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To: Paul Senior who wrote (1940)	1/9/1999 5:13:00 PM
From: kolo55	Read Replies (2) \| Respond to of 2542

Off-topic discussion follows: Hi Paul S. ... coincidentally was just reading your posts on Value Investing thread, trying to ground my perceptions on a more solid footing. First of all, my wife agrees with your reasoning 100%, so your 'seer' status is right on: BUT... I find it unfathomable that a retired person would invest this way. Concentrated and very highly margined. Absolutely crazy IMO -- nobody retired ought to jeopardize their funds (which is what I think is occurring)this way, nor should they have to have such a need for the profits. I think your wife should yell at you! She has been. Everyday she asks me if I sold yet. She is a long term holder who never sells her stock. She owns Intel since the Pentium flaw scare at a basis of about 12, Ford and Chevron since 1982-85 with each at a basis of about 5, Oracle in 1994 at about 10, and Pixar in 96 at 14. When she shifted jobs, and rolled over some 401k money to an IRA, she bought FLEX and JBL in the mid 30s last summer. She never sells anything. Yet she doesn't like my margin position, and asks me to sell all the time! Shifting directions for a moment, I have talked to a lot of people of how they manage their finances, and it always amazes me how little time they spend on working for themselves. They don't spend the requisite time to study and setup their personal finances, particularly with respect to tax management. So how does this relate to what I did this fall? Well, in short, I didn't sell any of my winners, because I couldn't. I almost made a huge mistake just selling 500 FLEX at 69 and change. I converted a large amount in a rollover IRA to a Roth last January. This required that we report an AGI of less than $100k for 98. In Sept, I deconverted/ reconverted lowering the taxable conversion amount. By the end of the year that account had more than doubled from that point. My wife also converted some of her rollover, leaving us with about $1.6 million in the new Roths (and still with significant IRA holdings). So we really had to work hard to keep our AGI under $100k, which was quite difficult. It required a lot of December tax loss selling; essentially all the losses we had, leaving us with a large amount of unrealized gains. In fact, the unrealized gains are significantly larger than the net equity in the margin account. Although I have been retired for over six years now, I am only 43 and really I guess I should be called a homemaker. (Schwab doesn't have a classification for homemaker, so they call me a 'housewife'; this has led to some pretty interesting face to face meetings at the Schwab offices. The presence of my wife at one of these meetings added partly to the humor.) My wife still likes her engineering job, and in a pinch, I could easily get a job. The Roth conversions put us in the maximum Fed (39.5%) and State(almost 9%) tax brackets for the next four years, and if we generate historical returns and given our Roth strategy, it is likely that we will be in the max brackets for the forseeable future. Last year we got AMT'd. The analysis to convert some of our IRA holdings to Roths, was pretty difficult. It is a confusing and complicated analysis. But I can summarize my strategy as follows: 1. Maximize the amount of new money moved into IRAs and 401ks. 2. Open new contributory Roths for the $2000 apiece we contribute annually. 3. Looking five years out, plan to have enough in taxable accounts to generate enough income/gains to keep us in the maximum brackets. If we have more than that, then convert some IRAs to Roths and use some of taxable account monies to pay the taxes due. This reduces the taxable account balances, and puts the added Roth monies into the tax-free category. 4. As we get closer to age 59 1/2, take the outstanding non-converted IRAs into consideration. Distributions from these accounts, plus income/gains on the taxable accounts should be enough to keep us in the maximum tax bracket after retirement. Again use excess funds to convert IRAs into Roths. 5. Gradually increase the money we spend on lifestyle and significantly increase the amount of money we give (follow patroller's lead). We have had over a 30% annualized rate of return in our margin account over the last 17 years, and its hard not to continue to use some margin at 8% as long as our returns are so high. Every year or two, there is a period when I regret using margin, but over the long haul, it has worked for me. Our cash accounts (IRAs) have only compounded about 22-24% annually. Using margin has allowed me to 'beat the index', but the real question is whether I could have beat a 'margined index', and although I don't know for sure, I'm pretty sure I have. It does seem that I spend a lot more time on tax analysis etc. this year, than in the past. The tax law changes in the last two years have turned the analysis into an almost hopelessly complicated morass. I can't say I agree with the changes; they seem to benefit certain types of monied independently wealthy people. They require the services of an extremely competent accountant. They seem to 'narrow the tax base' and encourage all kinds of non-value added work monitoring and changing paperwork. Even though I don't agree that the new rules are intelligent, fair, and beneficial, they seem to have been written to benefit me. And I am working to take full advantage of them. Paul