Buy Low, Sell High

Everyone that invests in the stock market knows that you are supposed to buy low and sell high. Yet the emotional nature of people always throws a monkey wrench in the gears of reason. This week was no exception as I tried to explain to a rather nice but unsophisticated client that he should sell one closed end fund to buy another. Below is the scenario. (note: if this kind of stock market talk bores you to death, just go buy some BTZ and quit reading)

Retired doctor. Income Investor who wants to get a better yield than your average 5% CD and is willing to take a little more risk to get it. I buy him some BCF late last year around 14.30 and he has been getting a 7.5% yield on his money. Now its trading at 16.30 and the yield is down to 6.7%. I suggest he sell the BCF, take a nice 11-12% profit (after commish on both ends) and buy some BTZ at 21.50 yielding about 8.5% and trading 6% below its NAV. It's been down the last two weeks due to the spike in interest rates, but it will go back up when rates straighten out.

So, does Joe Doctor listen to his smart financial advisor? Nope. Instead of taking advantage of an opportunity and making his situation better with more income AND more appreciation potential, he is going to wait. When BCF comes back down, he will complain that he didn't sell it at a good profit. In the meantime, he will continue getting his 6.7% and lose some principal while smart institutions and sophisticated investors make 8.5% on an appreciating asset. These are the same kind of people who I pleaded with to buy Merck in late 2004 at 27 with a 5% dividend yield. How would that have done? Well...more than a double with dividends reinvested and almost a double taking the dividends in cash.

And we wonder why Joe Q Public never seems to win in the stock market. Hmmmm.......