The Van Tharp Institute

March 16, 2005 — Issue #211

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Tharp's Thoughts Weekly Newsletter


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In this Issue:

Feature Article

An Annual Investing Ritual, By Melita Hunt

F-r-e-e Online Tutorial

Everything You Ever Wanted To Know About Your System But Were Afraid To Ask, by Dr. Chris Anderson

Tax Tip

Business Expenses for Travel, Meals and Entertainment, by Steve Meredith, CPA

Recommended Reading

Safe Strategies for  Financial Freedom

Trading Tip

One of My Favorite Indicators and What It Says About the Dollar, by D.R. Barton

View this newsletter on-line, or read back issues

 

Feature Article 

An Annual Investing Ritual

By

Melita Hunt

Last week, Van and I traveled down to Florida to attend the Investment University conference. An annual event in beautiful Delray Beach where over 250 people gather to learn about the latest investments, trends, stocks and other ideas from a diverse collection of people that specialize in different arenas.

I love this annual ritual, not only for the location, but also for the opportunity to catch up with great people, reconnect with clients and meet many new people. And it never surprises me that year after year, I hear the same thing over and over again from the old and the new. People continue to show up with bright eyes and good intentions, waiting for that ‘gem’ of information that will make them millions and alleviate all of their worries. And it always fascinates me that at the exact time that we are there – it is always deemed to be the perfect time for the particular ‘ware’ (or investment) that someone is selling – isn’t life grand and just so convenient!

Attendees are eager to have someone tell them the latest greatest stock pick, the investment that will return the highest yield or dividend or what the ‘experts’ predict will be the next big thing. Often they tell me about some great investment that they made in the previous year or they will share their woes at the ones that didn’t work out, blaming the investment – (not themselves) and I often cringe when they tell me about the ridiculous amounts of money that they risked without an exit plan (all based on an ‘experts’ prediction), especially the people that have already retired and are using their retirement funds.

But my biggest cringe factor comes from the people that tell me that they have chosen to invest in something and then they just put it away and don’t look at it because they are too nervous to see if it is winning or losing (I am deadly serious – and Van can back me up on this – many people do this with their 401Ks and mutual funds especially).

Now I don’t mean to sound critical, because my focus really is on abundance for all. I guess I just want everyone to see how easy it can be to invest wisely and safely if they take the time and effort to learn to swim before jumping straight into the trading pool.

I guess that I also need to remember that people will hear what they need to hear, when they’re ready to hear it. There is that age-old adage: When the student’s ready, the teacher will appear… and it will continue to be my motto (because I’m a lifelong student and it’s always worked for me!)

So Van takes the stage and proceeds to play his famous marble game, people get ready to place their bets, joining in the fun, many of them not even realizing the impact of what they are doing or the value of the lessons that they can learn.

Although many start the game full of interest and enthusiasm, ready to test their skills and abilities, before long, human nature reveals itself.

I watch intently as people hide their game sheets, while others show off what they are doing. Some people fluff their feathers after a big win and let everyone know how much money they have in their account; followed by immediate embarrassment when it abruptly goes the other way. I see people choosing to go into a confused state and just give up, even leaving the room or disturbing others (stating that it’s only a dumb game or they have something important to do). While others become very intense and annoyed if anyone speaks or moves, they take the game very seriously indeed. There are the talkers, who want to ask their buddies what they’re doing, or share their own opinions. The wives who choose to leave all the decisions up to their husbands (I have an entire article on that one comment alone!) and there are the hiders who shrink and think that they can’t be seen. Aren’t humans fascinating!

Everyone is playing exactly the same game, with exactly the same marbles, but the results are so incredibly different and from the back of the room it is always so much fun too watch. So what’s the determining factor? The determining factor is the person that is placing the bets (or risking the money). The way in which a person plays or doesn’t play the game. Period. And that’s what we teach.

Time and time again we tell people that games reflect life and that they should look at their behavior and at their results in any game that they are playing. Not only is it a great indicator of what is working or not working, but more importantly it is a reflection of how a person shows up in their life.

And, this applies to any game.

So which character do you represent?

Think about it. When you’re engrossed in a game and you’re winning, betting crazily or conservatively, losing, going bankrupt, excited, nervous, feeling angry, bored, and frustrated or any emotion for that matter – well, that’s YOUR stuff. The way that you are reacting or responding is just normal behavior for you, it’s just playing itself out in a game environment, which makes it much easier to recognize, because we think we’re only ‘playing’. That’s an incredible lesson in itself. 

In addition, when you are playing a game and you think that someone is looking at you, judging you, or is curious about your results – then that’s YOUR stuff too, because the truth is - no one really cares! Most people are so engrossed in their own experience that they don’t have time to be thinking about the person next to them, and when they do, it is usually to find out whether they have performed better or worse than them (because they are still thinking about themselves)

And the game doesn’t stop there. We have a number of people that stay in their experience, analyzing and dissecting the whole game and running up to Van eager to let him know their synopsis. Some are desperate to “get it right,” while others seek approval. It happens all the time, and it’s all-psychological stuff!

Others have a big ‘aha’ moment and come running to our booth, ready to learn more about themselves and how they could have played the game effectively. How can I win as a trader/investor? They ask; what is position sizing? What is the optimal bet size in any investment? How do I learn more about personal responsibility and gamblers fallacy? Kudos to them! At least they are willing to ask questions, listen and learn. 

But just as often as not, the major points of the game often fall on deaf ears. As the breakout sessions begin, people run to the rooms where they can find out what ‘stocks and investments are being recommended’ in precedence to debriefing the game and realizing that they could, in fact, follow a monkey’s predications and still win if they just learned the fundamentals.

So I hang out at the booth, ready to share the key principles that Van teaches to whoever wants to hear. Many attendees gesture at whether they have the time to study all the books, home study programs and reports that will guide them on the road to consistent financial success and then they just walk away, ready to sink thousands into predictions, oblivious to what they are really doing. While others know that they can’t afford the time or the money NOT to learn.

So we’ll continue to preach the virtues of money management and personal psychology. We’ll continue to share these timeless principles, to be here for the ones that are ready to hear and learn. It will take some time to get to the masses, but at least we have eternity to do it, because the fundamentals don’t change, and they won’t change. It’s basic human nature, not like the hot stock picks and the latest greatest investment vehicles that demand your attention right now…

Before they disappear…

Just like the tulips…

Melita Hunt is a senior executive here at the Van Tharp Institute. The resident Aussie on staff, she has been associated with Van Tharp since 1999. With a diverse background that includes accounting, marketing and coaching, Melita is primarily a writer, speaker and world traveler with a special interest in self-improvement and inspirational work. 

She is the author of a series of audio bedtime stories based around virtuous themes such as love, courage and respect; that are designed to empower children. Learn more or purchase a story by visiting: www.bedtimetreasures.com.

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-deom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

 

Video Article

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

Everything You Ever Wanted To Know About Your System But Were Afraid To Ask

A continuation of our series on backtesting systems.

Education brought to you in a brand new way.  
By Chris Anderson, PhD

C-l-i-c-k Below

On-Line Tutorial

 

Tax Tip

Tax Tip of the Week

Business Expenses for Travel, Meals and Entertainment

by

Stephen S. Meredith, CPA, PLL

How do you substantiate business expenses for travel, meals and entertainment?  These have some special requirements, but the IRS also provides special per diem (per day) allowances that can be used.  This article gives general information that IRS auditors look for when they review these deductions.

To the extent an employee business expense is the type of expense (e.g., travel, entertainment, and certain other expenses) that isn't deductible unless the substantiation requirements of Code Sec. 274(d) (see below for details) are met, the employee must meet those substantiation requirements within a reasonable period of time. Under these requirements, information sufficient to substantiate the requisite elements of each expense or use must be submitted to the employer.  Self-employed persons simply need to document this information in their file.  If you are employed by a corporation you need to give this information to the employer in order to get reimbursed.  Make yourself an expense report if you are self-employed and attach receipts!

For all other business expenses, sufficient information must be submitted to identify the specific nature of each expense and to conclude that the expense is attributable to the employer's business activities.

The following simplified substantiation rules apply to per diem or mileage allowances paid under an arrangement that otherwise qualifies as an accountable plan

... Mileage allowance. An employee who receives a fixed mileage allowance of not more than the optional business standard mileage rate (40.5 cents per mile in 2005) to cover transportation expenses while traveling is considered to have made an adequate accounting to his employer if the elements of time, place, and business purpose of the travel are substantiated.

... Per Diem allowance. If a payor (i.e., the employer, its agent, or a third party) pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal and incidental expenses (M&IE) incurred or to be incurred by an employee for travel away from home, the amount of the expenses that are treated as substantiated for each day is the lesser of the per diem allowance or the amount computed at the federal per diem rate for the locality of travel for that day.  An employee who is “related” to his employer is not considered to have accounted to his employer for the full federal per diem allowances for lodging, meals, and incidental expenses, and must substantiate any deductions he claims, but he may use the meals-only per diem and the business standard mileage rate.  This means that self-employed people and the owners of the business may not use the per diem rate for lodging, only for meals.

... Simplified (high-low) method for substantiating travel allowances. A simplified method can be used for per diem amounts paid for lodging plus meals and incidental expenses (M&IE) during travel within the continental U.S. If the previously mentioned option isn't used, in the first 9 months of 2004 an employer may reimburse up to $207 for high-cost localities ($161 for lodging and $46 for M&IE) and $126 for other localities ($90 for lodging and $36 for M&IE). For travel after Sept. 30, 2004 and before Oct. 1, 2005, the high-cost-area per diem is $199 ($153 for lodging and $46 for M&IE).The per diem for all other localities is $127 ($91 for lodging and $36 for M&IE). For travel outside the continental U.S. there is a separate rate and table.

... Fixed and variable rate (FAVR) allowances for auto expenses. Where an employer provides a mileage allowance under a reimbursement or other expense allowance arrangement in regard to an employee owned or leased car, the substantiation requirement is satisfied as to the amount if the employer reimburses in accordance with a fixed and variable rate (FAVR) allowance. A FAVR allowance is periodic fixed payments to cover fixed costs such as depreciation, coupled with periodic variable payments to cover operating costs such as gasoline. Among other things, a FAVR allowance may be paid only to an employee who substantiates at least 5,000 miles driven in connection with the performance of services as an employee, and at least ten employees must be covered by the FAVR allowance. This can be used in larger corporations to give employees a monthly car allowance, plus a varying amount of gas money each month.

A larger deduction can be taken if you use the optional high-low method.  That set of rules has a per diem rate for every major, and many minor, cities in the U.S.  The rates that are used are based on actual studies of lodging and meal costs in those cities.  If you travel to areas like New York or Washington D.C. or San Francisco you might find that your deduction is much higher than the amounts listed above.

What elements are required to be documented?  The Internal Revenue Code says the following in 274(d):

 d) Substantiation required.
No deduction or credit shall be allowed— 

(1) …. for any traveling expense (including meals and lodging while away from home), 

(2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, 

(3) for any expense for gifts, or 

(4) with respect to any listed property (as defined in section 280F(d)(4) ), 

Unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.

An employee who substantiates expenses to the employer need not account for them to the IRS. However, an employee who is “related” to his employer (certain close relatives of an individual employer, partners in a partnership, or a more than 10% shareholder of a corporate employer) may be asked by IRS to substantiate his expense amounts even though he has accounted to his employer.  Using standard per diem amounts only releases the taxpayer from the duty of substantiating the actual amount. Time, place and business purpose must still be substantiated in all cases.

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.  He has clients nationwide and lectures regularly on tax topics. He is often a featured speaker at Van Tharp's Infinite Wealth Workshop.

Recommended Reading:

Safe Strategies for Financial Fre-edom

by Van K. Tharp

Learn more about the fundamentals of successful trading, read about new and exciting real estate strategies, and the six different market conditions and how to trade in each. Van's newest book made #7 on the Wall Street Journal Top Ten Business Books List and hit the New York Times Best Seller List! 

This book  is an excellent source on how to read the 'big picture' and thrive in any financial scenario. 

Safe Strategies focuses on showing you how to make your money work for you, rather than just working hard for your money--all for only $24.95  Read More....

 

Trading Tips

Trading Tip

by  D. R. Barton, Jr.

One of My Favorite Indicators and What It Says About the Dollar

I’m becoming a bigger and bigger fan of sentiment analysis.  A simple definition of sentiment analysis is the measurement of pessimism or optimism in the markets.  It is usually used as a contrarian indictor:  for example, when optimism is high, the markets are likely to reverse and go lower.

There are many ways to measure the sentiment of the market.  Some popular measures used by analysts include:

·        Put/Call Ratios – measure sentiment by determining the balance of options bought

·        Breadth Ratios – give a read on sentiment by describing the extent of market participation in a move

·        Sentiment Surveys – tells the degree of bullish or bearish sentiment among groups of investors, analysts, newsletters, etc.

These are only a few of the broad categories of sentiment tools that are used.  Others include short sales reports, commitment of traders reports, insider buy vs. sell ratios and mutual fund asset flows.  There are certainly lots of ways to determine the sentiment of market participants.  But one of my favorite sentiment indicators is a broader and more easily accessible one.

I love to check out the covers of mainstream media magazines.  When Time, Newsweek, and Money magazines start covering a story, that’s a pretty good indication that the trend being reported is nearing its peak. 

I still remember visiting at my friend’s house outside of Pittsburgh in the spring of 2000.  On his coffee table were the most recent issues of Time and Newsweek.  Both covers had variations on the theme “Aren’t You Rich Yet?”, implying that everyone but you was getting rich in the stock boom.

This week, Newsweek is jumping on the recent currency hysteria with the cover story “The Incredible Shrinking Dollar”.  It has many pages about how the devaluation of the dollar has affected those in the U.S. (and abroad).  There are also logical reasons given on why the dollar will continue its slide.

I smell a bottom in dollar.

This bottom may just be an intermediate one that leads to further declines.  And it may not even come soon.  But if this sentiment analysis tool is any indication, be very wary of jumping on the dollar-bashing bandwagon.

To Newsweek’s credit, they have a sidebar story that presents an almost ironic counterpoint to the main article.  It is a good contrarian piece and worth reading.  You can find it at http://www.msnbc.msn.com/id/3672556/site/newsweek/ .  If you’d like to read the lead article, click here: http://www.msnbc.msn.com/id/7170226/site/newsweek .

It’s not time to load up and go long the dollar.  But prudent traders and investors will do well to look with a jaded eye at any dollar “gloom and doom” stories at a time when the dollar has already been on a three-year slide to the downside.

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.

 

 

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Van Tharp's Most Recent Market Update including the 1-2-3 Model and the Five Star Model.

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Quote of the Week:

"There are many paths to the top of the mountain, but the view is always the same."
-- Chinese Proverb 

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Feedback Corner: 


Just a quick thanks to Van for recommending "Marriage of the Spirit" a couple of weeks back. I purchased [the book] "Nothing "  in 1996 and put in a close spot on my desk so I would soon read it. Well it sat there for years, 8 to be exact, I mean its about nothing so what's the rush. Well I've reread it 3 times since and it has become the most important book I have ever read. I have the same feelings about "Marriage of the Spirit", thankfully I didn't wait so long to read it. All things happen at the right time. So I recommend both of these terrific books that help the "you" part of trading as opposed to the "markets" part of trading. Good Luck to all.
--Randy

 

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Dr. Van Tharp's Trading Discussion Forum
  www.mastermindforum.com

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