| The Van Tharp Institute |
March 23, 2005 � Issue #212 | |
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Tharp's Thoughts Weekly Newsletter |
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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 AndersonListening In... Question from Last Week's Newsletter Article
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Don�t Take Just Any Ol� Entry Trading Tip by D. R. Barton, Jr. �A single advantage is
worth a thousand sorceries.� 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.
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.
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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.
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Recommended
Listening:
Trading
On Target, II, 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:
Four audio cassette tapes.
now only |
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Want
To Be Profitable In This Real Estate Bubble? 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
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Excerpts from Dr. Tharp's Mastermind Discussion Forum Question on Former (Last
Week's) Newsletter
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Quote of the Week HAPPY SPRING!:
I wandered lonely
as a cloud |
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Van Tharp's Most Recent Market Update including the 1-2-3 Model and the Five Star Model. Look for a new updates at the beginning of each new month. |
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