Taxation Consideration

As I contemplated investment strategies for my own trading accounts, I considered taxation. If I bought and sold in the same year, any gains would be taxed at my ordinary income rate. My income as an Itochu Salaryman wasn’t much, but even with our housing interest deduction, I’d be paying in the high twenty percent range.

On the other hand, if I held my investments for a year, I’d be taxed on capital gains rather than income. That rate was at a relatively low 15%. I’d save somewhere between 10-15%. It seemed clear that I should try to hold if I got into a good investment.

As I invested, however, I realized my money was locked up with this strategy. While I sidelined my bets, I’d see other stocks taking their jumps. Slowly it dawned on me that 20% wasn’t such a great boost. Wouldn’t I be better off making bets on likely prospects that were going to move in a few weeks or months? Once they popped, I could move my money to other likely candidates. It seemed that almost any stock was destined to jump. Whether the driver was a positive news event or just the flood of new money entering the tech sector, everything seemed ready to sprint ten, twenty, forty points.

Suffice it to say, this led to impatience, both on my part and that of the investing public, or so it seemed. Nobody knew which one would rally. In reality, it was still a craps shoot. The stocks we held might well have been the ones to move. But that guy over there with stock M just made a 120% gain! And she made 80% in two weeks with N! Meanwhile, mine only bumped 4% in over a month.

Normally, a 48% annualized return would satisfy investors. But “annualized” was a concept long ago lost in a race to hit a winner, or series of winners. We were covering the craps table with bets, eager for the next roll. Let the old money stay on the bingo boards. This was a new world shaping up. Destiny lay with those who could move quickly — or so we continued to tell ourselves.

In my later investments, this 20% rule came into play as the market declined too. I held shares of Selectica to show my strategic tie to the company that had granted me this instant gain. I also thought of the 20% I might lose if that gain were realized within one year and taxed as ordinary income rather than capital gain. In truth, I hoped it would rise to its previous heights in the 150 range. Once you’ve tasted the high, the desire to return is an addictive response.

Yet the price continued its decline with the overall market: 88, 82, 75, 72. Soon, the 20% I didn’t have to pay to the feds vanished on its own. Would it decline another twenty?

I talked with Albert as we passed one another’s offices. “It’s going to come back!” he said, with all the belief of a religious zealot.

“Absolutely!” I joined in. “It’s turning around.” We held our hopes and our stock positions like monkeys with our hands in the monkey trap. Only if we released the fruit could we withdraw our hands from between the narrow bars. Clenching to our obsessive desires, we followed the market down, fists clenched.

Albert called me into his office as I walked by one morning. “Have you seen this website? They have a prediction engine that forecasts the likely target price of stocks. It has nothing to do with news or anything about the company. It just runs the numbers somehow on the stock price movements – some sort of natural AI thing. It’s predicting that Selectica will hit 108! Check it out!”

I looked at the site. It was enough to give me hope. I decided to hold my shares for a while longer. A few weeks later, Albert and I reconvened. “Hey, so much for that stock predictor!” Selectica was in the low fifties.

“Raj!” he moaned, referring to the company’s President. “That secondary offering killed it.” Maybe the secondary sale of company shares by the company itself flooded the market. Maybe it was headed south anyway. In any case, Selectica was in the forties by the end of the next week.