The Van Tharp Institute

March 23, 2005 — Issue #212

Home   | Workshops  | Products  |  Order On-Line Contact Us

www.vantharp.com

 

Tharp's Thoughts Weekly Newsletter


Thank you for subscribing to "Tharp's Thoughts"

In this Issue:

Feature Article

Don’t Take Just Any Ol’ Entry, by D.R. Barton, Jr.

Tax Tip

Tax Information for Limited Liability Companies by Steve Meredith, CPA

Recommended 

Trading on Target Tapes, with Jack Schwager and Van Tharp

Real Estate Investing

Want To Be Profitable In This Real Estate Bubble?
I’ll Show You How in Just Three Easy Steps by Dr. Chris Anderson

Listening In...

Question from Last Week's Newsletter Article

View this newsletter on-line, or read back issues

 

Feature Article 

Don’t Take Just Any Ol’ Entry

Trading Tip

by  D. R. Barton, Jr.

“A single advantage is worth a thousand sorceries.”
                                                --Turkish proverb

As traders and investors, we’re always looking for an edge in the markets.  Today we’re going to discuss finding edges in our entries.

But before we talk about entry edges, let me be clear that I believe that entries are much less important than money management, stops and exits when it comes to system design.

With that said, there are still some useful ways to approach the design and execution of entries that can give you some additional advantages in the way you initiate your trades.  Let’s look at a few questions and concepts you can use to make more effective entries.

·        Is your entry technique consistent with your strategy’s market concept?  When I speak of your system’s “market concept,” I’m talking about the beliefs upon which your strategy is built.  For example, if you have a system that identifies a channel and then buys the bottoms and sells the tops, you need some sort of counter-trend entry that will allow you to sell near the channel tops and buy near the channel bottom.

Some trend following systems count on getting a good entry on the long side by buying a pullback.  Since these are longer-term systems looking to capture longer-term trends, this can be an excellent strategy.

On the other hand, if your strategy is a breakout / breakdown system, then you are best served quickly following the price move after confirmation.  Waiting for a pullback will most likely lead to either of two unwanted results:  the price will never pull back and you miss the entry on a good trade, or the price pulls back and just keeps moving against the breakout for a loss  (a routine occurrence in breakout trading).

·        Do you have to get in now?  This is a great question for folks who follow long-term newsletter recommendations and those who take trades based on fundamental data.  For those trading on a shorter time frame or following a technical system, in most cases, you should take entries as they occur.

But back to those following long-term newsletter recommendations:  Jumping blindly in at the exact minute you hear or read about the recommendation is probably not the best entry technique.  If a popular newsletter with a big subscriber base makes a recommendation, LOTS of folks are going to be jumping in.  And unless the stock is very liquid, it will be a bit like someone yelling, “Fire!” in crowded theater – everyone wants to get through the same door at the same time.

Instead of fighting a newsletter “cattle call”, you might try waiting for the price to pull back a bit after the initial run-up.  A 50 percent retracement  of the move caused by the recommendation is a good rule-of-thumb to use.

·        Have you mastered the art of “stalking”?  One of Van’s famous Ten Tasks of Trading is stalking your trade.  Just like a cat stalks its prey looking for the best possible moment to pounce, so a trader can stalk an entry to get the best price for entry.  For a trader or investor entering a long-term trade based on fundamental analysis, stalking may include adding some technical analysis to help with the timing of the entry.  In almost all cases for long-term trading, waiting for the price to enter an up-trend is a good idea.

Shorter-term traders may use the Level II screen to help them stalk a trade.  The Level II tool helps to give traders a rough idea of the very short-term supply / demand balance for a given stock.  When used with an understanding of its strengths and weaknesses, the Level II screen can be a very useful stalking tool to help give traders an edge in getting the best entry price for their trade.

Designing your entries to give you as strong an edge as possible is a task that takes extra time, but can pay big dividends.  It may be useful to look back on your trade entries and see if there are other tools or techniques that can make those entries more effective.

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.

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.

 

Tax Tip

Tax Tip of the Week

Tax Information for Limited Liability Companies

by

Stephen S. Meredith, CPA, PLL

The Limited Liability Company (LLC) is a business structure that is increasing in popularity.  This business entity is a State created legal entity and has a separate legal existence from its owner(s).  Therefore, personal assets are kept separate from business assets and are not reachable by creditors with claims against the LLC.  This liability protection is the main reason people form an LLC.

Each state has its own registration and business requirements for an LLC.  LLC’s have a variety of names and level of asset protection based on State law.  This area of the law is evolving since this is a relatively new type of entity.  There is no Federal law or tax return specifically for the LLC; instead the State rules for LLC's will determine which Federal tax return they file.

So what type of federal tax return should an LLC file?  For Federal tax purposes, an LLC may file either a corporate (1120), partnership (1065) or sole proprietorship (schedule C of 1040) tax return depending on its circumstances.

An LLC that has at least two members can choose to be classified as either a partnership, or an association taxable as a corporation.  A business entity with a single member can choose to be classified as either an association taxable as a corporation or will be treated as a disregarded entity which, for tax purposes only, is an entity disregarded as separate from its owner.  If the LLC does not choose how it wants to be classified, the entity will default to a pre-determined classification for Federal tax purposes.

If the LLC has at least two members, and is not required to file as a corporation, it will default to a partnership classification and be required to file a partnership tax return.  An LLC with only one member, that is not required to file as a corporation, will be a disregarded entity and will be required to file as a sole proprietor and complete the required schedules as part of the owner's 1040.

For a variety of business reasons an entity may wish to be classified as something other than its default category.  To do this, or to change its current classification, an entity must file Form 8832, Entity Classification Election.  The election to be taxed differently will be in effect on the date the entity enters on line 4 of Form 8832.  If the entity does not enter a date on Line 4, the election will be in effect as of the date the form is filed.  Additionally, the election cannot take place more than 75 days prior to the filing date for Form 8832 nor can the election be effective for a date that is more than 12 months after Form 8832 is filed.  However, if the election is the "initial classification election", and not a request to change the entity classification, a late election can be made (more than 75 days before the filing of the Form 8832).  See the instructions for Form 8832 for further guidance.

Some LLC’s may want to elect to be taxed as a corporation, and then make the S Election on Form 2553.  The reason for doing this is so they can get a salary instead, do payroll withholding, and avoid part of the Social Security Tax.  The new rules just published in 2004 say that if you want to make the election to be an S-Corporation, you only have to file form 2553, and are not required to file form 8832.  An existing LLC can also elect to make the change to S Corporation status by filing form 2553.  Generally an S Election must be made within the first 75 days of the calendar year to be valid for the current year, otherwise it takes effect for the next tax year.

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 Listening:

Trading On Target, II, 
Audio Program

A series designed to answer the most frequently asked questions by traders to traders. A rare opportunity to hear the thoughts, opinions and experiences of some of the top names in the world of trading.

Featuring:  

  • Dr. Van K. Tharp; 

  • Market Wizard Tom Basso; 

  • Market Wizard author Jack D. Schwager; 

  • Options Trader Ray Kelly; and 

  • Trader/Author Bruce Babcock, 

Four audio cassette tapes.

$99.00

now only
 $29.95
Order Here

Real Estate:

Want To Be Profitable In This Real Estate Bubble? 
I’ll Show You How in Just Three Easy Steps

By Chris Anderson, Ph.D.

This is a question I get almost everyday from either our web site GetPreconstructionProfit.com or from my individual investment activities.  The question is “How Can I Be Profitable When We Are In A Real Estate Bubble”? 

STEP#1.  First you have to recognize that in order to make money in almost any market (i.e. stocks, commodities, real estate, etc.) you need to have the market in motion.  In other words, the prices or values have to be changing substantially, either up or down, for you to make money.  Did you know that many traders back in the NASDAQ bubble made millions by adopting a style that made perfect sense for the type of bubble market that was being experienced?  Of course this was financially devastating to buy and hold investors who bought at the market top.  So what is the difference?  The answer is a difference in investing/trading style and risk management.

STEP #2.  Now throw a little reality into the picture.  Specifically, you need to realize that nobody can consistently predict the turning point of a rapidly moving market.  People who pay attention to value (which is always a wise move) can tell you when things are out of whack with the market, but they cannot tell you if the market will turn in a week, a year, or a decade!  Warren Buffet correctly predicted that the stock market was way over valued LONG before it actually corrected.  Since Warren is a value-type investor, it made perfect sense to stay on the sidelines.  In contrast, many active traders became multiple millionaires during that period and then rapidly adapted to the market downturn.  Both were “correct” for the type of style that they employed.

STEP #3.  You have to realize that there are many ways for an overvalued market to correct.  For example, in the real estate markets, many people are claiming that the price-to-earnings (P/E) ratio is out-of-balance; that is the price you can collect for rents in a year relative to the purchase price.  Typically this should be around a ratio of 100 to 150 for a good cashflow investment.  In some areas of the country, this ratio is over 400. 

You need to realize that this imbalance can be corrected by the price dropping (as many claim), rents escalating, or combinations of both.  In addition, it may not correct as demonstrated in many markets for over 20 years!  So your choice becomes “do I sit on the sidelines” or “do I learn how to invest safely in this fast moving market.”  This is a personal choice that you have to make in regards to your own personal style.

Want to know an additional little secret? Like in stock trading, the secret to any successful investing is learning how to control your risk relative to your potential gain.  It’s that simple!  As an example, there are preconstruction real estate deals out there where an investor can risk less than $2,000 and can still make a potential reward of $50,000 or more.  If the investment does not work out, then all that investor is out is the $2,000 initial risk.  Knowing that little piece of information can potentially save you hundreds of thousands of dollars!  For investors that participate in real estate investments on a continuous basis, they always try to educate themselves on the risk potential first followed by the potential for gain.

The bottom line is that if you follow these simple steps, you can also learn how to invest in markets that other people perceive as dangerous bubbles!

Chris Anderson is a leading authority on preconstruction real estate investing.  Get his four-day e-mail course and a 33 minute video free today!  Visit www.GetPreconstructionProfit.com.  In addition, Dr. Anderson is the on-line training coordinator at the Van Tharp Institute, a group dedicated to providing world class training for investors and traders

 

Listening in....

Excerpts from Dr. Tharp's Mastermind Discussion Forum

Question on Former (Last Week's) Newsletter  
Author: nando
Date: 03-16-05 11:50

DR Van Tharp wrote in his newsletter (last week) : 

"...How do I protect myself? First, I am currently 100% long in the stock market. My personal account was up 24% in February. The reason is because there are so many explosive stocks right now – in the energy, steel, and home building sectors. However, I protect myself with a tight stop on my entire portfolio. If my portfolio drops by 5%, I basically get out of everything that’s in the red. I had to do that several times if February. But if the market collapses, I’ll have my gains and I’ll have cash to go short as the market proves itself on the downside."

It made me wonder:

--> Long? : But the market is in red condition

--> 5% drop and out of the market? But what should be a re entry? The exit is based on the portfolio equity curve even if the condition to entry are still correct... so what could be a re entry? Based on portfolio?

Please don’t misunderstand me, I am new to this and I just try to get some insight to be able to understand...

Reply To This Message 

Re: Question on Former Newsletter  
Author: Craig 

You might protect yourself by looking at all your long stocks. If you have stocks that 'everybody' wants into or are into, you may consider taking some profits. Put your profits into something like gold, commodities or currencies based on commodities. Heck cash is good or at least better than a rolling over hot item.

Reply To This Message 

Re: Question on Former Newsletter 
Author: Kevin
Date: 03-20-05 16:17

The Markets may be in red light mode, but in the shorter timeframe, there are tradable rallies. Van has stated this also, that although we may be in a secular bear market, there will be rallies to trade on the long side.

Look at 2003- this could be considered a bear market rally within a longer term bear scenario.

Re-entry criteria should be developed within your own trading or investing strategy, you need to create and test your own entry and exits plans, along with all other details of your trading system.

Good luck with your learning process and trading.

Regards,

Kevin

Reply To This Message 

Re: Question on Former Newsletter 
Author: nando
Date: 03-21-05 06:50

Thanks for your answers...

I am realizing how hard it is...

I thought red light mode was a set up condition for not going long... 

I am totally lost... I need to re read Van lines...

Reply To This Message 

Re: Question on Former Newsletter 
Author: Kevin T. 
Date: 03-21-05 13:24

Trading timeframe really enters into things when you are looking at overall market direction. Trading a momentum system, like Investors Business Daily's CANSLIM model requires a strong market trend, in order to be successful.

I swing trade, so I am able to trade the smaller up and down movements of the market, and worry less about the big picture (although when it is in a strong trend, I can loosen trailing stops a bit).

You might want to start with Van's first book, and then consider the Peak Performance course. You need to find a trading/investing strategy that is right for you.

Regards,

Kevin. 

Read the full, unedited thread on the forum,   link here. (Hint for finding it, look at the heading and the date) Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other. Search specific topics 

 

Back to top

Do Not Reply to This Email using the reply button as the email is not monitored. Please click this link contact us:  suggestions@iitm.com

R-e-m-o-v-e me

The Van Tharp Institute does not support spamming in any way, shape or form. This is a subscription based newsletter. If you no longer wish to subscribe, Unsubscribe. 

Back to top

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

Quote of the Week

HAPPY SPRING!:

I wandered lonely as a cloud
That floats on high o'er vales and hills,
When all at once I saw a crowd,
A host, of golden daffodils;
Beside the lake beneath the trees,
Fluttering and dancing in the breeze.

 William Woodsworth 

.

.

.

.

.

.

.

.

.

.

.

.

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

Click to Read

Look for a new updates at the beginning of each new month.

.

.

.

.

.

 

.

 

.

.

.

.

.

.

 

.

.

.

.

Back to top

.

.

.

.

.

.

.

.

.

.

 

 

.

.

.

.

.

.

.

.

.

Share this newsletter with a friend!

.

.

.

.

.

.

.

.

.

.

.

.

 

.

.

.

.

.

.

Back to top

.

.

.

Share this newsletter with a friend!

.

.

.

 

.

.

.

.

.

Back to top

.

 

.

.

.

.

.

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

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors.