How to Buy a Dollar with Just 88 Cents

American currency. Dollar notes and coins.USA
What if there was a way to buy Apple (AAPL) -- recently trading near $568 a share -- for just $500? It's not an outlandish scenario. That's essentially what investors buying into Tri-Continental (TY) are doing.

Like many closed-end stock funds, Tri-Continental trades for less than the value of its underlying assets. In Tri-Continental's case, its close on Dec. 24 of $20.18 is a 12 percent discount to its net asset value of $22.95 a share.

Tri-Continental invests in some of the country's largest companies across various different industries. Apple just happens to be its largest holding at nearly 3 percent of the portfolio, but it's one of the many stocks in Tri-Continental that investors are buying into for pennies on the dollar.

If this sounds too good to be true, you would be right. There's a catch -- and a big catch, at that. But let's first explore the largely ignored universe of closed-end funds.

Fun with Funds

When investors think about mutual funds they are probably referring to the wide universe of open-ended funds.

Led by iconic fund families including Vanguard, Fidelity and T. Rowe Price (TROW), these conventional funds sell an unlimited number of shares.
They typically are priced just once at the end of every trading day. Buyers invest and sellers cash out at that day's net asset value, or the closing value of all of the stocks and investments in the funds after subtracting any liabilities that is then divided by the number of shares outstanding.

Closed-end funds don't play that way. They trade throughout the day on public exchanges. Tri-Continental, for example, trades on the New York Stock Exchange. A closed-end fund doesn't create new shares when investors want to buy or subtract them when those shares are redeemed. There's a set number of shares, and the free markets of supply and demand dictate their price.

Tri-Continental isn't new. The fund has been around since 1929, the same year of a historic market crash. It's one of the hundreds of closed-end funds, and most of them are currently trading at a discount.

Adams Express (ADX) has also been around since 1929, and it trades at an even steeper 13.5 percent discount. Like Tri-Continental, it emphasizes blue chip stocks. There are several other closed-end funds that trade in specific sectors or geographical regions.

There's Always a Catch

The catch is that these funds have also historically traded at a discount to net asset value. That's important. Yes, you can buy Tri-Continental for 88 cents on the dollar -- or Adams Express for 86.5 cents on the dollar -- but that's also the same price that you would have to sell at if you wanted to punch out.

There is no free lunch here. The same discounting dynamics that may attract you as a buyer also apply to you as a seller.

Outside of a fund deciding to liquidate -- and that's something that isn't likely with Tri-Continental and Adams Express around for 84 years -- the funds have historically traded at similar discounts to what they are currently fetching.

This doesn't make them bad investments. Investors are still getting more bang for their investment buck, and that includes dividend distributions that pass through to investors after modest operating expenses are subtracted. Some funds even have minimum distribution rates, like Adams Express that will raise money to cover its minimum 6 percent annual distribution.

Closed-end funds were never as popular as traditional mutual funds, and they may be even more obscure in light of the similar exchange-traded funds -- or ETFs -- that have grown in popularity as perpetually traded vehicles. However, there are opportunities in these baskets of stocks that have been neglected for decades.

You can buy stocks at a discount through closed-end funds, as long as you realize that you're likely to sell them at a similar discount in the future.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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At least my family's ancestors know George Washington personally. Some were Patriots other's were Loyalists. ( I kid you not)

Topics Covered within:
Progress of the Age, Allottment of Lands, Cattle Marks, Montauk, Town Legislation, A Dog Law, The Revolution, Old Style Changed, Gardiner's Island Annexed to East-Hampton, Notices of Ministers Huntting, Buell, Beecher, Phillips, Condit, Eleazer Miller, Nathaniel Gardiner, Thomas Wickham, Jonathan S. Conkling, Abraham Parsons, Abel Huntington, M. D., David Hedges, Jr., Josiah C. Dayton, Samuel Miller, Concluding Remarks

December 30 2013 at 1:37 PM Report abuse +1 rate up rate down Reply

Is that how Asia bought the politicians however I think they sold our jobs at 10c on the dollar!

December 30 2013 at 1:30 PM Report abuse rate up rate down Reply

Glory To GOD In The Highest, & On Earth Peace, Good Will Toward Men.

December 30 2013 at 11:32 AM Report abuse rate up rate down Reply

A stupid article, it missed the point of closed-end funds completely. I'm invested in a very nice one that's currently valued at 3% more than I paid per share, pays dividends monthly, and with the DRIP plan purchases new shares at a discount to the NAV.

The fund mentioned here by the way is currently trading at it's 52 week high which makes it overpriced, also the quarterly dividend is only a little over 3% yield. A loser investment.

December 30 2013 at 10:31 AM Report abuse rate up rate down Reply

Your social security check is still a better idea. It is like a private account for the more you pay in the larger your check is when you retire. That is if the GOP does not drain the account any further.

December 30 2013 at 2:00 AM Report abuse -5 rate up rate down Reply
1 reply to toosmart4u's comment

You probably don\'t even pay into it you LOOOOOOSER .

December 30 2013 at 4:16 PM Report abuse +1 rate up rate down Reply

Don\'t worry, our dollar continues to devaluate--if you can get 88 cents on the dollar now you might want to sell.

December 29 2013 at 9:57 PM Report abuse +2 rate up rate down Reply
1 reply to tjstieg's comment

Take that 88c and buy a can of Tuna at ShopRite before the sale ends!

December 30 2013 at 1:41 PM Report abuse rate up rate down Reply

What a bullsh*t article.

December 29 2013 at 4:16 PM Report abuse +6 rate up rate down Reply

As I can see everyone seems only to be value traders. Let me get this straight. I buy in at .88 and also sell at .88 even if the stock falls to .80? Well that sounds cool. Now it seems that everyone missed the minimum 6% return on the .86 share. which is not bad at all unless some think they can do better in both an up and down market. So if I am correct that the sell out is always the same as the buy in it is just like having bonds in the companies.

December 29 2013 at 3:05 PM Report abuse rate up rate down Reply
1 reply to joematej's comment

Considering the inflation rate for the last 5 years alone has been more than 6% you still lose even if you collect a dividend.

December 30 2013 at 4:11 PM Report abuse rate up rate down Reply

You could buy 88 cents worth of rolled oats and make it into two dozen crunchy Chef's oatmeal lace cookies worth $1.00 each ($24.00 value) or $16.00 each ($384.00 value) if ordered as dessert with French Vanilla Ice Cream at One Central Park, if you can get reservations.

December 29 2013 at 7:50 AM Report abuse +3 rate up rate down Reply

Stupid's worth what it's worth

December 29 2013 at 2:49 AM Report abuse +3 rate up rate down Reply
1 reply to kluj1's comment

You'd be glad if you printed the article out incase you ran out of toilet paper.

December 30 2013 at 1:43 PM Report abuse rate up rate down Reply