• The Entrepreneur Forum | Startups | Entrepreneurship | Starting a Business | Motivation | Success
  1. Trading Life for a Weekend?
    Build a Business, Build a Life.
    Unleash the Dream.

    Become an UNSCRIPTED™Entrepreneur.

    UNSCRIPTED™ Entrepreneurship is an entrepreneurial business strategy that unleashes dreams, frees time, and explodes your incomes—but more importantly, it changes your life forever. Make no mistake; this isn’t something you “try”— this is something you live.

    FREE Download (Unscripted) FREE Download (Millionaire Fastlane)  Register
    Registering for the forum removes this block!

Money System Management: Real Example, Closed-End Fund

Discussion in 'Investing and Trading' started by MJ DeMarco, Aug 7, 2017.

FORUM SEARCH


Need answers about entrepreneurship? Search FIRST! More than likely your entrepreneurial topic has already been discussed.
Powered by Google Site Search.
  1. MJ DeMarco
    Online

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

    Messages:
    23,307
    Likes Received:
    56,360
    Joined:
    Jul 23, 2007
    Gender:
    Male
    Location:
    Phoenix, AZ
    Rep Bank:
    $230,186
    Admin Post
    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
     
  2. MJ DeMarco
    Online

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

    Messages:
    23,307
    Likes Received:
    56,360
    Joined:
    Jul 23, 2007
    Gender:
    Male
    Location:
    Phoenix, AZ
    Rep Bank:
    $230,186
    Admin Post
    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.
     
    Ghetto, André G. and ZeroTo100 like this.
  3. garyjsmith
    Offline

    garyjsmith Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

    Messages:
    168
    Likes Received:
    272
    Joined:
    Jun 28, 2017
    Gender:
    Male
    Location:
    Northern VA
    Rep Bank:
    $919
    Sounds exactly like what you wrote in the book. Further proof that you live by your teachings. Thanks for the documentation
     
    Thoelt53 and MJ DeMarco like this.
  4. MJ DeMarco
    Online

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

    Messages:
    23,307
    Likes Received:
    56,360
    Joined:
    Jul 23, 2007
    Gender:
    Male
    Location:
    Phoenix, AZ
    Rep Bank:
    $230,186
    Admin Post
    Now at 15.26 ... buying again becomes a consideration.
     
    MarekvBeek, ZeroTo100 and Thoelk like this.
  5. ZeroTo100
    Offline

    ZeroTo100 Bronze Contributor Read Millionaire Fastlane Speedway Pass

    Messages:
    177
    Likes Received:
    238
    Joined:
    Feb 2, 2016
    Gender:
    Male
    Location:
    New York City
    Rep Bank:
    $1,226
    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
     
  6. MJ DeMarco
    Online

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

    Messages:
    23,307
    Likes Received:
    56,360
    Joined:
    Jul 23, 2007
    Gender:
    Male
    Location:
    Phoenix, AZ
    Rep Bank:
    $230,186
    Admin Post
    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.
     
    ZeroTo100 likes this.
  7. InspireHD
    Online

    InspireHD Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

    Messages:
    224
    Likes Received:
    498
    Joined:
    Dec 9, 2014
    Gender:
    Male
    Rep Bank:
    $2,714
    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.
     
  8. MJ DeMarco
    Online

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

    Messages:
    23,307
    Likes Received:
    56,360
    Joined:
    Jul 23, 2007
    Gender:
    Male
    Location:
    Phoenix, AZ
    Rep Bank:
    $230,186
    Admin Post
    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?
     
    ZeroTo100 and InspireHD like this.