The Van Tharp Institute

January 19, 2005 — Issue #203

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In this Issue:

February Workshop Learn to Trade Exchange Traded Funds. 
Feature Article 1

Discipline in Keeping Your New Years’ Resolutions, By Van K. Tharp, Ph.D.

Trading Tip

The Supply Side, Housing Bubble or Housing Bull Part V, By D.R. Barton, Jr.

F-r-e-e Online Tutorial

Excelling At Entries

Tax Tip

Have You Started A New Business in 2004? Steve Meredith

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New Trading Workshop

 

What are Exchange-Traded Funds?

They are funds that reflect the big sectors of the market.  For example, you can buy a fund that represents the Internet sector of the market and short another that represents the retail sector of the market.  And you can do this in seconds, as soon as you spot what the big money is doing.  So while big money might take a week to move money around, you can jump in ahead of them and take advantage of money flowing into the sector you’ve just bought.  The advantage is huge.

Learn six different strategies that allow you to take advantage of what big money is doing and turn it into big money for you .

 

Feature Article 

Discipline in Keeping Your New Years’ Resolutions, 
by Van K. Tharp

Last week we finished my series on 12 Financial Resolutions for the New Year. I thought it was a good time to also offer everyone a refresher on how to keep those resolutions. 

Here are several ideas that may help you to continue your resolution throughout the entire year.

1) Divide a General Resolution into Specific Steps.

Whatever your resolution may be, you can divide it into specific steps. It’s much easier to accomplish small steps that you can imagine doing for the rest of the year (or the rest of your life) than it is to fulfill a giant goal that would be huge. Start with something that is easy and make sure you can accomplish it.

Thus, a resolution to make 50% this year in your account could be broken into a number of steps such as (a) look at ideas that might help improve your trading; (b) test each idea and see how much improvement you will get from each one; (c) implement the best idea following the ten tasks of trading. In fact, your resolution might simply be to follow the ten tasks of trading each day and notice what that means for you.

2) Make Promises to Yourself and Include the Reason for the Promise in the Resolution.

Suppose your promise to yourself is to do a daily mental rehearsal. The way you might phrase that is to promise yourself to do a daily mental rehearsal in order to plan ways to increase your discipline. The second statement is much easier for you to follow- through with on a regular basis. Also make sure that the promise you set is something you want to do and not something someone else wants you to do. If I tell you that you must do a daily mental rehearsal, you are not likely to do it. On the other hand, if you decide how important this kind of rehearsal will be for your well being and your trading, you are much more likely to do it.

3) Determine Your Triggers.

If you are setting a resolution, it is probably because you want to do something that you have not been able to do. There is probably a reason for your inability to do it — certain triggers that set you off. What are those triggers? Are there environmental triggers, such as the presence of certain people or certain conditions? Are there certain internal feelings that set you off? What are those feelings and when do they occur?

Once you determine what your triggers are, you are much more prepared for them. I strongly recommend doing extensive mental rehearsal around the issue of dealing with those triggers. Use the mental state exercises in Book Four of the Peak Performance home study course and rehearse dealing with those triggers so that you have more discipline in situations in which you will need it. Awareness is a big part of keeping your resolutions.

4) Look at the Positive Side of Your New Resolution.

When we get into the act of keeping our resolutions, we sometimes feel as if we are denying ourselves. Instead, look at the positive side of what we are accomplishing. Turn on something positive. For example, if you are trying to stop smoking, whenever you get the urge to smoke exercise, or take a walk, . Concentrate on the joy of the new behavior instead of the negative that you are trying to overcome. You’ll find that moving forward is much easier.

5) Keep a Diary of Whatever It is You Are Working On.

A lot of what I’ve suggested for you involves mental awareness. Most people are unaware of the big picture that’s involved in accomplishing some goal. However, when you keep a diary that lists your accomplishments and your thoughts, you’ll find it much easier to understand what is going on inside of you.

Listing your accomplishments is also a form of reward. When you start focusing on your accomplishments — especially if you’ve followed step one and have set small steps toward your total goal — you’ll feel great about what you achieved and where you are going.

6) Make It Okay to Give In Occasionally.

If you are attempting to make a major change, you may have occasional setbacks. If you view that setback as failure, then the resolution is over. You can give yourself a bad name. On the other hand, if you make it okay to have occasional setbacks, then you can keep going — it’s just a setback.

Realize that your setback is an opportunity to learn something about yourself. What happened? What were your thoughts? Write down all of that information in your diary and determine what you can learn from that. You might discover a new trigger and then you can plan for how to get around those triggers. In any case, forgive yourself for the setback and then move on.

Quite often setbacks are due to inadequate preparation. Perhaps you didn’t do enough research with respect to your trading. Perhaps more mental rehearsal was needed. Perhaps you discovered something about your thought process that you didn’t expect, but can now use in your preparation. What additional preparation can you do to make sure that you move ahead toward generally keeping your resolution?

7) Reward Yourself Throughout the Process.

You need to acknowledge accomplishments early in the process. The first few days will probably be the hardest. Consequently, when you get through those days and accomplish your goals, find a reward. Make the process fun through a system of rewards.


Van K. Tharp, Ph.D.

 

Van Tharp has been coaching traders and investors for over 20 years. He is the author of the New York Times Best Seller – Safe Strategies for Financial Fre-edom, Trade Your Way to Financial Fre-edom and Financial Fre-edom Through Electronic Day Trading. His training materials, such as his Peak Performance Home Study Course, are among the best the world.

 

Trading Tips

Trading Tip

by  D. R. Barton, Jr.

Housing Bubble or Housing Bull Part V

The Supply Side

Housing bubble or no housing bubble?  The more I look into this question, the more I see sides with vested interests weighing in to push their agenda or their point of view.  That’s not surprising, since public debate in our country seems to have been reduced in recent times to nothing more than polar opposites voicing increasingly polar ideas with no one seeking a balanced position that objectively weighs the merits of both points of view.  I better get used to that, because this trend doesn’t seem likely to change anytime soon.

Back to the bubble, or lack thereof.  When I look at the issue of housing supply, I find a surprisingly balanced number of voices (even if they are espousing opposite views).  On the one hand, builders and mortgage lenders along with Freddie Mac and Fannie Mae claim that housing supply, as a ratio of housing demand, is dropping.  On the other hand, those who fear an impending bubble point to the absolute supply of housing that is up 250% since the lows of the early 1990s (In raw numbers this jump is from 800k to 2,000k – source:  www.briefing.com).

Which side has a more valid point of view?  My take is that the champions of an ever-growing housing market are using an argument that is logically flawed.  They claim that there is no bubble because demand continues to keep up with or push ahead of supply.  As the kids in middle school would say, “Well, duh!”  In every bubble, demand exceeds supply.  That’s how we get a bubble in the first place – when demand for a commodity (be it residential real estate or internet stocks or tulip bulbs) so outstrips the supply that fundamental pricing models are out of whack, you get a bubble. 

To be fair, there are some rational reasons that demand continues to climb, including immigration and growing household income.  However, on the other of side of that argument are some very real reasons that supply continues to press forward.  The business of residential real estate is no longer comprised of the corner bank working with a local contractor to finance and sell homes.  Multi-billion dollar publicly owned and traded conglomerates like Freddie Mae and Freddie Mac have a vice-grip control on real estate financing.  Joining them are the publicly traded homebuilders Like D.R. Horton (symbol: DHI), Lennar (LEN), Centex (CTX) and Hovnanian (HOV) to name a few.  These companies have stockholders to satisfy who will only be placated by one thing: growth.  So the supply side has a relatively new champion – publicly traded homebuilders who have a need to grow.  

Next week we’ll pull together the data and see if we can make some sensible (and dare I say, even balanced?) conclusions that can serve as a guide.  Until then, great trading!

 

D. R. Barton, Jr. is a lead instructor for Van Tharp Institute courses. He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986.  D. R. has created extensive and innovative new training products and taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-doom and co-creator and contributing author on Fin-ancial Fre-doom Through  Electronic Day Trading. He also writes a stock screening newsletter called Ten Minute Trader, has feature articles in Market Mastery, writes for Traders-U and is a regular contributor to Tharp's Thoughts.

 

Video Article

This week's F-r-e-e On-Line Tutorial

Excelling At Entries

By Chris Anderson, PhD


Education brought to you in a brand new way.  

Follow the link below and join us in this fun new way of learning.

 
C-l-i-c-k Below

On-Line Tutorial

 

Tax Tip

Tax Tip of the Week

Have You Started A New Business in 2004?

by

Stephen S. Meredith, CPA, PLL

Have you started a new business in 2004?  As part of the new corporate tax bill that went into effect on October 22, 2004 there were some new rules for startup business deductions.  Three new rules affect new business owners.  One rule is for Start-Up Costs under section §195, one for Organizational Expenses under section §248, and one for Leasehold Improvements under section §168(i)(8).

Start-Up Costs generally are expenses incurred to investigate a new business prior to starting the business.  They might include items like travel, meals, printing and postage, appraisals, payroll, consultant fees, legal fees to review a lease, or other costs to get the business ready to open.  The old rule said you had to amortize ALL the expenses over 5 years, using the straight-line method (spread equally over 60 months) starting in the month that the business actually opened.  Note: if the business never opens, you get NO deduction unless you are already in that same line of work.  This deduction does not apply to your rental deposit on leased space.  That is capitalized and not generally deducted (you probably get it back later).

The new rule says the first $5,000 can be deducted right away for business opened after 10/22/04.  Anything over that has to be deducted over 15 years (also straight-line).  The good news is the expense for small businesses is usually less than the $5,000 limit.  The bad news is that if you go over, the deduction takes three times as long to fully write off.

Organizational Costs are expenses incurred to incorporate, form a partnership, an LLC, or proprietorship.  This means the cost of the legal or accounting fees to set up the organizational documents and the fee to the State for your initial Charter.  The same new rule applies here as with the Start-up Costs described above.  The first $5,000 is deductible now; the rest is amortized over 15 years. 

If you incorporate and you have costs over $5,000 what can you do?  Make sure each person who bills you itemizes their charges.  Sometimes legal or accounting fees are startup costs and sometimes they can be organizational costs.  If you have some of each, you can deduct up to $10,000 in the year you start the business - $5,000 for each.  Talk to your hired guns and get them to word their invoices appropriately.

Leasehold Improvements are expenses incurred to change the interior of a building.  They were previously required to be written off over the life of the building, even if you were renting the space for one year.  Non-Residential depreciation is usually 39 years, which meant that small tenants who added walls or otherwise changed the interior had a very small deduction compared to the money that they had spent out of pocket.  The new rule says leasehold improvements placed in service after 10/22/04 can be written off over 15 years, using the straight-line method.

There may be an even better way to write off improvements.  If you separately keep track of the cost of the various types of improvements, like plumbing, painting, carpeting, and electrical work, you may depreciate those items on an even shorter life.  Frequently the life is between 5 and 10 years depending on the item.  This is due to a recent court case referred to the HCA decision because it dealt with Hospital Corporation of America.  Under that court decision, elements of the improvements may be separately accounted for and depreciated based on the useful life of the item itself, not the life of the building.

As always, check with your local tax advisor to make sure you are getting the best treatment for your expenses and using the right strategies for your situation.

Stephen S. Meredith is a CPA in Richmond Virginia.  He specializes in preparing income tax returns for all types of businesses, individuals, estates, and trusts.  He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws.  Steve deals with many stock market and real estate investors.  

 

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Quote of the Week:

"Love is composed of a single soul inhabiting two bodies."
Aristotle


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Feedback Corner: 


The ideas learned at the seminar are becoming more meaningful each day as I try to understand them more fully and actually use them. I have clearly changed some thinking about the market and in particular I'm paying more attention to the big picture rather than the day to day activities. It does provide a different perspective. Thanks for the seminar.

Tom Wersten

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