taxes
Are we talking personal growth or portfolio growth?
Stocks that collapse in price were once known as dogs and cats. Brokers started calling them value stocks and were able to peddle them to individuals and mutual fund managers. Unfortunately, value stocks are highly unstable. Many are troubled companies headed for bankruptcy. Others are turning around. In today’s markets, value stocks can quickly become overpriced.
Then value fund managers sell them to growth managers. Investors looking to value stocks for low volatility will not find it. Growth stocks are overpriced stocks that are hyped as having huge earnings potential. Growth investors are gullible sorts who believe a few years of fabulous growth will be repeated for decades. They are willing to pay any price for this dream.
The tech mania of 1999 was an extreme example of this magical thinking. Growth investors convinced themselves that untested Internet companies would take over the American economy in a few years. Tech mania has a long and sad history in stock investing. Tech mania generally ends badly. Railroad stocks got up a full head f steam and then jumped the track in the late 1800s. Electricity plays and auto stocks had huge booms and busts in the early 1900s. Long-term studies show that tech stocks do no better than the overall market. However, they are subject to periods of extreme volatility. Tech stocks, when the mania is on, double and triple in a few months. Then they lose 95 percent of their value in the crash. Tech stocks are for dreamers and speculators, not investors. People who do not mind losing a few thousand dollars for the potential of extreme wealth are comfortable with tech stocks. Investors with low self-esteem, who may throw good money after bad, should stay away from tech stocks and other growth stocks.
Set a financial goal
To help you visualize the rewards of all your hard work, I want you to sit back, close your eyes for 60 seconds, and imagine a debt-free life. In fact, I want you to imagine the number-one thing that will change. Do it now, I’ll wait right here for you! Now, grab your Debt Journal and sum up that change in three or four words. Write it really big and circle it. This is your opportunity cost of failing to reduce your debt. By not getting your debts paid down, this is what you’re missing out on. Strive to keep this at the front of your mind!
Voluntary rescue frameworks
Voluntary rescue frameworks aim to provide a stable environment in which all the participants involved in negotiating a company’s rescue can do so, without any fear of their relative positions being worsened as a result. Such frameworks generally share a number of important features:
- They tend to provide for principles or guidelines, rather than prescriptive rules. The key
objective is to retain flexibility so that the principles can be put into operation on a
case-by-case basis. - Stress is placed on achieving stability in a company’s business and, in particular, finances. This is usually achieved by the major financial creditors (at the very least) agreeing to a moratorium, or standstill, so that a company’s current situation and prospects can be ascertained.
- The gathering and sharing of reliable information about a company’s financial situation and future prospects is seen as a critical prerequisite for developing a sustainable solution.
- Risk-sharing. The participants agree to share equitably in the risks and rewards of the process.
- There is usually the need for an independent mediator in the event of disagreements
between the participants. For example, this role has traditionally been fulfilled by the Bank of England in the United Kingdom.
Professional Advice with Equity Score Report
The Moody’s Equity Score Report breaks down results by vintage and asset type, and further into terminated and nonterminated deals. This report lists each deal (with a nine-digit number as the Moody’s Equity Score Report Deal ID), and then lists the following information: the total cash return, dividend yield, previous dividend yield, cash-on-cash return, XIRR and payoff date (if applicable). Total cash return is the nondiscounted sum of all payments to equity from closing to the most recent payment date, divided by initial equity balance. Dividend yield is the most recent payment to equity, divided by initial equity balance, multiplied by the payment frequency. Nonpayments are treated as zero for dividend yield calculations. Cash-on-cash return is the nondiscounted sum of the equity payments over the previous year, divided by the initial equity balance. Deals with less than one year of equity payments do not have the cash-on-cash return calculated. XIRR is the internal rate of return for equity cash flows, adjusted for the timing of these payments. The Moody’s XIRR assumes equity is purchased at par, and that the equity has zero liquidation value. This last assumption is problematic, as it is highly doubtful that the collateral pool has zero value, and leads to large negative XIRRs for deals in which the equity holder has not yet been made whole.
The Equity Score Report shows investors how the equity of different deals is performing. Moody’s disguises the deal names, but investors still can use the report to look at trends in equity performance. For example, the investor can examine how many 2001 RESECs are currently paying double-digit dividends, or how many CBOs terminated without making whole equity holders.
Advice on Hard Delinquency Triggers
The second type of trigger is a hard delinquency trigger. Hard delinquency triggers are not tied to the senior enhancement percentage. Rather, the threshold is a fixed percentage of the current collateral balance. The hard delinquency trigger offers several advantages over a soft delinquency trigger.
First, it mitigates the adverse selection risk due to rapid repayments. Second, a hard delinquency trigger’s ability to prevent step-down does not diminish with the increase in subordination to the senior bonds like a soft delinquency trigger.
The hard delinquency trigger equivalent of a soft delinquency trigger can be estimated as follows: multiply the soft trigger by two times the initial senior enhancement and the soft delinquency trigger threshold. Using the 30% CPR example, the equivalent hard trigger at year three would be (0.20 times 2 times 0.233) = 9.3%.