Help! My Stocks Went Up Too High!

As silly as it may seem, sometimes you come upon a problem of your stocks going too high. Is this bragging? A little, but I do have a problem I am worried about which is if it is prone to a crash after having gone up so much.

The stock or 'bond' in question is the Pimco CA Municipal Bonds '2' I purchase around end of June 2015. I have an average buy-in price of $9.39/share. It is now $10.69/share translating to a gain of 13.87%

Take a look at this google finance chart:



From this, I am starting to think I caught some sort of Warren Buffet mojo. A few other assets I bought in the last year appears to have been smiled upon by the god(s) as well but let me just focus on just this fund on this post.

It's not everyday I am able to pick the bottom. I happened to buy it because I wanted a steady income stream. When I bought it at the time, the cost was $9.39 translating to a yield of 6.9% a year. I.e. $10,000 invested will get you $690 of dividends that is Tax Free. I put in about $20k worth so I get about 2x time per year.

Yeah! Did you hear that right? TAX FREE! This is the stuff that rich people use to not pay any taxes and so why shouldn't you employ it to do the same? They have millions to spare so as part of a diversified portfolio, maybe they put in 1/4 of their assets worth $1million in. That nets you $69,000 of easy spending cash a year! Wholly molly! 6.9% of dividend is nothing to sneeze at. Unfortunately, the price has gone up so much that you only get about 6.03% now, still not too shabby.

To figure out what you have to earn to get $690 of after tax dollars you do:

$690/(1-0.28)= $958.33

This is assuming you are in the 28% tax bracket. It doesn't matter the exact bracket but you get the point, its a lot more before tax dollars.

So back to the original point of the price going too high. There is a thing called NAV or net asset value of the bond. PCK have fund managers that buys whole bunch of CA bonds from various places like schools and citys and such on the order of 1-20 million. These places have to pay them back at a certain interest rate and that is roughly how we get our 6.9%. The NAV is the value of all the assets minus any liabilities, so in essence it is what it is really WORTH.

The current price of $10.69 but the NAV is about $9.09 representing a whopping 17.6% premium over the underlying value.

You can check PCK and its NAV comparison on Morningstar's website here: http://bit.ly/1pSxtNH

In a way, you can think of paying for the premium like a buy-in in order to get the good 6% a year returns. You just have to wait 3 years before the payouts will cover the premium you paid to get it.

Since 2008, there has been a growing premium on PCK and it is this growth that has me wondering if I should take the profit but loose out on all the monthly payouts. You could say that even if I reverts to the NAV value, I would not have lost much because you buy this for the payouts and not the appreciation of the stock itself.

I am certainly thinking about selling this asset as anyone should if the premium over NAV gets too much into the crazy money territory.

Whats this whole post about anyway? It's about informing you, the reader, about such cool things as tax-free bonds out there that you can buy to get yourself a recurring income. This being an essential part of freeing yourself from the cubicle.