Using the Discounter

The Discount Brokerage Industry: Part 2

You want to use discount and specialty brokers when you feel that you have enough confidence in yourself to make your own buy and sell decisions. Discount brokers are far less expensive than the full brokerage firms. That also means that you will be offered less services than what a full brokerage firm will offer you.

Discounters have a broad range of services. Discount brokerage firms can offer almost the same services of a full brokerage firm to just offering stock and bond execution services. So you have to know what services you want and ask questions as to what the discounter is offering. You have to interview the firms just like if you were going to hire them to do a job. In fact, you are hiring them to do a job. So know what they can do for you before you commit your money to an account with them. If you are hiring them to buy and sell bonds for you, know if they have a large enough bond inventory to choose from. If it is stock execution that you are after, make sure that they have computer equipment that can buy and sell for you in less than 5 minutes at a very cheap price. If you are looking to have some "hand holding" such as research or advice but at a price less than you would pay at a full brokerage firm, make sure that they can help you with the special need that you require.

The dark side of bond executions with a discount or specialty broker is that you as a client is closer to the trading than if you would use a full brokerage service. Because of the change in the economy, I was forced to change my investment strategy or model to fit the current investment climate. I called my discount bond broker Zions Direct in Salt Lake City, Utah to execute the trade for me. I asked that my long term bond issue be sold at a specific price on the next days trading. At a full brokerage firm, my personal broker would have taken care of that for me. But not with a discount or specialty firm such as Zions Direct.

When selling Corporate Bonds you have to tell the broker who answers the phone that you are interested in selling your bonds. When the market is trading, the firm will put the issue out for bids to other firms around the world since the Corporate Bond Market is mostly an "Over the Counter" Market. As a client, you will have to check back with the firm in about 30 Minutes to see if someone offered to buy them and at what price. At that time, you except the price and sell or refuse to sell. If you refuse to sell, you may want to put them out for bid a few hours or days later. So you as a client may have to act as your own Bond Broker Dealer.

With discounters, you may have to use the library and the internet to do your own research on companies that you are interested in. Some discounters have news services where you as the client can look up public company information and opinions from professional investment analyst.

Next we will look at short term bond strategy for use in your investment model.

What Brokerage Firms to Use

Who To Use For a Broker? Part 1

So you want to get into the stock and bond markets but don’t know what to do. Back in the 1970s when I first walked into a brokerage firm things were a lot different. You could stand around and talk to the retired people who had nothing to do all day but stand around and talk about the market. At that time, a person at age 21 and Black was a rare sight. The old timers would call you over and teach you a few things that wasn’t in the brokerage booklets.

Today you don’t have board rooms where people could hang out. Because of 401K programs and layoffs, people of all ages and colors have to use brokerage firm if they want to increase their retirement holdings over time. The problem has become for many people, how do I select the brokerage firm for me? First you have to know what you want to do with your money. Do you want to invest in stocks, bonds, mutual funds, insurance products such as annuities, or other products that they sell or broker?

The Full Brokerage Service

If you know nothing at all about investments and you are too lazy to learn on your own then the Full Brokerage Services might be what you need for starters. These are the big firms such as A.G. Edwards, Morgan Stanley Dean Winter, Merrill Lynch, or my families firm, Smith Barney (Citi). While these firms have much higher commissions and fees than the discount brokers, they do offer a much wider range of services than other firms. They have a wide array of search sources to reference from. They also can give you guidance on your investment program. Full brokerage firms employ financial planners who can help with Wills and Trust (working with your lawyer), college planning, retirement planning, and other major mile stones in your families life. Your personal broker will suggest investments for your portfolio and give you advise on when to buy and sell.

Brokerages have begun offering Visa Check Cards which work exactly like a credit card. The difference is, the money you spend is taken directly out of your brokerage account. This way, you have the combined functionality of a checking / savings / money market account with a stock and bond investment account. It is tremendously convenient and can help simplify your finances. If you are looking for an all-in-one solution to your banking and investment needs, an Asset Management Account may be a more attractive alternative.

But there is a downside. In the 1987 crash, my full service broker would not pick up the phone. In fact, all I got was a busy signal. In the 9/11 bear market, I heard stories from people who told me that they followed their broker’s advise not to sell their investments. After the market hit bottom, they lost almost half their investments. They listened to their broker again in 2007 not to sell but this time they lost most of their investment. Now they can’t retire. Brokers are tied to their firm and most of the time will do what their brokerage firm tells them to do. In most markets, the advise will be right but in that one in a 20 to 50 year market they can be totally wrong. But it is you that will pay that price if you don’t understand the markets and your risk.

Next time we will look at discount and specialty firms.

Do you need Tuition Insurance?

What about College and Private School Tuition Insurance? Part 2

I saved my money every month from the time my children where born to the time they started college. That was the only way I was going to put them through college without putting me or my children in the poor house. But there is one thing that I never thought about while they were in college. What if my children had to leave college in mid semester due to illness, death, or some other disaster? For some of these people who pay for their children to attend a private school from K thru 12, what if the parents job goes south for one reason or another? What if the major breadwinner confronts a job layoff? What if they have to move away because the job demands it? What if your angle of a child gets a student's suspension from school?

In a few schools, if a child withdraws in a short time after starting, they will be refunded all or in part by the school. Many schools have other refund policies. Some schools provide up to a 60% refund if the student withdraws for mental health or emotional reasons. You should protect your investment in your child by asking the school administrator what the policies are for mid-semester withdraws. Many schools offer a third party insurance policy that may be something that you as the parent or the student may want to consider.


When figuring out if you do or don’t want to take the risk of losing tuition, you must think of two issues. The first is, who is paying for this education? If the person paying for this education has a job where the employer has a history or reputation of laying off workers, it might be reasonable to consider insurance, especially if the tuition is high at that institution. The second is the condition of the student. Does your child struggle with disciplinary problems? Is the child an angle at home but a devil away from home? If so, an insurance policy may come in handy.


For the parents who have children in a private school from K thru 12 grade, I have two extra questions? Do you, the parent, have a job that has a history of job transfers to other parts of the country? Are the parents in careers that require them to transfer to other parts of the country? If so, insurance is a good way to protect your children’s tuition.


According to Kenyon College in Gambier, Ohio, about 13% of students bought tuition insurance in 2007. Most people would rather self insure themselves. But for a small minority of students, the protection is worth the cost of insurance. With tuition rates skyrocketing and a weakening economy, obtaining tuition insurance may be the way of the future.

Insurance Contracts

Insurance vs. Investments: Part 1

Several years ago, I got a job as a Part Time Flex (PTF) at the Harrisburg Main Post Office. I needed a part time job (so I was told by the family.) I thought that the name meant part time but I forgot I was dealing with a federal government corporation who does not know that slavery ended in 1865. I worked 12 hour days for 5 days then one day at 8 hours. Most of the time, when a holiday was not involved, I got one day off. That day was for sleeping.

One day, someone got me out of bed by ringing my door bell. It was an insurance salesman who came to give me a free book that I ask for. I did not know that this free book was connected with an insurance company. I filled out the card in the Post Office Cafeteria and mailed it in. This man wanted to talk to me about buying an annuity giving me 6% guaranteed. All I had to do was give his company so much money a month for so many years and I could get $25,000. I calculated the payment over time in my head then said, "You mean to tell me, if I give you $51,000, you will give me a guaranteed $25,000 back?" He looked at me then looked over at my book shelf, full of mathematical, computer, and financial books. He got up, collected his information, and said good day. That was the last that I seen of this salesman.

Most people do not know that insurance and investments are two different subjects. Insurance is protection against loss. You buy insurance to protect your families way of life incase you, the bread winner dies at a young age. You buy car insurance to protect you from being sued and loosing everything you have because you killed someone in an accident or caused some property damage. You buy umbrella insurance like O.J. did so that you can hire high priced lawyers to defend you in court in case you slander someone or incase you are involved in a wrongful death suit.

According to Dictionary.Com, the definition of insurance is;

1. The act, system, or business of insuring property, life, one's person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.

2. coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract.

3. the contract itself, set forth in a written or printed agreement or policy.

4. the amount for which anything is insured.

According to Dictionary.Com, the definition of investments is;

1. Investments are Property or another possession acquired for future financial return or benefit.

2. A commitment, as of time or support.

You buy an $18 US Savings Bond for 10 years giving $25 at maturity. That is an investment. You buy a corporate bond for 3 years, giving you 4% a year with payments to you of $20, every six months. These are investments. You know them because they give you more money in the end than you put into them at the beginning.

Annuities are insurance contracts. Along with insurance policies, it will pay you so much money in case you do not suffer the loss that you had expected. Some people use them as expensive savings accounts like the insurance salesman was trying to talk me into buying. You must know what product to use to meet your objective, protection against loss or to later maintain your own way of life.

By now, you heard of financier Bernard Madoff. The 70-year-old former NASDAQ stock market chairman was arrested Dec. 11 on securities fraud charges alleging he duped investors out of as much as $50 billion in a giant Ponzi scheme. The real problem was, he took the rich for everything they had. If it was a bunch of poor people, it would not be in the news and he would not have been arrested.

What he appeared to have done was bought stock then wrote "PUTS" against the stock and made 1% a month on the investment of "PUTS". He also wrote what is called NAKED PUTS". "PUTS" are insurance contracts against loss in case the stock unexpectedly would go up. "NAKED PUTS" are "PUTS" that are written but are not backed by stock. In the 1980s, 1990s, and until last year, stocks in general, always went up. So the people who bought his "PUTS" lost their money and Mr. Madoff made his money.

Then we had the big crash from 14,000 to 8,475 in less than a year. Many stocks fell 60% or more. Mr. Madoff had to pay off the people who bought his"PUTS" in stock. If he did not have the stock, he had to pay them off in cash. Just like in 1929, he had to give away his new clients money to cover his old clients contract obligations. So he and all his clients went broke. The clients had no idea that they were in the business of writing insurance contracts.

Moral of the story, know if you are dealing in investments or insurance. Next time, we will learn about using insurance to cover your children’s education fund.

Special Corporate Bond Situations

Note: Darnell L Williams is an investor and does not own or work for any financial or investment advising institution. His interest here is to educate the public in the area of savings and investment. He strongly believes that it is everyone in the community’s responsibility to educate and train the public in their area of expertise. That way, no one in the community can be scammed.

Bankruptcy, A Special Situation: Part 6

Every time I go into a new brokerage firm and tell them about my junk bond investments, I can count on them telling me how much more risk I am taking than if I would invest in Common Stocks. Remember what I told you about risk You can make far more money in the stock market than you can in the Bond Market. But you are being paid to take on the risk. In any given company, if they were to file for chapter 11 or chapter 7, generally, this is how the money would be rewarded to investors by the Federal Court System. But no matter how the judge rules, stockholders are almost always last.

1. Federal Taxes paid
2. State Taxes paid
3. Local Taxes paid
4. Employee Payroll paid
5. Mortgages including Mortgage Corporate Bonds settled
6. Bond Senior Notes paid
7. Bond Junior Notes paid
8. Debentures paid
9. Expenses such as Utilities, rents, leases, and, vendors paid
10. Preferred Stock holder will get paid according to the contract
11. Common Stockholder gets what is left.


People do have the potential to make money in special bond situations when corporations file for bankruptcy; chapter 11 or chapter 7. If you notice, the last people to get money after bankruptcy is the common stockholder. Most of the time, the money runs out before it gets to the common stockholder. On December 29, 2008, GM Common Stockholders had zero equity in the company. The stock is worthless if the company would go out of business. But if you are a mortgage bond holder in the company, chances are, you will get your money back. Chances increase that you will get little to nothing as you go down the list of securities. If you are worried about bankruptcy, you as an investor would want to read the Indenture, the contract between the bond holder and the company, before investing. Your broker should be able to provide you with a copy, you can email the company for a copy, or it may be available on the internet.


Since most investment funds and managed brokerage accounts have GM stock in them, maybe that is why congress will not let them file Chapter 11. The stockholders will be wiped out. Many of our pension funds, colleges, and institutions will take another big hit. Instead, the Federal Government bought Preferred Stock. This stock gives the Feds 8% interest but the company does not fold if GM does not pay it. If they would have bought bonds from GM and they do not pay interest or principal, the company could be forced into bankruptcy.


On Sunday, January 4, 2008, John Luciew of the Patriot News write a story, "How to invest depends on who you are." He interviewed Certified Financial Planner, Stacey Gibble Barrick. She said, "Corporate bonds – issued by companies needing to raise money to, say, build new plants – are riskier because companies can go out of business, meaning the bonds are worthless. For this reason, their rates of return are generally higher, currently around 10 percent, Barrick said." She claims that prices of most corporate bonds have plunged, denting their overall yields. That is why she cautions investing in this sector. From what you have read in my lessons, does what she say make any sense? No, it does not because we have learned that stockholders have the highest risk since they are last to be paid in bankruptcy. That is why stockholders carry the most risk. If a company goes out of business, the bondholder has a better chance of getting paid vs. the stockholder. In 95% of the time, the stockholder never receives money after bankruptcy. If they do, the bondholder is paid in full. You can buy corporate bonds, lock in a yield and never sell the bond.


So why would a certified financial planner mislead people? Because they make money when you buy stocks and when you sell stocks. They can turn over your account many times and make money on commissions. If you buy bonds, you may buy one time in several years. That means that they get little or no commissions. Remember they have to eat, buy homes, and send children to college. So they have a conflict of interest when servicing the public. That is why you have to take your financial situation in your own hands.


Special Situations

A special situation might be where an investor would look for Mortgage Bonds at a deep discount. In the early 1980s, I bought a TWA Mortgage bond with a lien on a 747. I bought the bond at $200 per bond. Within 2 years, the 747 was sold and I got $1,000 for every bond that I held. Several years ago, I bought Senior Notes of Calpine Corporation, an Electric Utility at 50 cents on the dollar. They went chapter 11, about two years later. They reorganized and I exchanged my bonds for the new Calpine Common Stock. Later I sold the common stock at a profit. In the early 2000s, I bought Weirton Steel Corporation at 25 cents on the dollar. I was lucky enough to get my money back in interest before it went Chapter 7 and the bonds were worth zero. So there is a danger of investors being wiped out in the bond market as well. But the danger is not as great as it is with Common Stock.


Play the Market Using Convertible Bonds

Another safer special situation is investing in Convertible Corporate Bonds. They are bonds that can be converted from bonds to stock based on what is stated in the Indenture. If you want to invest in the Common Stock of a company, it might be wise to check to see if they have Convertible Bonds. With Convertible bonds, you can benefit from the increase in price of the stock while getting the benefit of collecting interest off the bonds. I did this with an Aircraft producer in the mid 1970s. I bought the convertible bond on a Monday at $1,000 per bond. On Friday, I sold them at $2,000 per bond. I doubled my money in appreciation and made five days interest on top of that. If the stock would have stayed at the same price, I would still have made interest on my money until I sold or until maturity.


What We Learned

We have studied 6 lesson on Corporate non-investment grade Bond. What we have learned;

1. To pick an investment broker with a large Bond Inventory (more in later lessons)
2. To go into the bond inventory and find bonds of companies with the proper Standard and Poor’s rating that fits your investment needs.
3. To look for these companies that we are interested in by writing the company, looking information up at the library, and asking the librarian for help finding the Standard and Poor’s financial information on the companies and industry.
4. To look up information on the companies by way of the internet.
5. To figure out how much we can make on the investment over time.
6. To figure out your cost per transaction.
7. Look for convertible bonds first before buying the common stock.


Before you get started on your way to investing, try a few transactions on paper and follow your investments while you set up your IRA account at the brokerage firm of your choice.