Monday, November 29, 2010

A Taxing Issue

For those of us who are ambitious enough or naive enough to manage our own money, now is the time to make decisions about capital gains to be recognized in a tax efficient way. 2010 has been a year of short term gains taken and some long term gains realized on the sale of both some long held mutual funds with expense ratios that are no longer justifiable in the age of Vanguard and ETF's and some stocks that have been beneficial but are perceived to lack potential. Some losses have been taken to offset the gains but not nearly enough, yet. Fortunately, or should I say unfortunately, there are still embedded residual losses from the dark days. It's harvest time for some losses.

For those who mostly stood firm during the equity market collapse in '08/'09, or perhaps even added some at lows with a "what have I got to lose now attitude", they have been rewarded with a stock market that has recovered, in the S&P 500 for example, more that 80% of the losses that existed at the bottom in March of '09.
Many stocks have more than fully recovered but some never woke up. Those still sleeping stocks were at one time bought for a reason but either were small caps crushed by lack of scale or credit or they were companies like U.S. Gypsum that found themselves the market leader with a decent balance sheet in a business that was uniquely destroyed by our economic woes(USG is the market leader in wallboard and sheetrock for residential and commercial construction).

Today was a day of selling, all of three positions and a portion of eight others. ENS circumstances are rarely unique. This tax inspired selling is being and will be repeated across mutual funds, pension funds, and many individual investor portfolios, over the last month and through December. The rationale for selling is a calculated one that is based both on the benefit of offsetting capital gains taxes and a judgement on the near term opportunity on individual stocks. This type of selling presents opportunities to those with the liquidity and insight to spot undue pressure on underperforming stocks that is not justifiable by the fundamentals.

Is it worth the time? Who knows. Opinion here is only if it happens to stocks that have been followed long enough and well enough to spot clearly the aberrant trend.


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