Individual Stock Investment Performance

birkharv on

Laurie, when I attempt to open your link to the Northern Traders Portfolio I receive a blank page. Would you please resend it so that I may see to what you are referring?

Thanks

Bill Harvey

From: "Laurie Frederiksen" <laurie@bivio.biz>
To: "club cafe" <club_cafe@bivio.com>
Sent: Monday, December 5, 2011 12:03:07 PM
Subject: Re: [club_cafe] Individual Stock Investment Performance

Dear Etana,

Perhaps you haven't been doing as well as you'd like because you are focusing on past results rather than the future.   I find that past history can be very distracting and keeps me from focusing on what is really important.    I personally have been trying to avoid spending too much time looking at it.

I think past history is interesting to look at to learn from but, other than that I don't see a lot of value to it for managing what you want to do for the future.

The bivio valuation report is certainly not a portfolio management report. It is an accounting report that gives you the value of your partnership at any point in time. The unrealized gains/losses column on that report is especially useless for figuring out what to do next.

I think it is great that your club has a portfolio manager. I think it is important for someone in a club to be accumulating all the information about all of your stocks in one place and making sure everyone knows how it adds up for your overall portfolio. If you are interested, here is a link to a spreadsheet that one of my clubs uses to help us manage our portfolio.

Northern Traders Portfolio

It is very similar to a Manifest Investing dashboard but we look at projections for a one year time frame rather than a 5 year one and we use our own estimates of the three fundamentals: sales growth rate, net profit margin and average projected P/E.

(Disclaimer: I share this for educational and discussion purposes only. A lot of our companies have reported earnings since our last meeting. At our next meeting each stock watcher will report on what was said. We'll be updating the sales numbers and, if there's any significant news we'll be discussing whether we might want to adjust any of our judgments.   If you're interested in any of these stocks, you should evaluate them on your own and come up with your own judgments.)

If any of our changes in judgments caused a significant change in our projected return, that is what would lead us to sell a stock. If we have money to invest, we'll first take a look at putting it into those stocks that we already own.

The only history we really look at is our portfolio IRR benchmarked against VFINX.   We only started 2 and a half years ago but so far we're doing pretty well:

Northern Traders QPRR Graph

We find it interesting to think about and learn from what was happening during the times this graph has big changes in it.

Hope that helps.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

birkharv on

Laurie, sorry I just got your corrected email.

Thanks

Bill

Roy Chastain on

Laurie, A number of questions have arisen from some clubs in my area, so I thought I better seek clarification. These questions assume insufficient cash for payout.

1. When Partner 1 leaves, you MAY give stocks that have increased in value. (But, I still don't understand when the tax consequences hit the remaining partners, or how the capital gains are treated.)

2. When Partner 2 leaves, Sell losers and use cash for pay off. Everybody takes the off-setting deduction.

3. When Partner 3 wishes to cash out a portion of his/her Units, do you sell & give cash, or give stocks (as above), and how are the taxes handled?

4. (Different scenario): When a club disbands, it seems easier to sell everything and pay out the cash. Then the next tax return is clean, simple and final. But, can you instead distribute the stocks and, if so, how are profits handled?

5. (There may be other scenarios that I haven't thought of, but may have crossed your threshold.)

Thank you.

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

Laurie Frederiksen on

Dear Roy,

If you are referring to completely disbanding, I'd recommend you first sell any losers for the cash and let everyone claim part of the losses this year. They can use them to offset any gains and possibly even to offset some of their regular (ordinary) income.

Then, consider transferring stocks in which you have a gain. This lets members defer paying taxes on any gain they have on their investment in the club until they decide to sell the stock. In addition, their basis in the shares they receive will be their basis in the club minus any cash they receive.

Here is a link to our instructions for disbanding

You may consider it easier to sell everything but then you will be taxed on any capital gains in the year of the sale. By distributing appreciated stock, everyone has an opportunity to take advantage of a nice opportunity to defer taxes.

Partial withdrawals work completely differently. (Because that's what the tax code requires) If shares are transferred in a partial withdrawal, the member takes the club basis in the stock. This may mean he'll end up prepaying taxes on the gain. That's why we don't recommend that stocks be transferred in payment of a partial withdrawal.

In a partial withdrawal, if a member withdraws less than his basis in the club in cash, he will not owe any current taxes. This can be an attractive thing.

Deferring taxes is what these recommendations are all about. In the tax world, due to the present value of money, the general advice is to defer income and accelerate deductions. Taxes paid in the future in general, cost less in present day dollars than taxes paid today. Of course the specific details of how things will affect any one person will depend on their personal tax situation and what happens to inflation and tax rates in the future, so these are only guidelines. As they always say "Consult your tax advisor"

We are glad to help anyone out with specific questions about their specific situations if they want to email us at support@bivio.com

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Jim Thomas on

Etana,

> Are you suggesting that bivio change the Valuation Report to add IRR figures for certain defined time periods? <

I'm trying to (1) clarify what additional information you want to see and (2) understand how you believe that information can be useful. If IRR figures for various pre-defined time periods is what you want easier access to, then I guess it's *you* who are suggesting that bivio make that information easier to get. :)

For example ...

http://www.bivio.com/iclwc/accounting/reports/valuation?date=12/05/2011 is the Valuation Statement for the public "ICL Wager" club. This is not an actual club and the holdings (and any dividends paid) haven't been updated in years, so this is just for the sake of discussion!!!!

Imagine the following added to that Valuation Statement, or otherwise made available via a single click. Would you find that information useful? Why or why not?

Trailing IRR: 12-mo   18-mo    2-yr   3-yr   5-yr
Best Buy      -35.6% -20.4% -20.6% 6.2%
Coach           9.9% 35.1%   30.5% 46.8%
FactSet        -0.8% 22.3% 12.0% 37.0%
Infosys       -23.8% -5.8%    0.3% 30.5%
Stryker        -8.6% -5.7%   -4.1%   7.0% -0.7%
Westpac         0.5% 13.1%   -0.6% 25.2%

(In this portfolio, only Stryker was purchased long enough ago to have a 5-yr IRR).

Here are the URLs used to get those IRR values.

12-month http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2010&d=12/05/2011

18-month http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=06/05/2010&d=12/05/2011

2-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2009&d=12/05/2011

3-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2008&d=12/05/2011

5-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2006&d=12/05/2011

-Jim Thomas

Etana Finkler on

Laurie,

Thank you for your comments.

You might look at the market the past 2 years, to see that if you BEGAN investing at the low of 2008/2009, then most stocks did do well, but still, it is always nice to be doing well.

I see your spreadsheet, thanks. What I don't see is CHANGE. How do you know whether you are achieving what you are expecting to achieve. I think that is a major issue that I have neglected to look at or act on in the past 16 years. I always look at the current picture.

I tend to disagree with you. I look at the current picture. I look at the past history with the SSG. That of course tells something about the fundamentals of the company. I look at the future projections from my judgment on the SSG and from MI projections.

But what I don't look at is

1. what if the company in 12 months, 18 months, 24 months is achieving the projections in fundamentals

2. What if the company IS meeting the fundamental projections, as in the case of JST, STRA, CPLA, AFAM, FCN, all Manifest Investing darlings, rated 100% on the bivio dozen, all have done really poorly the past 2 years.

I think my technical analysis and learning has really helped me to manage my personal porfolio, to act when a stock is overvalued, to sell when the price trend is down down down. There is more to success than fundamental analysis, in my opinion.

i still feel, 'all of you BI investors are doing well, and only Etana picks poor stocks and loses 60% value" but I do not think that is the reality. I think others do not bring issues to surface like i do.

I think it is important for someone in a club to be accumulating all the information about all of your stocks in one place and making sure everyone knows how it adds up for your overall portfolio.

I think I need and probably BI members need more information about what to be watching for. I have watched. I have seen SSGs become so good that we bought more AFAM, more CPLA, and lost lots of money on good SSGs.

Northern Traders Portfolio=

It is very similar to a Manifest Investing dashboard but we look at projections for a one year time frame r

What do you do besides LOOK? What do you do after a year if the price has not increased?

Northern Traders QPRR Graph

This graph is very nice and I will show it to the MicNOVA model club so we can do this too.

However, if you notice, the QPRR went from 4% to 4% from 1/2009 to today. We are not in a growth market, so BI philosophy is challenged.

Your club went from -7% to +4%

What I like seeing is the high peaks your club did that were so much better than the QPRR.

So the graph means that currently your club is 4% higher than the VFINX?? Is that what it shows?

Etana Finkler

etana.finkler@gmail.com

Please note NEW email address

On Dec 5, 2011, at 12:03 PM, Laurie Frederiksen wrote:

Dear Etana,

Perhaps you haven't been doing as well as you'd like because you are focusing on past results rather than the future.   I find that past history can be very distracting and keeps me from focusing on what is really important.    I personally have been trying to avoid spending too much time looking at it.

I think past history is interesting to look at to learn from but, other than that I don't see a lot of value to it for managing what you want to do for the future.

The bivio valuation report is certainly not a portfolio management report. It is an accounting report that gives you the value of your partnership at any point in time. The unrealized gains/losses column on that report is especially useless for figuring out what to do next.

I think it is great that your club has a portfolio manager. I think it is important for someone in a club to be accumulating all the information about all of your stocks in one place and making sure everyone knows how it adds up for your overall portfolio. If you are interested, here is a link to a spreadsheet that one of my clubs uses to help us manage our portfolio.

Northern Traders Portfolio

It is very similar to a Manifest Investing dashboard but we look at projections for a one year time frame rather than a 5 year one and we use our own estimates of the three fundamentals: sales growth rate, net profit margin and average projected P/E.

(Disclaimer: I share this for educational and discussion purposes only. A lot of our companies have reported earnings since our last meeting. At our next meeting each stock watcher will report on what was said. We'll be updating the sales numbers and, if there's any significant news we'll be discussing whether we might want to adjust any of our judgments.   If you're interested in any of these stocks, you should evaluate them on your own and come up with your own judgments.)

If any of our changes in judgments caused a significant change in our projected return, that is what would lead us to sell a stock. If we have money to invest, we'll first take a look at putting it into those stocks that we already own.

The only history we really look at is our portfolio IRR benchmarked against VFINX.   We only started 2 and a half years ago but so far we're doing pretty well:

Northern Traders QPRR Graph

We find it interesting to think about and learn from what was happening during the times this graph has big changes in it.

Hope that helps.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Etana Finkler on

Jim,

I had never thought that I could make that suggestion to bivio, but why not.

I have never felt the reports were handy for discussion with the club.

You see the information, but not enough to make conclusions or see red flags

Each month when Treasurer shows the reports, I thought, "there is not enough info here to compare to how we are doing; this is only a capture of the present time"

With your additions of performance over time, I could see that a stock is not meeting my goals in 6 months, nor in 12 months, and could look to sell it, or if my club were like MicNOVA, and wanted to make that decision after 3 years, perhaps we could do that...

I'd like the columns switched, so that it went:

ticker---shares--time--cost basis---- current price---- total cost-----market--- unrealized --percent

---------held-----held---per share----- per share------- basis --------- value----gain/loss----- gain/loss

.. and "time held" added

Etana Finkler

etana.finkler@gmail.com

Please note NEW email address

240.678.8142

On Dec 5, 2011, at 1:43 PM, Jim Thomas wrote:

Etana,

> Are you suggesting that bivio change the Valuation Report to add IRR figures for certain defined time periods? <

I'm trying to (1) clarify what additional information you want to see and (2) understand how you believe that information can be useful. If IRR figures for various pre-defined time periods is what you want easier access to, then I guess it's *you* who are suggesting that bivio make that information easier to get. :)

For example ...

http://www.bivio.com/iclwc/accounting/reports/valuation?date=12/05/2011 is the Valuation Statement for the public "ICL Wager" club. This is not an actual club and the holdings (and any dividends paid) haven't been updated in years, so this is just for the sake of discussion!!!!

Imagine the following added to that Valuation Statement, or otherwise made available via a single click.  Would you find that information useful? Why or why not?

Trailing IRR: 12-mo   18-mo    2-yr   3-yr   5-yr
Best Buy      -35.6% -20.4% -20.6% 6.2%
Coach           9.9% 35.1%   30.5% 46.8%
FactSet        -0.8% 22.3% 12.0% 37.0%
Infosys       -23.8% -5.8%    0.3% 30.5%
Stryker        -8.6% -5.7%   -4.1%   7.0% -0.7%
Westpac         0.5% 13.1%   -0.6% 25.2%

(In this portfolio, only Stryker was purchased long enough ago to have a 5-yr IRR).

Here are the URLs used to get those IRR values.
    12-month http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2010&d=12/05/2011
    18-month http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=06/05/2010&d=12/05/2011
    2-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2009&d=12/05/2011
    3-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2008&d=12/05/2011
    5-year http://www.bivio.com/iclwc/accounting/reports/investment-performance?b=12/05/2006&d=12/05/2011

-Jim Thomas

Laurie Frederiksen on

I see your spreadsheet, thanks. What I don't see is CHANGE. How do you know whether you are achieving what you are expecting to achieve.

We can see that from our historical relative returns.

But what I don't look at is
1. what if the company in 12 months, 18 months, 24 months is achieving the projections in fundamentals

Even if it is, that doesn't necessarily tell you anything about what it might do in the future.

2. What if the company IS meeting the fundamental projections, as in the case of JST, STRA, CPLA, AFAM, FCN, all Manifest Investing darlings, rated 100% on the bivio dozen, all have done really poorly the past 2 years.

Are you sure they really are?

I also think there are stocks for which making 5 year projections is extremely difficult. I recently attended a seminar where Angel investors were working with entrepreneurs to help them learn how to make business plans. Someone asked whether banks still required 5 year projections. The bankers who were there indicated that this is not really the case these days. They have found that things change much too quickly for 5 year projections to be a lot of use.

There are stocks that it is possible to make 5 year projections for and be pretty comfortable. Sometimes called core stocks, they have been along a long time and have a pretty established business model. But even they can change. I think it's more important to know a lot about a few stocks than to try and purchase too many.

I, personally don't feel making stock decisions on 5 year projections for all stocks is appropriate.

i still feel, 'all of you BI investors are doing well, and only Etana picks poor stocks and loses 60% value" but I do not think that is the reality. I think others do not bring issues to surface like i do.

I agree with your feeling that there may not have been enough discussion over the years about "How are you doing". That's why I've been trying to bring some attention to things like QPRR. You can't get better unless you know how you are doing.

But I also think, for many of us, an investment club is an opportunity to learn. I don't know anybody who instantly does well at something they are learning. Learning to invest is a journey. At least if you are trying to learn in a club environment, you have a cost effective way to make progress on that journey

What do you do besides LOOK? What do you do after a year if the price has not increased?

If we think the fundamentals we are using to make our projections are still good, and we like the projections, we keep the stock.

However, if you notice, the QPRR went from 4% to 4% from 1/2009 to today. We are not in a growth market, so BI philosophy is challenged.

These graphs plot relative return. Anything better than 0 is pretty good. +4 is very good.

That said, there is no one methodology which will work all the time. If there was, everyone would use it! But when you are learning, I think it is important to focus on one or another till you get to the point where you comfortable assimilating more ideas.

So the graph means that currently your club is 4% higher than the VFINX?? Is that what it shows?

It means that for the past 12 months, our IRR was 4% better than if we'd invested the same amounts at the same time in VFINX.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Jim Thomas on

Etana,

Before you can convince anyone to add "time held and "percent gain/loss" to the Valuation Statement, you'll have to make a case for what those numbers are supposed to mean when, for example, a stock has been purchased on multiple dates. That information might make more sense on a detail report showing each individual tax lot.

ticker---shares--time--cost basis---- current price---- total cost-----market--- unrealized --percent

---------held-----held---per share----- per share------- basis --------- value----gain/loss----- gain/loss

As Laurie mentioned earlier, the Valuation Statement is really an accounting report. It's primary purpose is to show the computation of current unit value. There is already information on the Valuation Statement unrelated to this and I'd be wary of adding more. If providing more portfolio management information makes sense, I'd be inclined to design a report specifically for that purpose.

-Jim Thomas

Roy Chastain on

Laurie, Thank you for your explanation. I understand the rationale for deferring the taxes, but it is the actual "but then what" that I haven't understood, even following Ira's excellent attempts in the past. What I still don't understand is what happens after the appreciated stock is transferred to an individual. I understand that capital gains are not due until the stocks are sold. But, who pays the capital gains? For me, actual examples work best.

Let's say a stock tripled in value, from $50/sh to $150/sh. The "payoff" in shares is valued at $150/share, and club's gain of the $100/share is used to determine the value of the units. It doesn't seem appropriate that only the receiving partner pays the $100/share capital gains.

But, if the capital gains are shared by all, I see other problems. How does the club know when the shares are sold? If the receiver holds the stock for another 8 years, and it increases in value to $400/share (or split a couple of times) before selling, the sale must be broken down for reporting back to the club. And, what if other Partners have left the club during the year following the receiving Partner's departure? K-1s must be created for Partners who left seven years before the sale. That seems to be a burden on the Treasurer.''

Thank you for the education. ;-)

Roy Chastain

"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"

--- On Mon, 12/5/11, Laurie Frederiksen <laurie@bivio.biz> wrote:

Dear Roy,

<skip>

Then, consider transferring stocks in which you have a gain. This lets members defer paying taxes on any gain they have on their investment in the club until they decide to sell the stock. In addition, their basis in the shares they receive will be their basis in the club minus any cash they receive.

<skip>

You may consider it easier to sell everything but then you will be taxed on any capital gains in the year of the sale. By distributing appreciated stock, everyone has an opportunity to take advantage of a nice opportunity to defer taxes.

<skip>

Deferring taxes is what these recommendations are all about. In the tax world, due to the present value of money, the general advice is to defer income and accelerate deductions. Taxes paid in the future in general, cost less in present day dollars than taxes paid today. Of course the specific details of how things will affect any one person will depend on their personal tax situation and what happens to inflation and tax rates in the future, so these are only guidelines. As they always say "Consult your tax advisor"

Etana Finkler on

There comes a time, say after 16 years, that "when you are learning" is/shouldn't be the situation... lol

What I really need is better stock management skills.

That's why I added Saul Seinberg and Mary Ann Davis and Don Cassidy as mentors with their different perspectives.

I still don't feel comfortable with know how to manage troubling and underperforming stocks.

I have Zhongpin at a 60% loss, still and have not sold it in my personal account

I don't know what to do, when I look at MicNOVA's terrible performance the past 2.5 years, when other investors have done well. I don't know what to talk about with the club. They don't seem concerned with the poor performance, feeling that the stocks are good companies. I am very frustrated, because I think we should be doing better, but don't know really, how to decide if a stock is underperforming.

I agree with you about 5 years being too long a window. I wonder if MI will change to a shorter projection...

I agree with your feeling that there may not have been enough discussion over the years about "How are you doing". That's why I've been trying to bring some attention to things like QPRR. You can't get better unless you know how you are doing.

excellent

Etana Finkler

etana.finkler@gmail.com

Please note NEW email address

On Dec 5, 2011, at 2:36 PM, Laurie Frederiksen wrote:

I see your spreadsheet, thanks. What I don't see is CHANGE. How do you know whether you are achieving what you are expecting to achieve.

We can see that from our historical relative returns.

But what I don't look at is
1. what if the company in 12 months, 18 months, 24 months is achieving the projections in fundamentals

Even if it is, that doesn't necessarily tell you anything about what it might do in the future.

2. What if the company IS meeting the fundamental projections, as in the case of JST, STRA, CPLA, AFAM, FCN, all Manifest Investing darlings, rated 100% on the bivio dozen, all have done really poorly the past 2 years.

Are you sure they really are?

What do you do besides LOOK? What do you do after a year if the price has not increased?

If we think the fundamentals we are using to make our projections are still good, and we like the projections, we keep the stock.

However, if you notice, the QPRR went from 4% to 4% from 1/2009 to today. We are not in a growth market, so BI philosophy is challenged.

These graphs plot relative return. Anything better than 0 is pretty good. +4 is very good.

That said, there is no one methodology which will work all the time. If there was, everyone would use it! But when you are learning, I think it is important to focus on one or another till you get to the point where you comfortable assimilating more ideas.

Laurie Frederiksen on

There comes a time, say after 16 years, that "when you are learning" is/shouldn't be the situation... lol

One of my favorite quotes is one by Thomas Jefferson. "But though I am an old man, I am but a young gardner"

He probably might have said something similar about investing. <g>

I still don't feel comfortable with know how to manage troubling and underperforming stocks.

I have Zhongpin at a 60% loss, still and have not sold it in my personal account

That is a very complicated situation. I don't think anyone has the answer. Even people who spend far more time at this than you probably do. I think sometimes it's important to just move on. There are an awful lot of stocks out there to choose from. You really don't need that many to make up a good portfolio

I don't know what to do, when I look at MicNOVA's terrible performance the past 2.5 years, when other investors have done well. I don't know what to talk about with the club.

You can't change the past but perhaps if you look at your QPRR graph and discuss what investing decisions you were making and why during the down times, you might gain some insight into what you might change about your methodology.

They don't seem concerned with the poor performance,

I kind of doubt that.

feeling that the stocks are good companies.

If they are, you will eventually do better. By making the investments you are learning how to determine whether they are good or not. You really wouldn't be having the same learning experience if you hadn't invested real money in them.

I am very frustrated, because I think we should be doing better, but don't know really, how to decide if a stock is underperforming.

I find the more time I spend getting very engaged with the business results of the company I have invested in, the better I do. Even taking the time to listen to quarterly conference calls is valuable. Especially if you keep up with them from quarter to quarter.

I agree with you about 5 years being too long a window. I wonder if MI will change to a shorter projection...

5 years isn't bad if you are looking for a certain type of company. I do think you have to know enough about the situation to understand if it is really appropriate or not. Spend your time really getting to know more about fewer companies and it might help you. If you were investing in a business on the main street in your hometown you would do this. It shouldn't really be any different for investing in stocks.

-
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Laurie Frederiksen on

Hi Roy,

It's difficult for most to understand because most people don't think of having made a capital investment in the club itself. But your club (partnership) is a capital asset just like your shares of stock are.

You are not avoiding taxes by transferring shares, you are changing when you have to report them. It's just the way the tax code works.

There are two important words in the tax world. Realizing a gain and recognizing it. You realize a gain if something has increased in value. However you only have to recognize it for tax purposes (be taxed on it) when you dispose of it. In the case of a stock this would be when you sell it for cash.

The $100 gain you refer to in your example is part of the realized increase in value of your entire club. If you sell the stock as a club, you all have to recognize the gain immediately and will be taxed on your share of it. If, instead, everyone left the club at that point, the $100 would be a part of the capital gain on their share of the club. If they were paid out with stock, the gain would remain unrecognized (taxed) until they sold the stock they were paid out with.

By transferring stock, the club has never recognized the gain and nobody will have to pay immediate taxes on it. It is still there and will be recognized when everyone withdraws their equity from the club if they do so in cash. You haven't avoided the $100 gain, you have just deferred it.

But, if the capital gains are shared by all, I see other problems. How does the club know when the shares are sold? If the receiver holds the stock for another 8 years, and it increases in value to $400/share (or split a couple of times) before selling, the sale must be broken down for reporting back to the club. And, what if other Partners have left the club during the year following the receiving Partner's departure? K-1s must be created for Partners who left seven years before the sale. That seems to be a burden on the Treasurer.''

Once assets are transferred to a member, they are gone from the club. It doesn't matter what happens to them later. The club gain or loss on them at the time the club parts with them is part of the current value of each members equity in the club. If the assets are gone they won't have any further affect on future equity.

Hope that helps. Partnership taxation isn't the most obvious thing in the world to understand or explain. :)

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Jim Thomas on

Roy,

When a club transfers stock to a withdrawing member, there is no need for that member to tell the club anything when they sell the stock.

Perhaps this example will help?

Club buys $1,000 worth of stock X.
Stock X appreciates to $3,000.
Member A withdraws. Their club units are worth $3,000 and their personal cost basis in the club is $1,500.
Club pays member A by transferring stock X worth $3,000. The member's tax basis in stock X is set at $1,500, the same as their personal tax basis in the club at the time of their withdrawal.
Member A gets a Withdrawal Report (in addition to a K-1) showing an *unrealized* gain due to their withdrawal (and showing their $1,500 tax basis in stock X).
Stock A declines in value to $2,000. (Of course, stock A might appreciate instead.)
Former member A sells stock X. On their personal tax return they report a $500 realized gain from selling stock X ($2,000 market value at the time of sale minus $1,500 tax basis).

You're probably wondering what happened to the club's $2,000 *unrealized* gain on stock X (between step 1 and step 2).

Imagine what would have happened if step 3 were "Club sells stock X for $3,000". The club would then have a $2,000 *realized* gain on stock X, which would be allocated among all the members and appear on the K-1's for that year. Each member's tax basis in the club would increase by their share of that $2,000 gain (reducing the amount of capital gain they'll eventually have when they fully withdraw). Let's say member B was allocated $200 of that gain (because they owned 10% of the club when the club sold stock X).

Now, back to the original steps above. All the others members will eventually make a full withdrawal from the club. As they withdraw, each will have a capital gain (or loss) due to their membership in the club (just like member A did). Because stock X was transferred out of the club, when member B fully withdraws they will have a $200 larger capital gain (or smaller loss) than they would have if the club had sold stock X in step 3. Why? Because the $200 basis increase for member B (that would have been made if the club had sold the stock) didn't happen. Once the rest of the members have each withdrawn, the sum of their capital gains upon withdrawal will be $2,000 larger (because stock X was transferred) vs. the case where the club sold stock X. The "missing" $2,000 unrealized gain is accounted for in the tax basis of all the club members at the time stock X is transferred and it will eventually surface, member by member, as each one withdraws.

-Jim Thomas

John Rice on

Etana,

Why are you holding onto a stock that has depreciated so much? A stock that drops from $100/share to $50 a share for a 50% loss will have to double for you to make any gains? What are the chances of a stock that has dropped that far will come back and double within a reasonable time. There are too many good stocks out there to keep any big losers. My club has a 25% trailing stop on all of our stocks. I have even a smaller trailing stop threshhold in my personal account. As a bonus, the loss can offset any capital gains from other stock sells and dividends. As for our QPRR, we have been doing really well because we get rid of the big losers.

John Rice

ABODI Investment Club

Quest for Positive Relative Returns-Abodi Investment Club

	The green line on the graph below compares the rate of return you've achieved in your club relative to the rate of return you would have achieved if you'd invested the same amounts at the same times in VFINX (The Vanguard Index 500 Fund). Positive values mean you've made your money grow faster than the market return represented by the index fund. The yellow line is shown for comparison. It is the average relative return for each time period for all clubs participating in the Quest for Positive Relative Returns.

	Dates are the end points of successive 12 month time periods shown below.

Mail