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Draw-downs, losses, and our interpretations of them
Old 03-15-2016, 10:07 AM   #1
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Draw-downs, losses, and our interpretations of them

Although oil and gas and materials stocks are not yet out of the woods, I noticed something about the way I react during these portfolio stresses.

In particular, I and various other people here own at least some MLPs. I have 3, all pretty large positions that in 2 cases were once larger. One is a rare bird, a timberland MLP. I used to drive by some of their lands, when they were still a C-Corp. I bought it in '08. and it's been off to the races ever since. The other 2 are oil and gas related, and like most oil and gas their stock prices have been clobbered. But a peculiarity about an MLP is that it's payouts are way more than it's taxable income. So basis is adjusted down accordingly. Although brokers adjust basis for ordinary return of capital, I think that most frequently the basis you see on your brokerage website is unadjusted. Every tax season you get a K-1 which will show an adjusted basis which correspond to your tax basis. When I look at these reports, I see that if I sold my units I would have a gain, not a loss. So I should think twice about selling, and also I should not harass myself about poor results, because they are not poor! They are merely good, not spectacular.

I don't benchmark against some index. I informally benchmark against a putatively low risk fixed income alternative, and plan to best it handily without losing money permanently.

If I occasionally take a hit, I try to realize that this is part of reality, but I really don't want any large hits.

Anyway, with MLPs that are ongoing well financed viable businesses, things may seem more difficult than they actually are.

Ha
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Old 03-15-2016, 12:25 PM   #2
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If your MLP is giving you distributions that are a return-of-capital, the underlying basis goes down by a like amount.

So even if the MLP value is the same as what you originally paid, if you sell there will be taxes due based on the difference in selling price and basis. Luckily the taxes will probably be mostly Long term capital gains provided you bought them more than a year ago.

But you know all this already.
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Old 03-15-2016, 12:42 PM   #3
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I'm not quite sure what kind of responses you are wanting here, Ha.

My feeling is that (1) this is only a component of your overall portfolio, (2) taking on a non-standard portfolio means one has to expect tracking errors that are perhaps large and negative, (3) any portfolio will have miserable periods. That last one, the portfolio does not care but the human who holds it sure does.

How does one ever know if large losses are permanent? That is a tough one as we get older.

I think having intelligently chosen benchmark portfolios is a good idea. Those should be something that one sees as real future possibilities should one find his current selection is just not cutting it. But then again, one never quite knows if things are going to turn around in one's current portfolio ... someday.
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Old 03-15-2016, 02:58 PM   #4
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....When I look at these reports, I see that if I sold my units I would have a gain, not a loss. So I should think twice about selling....
Be wary of the tax tail wagging the investment dog.
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Old 03-16-2016, 04:49 PM   #5
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All the responses to this thread are very helpful.

I have several comments-

True enough, our goal is an after-tax profit, so a crappy investment cannot serve that goal very well. Nevertheless, I feel that for a taxable investor, particularly one who is into or up against any of the new tax code gotchas, if taxes are a tail, they are closer to a kangaroo's tail than a dog's.

Regarding when does a draw-down become a loss? When you sell it, or when a rational investor with similar outlook and information as you would sell it. This is true for value investors. Momentum investors IMO should be very quick to sell, because loss of momentum denotes a mistake, at least in the momentum investor's typical time window.

Regarding MLPs or other cash flow investments: to me it is quite clear that an investment bought at $10, pays out $1.50/year and can be sold on year 10 for $9 is a successful though not spectacular investment in today's interest rate environent, even though it sustains a "capital loss". This is similar to many business operating investments, you get paid off over time, not on sale. I also agree with others here who have pointed out that there are important issues with energy MLPs in particular, issues that relate to their business form/and or current O&G financial stress.

Update on my MLP investments- ignoring years of positive cash flows, and dealing only with original basis, I am at break-even with one pipeline mlp, ahead 85% with a timber MLP, and down 35% with one E&P MLP. However, the two oil and gas pipelines added to my very pedestrian SS have paid my modest keep for years. Everything else I re-invest. This would mean nothing if these cash payers were on a wing and a prayer, but in my judgment anyway, they are not. If somehow this is wrong, I am far from being all in on these investments. So maybe less black cod, more "true cod" for me in this case.

When I set up my current plan my cardinal goal was-I can continue to afford living where and how I live. Looks like I will, absent some problem coming from our corrupt medical or political systems. Being an economic refugee or third world wanderer would to me represent a fail.

Ha
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Old 03-17-2016, 06:20 AM   #6
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When I set up my current plan my cardinal goal was-I can continue to afford living where and how I live. Looks like I will, absent some problem coming from our corrupt medical or political systems. Being an economic refugee or third world wanderer would to me represent a fail.

Ha
Some wander the world by preference. To me, getting stuck in the US for my 'golden' years would represent a fail. I'd much rather be the drummer in a hair metal cover band at 70, playing the third world beach bar circuit. Or maybe reggae. Third World Wanderers. Has a nice ring to it.
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Old 03-17-2016, 07:02 AM   #7
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Since I don't even know what "MLP" stand for, I'm sure I don't have any useful insights here.

But I sure would like to know what is an MLP?
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Old 03-17-2016, 07:06 AM   #8
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Not sure.

It's either My Little Pony

or Master Limited Partnership (MLP) Definition | Investopedia
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Old 03-17-2016, 07:09 AM   #9
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I'd much rather be the drummer in a hair metal cover band at 70, playing the third world beach bar circuit. Or maybe reggae. Third World Wanderers. Has a nice ring to it.
I'd stop and have a cold one and listen for a bit! If it was any good I might just have a couple of more!
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Old 03-17-2016, 07:56 AM   #10
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REWahoo - I had no idea you were a bro-ny. (That's a guy who likes My little Pony). LOL.
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Old 03-17-2016, 08:12 AM   #11
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REWahoo - I had no idea you were a bro-ny. (That's a guy who likes My little Pony). LOL.
Awww .. ain't that so sweet
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Old 03-17-2016, 10:12 AM   #12
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Not sure.

It's either My Little Pony
...
Will have to look into this one for diversification purposes.
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