Post by shark on Oct 21, 2015 6:29:32 GMT
*** This will be another very long post. There is no TL;DR.***
One very important thing for anyone who’s starting out in stocks to know is the difference between an investment and a speculation. Very broadly, an investment is something you put money in that has a respectable return, based on facts that can be independently verified by anybody. A speculation is something you put money in with an uncertainty of return whose likelihood of success is determined by conjecture and expectation. A speculation is not always bad; there are professionals who make a living off of trading speculative securities when they know the odds are in their favor. However, speculation has a connotation of pure uneducated gambling, which it often is. We’ve all seen theses for stocks that are development stage biotech companies and gold mine ventures with no revenues that promise future returns based on potential upsides. The only type of stock speculation that I’ve seen pay off consistently is NOL Shells, which is what I have for you today.
First, some background on what an NOL Shell is. NOL stands for “Net Operating Loss”. These are tax benefits derived from failure. When a company loses money from the operation of its business, the losses can be applied to positive income in future years for tax purposes to cancel it out and lower the total amount of taxes the company owes. A company becomes an NOL Shell when it fails continuously, accumulating NOLs at the same time the business does poorly and shrinks. It reaches NOL Shell status when the NOLs are pretty much the only thing left at the company with value. Occasionally, these shells are repurposed in one way or another to become a different business than what they were before in the hopes of someday being able to utilize these NOLs.
There is a catch, however. Imagine for a moment that you are an entrepreneur who is seeking to start a new business. Instead of just starting your business, wouldn’t it be better for you to just find a failed entity in your community with a bunch of NOLs, buy it from the broke owner, and utilize the tax benefits? The IRS realizes this, and as such there are limitations on the use of NOLs with regard to changes in ownership. These are called Section 382 Limitations, and they are a bitch. They state that if the ownership of a corporation changes by more than 50% over any three year period, the ability of that entity to utilize the NOLs is severely limited. The worst part of this limitation is that an outside investor cannot effectively run a 382 analysis because the inputs required to do so are not public information. Whenever an NOL Shell gets juice and gains potential, the company generally puts safeguards in place to prevent the 382 from being triggered (google: NOL Poison Pill), however, 382 is something you always want to be wary of.
One very important thing for anyone who’s starting out in stocks to know is the difference between an investment and a speculation. Very broadly, an investment is something you put money in that has a respectable return, based on facts that can be independently verified by anybody. A speculation is something you put money in with an uncertainty of return whose likelihood of success is determined by conjecture and expectation. A speculation is not always bad; there are professionals who make a living off of trading speculative securities when they know the odds are in their favor. However, speculation has a connotation of pure uneducated gambling, which it often is. We’ve all seen theses for stocks that are development stage biotech companies and gold mine ventures with no revenues that promise future returns based on potential upsides. The only type of stock speculation that I’ve seen pay off consistently is NOL Shells, which is what I have for you today.
First, some background on what an NOL Shell is. NOL stands for “Net Operating Loss”. These are tax benefits derived from failure. When a company loses money from the operation of its business, the losses can be applied to positive income in future years for tax purposes to cancel it out and lower the total amount of taxes the company owes. A company becomes an NOL Shell when it fails continuously, accumulating NOLs at the same time the business does poorly and shrinks. It reaches NOL Shell status when the NOLs are pretty much the only thing left at the company with value. Occasionally, these shells are repurposed in one way or another to become a different business than what they were before in the hopes of someday being able to utilize these NOLs.
There is a catch, however. Imagine for a moment that you are an entrepreneur who is seeking to start a new business. Instead of just starting your business, wouldn’t it be better for you to just find a failed entity in your community with a bunch of NOLs, buy it from the broke owner, and utilize the tax benefits? The IRS realizes this, and as such there are limitations on the use of NOLs with regard to changes in ownership. These are called Section 382 Limitations, and they are a bitch. They state that if the ownership of a corporation changes by more than 50% over any three year period, the ability of that entity to utilize the NOLs is severely limited. The worst part of this limitation is that an outside investor cannot effectively run a 382 analysis because the inputs required to do so are not public information. Whenever an NOL Shell gets juice and gains potential, the company generally puts safeguards in place to prevent the 382 from being triggered (google: NOL Poison Pill), however, 382 is something you always want to be wary of.