Online Classes for Series 65 and Series 66 Exams

No matter which materials you have, I recommend that you sign up now for our live online classes for the Series 65 and Series 66 exams. We present the exam material in digestible bites of information that you can review on your own time at your own pace by watching the recording. No instructor-at-the-whiteboard or talking heads. This is full-color animation, photos, and voiceover, making the material understandable and often interesting.
Seriously. Best of all, you can ask questions during the session!
Use the link at the end of this post to get on board and put the Series 65 or Series 66 exam behind you. Sign Up Now!

What is Per Stirpes, Please?

The Series 65 and Series 66 exams ask a handful of questions about estates and trusts, and you could end up seeing the phrase per stirpes on a test question. In fact, you'll likely bump into it in your financial planning activities, so it is worth knowing even if it doesn't show up. As I just pulled from a Transfer on Death Beneficiary Agreement for a brokerage account, " the term 'per stirpes' shall mean the following:
if any primary or contingent Beneficiary does not survive the account owner, but leaves surviving descendants, any share otherwise payable to such Beneficiary shall instead be paid to such Beneficiary's surviving descendants."
And, there you have it. If a will, a trust, or a transfer on death account name a beneficiary, the term "per stirpes" means that if that beneficiary is to be paid but has passed away, his or her share passes to his or her own beneficiaries. Pass the Series 66 exam

Capital Gains and Capital Losses on Real Estate Sales

The Series 65 and Series 66 exams might ask a question or two about the tax implications of selling real estate, so let's look at some key issues here. First, if you sell your primary residence at a loss, you get no tax benefit whatsoever. Therefore, if your house is so underwater at this point that you will never sell it for a gain, you might consider turning it into a rental property and finding other digs. This way, you can take depreciation on the property, which will cancel out some or all of the rent you receive for tax purposes. And, when you sell at a loss, you can use that to offset taxable income. I'm not saying that would be cause for a case of Dom Perignon, but it might turn a bad situation into something a little more beneficial.
On the other hand, if you have a house that will sell for a capital gain, you might be able to avoid paying any tax on it at all. But, you have to be able to go back 5 years from the date of sale and show that you both owned the house for any 2 years during that period and used the house for any 2 years during that period. These 2-year periods do not have to be continuous and they do not have to happen at the same time. For example, I'm sitting on a house with some real equity at the moment. While I have used the house for two years at this point, starting as a renter, I have only owned it since last November 1st. Therefore, to turn any capital gain into a tax-free gain, I need to own the place for another 21 months. That means I can either live here for 21 months, or rent the place out for some or all of that time.
Either way, if I sell a year from this coming November and realize, say, a $75,000 capital gain it will all be tax-free. If I didn't establish the two-year ownership period going forward and sold for a $75,000 capital gain, on the other hand, the IRS would tax it at either 15% or 20%, meaning I would keep only $63,750 if taxed at 15% or just $60,000 if taxed at 20%.
There are ways around having to both own and use a residence for 2 of the previous 5 years and still get the tax-free capital gain, but I don't qualify for any of them. If interested, check out www.irs.gov "selling your house". pass your series 65 NOW!

Shark Tank and The Profit

To understand different investment approaches, one could watch two "reality TV" shows, both of which I caught last night: Shark Tank, and The Profit. In the Shark Tank, venture capitalists listen to start-up companies make pitches for capital in exchange for a percentage of equity in the business. Usually, the venture capitalists--the "sharks"--invest somewhere between $50,000 and $500,000 for a minority interest in the company. They are only interested in businesses that are already doing well, where the entrepreneur is kicking butt and seems able to adapt and solve problems without melting down. The companies have an interesting brand that either solves a problem or fills a niche, and their sales are growing. The best ways to turn off the spigot of capital from the sharks is to do any of the following individually or in any combination: fudge on your numbers, report either small or shrinking sales, reveal that after 10 years of hard struggle your business still makes no profit. The "sharks" are venture capitalists who invest in businesses long before any thought of an IPO to public investors, so whatever "growth investors" in public equities are looking for, so are the sharks--only more so. They are looking for a great idea, a great founder, and a business model that can easily be duplicated and scaled with a little bit of help from their rather large wallets. If they have to pay a little premium to get in, so be it. What's a few thousand bucks when we're clearly about to make millions here?
On the other hand, in The Profit, we see an investor named Marcus Lemonis who wants to take an equity stake in businesses that used to be great or could be great if only someone could come in and do some key fix-ups. See, growth investors like the sharks are out as soon as they hear even one problem, while turnaround specialists are investors interested only in companies with problems.
If Marcus, the turnaround specialist, sees, say, a pizza restaurant doing $2 million in sales yet still managing to lose $400,000 a year, he's probably interested already. When he takes a closer look, maybe he finds a pretty decent staff of waitresses and pizza chefs, but sees immediately that the delivery personnel and the store manager are weak. There is no advertising, the restaurant looks tired and dated, and no one can even see the sign from the highway that passes by the place. While the sharks don't have time to fix all these problems, the turnaround specialist now sees his opportunity. As he loves to remind the viewer, he only focuses on the three P's--product, process, and people. The product must be great to do $2 million in revenue, so that's probably not the issue. As far as the process, Marcus probably quickly invests in new pizza ovens that crank out more pies in less time, and then either re-trains the delivery drivers, equips them with GPS, or both. The first two p's (product and process) are easy--he then has to deal with the scary part, the people.
He's only in charge for one week, so he has to either turn a currently lousy employee into an asset or replace him quickly. Many currently lousy managers are just being human--they don't communicate well; they don't handle constructive criticism; they like to fudge the numbers and then get defensive about it, etc.. Unlike a therapist, who would use a gradual soft-sell approach, Marcus confronts the current problem  head-on, usually with as much rudeness as one can get by with without getting punched. After the tears (if female) or threats of violence (if male) the entrepreneur usually comes to recognize that he or she is actually part of the problem and is going to have to listen to the rich guy driving the flashy red sports car if they want to hang onto the business without dragging down the employees and the mom who foolishly took out the second mortgage to keep the thing afloat.
So, Marcus is taking on much more risk than what we call a "value investor," like Warren Buffett. Warren Buffett would not invest money with any of the shifty, defensive people that Marcus routinely works with. For Mr. Buffett, the business is already doing well and is being run by people he trusts implicitly. How much hands-on management does he then do in the acquired companies?
None. If he had to go in and shape things up, he wouldn't be investing in the first place. Warren Buffett doesn't refer to himself as a "value investor," actually--he just likes to buy great companies at currently marked-down prices. That tends to rule out growth stocks, as they simply can't be purchased at an attractive price. But it doesn't mean he sits there with a stock screener pouncing when price-to-book or price-to-cash-flow ratios drop to a certain pre-set multiple.
In any case, every investor mentioned above is doing about $3 billion better than I am, so let me get back to my little Simple IRA and see what I can do to boost my total return for the year. Sign Up for Online Classes That Make Sense

What is CAPM?

CAPM or the Capital Asset Pricing Model is something I would expect you to define rather than calculate on your Series 65 or Series 66 exam. But, the exam will throw out a few tough calculations, so let's figure out the expected return of KKD common stock based on CAPM, just in case. CAPM uses just three numbers: risk-free rate, beta, expected market return. Why does it do that? Because the idea behind CAPM is that investors expect to be compensated not just for the risk they're taking but for the time value of money, too. Therefore, the expected return is just a function of assuming that the investment will receive the riskless rate of return plus a "risk premium." That risk premium is basically just a function of the expected market return and the beta of the stock. So, KKD has a beta of 2. The expected market return is 9%. The rate on 3-month T-bills is 1%. Let's plug in those numbers:

1% PLUS 2-TIMES-9-MINUS-2-TIMES-1%.

Usually we see that in parentheses, but the strange "formula" above shows the order of the operations. Take 1% and hold that thought. Take two times nine (18) minus two times one (2) to get 16. Add 1 plus 16, and Krispy Kreme (KKD) common stock has an expected return of 17%. Pass your exam!

Caution: Investing in Growth Stocks May Cause Serious Injury

When an exam question implies that investing in growth stocks is riskier than investing in value stocks, it's not necessarily saying that growth stocks are issued by companies likely to melt down. The real risk of investing in growth stocks is that they are priced for perfection and, therefore, super-sensitive to any tidbit of bad news. For example, I'm holding a few hundred shares of KKD, which is trading at what seems a crazy-high PE ratio of about 80! The other day the company announced that it had met Wall Street analysts' expectations, had increased their earnings-per-share by 33% compared to last year, with sales/revenue up 6.7%. What happened to the stock? It dropped about 25%.
Huh?
Yes. If a stock is already pumped up with such a high earnings multiple, even a lack of awesome news can cause a sudden and significant drop in market price. Luckily, I already knew this and used a sell-stop to take a $13,000 profit during the previous earnings announcement.
But, with value stocks--Pfizer and GM--I never think about sell-stop orders. I just follow the company and hold the stock unless there is clearly disaster up ahead.
And, that's the difference between investing in growth stocks versus value stocks. With growth stocks, if the news isn't really good, the share price can plummet. That's because good news has already been baked into the inflated stock price.
With value stocks, as long as the news isn't terrible, the market price usually hangs tough--since bad news has already been priced into the stocks.Pass your Series 65 or 66 exam

Test World vs. Real World for Series 65 and Series 66

One of the most frequently heard sayings in the securities test prep industry is, "there is the test world . . . and then there is the real world." While it's also one of the most universally accepted truths about the Series 65 and Series 66 license exams, upon closer look, there's not much there there. In fact, after teaching this material for around 10 years now, I still cannot come up with a good example of something you learn for the Series 65 or 66 that is not also true in the so-called "real world." The fact that a candidate might know something about financial planning issues does not make an answer like "$10,000 indexed for inflation" incorrect when he or she was really looking for the more precise and up-to-date number of $14,000 for the annual gift tax exclusion. If you know the precise number for the lifetime estate credit, that does not make an answer like "$5 million indexed for inflation" wrong. In fact, it makes it a lot more workable than some precise number that goes up at some point during the year--exactly when, no one really knows.

Some folks seem to take comfort in assuming that the test is stupid, stupid, stupid. However, I've taken the 65 four times and the 66 once, and I can tell you there is nothing stupid about these exams. These exams expect you to know the vocabulary terms inside out, and understand important concepts about fraud, registration, securities risk, and economics . . . all of which relate to the so-called "real world." My impression is simply that you have to study and do some critical thinking in real-time at the testing center. That's it.
So, complain about the test if you must, put it down if it makes you feel better, but if you study with due diligence and avoid a meltdown at the testing center, you will pass the Series 65 or Series 66 exam. Pass your Series 65 exam