Income Investing: Go Ask Alice

Jefferson Airplane has never, ever, been mistaken for a band of financial
advisors, but the White Rabbit lyrics can be incredibly instructional to the
generation of investors who experienced the classic first hand--- as a
description of their own college days' lifestyle. If only they had heeded the
dormouse's call to "feed your head." For the sake of your retirement sanity and
security, you just have to make income investing an intellectual exercise--- not
an emotional one.

The Brainwashing of the American Investor has its own tale of an Alice whose
"logic and proportion" had "fallen sloppy dead". Many years ago, when interest
rates soared into double digits, elderly Alice was well advised to invest her
stash in a portfolio of Ginnie Maes. Smiling broadly, she bragged to her friends
about the federally guaranteed 13% interest she was receiving in regular monthly
intervals--- much more than she needed to cover her living expenses.

But interest rates continued to move higher, and the decreasing market value of
her Ginnie Maes was more than she could tolerate. "If rates continue to go up,
I'll have nothing left" she cried to her White Knight financial advisor who
suggested patience and understanding. The very same pill that made her income
grow larger was also making her market value become smaller. But the income kept
rolling in, higher yielding unit trusts were purchased with the excess, and
major redemptions were nowhere to be seen. The income kept growing, the market
value kept shrinking, and Alice was seeing red from seeing red on her account
statements.

So Alice went to her local bank and traded in her absolutely government
guaranteed 13 per centers for some laddered, non-negotiable, 8.5% CDs. "No more
erosion of my nest egg", she toasted proudly with the hookah smoking bank
caterpillar who orchestrated her move to lower income levels. Within a few
months, she was liquidating CDs to pay the bills that never seemed to be a
problem with those terrible Ginnie Maes.

Don't let such uniformed thinking sabotage your retirement program; don't let
the selfish advice of a product sharpshooter send you chasing rabbits when IRE
(interest rate expectations) or other temporary market conditions shrink the
market value of your income portfolio. Feed your head; feed---your---head.
Income pays the bills, and if the income level is both steady and adequate,
there is no need to change investments. Market value should be used to determine
when to buy more (at lower prices) and when to take profits (at higher ones). It
is almost never necessary to take a loss on a high quality (government
guaranteed in Alice's case) income security.

More recent experimenters in much more sophisticated potions have addressed the
issue with similar results, reaching mind-numbing conclusions such as these: 1)
I know that my income has actually grown throughout the debacle in the financial
sector but I don't want to buy anymore of these securities until the prices go
back above what I paid for them originally. Translation: I'd rather stick with
my 4.5% tax-free yield than increase it by adding to my positions at lower
prices.

2) Sure, I understand the relationship between IRE and the prices of income CEFs
but individual bonds and Treasuries haven't suffered nearly as much. That's
where we should have been. Translation: I would be much happier with 3%
stability than with an 8% rate of realized spending money. 3) I'm tired of
seeing all the negative positions in my portfolio. Let's keep all the income we
receive in money market until we're back in positive territory. Translation: I'd
rather accept 1.5% or so than reduce my cost basis and compound my yield by
adding to my positions at lower prices.

Modern brokerage firm monthly statement "pills" were developed during the
dot-com drug era, when Wall Street was trying to emphasize the brilliance of its
speculative prescriptions by making us all feel ten feet tall, month after month
after month---. But the geniuses on the institutional chessboard produced too
many mushroom product varietals causing the red correction queen to lop off many
of their sacred heads. The papers that were designed to make our chests burst
with pride have turned on us as a haunting reminder of the reality of markets
and the cycles that push them in either direction.

It should be easy to navigate a quality income portfolio through whatever
circumstances, cycles, and scandals come at you, but a clear head and a clearer
understanding of what to expect is required. Most brokerage firm statements make
it difficult to monitor asset allocation using any methodology, including the
Working Capital Model, and I don't think that it's by chance. Most income
investors expect income securities to have stable market values. Constant
confusion breeds unhappiness, unhappiness foments change, and the masters of the
universe encourage you to fritter around from mushroom to mushroom in perpetual
emotional chaos. To who's benefit?

It would be wonderful if an investor's monthly statement would organize his
securities based on their class and purpose, but Wall Street doesn't want such
distinctions to be made easily. It would be great if the institutions would help
investors formulate reasonable expectations about what will happen to the market
values of their securities in varying market place conditions, but that's not
likely to become a reality any time soon. It would spectacular if the media
would produce information and explanation instead of news bites and
sensationalism, but you guessed it--- not much chance of that either.

Income investing should be easy. How many hookah-smoking caterpillars have given
you the how?


Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street
Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"



You have received this e-mail because you opted to do so. If you wish to
unsubscribe from this mailing list please click here
http://www.fatcow.com/utils/UnSubscribeMe.bml?Name=moo.sancoserve&List=Yahoo_Gro\
ups&Email=Market_Toolbox@yahoogroups.com .