I have maybe two really good ideas each year. Seriously. I'm a believer that inspiration occurs on a bell curve. Most of the decisions that I formulate are generally appropriate, with a sprinkling of solid moves counterbalanced by a few bonehead moves. Most of my efforts are aimed at preventing catastrophic consequences, so I'll often forgo swinging for the fences if the consequence is striking out. As a result, the really top-notch, next-level epiphanies are few and far between.
Anyway, about ten years ago, I had a seemingly foolproof idea for how to game the stock market and make nearly-unlimited amounts of money. Legally.
Around the time of this revelation, I'd been reading about dividend growth investing strategies. In a nutshell, DGI focuses on purchasing shares of companies that pay a regular, healthy dividend. Not all companies do this (Google - Alphabet these days - has never paid a dividend, despite having more than 10 billion in cash), preferring to reinvest and grow the business (and the price of the shares), but certain industries are predicated on the dividend. Utilities, for example, have little room for explosive growth, and attract investors with the prospect of a tidy, relatively secure dividend. Dividend investors buy these and hold them, believing that the influx of actual money into their accounts exceeds any gains in share price*.
So I'm learning about dividend investing and I discover that, to receive a dividend (most of which are paid out four times a year at regular intervals), you need only own the stock for a single day (the so-called ex-div date) to get the payout. You were then free to sell the stock (even before the payout arrived) and invest elsewhere.
I figured out a way to game the system. Here was my strategy:
I would ante up some amount, say ten thousand dollars, into a brokerage account. Then I would scan the papers, looking for companies paying dividends soon. Let's say that I see Coke's ex-div date is tomorrow, GE's is two days later, and Duke Energy's is a couple days after that.
I buy ten thousand bucks worth of Coke the day before the ex-div date. Two days later, having locked in the dividend from this purchase, I'd sell and immediately purchase GE, repeating the process of securing their dividend before likewise buying and selling Duke Energy.
Using this strategy, I estimated I could collect a dividend every three days or so. Instead of the usual four dividend payments, I could collect more than a hundred such payments with the same modest amount of money. Moreover, as I started to receive this money, I could add it to my snowball to receive larger and larger dividend payments. There was no apparent limit to how much money I could make with this strategy for exponentially growing my money. It was dividend investing on steroids, and I was on track for some sick gainz.
I lived in a bubble of pure bliss for about six hours. That was how long it took for the giddiness to wear off and allow another question to pierce my little slice of financial nirvana: why hadn't anyone figured out/employed this foolproof strategy out already?
At first I thought that what I was considering was illegal. Nope - you can do exactly what I proposed. But by now I was almost certain that I was on the wrong track, even though it would take me another our of carefully working through the process to find the hole in my logic.
The Hole In My Boat
What I'd forgotten was that markets are inherently efficient. On the day of the ex-div date, the precise value of the dividend would magically disappear from the company as investors noted the payout. For example, if Coca-Cola paid out a 20-cents-per-share dividend, the price of the share would drop 20 cents that day**.
But there was another problem: reason number two turns the zero-sum game I sought to play into a guaranteed loser. That reason: taxes. Whenever you receive a dividend in a taxable account (the most commonly used by day traders like I aspired to be) it is a taxable event. Buy-and-hold investing requires you to hold a stock longer than a year to move to a lower-tax bracket, partly to curtail the idiotic behavior I was now considering. By speed trading, I would be taxed at ordinary income rates, basically tripling the tax burden. This is the hole from which I would slowly lose money.
My strategy was the financial equivalent of running into a drug store, grabbing a handful of gift cards to Applebee's and running out, thinking that I'd be able to use them. I came THIS CLOSE to opening up an account and learning things the hard way. Had I done so, it would surely have resulted in a humiliating loss of time, money and pride. Rest assured, had I actually done this, it probably would have been something I carried to the grave without disclosing. As is, this dumb get-rich idea serves only one purpose: to amuse and - hopefully - prevent the next generation of greedy idiots.
*I don't think this is a great strategy, but that's a whole 'nother topic.
**That doesn't mean it will necessarily happen; the price could increase, but it would be the result of stronger market forces. Even with a serendipitous surge in price, this is a bad idea for reason number two.
Noah's Inner Monologue
Scribblings of a man who can barely operate an idiotproof website.