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Rational Investing

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by Clark Davis

With all the activities during the holiday season, it is sometimes easy to overlook the year-end actions we can take to limit our tax liability and enhance our investment return in the coming year(s).

We have written often about working with a proactive accountant prior to the end of your tax year.

It does no good to dump all your gains and losses on him or her after Dec. 31 and, when you look at your completed return ask, "Isn't there anything that can be done to lower my taxes?"

If you have had an active year taking capital gains (congratulations!), review your portfolio for any unrealized losses you have that could be used to offset the gains.

Remember the new 12-month holding period for long-term capital gains. Any profits you might have taken on issues held less than 12 months will be taxed at ordinary income rates, so it can be especially beneficial to offset such gains with any available short-term losses.

If your records of capital gains and losses taken so far this year are incomplete, contact your broker first and have him help you assemble them. (Another reason we recommend a full-service investment broker, a professional, rather than simply using a low cost order taker.)

Remember also that capital items other than stocks and bonds are eligible for this purpose.

Let your accountant do the best job possible for you by working with him before the end of the year.

From an opportunity standpoint, December can be a very beneficial month, as tax selling and institutional window dressing can create price levels in individual issues that make them very attractive for the serious long-term investor.

Look for issues that have had significant declines in market value as candidates for purchase if volume selling hits them as the year winds down. Obviously, the company's fundamentals should look attractive for a 12- to 18-month targeted holding period.

Look at prices to be below historic norms relative to sales, cash flow, and earnings and earnings growth rates. We like to add to these criteria a low (under 60 percent) institutional ownership. As a matter of fact, the lower the ownership of the issue, providing it is a mid- to large-cap with good liquidity (daily transaction volume), the better we like it.

We would rather be the ones from whom the institutional mob buys when they discover undervalued situations and start accumulating their positions.

Where to look? Among the industries most severely beaten down. Few have more positive long-term potential than the energy sector.

Look at the oil, oil-service and natural-gas issues. They are among the current outcasts.

With help from your broker and/or Value Line you will be able to identify the "blood in the street" issues in the energy sectors that are likely to be profitable investments over the next several years.

While we are reluctant to make specific recommendations without knowing an investor's requirements, we suggest that a starting point, not an exhaustive list, might be such issues as Transocean Offshore, Marine Drilling, Diamond Offshore Drilling, Schlumberger and Halliburton. Your broker can help you with a search and analysis of energy issues that may be appropriate for your portfolio.

No, you will not find any of the Internet stocks in your search for undervalued issues, but then we are talking serious investing, owning strong companies with earnings not promises or pie-in-the-sky extrapolations.

After you have met with your accountant and worked with your broker to enhance your portfolio, it will be time for more important things.

May you and your family and friends find your hearts and homes filled with the joy and blessings of Christmas.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at clark @ slia.com.)

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