My Dad (Bud) was the biggest fan of the stock market I have ever met. I’m not a licensed advisor, I’m just passing on what he told me. Always consult a professional. He’s been gone for 15 years now, but if you knew Bud, you undoubtedly heard most of this:
• Dad often reminded me that stocks always go up. At least on average and over time.
• Dad never bought a bond or a CD---as they get devoured by inflation. If you buy a stock with growing dividends, you may find that in 30 years the annual dividend you receive is worth more than what you paid for the stock. Stocks go up with inflation because companies can raise prices.
• If you buy five small-cap stocks, four of them will probably go broke, and the other one will undoubtedly make up for those four losers. Yeah, that is gambling, but only small companies can become big companies.
• Never buy mutual funds outside of a retirement plan. The reason is you get clobbered with capital gains as the fund manager churns the portfolio. If you buy individual stocks, you can choose to keep them forever, and NEVER pay the capital gains tax. The stocks get a new basis when you die.
• There is never a reason not to sell your losers. This way the government pays for part of your bad idea as the losses are deductible. On the flip side, you don’t ever have to pay tax on the winners, if you don’t sell them. He called this “playing with the house’s money.” If you like the stock, double down for 31 days and then sell your higher cost shares, to avoid the wash sale rules.
• Never trade commodities or options. For every winner, there is a loser, plus there is someone in the middle taking a “cut” of every transaction. Professional traders are smarter than you are. Stay away.
• Never catch a falling knife. If a stock is going down, don’t buy it until it starts going back up.
• Don’t be afraid to sell a winner if its valuation gets crazy high. Take some money off the table.
• Buying stocks requires savings. Savings requires sacrifice. You might need to sacrifice that new car, or that big house. (Yeah, I have been in my same house for 30 years.)
• Learn to sleep restfully when the stock market crashes. It will go back up.
• Stocks are liquid like cash. Bankers are a lot easier to deal with if you have substantial liquidity. Real estate is a better way to diversify as rents go up with inflation. And you can’t buy real estate without a banker.
• Buy stocks all the time. Never keep cash. You can always borrow against your stocks on a rainy day, or simply sell them.
• If you buy Black Hills Corp and MDU, the dividends will pay your utility bills.
• Why buy a mutual fund when you can buy a closed-end fund that trades at a steep discount to Net Asset Value?
• Read the glossy annual reports. Then stack them up in the corner of your office as that is so cool.
• Buy stocks when you are very young. It takes time to get rich.
• How to find a good stock to buy? Pick up a magazine or newspaper and read.
• Give stocks to charity. That way you don’t have to pay tax on the gains, and the charity gets more.
• Never buy annuities. They are not tax efficient.
• Regarding bank certificates of deposit (CD), he told everyone: “Why put your money in the bank, when you can buy the bank?” Dad had stock in Wells Fargo and US Bank, which by the way yielded 4.39% and 2.82% today. Find those rates in a CD!
Bud Thorstenson started working for the accounting practice that would become Ketel Thorstenson, LLP in 1950. He worked 54 tax season and have a profound effect on the local community. He died in 2004 at the age of 78.
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