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The Sword-Finance, its Sheath-Accounting, and the Shield-Tax Planning: Lesson 1 When to Sell and Investing Tax Tips
Posted by: Nelson Nguyen (IP Logged)
Date: July 22, 2014 09:56AM

Warren Buffet coined the phrase “Economic Moat,” which you can learn more about in the following article entitled “Economic Moats, Durable Competitive Advantage and Wide Moat Investments.

Investing legends often begin with tales of knights and shining armor. Young investing squires grow into investing gurus like Warren Buffett (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Howard Marks (Trades, Portfolio) who wield their investing knowledge like weapons with skill and craft. The Sword-Finance can be wielded by a mixture of Modern Portfolio Theory or the Legendary Value Investing methods. Its Sheath-Accounting keeps the Sword-Finance sharp and free from the elements.

I describe Finance as forward-looking where you often project, model and value the future cash flows of assets or projects. With sound Financial Analysis skills, you can wield the Sword-Finance to defeat your enemies and gain new territories. Generally, Accounting is more focused on the past where you often prepare financial statements, audit financials, and prepare taxes. Accounting is the language of Finance. If you understand the language, you can understand what the Income Statement, Balance Sheet, and Cash Flow Statement are really saying. Proper Tax Planning can save you a lot of money. You fought hard for your hard earned money using the Sword-Finance and its Sheath-Accounting. The Shield-Tax Planning can protect those precious earnings from poor tax planning.

In the world of investing, proper Tax Planning can save you hard earned money or help you pay less taxes. What I want to talk to you about is “I.T.” 1) Investing and 2) Tax Planning. My focus today is: the Shield-Tax Planning and how to use it with the Sword-Finance and the Sheath-Accounting. Today’s lesson is on: “When to Sell and Investing Tax Tips.”

Question: When do I sell?


  1. Finance: When the company becomes fairly valued or sells for more than its intrinsic value.
  2. Accounting: When the company’s fundamentals are deteriorating or financial shenanigans are suspected.
  3. Tax Planning: Consider the tax consequences.

Selling Check List:

  • The Five Rules for Successful Stock Investing Selling Check List:
    • Did you make a mistake?
    • Have the fundamentals of the company deteriorated?
    • Has the stock risen too far above its Intrinsic Value?
    • Is there something better you can do with the money?
    • Do you have too much money in one stock?

  • The New Buffettology (by Mary Buffett and David Clark) Selling Check List:
    • Warren made his big money by holding on to durable-competitive advantage companies for the long term (companies with wide Economic Moats).
    • At the height of a bull market, wide Economic Moats companies can reach prices at which it makes business sense to sell.
      • Rule of thumb: add up the expected per share earnings of a company over the next 10 years and then compare that sum with what you would earn if you sold the stock and placed the proceeds in bonds instead.
    • A change in business environment may dictate a sale of a stock.
    • A change in a company’s business model can also dictate a sale of a stock.
    • Reaching a stock’s target price can dictate a sale.

  • F Wall Street (by Joe Ponzio) Selling Check List:
    • It does not matter if you are up or down, it depends on whether or not you can find more value at a better price.
      • Decision:
        • Do you hang on to the company because it is wonderful, you expect it to continue to be excellent, and you would be happy with the long-term return roughly matching the growth in the business from that point on?
        • Do you sell your stock and look for another grossly mispriced stock?
        • Did you make a mistake?
          • If the stock’s future cash flows are not as high as you expected, it is time to move on to another opportunity.
        • Are you unsure what to do?
          • Sell, it is far better to sell and find a new opportunity that you are sure of than to suffer losses and not understand why.

  • Lower Your Taxes Big Time (by Sandy Botkin, CPA, Esq.) Tax Planning Check List:
    • Strategy 1) Offset all capital gains with capital losses.
      • If you have some capital gains, consider selling some stocks or bonds that generate a loss. By doing so, you offset any gains with losses. In fact, you can even buy back your loss stocks if you wait at least 31 days after the sale to avoid a wash-sale.
      • The wash-sale rule says you cannot take a loss on any security, such as stocks, bonds or mutual funds, if you acquire or enter into an option to acquire, substantially identical securities within 30 days either before or after the date of the sale of the security.
    • Strategy 2) Wait at least 31 days either before or after the sale of any securities at a loss before you buy the same securities in order to be able to use the loss.
    • Strategy 3) Consider buying stock in a different company within 30 days in order to avoid the application of the wash-sale rule.
    • Strategy 4) Hold stock and bonds for more than one year in order to obtain long-term capital gains tax.
    • Strategy 5) Identify the shares sold and pay less taxes.
      • You are allowed to specifically identify which shares were sold and change your tax effects.
      • If you have a gain, sell the shares that give you long-term capital gains treatment. If all shares qualify, sell the shares that have the highest basis. As a result, you pay less taxes.
      • If you sell at a loss, sell the shares with the highest basis in order to maximize the loss.
    • Strategy 6) Keep good records of your mutual funds.
      • You have to keep good records of your mutual fund basis in order to minimize your gains. The higher your basis, the lower your gains. As a result, you pay less taxes.
    • Strategy 7) Do not fail to use tax efficient funds.
      • Mutual funds held for long term should be in tax efficient if held in taxable accounts (i.e. trading account). Invest in mutual funds that are less tax efficient in tax deferred (traditional IRA or 401K) or tax free accounts (i.e. Roth IRA or Roth 401K).
    • Strategy 8) Put the right investments in the right accounts.
      • Place investments that produce ordinary income into tax-advantaged accounts.
      • Place investments that produce little tax or are taxed at long-term capital gains rates into traditional investment accounts.
    • Strategy 9) Do not place real estate, tax-exempt bonds, or annuities in tax-advantaged accounts.
      • All funds that come out of tax-advantaged accounts are taxed at ordinary income rates.
      • Placing tax-exempt bonds into these accounts would convert tax-free interest into fully taxable interest.
      • Placing real estate in tax-advantaged accounts would be a poor investment, because the tax benefits in real estate are: 1) it produces long-term capital gains on its sale if there is a gain, and 2) ordinary losses if there is a loss. It also allows for a lot of leverage since you can borrow most of the purchase price. Finally, it produces a lot of depreciation throughout your ownership. However, if you place real estate in tax-advantaged accounts, you have done away with all these wonderful benefits.
        • All distributions from tax-advantaged accounts will be ordinary income to you.
        • There will be no losses allowed on the sale of real estate by the plan.
        • You cannot borrow money to buy real estate in a tax-advantaged plan.
        • Finally, you do not get to deduct depreciation because the plan gets the depreciation, which is worthless to it since tax-advantaged plans don’t generally pay taxes.


Does your accountant get I.T.? Do they help you understand 1) how to Invest and 2) how to save on Taxes? Death and Taxes are unavoidable. However, with the proper Tax Planning, you can avoid unnecessary taxes. There is a difference between: 1) Tax Avoidance (legal means to pay less taxes), and 2) Tax Evasion (illegal and can lead to stiff penalties, interest, fines and even jail time). If your accountant does not get I.T. (Investing and Tax Planning), then you must hold the keys to your Economic Kingdom.

Guru Discussed: Howard Marks: Current Portfolio, Stock Picks
Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: SPY, QQQ, DIA,
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