
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!
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
CommonWall Streetese for General Obligation Bonds.
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.
See Sector Dynamics.
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 is a result of some form of higher
risk, and is often used on The Street as a euphemism for junk bonds.
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
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.
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
See Securities buckets.
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.
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.
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.
Simply put, this is a situation where short-term
interest rates exceed long-term rates. Something you really need not be too
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.
A figment of my imagination. they do not reside on
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.
The planning, organizing, controlling, and
decision-making involved in implementing the Investment Plan.
Investment opportunities areSecurities
that meet our price, income, quality and diversification standards. No news, no
we-thinks, no predictions.
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.
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.
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.
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.
An acronym for an Internal Revenue Code greatly in need of reform.
Acronym for Individual Retirement Account and Irish Republican Army. There are
too many forms of IRAs. and armies.
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.
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.
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.
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
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.
A Federal Penitentiary where too few Wall Street Con Creators
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
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.
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.
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.
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
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 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
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.
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.
Technical analysis gone mad.
.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.
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
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.
The safe way to invest - you know better,
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.
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.
52-Week Highs and Lows:
See NYSE Highs and Lows.
York Stock Exchange:
"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.
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.
Acronym for New York Stock Exchange.
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.
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.
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.
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.
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.
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.
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.
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.
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.
You get what you pay for.
One of the many creative and impressive euphemisms
for Stock Broker or Financial Planner/Advisor.
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.
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.
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
An example of a Buzzword.
See Financial Product
An acronym for: quality, diversification, and income.
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.
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
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.
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.
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.
This information is simply sales promotional propaganda
prepared by Wall Street firms to rationalize speculative investment behavior.
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.
Acronym for Registered Investment Advisor
Abbreviation for Standard & Poor's Corporation.
& 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.
& 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
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.
See ADV II
An acronym for The United States Securities and Exchange Commission, watchdog
of the Securities Industry.
See Group Dynamics.
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.
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.
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 - --- ------.
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.
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.
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.
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.
Wall Street term meaning clients or customers.
& Poor's Corporation:
See S & P.
See stock Split.
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.
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
See Selection Universe.
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.
The collection of all stocks in the Selection
Universe that are either at or within striking distance of our buy target.
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.
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.
Wall Street term meaning clients or customers.
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.
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
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.
Financial Institutions of Wall Street.
Short form for The Dow Jones Industrial Average.
Some pretty good tax reform ideas that you should
familiarize yourself with. Its congressional backers could use your support.
See Federal Reserve.
You need to know this by heart.
The Financial Institutions of Wall Street.
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.
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
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.
Similar to peak-to-peak analysis, but it examines
performance between market low points.
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.
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.
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.
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.
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
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.
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.
of Wall Street:
The Financial Institutions of Wall Street.
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.
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.
Give me a break!