Dear Outsider,
I decided to get some cheap food at the local Mexican joint around the corner and lick my wounds from a terrible week of trading for me.
Last week I wrote to you about the biggest investing mistake of my career.
I didn't follow my own advice and got burned because I had too many eggs in one basket...
A classic mistake.
All the signs were there...
It was too good to be true...
An extremely high dividend and a consistent share price...
What could be better?
The red flags were popping up not for the company necessarily but for how I was spending my money.
I acted as if nothing could ever happen to this one stock, that it was a sure thing.
I even felt like I was getting away with something, which is when you know there's a problem.
But I chose to ignore my intuition, pile my money into one company, and bam - out of nowhere, a short seller released a report defaming the company's operations.
I was caught in a battle of billionaires that tanked the stock 40%.
Any profit I had was gone.
I panic sold.
I went against all of my own advice - because in the heat of the moment and when real money was involved, I went into wealth-preservation mode.
Anyway, as all this was going through my head, I overheard a conversation at the bar that piqued my interest.
A couple was talking to the bartender about how they were flying out to Vegas in the morning.
They exchanged the common pleasantries of travel.
Then the guy said, "If I hit it big, I'm definitely buying a new guitar."
His girlfriend angrily said, "No, you're not."
He replied, "Yes, I definitely am."
It was quickly followed by, "No... You're not."
They were in the middle of leaving and got up out of their chairs.
Then he said, "Hey, don't tell me what to do with my money."
She replied as they were walking out the door (but loud enough for everyone to hear), "You're $8,000 in credit card debt. You're not buying anything!"
He promptly shut up, tucked his tail between his legs, and walked out the door.
I guess I'm not the only one making poor financial decisions, I thought.
But this also sums up a whole host of problems and why the average person in the U.S. has no idea what they're doing with money.
This person shouldn't be traveling anywhere, let alone Las Vegas, where he'll surely lose it all.
Trying to hit it big is a gambler's mindset, something I'm guilty of from time to time.
In Animal House, Dean Vernon Wormer tells Flounder, "Fat, drunk, and stupid is no way to go through life, son."
Well, having a gambler's mindset is no way to be an investor.
This is how you dig yourself deeper into debt.
And it can lead you to consider using one of the most controversial investing strategies, which I'll reveal below.
The stock I'm talking about above is of course Icahn Enterprises (NASDAQ: IEP). Last week, I wrote that activist investor Carl Icahn's investment fund dropped 40% in just two days after short seller Hindenburg Research released a report accusing the company of operating like a Ponzi scheme by taking new investment dollars and paying them out to older investors through dividends. The feared research company also said Icahn was falsely marking up the value of certain assets, thereby inflating the value of the fund. Not only that, but the company was trading at a 218% premium to its net asset value (NAV). On top of all that, Hindenburg claimed that Icahn didn't have enough money to continue paying the dividend and that the business was unsustainable.
Hindenburg writes, "Icahn has been using money taken in from new investors to pay out dividends to old investors. Such Ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one 'holding the bag.'"
Investors panicked, and Icahn lost nearly $10 billion on paper in two days.
Icahn Enterprises countered the short seller report this week, saying the dividend was intact and that the company's performance would speak for itself. Icahn even called the Hindenburg report a "blitzkrieg" attack on retail investors because so many people lost money. Now the company's approved a $500 million buyback program.
The gambler's mindset started to creep back in, and I started thinking about ways to make back what I'd lost, which brought me to the controversial practice of capturing dividends.You'll Never Be On The Inside!
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It may not sound controversial, but among investors and especially companies, it most certainly is.
Before getting into the strategy, you need to know an important date. The ex-dividend date is the day when investors will no longer be eligible to receive the dividend (hence the "ex").
However, if you buy shares the day before the ex-dividend date and hold until market open on the ex-day, you'll be eligible for the dividends. Therefore, dividend capture is the practice of buying shares before the ex-dividend date and then selling on the ex-dividend date in order to "capture" the dividend.
Seems easy enough, but it comes with some serious risks.
The first risk is the share price is typically going to fall by the dividend amount on the ex-date. That's just basic arithmetic since the company's going to have less cash on the books.
The second risk is that you're going to have to pay taxes and transaction fees. Of course, you can utilize this strategy in a Roth IRA and not have to pay taxes on the dividends, but then you won't have access to the cash until you retire.
Finally, you're going to be spending a lot of time trading in and out, which some people just don't have the patience for.
However, the strategy also comes with some obvious benefits.
First, every single day of the year, a company goes ex-dividend, so you could theoretically trade every single day and get paid to do so.
Second, you don't have to ride the ups and downs of the market like you would by holding a stock for years. You're in and out, nice and quick.
Finally, you're bringing in consistent cash, not to mention you can make even more money if a company announces a special dividend with a huge payout.
Statistically, most people end up just breaking even, but I'm sure there are others who use this technique profitably.
Don't have a gambler's mindset when you're investing.
Don't think of only the upside potential; consider the downside risks as well.
Also, don't forget to look at what's coming further down the road.
We just got word last week that our neighbors to the north are one step closer to a digital currency.
The Bank of Canada is actively polling citizens about what features they'd like to see in a digital Canadian dollar:
This isn't good.
If you thought it couldn't happen here, think again.
A U.S. digital dollar would devastate our economy.
Look out, because it's coming fast.
The threat is at our doorstep.
Stay frosty,
Alexander Boulden Editor, Outsider Club
After Alexander's passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.
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