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Money System Management: Real Example, Closed-End Fund

Discussion in 'Investing/Trading/Cryptocurrency/Altcoins' started by MJ DeMarco, Aug 7, 2017.

  1. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Money system management was discussed briefly in UNSCRIPTED toward the back end of the book. I thought I'd relay a real-life example into how I recently managed a money-system investment. While my objective in these investments is a monthly yield, sometimes the instruments move in a fashion where you can make much more.

    I this case, I made 37% annualized or a 15.3% return in a matter of months.

    The instrument was MZA, a closed-end municipal bond fund that pays monthly dividends FREE of taxation at BOTH the federal and state level.

    MZA BlackRock MuniYield Arizona, closed-end fund summary - CEF Connect - Brought to you by Nuveen Closed-End Funds

    Now a word on Closed-End funds, or CEFs. These funds have a limited allocation of shares (closed) and their prices generally trade at a PREMIUM or a DISCOUNT to NAV, or Net Asset Value. While the NAV is the real price based on the assets, these shares trade above or below the NAV, hence making up the premium or discount.

    For instance, if the fund is trading at $11.00 and the NAV is $10.00, the premium on the fund is 10%. If the fund trades at $9 and the NAV is $10, the discount is 10%.

    Closed-end funds fluctuate in their premium / discounts and this simple fact can help you squeeze out gains faster, or more intelligently.

    So on to my example:

    On February 28th, I sought to purchase MZA. The current price was $14.94 which was a 3.82% premium on NAV. Looking over its history, this premium was about an average as the fund typically trades at a premium.

    I wanted to buy 10,000 shares, or $149,400.

    Unfortunately the spreads (bid/asks) in CEF's also pose difficulty because they are unusually wide. These spreads are likened to a big commission on your buys.

    So over the course of the day, I only was able to pick up 2,102 shares. Oh well.

    Anyhow, I held this instrument for 5 months.

    I bought 2102 @ $14.94
    I sold 2102 @ 16.88 on July 27th
    Total gain: $4,042.95.

    Additionally, I picked up $780 in monthly dividends.

    Total net gain: $4,822.95 or a 37% return annualized on what was a small $31K investment.

    How was this possible?

    Well first the NAV went up. But NOT by that much.

    But more importantly, the PREMIUM spiked from 3.82% to 15.3%. When I noticed this quick inflation, I knew it was an opportunity to sell and lock in gains that would have taken YEARS to accumulate.

    The next day the price spiked again to over 17 but then drifted back well below my sell point.

    When the premium deflates and moves toward the normal range, I WILL BUY AGAIN. Today the bid price is 16.33 and has moved lower.

    The point of this is to demonstrate how to manage your "paycheck pot" assets. Sure we want a monthly paycheck in the form of yield, but sometimes things don't work out that way. Pay attention to what your instruments are doing. It only takes a few seconds per day.

    Had I not paid attention, I would have missed out on a 37% gain opportunity.

    Closed-end funds can be expensive (this one was right at my 1% management fee mark) but if you learn to pay attention to how they work, you can help alleviate some of that expense by buying/selling smartly.

    To research closed end funds, check out etfconnect.com
     
    MB2, ButGregSaid, Raoul Duke and 38 others like this.
  2. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    This instrument has since retreated, now at 15.79, plus the premium has lost a bit. Now I consider buying again.

    I sold at 16.88.
     
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  3. garyjsmith
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    garyjsmith Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation
     
  4. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Now at 15.26 ... buying again becomes a consideration.
     
  5. ZeroTo100
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    ZeroTo100 Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    I like the concept. This is similar (not the fund but the trading concept) to the way GBTC can be traded. The asset hit $1000 and was trading at double what NAV of coins in the fund were = major short. When the asset trades under the NAV = long.

    I like the vehicle but what scares me is the low volume on MZA. Is that typical for a closed end fund? When you sold, was the execution dragged on?

    MZA Seems interesting
     
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  6. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Yes, for the smaller ones. The larger ones have tighter spreads. Watching the spread is how you can also get a better discount. Getting a fill wasn't that hard either. But yes, low volume makes exiting / entering more difficult to manage with more weekly peeks.
     
  7. InspireHD
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    InspireHD Silver Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    I'm trying to understand this more. I followed your example so I have some questions.

    My brain says "discounts are better because you're buying at less than it's true intrinsic price." Why not find the funds that are trading at a discount, with the expectation they will eventually be priced toward their NAV?

    Regarding your example, were you analyzing the 3.82% premium as a discount to it's normal premium level? Therefore, you bought at the lower premium with the expectation that it would eventually trade for a higher premium?

    From my limited research, it sounds like a state specific fund would only be tax free if you are a resident of that state. So, an Arizona fund wouldn't be completely tax free for everyone.
     
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  8. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Yes, there are many state specific funds. I live in AZ, hence an AZ fund,

    Yes. It's now below it's average premium.

    Yes.

    Because usually those funds are discounted for a reason. In the muni space, this probably means those funds have a heavy exposure to California, Illinois, and other fiscally reckless states. A big discount usually has some meaning behind it, but yea, you can do this. I tend to look at the discount in relation to mean. Above? Below?
     
  9. MJ DeMarco
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  10. InspireHD
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    Wow. I was watching this when it cracked 14.98 and almost pulled the trigger on it (and was kicking myself when it went back to 15.10 and hung there for awhile), but wasn't sure if it was worth it for me not living in Arizona. I ultimately decided it probably wasn't the best for me and started looking around for other funds, but couldn't find any that were similar to MZA. Now, seeing it again, wow!

    I'm not sure what the implications are for being out of state or if there are any advantages so I couldn't make a decision.
     
  11. MJ DeMarco
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    My guess is the income dividends would be taxable at your state rates. @CareCPA ?
     
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  12. CareCPA
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    CareCPA Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass

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    Most likely. State taxes are a pain because there are 50 different sets of rules, so I can't say for sure that they would be taxable in your specific state, but as a general rule, yes.
     
  13. ZeroTo100
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    Lol when gbtc hit $1000 (sept 12th)... now $1970.
     
  14. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Fund has moved back again, currently 15.99, although the premium is still a bit high.

    Considering a rebuy again.
     
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  15. RobD88
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    RobD88 Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Sounds like somebody just keep handing you their money...thanks for the look into your personal strategy and finances.
     
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  16. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Still sitting on sidelines, premium to NAV is still 15%, way too high. Price has retreated a bit since selling (again).
     
  17. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    This instrument is now under consideration again.

    I sold above the price 17 when the premium was over 20.

    Now it is near the average.

    For me to buy, it will need to go below the average discount, probably around 2%.

    They lowered the distribution rate on this which is why the fund sold off a bit.

    I expect it to sell off some more. When it pays 4.5% tax-free (about is equal to about a 6.6% taxable yield) I will buy again.

    And then repeat.


    Screenshot-mza.png
     
  18. ZeroTo100
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    ZeroTo100 Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Thanks for sharing this. Def a nice little instrument. What did you use to find the average premiums that you trade off of? It seems like it hasn't really been trading at a discount in a long time. Can you short these?

    If the premium goes to 20% and the 1, 3, 5, year averages are around 10%...Does it make sense to go against the grain? This thing hasn't traded at a discount in a few years.

    I do like it though and I like how cef lays everything out for you. Awesome!
     
  19. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Etfconnect.com

    Yes, that's why I sold. Made thousands in a few short months (would have been YEARS in dividends) because the premium went way beyond average. Now, because they lowered the dividend (which could be perceived as a problem) the premium should drop, in my thinking, at average or below. Interest rates are rising so the bond prices fall as well.
     
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  20. ZeroTo100
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    On my radar...Would love to see this at discount, probably won't get there though. It definitely is oversold but that doesn't mean it can't get oversold(er).
     
  21. Elif
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    Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation
     

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