Reason 65 not to buy individual stocks

Most of the arguments against investing in individual stocks boil down to investors not being able to beat the market, therefore shouldn’t even try, and instead buy low-cost index funds. The fact that “you (or any money manager) can’t consistently beat the market” was even confirmed by the world’s greatest money manager, Ken Fisher, in a recent article of mine.

At this point, it will usually be mentioned that buying and selling individual stocks results in increased (and earlier) taxes due to having to pay tax on your capital gains when you sell the stock.

What is never mentioned is that now you have enter this sell transaction on Schedule D of your federal tax return. Now as I get older, I find this more and more frustrating as tax preparation software (I mean you TurboTax) does everything they can to increase the complexity and the effort required.

Now if all this data entry wasn’t bad enough (i.e. carpel tunnel syndrome), you have to trust your broker correctly entered the cost basis on Form 1099-B. In the past I detailed an issue I had with E*TRADE incorrectly classifying a tax-free spinoff of shares of Brookfield Renewable Partners (BEP) as taxable. I’m thankful that I noticed and that E*TRADE agreed with my reclassification dissertation.

With the market reaching new highs I have been selling some of my stocks – not because I have any insight, but because my portfolio was getting a little stock heavy. While I know I should sell based on each stock’s intrinsic value, I instead focused my pruners on those stocks with minimal capital gains or even better a capital loss. You see my pruning plan has more to do with minimizing income prior to this year’s Roth conversion and less to do with helping ensure an efficient market.

The stock I’m currently looking to snip is AbbVie (ABBV). Now to make my case against individual stocks even more compelling, I never even bought these eight shares myself. Back in 2016 I read what must have been a fascinating article written in the eBay of stock analysis, Seeking Alpha (“most of its products have been previously used”).

It was an arbitrage play, based on a Pfizer (PFE) buyout of Allergan (AGN). The (very) basic idea being, Pfizer made an offer to buy Allergan at a (very) nice premium, and an investor (me) could still capture a fair amount of it and thereby lock in a 15% annualized return. For those dividend zealots it was framed as being able to turn Pfizer’s 4% yield into, hold on to your hats . . . 5%!

So, I bought 10 shares at $295.55 a share and soon after . . . the deal fell through. Apparently the U.S. Treasury wasn’t as excited and I was about Pfizer buying the smaller Allergan and reincorporating the new company in Ireland to drastically reduce its taxes. Like most investors who celebrate their wins by telling everyone how smart they are and their losses by erasing it from their memory, I (very) soon forgot I even owned Allergan. This made things a little confusing in 2020 when I noticed on my 1099-B that I had $1,932.35 of proceeds from Allergan. After a little research I determined that a slightly less ridiculously sounding company called AbbVie (ABBV), had bought out my ten shares of Allergan and in return given me eight shares of AbbVie and some cash.

Instead of doing an all-stock deal which would have made things tax and 1099-B free or doing a taxable all cash deal, which would have required just one final tax entry, AbbVie decided to do a combo (increased taxes and reporting complexity).

It gets even better though as the cost basis E*TRADE listed on my 1099-G was the entire cost that I paid for Allergan back in 2016 ($2,955), which gave me a nice little capital loss of $1,028. Back in 2020 after realizing this I may not have realized the oddness of the accounting (or cared).

So, when I recently checked on my eight shares of AbbVie I noticed they came with a cost basis of $84.22 a share, which of course made no sense.

I’m thinking of contacting E*TRADE to better understand it all. Though another option may be to immediately sell my shares, just trust that they enter the correct cost basis on my 2025 1099-G and then hopefully play a little Dylan next April . . .

Why wait any longer for the world to begin?

You can have your cake and eat it too.

Bob Dylan, “Lay Lady Lay”

PS: BTW, it just dawned on me that this could be a reason to buy individual stocks.