December 2015 - Bankers Anonymous

December 31, 2015

Behavior Matters, Not Markets

From a personal finance perspective, markets don’t matter in the least. Behavior matters.

Imagine if financial media reported every day on what actually affects whether you get richer or poorer over your lifetime? Wouldn’t that be awesome?

I mean, don’t get me wrong. My imaginary show, “Nightly Financial Behavior, with Mike Taylor” would be a really weird program.

On Retirement

“Thank you everybody for turning in to my show. Ok, now let’s hear from our correspondent Bob in Des Moines about a stunning catastrophic loss today – foregone matches on 401Ks!”

“Thanks Mike. That’s right, we’re hearing tonight that millions of people in Des Moines – as well as across the country – have put their retirement at risk by not checking that little box on the HR form at work to automatically withhold their paycheck. They’re missing out on employer-matching funds – one of the few examples of ‘free lunch’ in the known universe.”

“Well, that’s really terrible news Bob. I know I speak for all of America when I say we’ll pray for them and their families tonight.”

On Asset Allocation

“But that’s not all, Mike. We’re just getting late breaking news this evening that tens of millions of people under age sixty are choosing bonds, annuities and money markets in their retirement accounts because it makes them feel ‘safe’ from ‘risk.’”

“That’s horrible Bob. Has nobody explained to them that this is the riskiest thing they could do? That’s like elder abuse against themselves, and somebody should call the authorities to stop this tragedy right now. Their money has no chance of growing that way. By not understanding the true meaning of ‘risk,’ they might run out of money later on – a much worse outcome than a bit of market volatility from stocks.”

On Overspending

Now let’s go over to our San Francisco correspondent Carmen: what’s the latest you’re hearing on household surpluses?”

“Not good, Mike. Throughout the day today we’ve seen irrational spending behavior in the overwhelming majority of households nationwide. I even did it today, and so did you, by the way. We’ve got a rampant case of excessive purchasing, followed by scattered reports of “spending, in order to save money,” through ‘bargain shopping’ and ‘holiday sales.’”

“But that’s not all Mike. More and more doctors report an epidemic of partial to total blindness when it comes to matching household spending with household income.

“We’ve put in a call to area hospitals to explain this epidemic, and the Centers for Disease Control (CDC) are working around the clock on the blindness cure. We’ll keep you informed if we hear anything.”

“Thanks Carmen. Now over to our correspondent Elizabeth for the nightly Wall Street update.”

On Costs

“That’s right Mike. I’m standing on the streets here in downtown New York, and as we’ve reported every day for the past 15 years, the sound of laughing hyenas continues unabated from inside the offices of the largest banks and brokerages.

Every once in a while the giggling dies down, and then a voice says ‘…And they still never think to ask us the cost of our products. Hahaha! Buying our stuff and then – snort, guffaw – being too embarrassed to ask what we charge them. I can’t stop laughing, it’s just, oh gosh, our customers are so darn adorable.’

And then out here on the street we can hear more loud, uncontrolled laughing by everybody in the building. That’s about it from Wall Street today.”

“Sounds like at least something is going well for some people. It’s important to have good news as part of our nightly broadcast. Thanks Elizabeth for sharing that joy with our viewers. That wraps up our show tonight. Don’t forget to tune in tomorrow for an update on what matters in personal finance for Exactly. The Same. Story.”

Naturally, my show’s Nielson ratings would hit zero by the end of the first week. I’d like to think my Mom would still watch, but that’s about it.

None of these things

Many topics would never appear on my show.

For example, we would never, ever, talk about the Dow Jones Industrial Average movement today, or that the NASDAQ Index slipped by one point three percent in light volume trading.

No uninformed talking-head would claim that worries about Chinese devaluation, Greek debt negotiations, or the release of last month’s Federal Reserve meeting minutes explained the market’s drop today. Total irrelevancy.

The celebrity CEO’s outlook on his industry – whose pay and stock options unjustifiably call attention to his words – would not get an invitation to the studio.

blue_line_composite_index — The Onion’s classic “Blue Line Jumps” story is truth through satire.

As for the peripatetic ups and downs of blue lines and black arrows, the random-number generator of data points, the minute-by-minute spins on the market’s roulette wheel, you would not hear any of that.

You simply wouldn’t ever hear about “the market” and “the economy,” because these are really just made-up figments of our media’s imagination. Trust me that they really do not matter when it comes to whether you get richer or poorer over the long run.

“How’s the market doing?” I sometimes get asked.

“I don’t know: how’s your behavior doing?” I want to reply.

I am just socially-aware enough to mumble something slightly more acceptable.

But my question back would be the right one.

What matters is not what the economy does, or what the market does, but what you do.

A version of this post appeared in the San Antonio Express News.

Please see related post:

Book Review: Behavioral Investment Counseling by Nick Murray

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December 21, 2015December 22, 2015

On “The Economy” (If Such A Thing Exists)

One of the odd things about listening to Republican candidates for president is their insistence on describing the ‘weak economy’ or the ‘anemic recovery’ of the Obama Presidency. For which they propose a new approach, naturally.

And obviously we understand why they say that. But just to be clear – that’s crazy talk.

“The US Economy,” if such an abstract thing even exists, may be described in short-hand by

The National Unemployment Rate
The Inflation Rate
Gross Domestic Product (GDP) growth
Asset Prices – Like a broad US stock index (and maybe housing)

There are obviously many other things that impact how people feel about the economy, but on the grand scale of these four economic conditions – GDP, Unemployment, Inflation, and Stocks in 2015 – it doesn’t get any better than right now.

The Unemployment Rate

The Bureau of Labor Statistics reports a 5 percent national (seasonally adjusted) unemployment rate, the lowest since 2008. The unemployment rate has only rarely been this low since about 1971.

Inflation

The past year’s inflation rate (through October 2015) was 0.2%, a ridiculously favorable rate. This is a stunning rebuke of the chicken-little claims about loose monetary policy since 2008, and it partly explains why the Federal Reserve waited so many years – until this week – to begin raising interest rates. No inflation. The last three annual inflation readings this low were 2009, 1955, and 1949. Again, it doesn’t get any better than this.

GDP Growth

The 2.4 percent annual GDP growth in 2014 – a crude measure of our increasing national output and wealth – is a reasonable historical rate. It’s grown faster in the past – an average of 3.22 percent since 1948 – but it sure beats shrinkage, and it’s not anything close to a recession or even particularly ‘anemic.’

Asset Prices

As of this writing the S&P500 Index is within spitting distance (off 3 percent) from its all-time historic highwater mark of 2134, something that could be breached without any warning in a day, or week.

In sum: We are living through the kind of incredible boom-time economic conditions that – as the 1980s hair-metal band Cinderella sang – you “Don’t Know What You Got ‘Till Its Gone.”

When things get worse in the future, we will look back fondly to recognize 2015 as the Goldilocks situation that it was.

So, please guys, stop complaining about “The Weak Economy.”

“The US Economy” – at least in aggregate – is humming along awesomely.

Now, let me clarify: I don’t give President Obama credit for this economic boom. Frankly, no US president deserves much credit or blame for the performance of an economy during his tenure. We can’t stop critics or supporters from assigning credit and blame – that’s just what critics and supporters do – but thinking people (psst, that’s you and me) know better than to believe in it.

A Non-Crazy Position

One sort of reasonable position to take is that there’s no such thing as ‘The US Economy,’ but rather a variety of regionally and demographically-specific financial conditions. Think of South Texas, or rust-best manufacturing, or our inner cities.

“The economy” of South Texas for example is headed for an apocalyptic set of oil-based bankruptcies right now.

The “manufacturing economy” could be described as anemic, and is in a multi-decade secular decline. That will be true until, well, until always, because we pay people more money in this country than they are paid to do the same manufacturing jobs in other countries, which makes us less competitive in manufacturing. Overall that’s a high-class national problem, because it means workers get better pay here than in other places, but it obviously doesn’t feel like a blessing to traditional manufacturing employees.

And then there’s the “inner city economy”: high-school dropouts in our inner cities face inter-generational poverty for which there is no cure in sight. To a 20-24 year-old black man in 2015 – experiencing a 16.7 percent rate of unemployment right now – the difference between a recession and a boom in our overall economy may be hard to see. It likely feels like it’s always a recession in the inner city. The Obama presidency didn’t change that. Johnson’s “War on Poverty” didn’t change that. The economy will be weak in the inner city until college outpaces prison as the most-likely institutional destination for ambitious young black men.

It’s The Inequality, Stupid

One of my pet peeves of Presidential candidate discourse – and Rs and Ds do this in equal measure – is the laser-like focus on ‘middle-class jobs,’ as if everyone is middle class or above in this country. We engage in a weird collective blindness, as if pockets of extraordinary poverty don’t exist.

The so-called “Obama recovery” can seem weak to many because a booming economy produces very unequally-distributed benefits.

For the 50 percent of American households currently boasting zero to negative net worth, this “awesome economy” means very little.

For the top 10 percent of American households – who control 85 percent of financial assets – there’s nothing ‘anemic’ about the economic recovery of the Obama years.

With stocks up more than 100% since the Great Recession of 2009, in fact, the “awesome economy” of the past 7 years amply rewarded existing owners of wealth. Obviously, the other 90 percent of American households should feel differently. They’ve benefited very little by comparison.

There’s plenty to be upset about during the “Obama recovery.” It’s not at all true – as I think too many candidates for President argue – that the recovery is weak. It’s that the recovery is unequal.

A version of this post ran in the San Antonio Express News.

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December 18, 2015January 4, 2016

Book Review: Stocks For The Long Run by Jeremy Siegel

Reading Jeremy Siegel’s classic on investing Stocks For The Long Run: A Guide To Selecting Markets For Long-Term Growth, I was reminded of three well-known investing aphorisms.

“Take the long view.” (Also related: “Successful people have long time horizons. Unsuccessful people have short time horizons.”)

“It almost certainly isn’t different this time”; and

“Read books, not magazines and newspapers (nevermind blogs or tweets) on investing.”

In taking the long view, Siegel presents the data and definitively settles the answer to the question of stocks v. bonds. He’s the guy that produced the 200+ years of data – going back to 1800 – that show the superior returns of stocks vs bonds or vs cash or vs (horrors!) gold.

Because it certainly isn’t different this time, Siegel himself draws upon work done in earlier eras that conclude, inevitably, the same way.[1] I had not previously heard of Edgar Lawrence Smith’s Common Stocks as Long Term Investments, which came out in 1924, but Siegel credits him with carefully and correctly building the earlier time series to show the overwhelming advantage of equities throughout modern times.[2] Siegel’s book – first published in 1994 – updates and extends the time horizon for considering the relative returns on different asset classes.

When I teach a night-school course for adults called “Get Rich Slow,” one of the visual lessons I employ is to show the relative returns of different assets according to different time horizons. The lesson of my visuals is the importance of taking the long view.

With a one-year timeframe, for example, stocks appear extremely volatile, especially compared to a ‘safe’ investment like bonds.

Widening the timeframe to a five-year horizon, however, you can see that in the majority of time periods stocks beat bonds, and typically quite handily.

Taking an even broader timeframe – such as ten years – the historic data shows that stocks are an overwhelming favorite over bonds. To prefer bonds over stocks through an investing decade is really to say that you believe a quite rare and unusual thing is likely to happen. You’re betting on the improbable. You’re betting, in fact, that you know “it’s different this time,” which is typically a losing bet.

The power of Siegel’s book derives from him taking the longest view – from 1800 to today – to show that equities are the only way to build wealth.

Readers of Nick Murray’s Simple Wealth Inevitable Wealth – or readers of my review of that book – will not find the overarching message of this book any different in Siegel’s Stocks For The Long Run.

What readers of both books will find different is that – while Murray assumes the voice of accumulated self-evident wisdom and a bit of disdain to ‘prove’ his points – Siegel actually has done the proving (in so far as a long-dated data series can ‘prove’ anything in finance.) I’m sure Murray was deeply influenced by Siegel’s book and considers it the final word on long-term stock versus long-term bond returns. And it is.

The big idea

Both authors conclude that – in the long run – only stocks provide an increase in purchasing power over an investor’s lifetime. Meaning, only stocks grow your wealth. Bonds (and similar fixed income instruments) preserve nominal dollar values but might not even keep pace with inflation, and certainly cannot build wealth.

Risk, therefore, resides with bonds and the loss of purchasing power, not with stocks. Stocks – when held for the long run (and with diversification) – turn out to be not risky at all.

If you want the data and charts behind this idea that only stocks can build wealth, and are not risky, while bonds are the opposite, Siegel’s book brings the data.

Read books not articles

Siegel also comprehensively addresses major questions an intelligent investor might want to have answered, in a way that only a full book-length work can. Since you’re reading an article I’ll do my best to summarize each chapter in my own words, with a view to enticing you to read the whole thing.[3]

Chapter 1 – $1 invested in 1800 in US stocks becomes $260,000 in real terms (inflation-adjusted), while $1 in bonds becomes $563 by 1994. The value of that data point alone is worth the price of admission. Stocks in Britain, Japan, Germany – while responding to their own historical ups and downs – have a similar long-term upward trajectory.

Chapter 2 – Stocks, in contrast to bonds, have never offered investors a negative real return over 20 years. Bonds may offer a positive ‘nominal’ return, but after medium to high inflation your money invested in bonds may actually buy less than it did 20 years ago.

Chapter 3 – A broadly diversified portfolio – such as a market-representative index – offers lower risk than one or a few securities, assuming individual stocks are not perfectly correlated.

Chapter 4 – Stock prices respond to a combination of fundamental value (in the longest run) and investor sentiment (in the short and medium run), but neither approach provides certainty when it comes to investing. Dividends, it turns out, account for a tremendous amount of long-term returns to investors. Dividend Yield (dividends/price) offers an imperfect indicator of a good investment.

Chapter 5 – Small capitalization stocks might provide superior returns compared to large capitalization stocks in the longest run, but are certainly more volatile, and might underperform for significant amounts of time. Value stocks might provide superior returns compared to growth stocks in the longest run, but the evidence is still mixed. Ironically and contrarily, negative earnings and non-dividend paying stocks might also offer above-market returns, historically. Buying an IPO at the initial price usually is rewarded (if you sell right away) but buying at the first days’ closing price is usually punished.

Chapter 6 – While many investors would do well to pay attention to a stock’s price/earning ratio, sometimes buying a huge PE stock turns out well, while conversely a low PE stock can just as easily evolve into a complete loser.

Chapter 7 – The tax code, and in particular the tax on capital gains, heavily rewards long term holding of stocks compared to short-term stock holding, or compared to holding bonds.

Chapter 8 – For US investors, investing only in the US is akin to remaining undiversified in a single industry, with the US making up only a third of global equity market capitalization. The lesson: diversify by geography.

Chapter 9 &10 – Leaving the gold standard in the 20^th Century appeared to auger the beginning of inflationary pressures, but stocks have served as an excellent long-term hedge against inflation, preserving and enhancing purchasing power over the long run, which bonds certainly to not do.

Chapter 11 – Timing the business cycle via stock investing would be theoretically super-profitable, but also appears nearly impossible.

Chapter 12 & 13 – Wars, political shifts, and economic data releases all affect stock prices in the short run, but rarely in predictable ways. Short-term news is only effective when compared to an aggregate of market expectations.

Chapter 14 &15[4] – The combination of futures trading and financial technology explains much of the short-term market fluctuations, including in some cases crashes such as observed in 1987.

Chapter 16 &17 – Some people subscribe to ‘technical’ techniques such as ‘charting,’ and Siegel even allows for the possibility of using factors such as “200-day moving averages” as a guide to buying and selling, but I’ll editorialize these chapters and say that’s crazy talk. Siegel also describes some long-standing efficient-market anomalies such as the “January effect” of small-stock outperformance in January, or a notable market underperformance on Mondays, but again I’ll editorialize and say pay no attention to that.

Chapter 18 – Picking successful stock mutual fund managers who consistently outperform the market has proven extremely difficult. Getting warmer…

Chapter 19 – Siegel saves the best for last. For holding periods above ten years, stocks have overwhelming advantages over bonds. The risk of holding stocks (measured by the standard deviation of real returns) actually shrinks to below bonds after ten years. For investors with a long horizon, rational behavior would call for holding 100% (or even more!)[5] of one’s investment portfolio in stocks.

Given the typical underperformance of managed stock mutual funds, most investors would do better with an index fund, an idea with which I am familiar.

The best personal finance books of all time

If you’re looking for the classics of personal investing and want to read the fewest number of books with the greatest impact, I think my short list goes something like this, in some order or another.

A Random Walk Down Wall Street, by Burton Malkiel,

Simple Wealth, Inevitable Wealth, by Nick Murray,

The Intelligent Investor by Benjamin Graham, and

Stocks For The Long Run by Jeremy Siegel.

None of these are controversial picks and only Simple Wealth Inevitable Wealth is not a perennial in this type of list. If you’re looking for classics on the importance of saving money and controlling spending as a path to wealth, the two that stand out are The Millionaire Next Door by Thomas Stanley, and George Clason’s The Richest Man In Babylon.

Please see related posts:

How to Invest

Stocks vs. Bonds – The Probabilistic Answer

Book Review: A Random Walk Down Wall Street, by Burton Malkiel

Book Review: Simple Wealth, Inevitable Wealth, by Nick Murray

Book Review: The Intelligent Investor by Benjamin Graham

Book Review: The Richest Man in Babylon by George Clason

Book Review: The Millionaire Next Door by Thomas Stanley

[1] Even if history does not repeat itself, it probably rhymes.

[2] Smith’s work was roundly attacked and discredited following the market crash in 1929, and the scars of that era prevented people from seeing that he was, in fact, correct. Siegel draws on his work and extends it.

[3] Note: I read the 1994 edition (since that’s what my library had) and I know Siegel has updated it five times since then with probably a lot of good new stuff. On the other hand, taking the long view, the messages can’t be all that different.

[4] This is probably the most dated portion of the 1994 edition I read, and I’m guessing the most updated in the 2014 Fifth Edition, since financial technology has evolved quite a bit in 20 years.

[5] For a person comfortable with risk and a 30-year investment horizon, Siegel says a 134% allocation to stocks is theoretical optimal. How does one do that? Leverage, of course. Ok, let’s just stop right there, put the leverage down, and nobody gets hurt.

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December 14, 2015

Hillary Clinton Tax Proposals

Last week I described future Republican Presidential nominee Jeb Bush’s tax proposals. This week, for balance, I will review future Democratic Presidential nominee Clinton’s tax proposals.

Now, before you #FeelTheBern folks write to tell me about your favorite candidate’s chances in the Democratic primaries, I should say the following: Every letter you write me must be followed up with a $1 bill in the mail to me when Hillary seals the nomination in Summer 2016. I’ll do the same if your candidate wins. Agreed? I’m happy to receive your letters, in that case. Thanks.

Prominent on Clinton’s website – under the topic of “Economy” – are two tax breaks.

Education tax breaks

The first tax break for students is standard stuff. Every family with a student enrolled in higher education is eligible for a $2,500 credit, via the already existing American Opportunity Tax Credit, currently set to expire in 2017. Clinton’s idea there is to make it permanent. No big change there.

Profit-sharing

More interestingly, Clinton calls for private employers to receive a tax advantage for including employees in a profit-sharing plan. Meaning, if every eligible worker receives a proportion of annual profits, then the federal government would incentivize the private employer through lower corporate taxes. Clinton cites studies that link higher worker productivity to profit-sharing plans.

In my town, a large grocery chain (with an estimated 80,000 employees!) named HEB recently announced plans that sound quite similar to Clinton’s tax proposal. HEB’s stated purpose is to foster employee loyalty and enhance employee financial stability. Employees who own HEB shares would qualify for profit-sharing dividends, similar to what Clinton would like to push companies to do through this tax plan.

HEB did not wait for Clinton’s tax incentive to announce the change. It’s unclear from Clinton’s website whether profit-sharing in the form of private stock ownership is what she has in mind, or some other unstated mechanism.

A skeptical part of me thinks employers like HEB will decide to share profits – or not – based on factors much bigger than a possible one-time federal tax incentive like Clinton proposes. But I could be wrong.

Paying for tax breaks

Interestingly, the Clinton campaign includes estimates of the cost of these two taxes, something not obvious on the Bush campaign site.

The college credit, she estimates, would cost $350 Billion over 10 years.

The profit-sharing tax incentive, she estimates, would cost $20 Billion over ten years.[1] So, combined, we’re talking $37 Billion per year, which sounds like a big number to me, but really comes to less than 1% of the Federal Government’s annual expenditures.

How do you pay for these things?

The only answer on her website is to “close loopholes” to make up the lost revenue. This is an interesting example of closing loopholes to pay for other loopholes. But I suppose one person’s “loophole” is another person’s thoughtfully crafted tax benefit? Also, “closing loopholes” is what one always says when one needs a cop-out answer.

Estate Tax

This is the best of all taxes, just ask me. Clinton’s campaign website does not mention her views, but I can make an educated guess.

Clinton voted as a Senator to maintain taxes on estates as small as $1 million, so we can intuit that she supports maintaining or increasing estate taxes. On the other hand, since that time she’s acquired a grandchild and we’ve learned she and her husband have earned over $100 million (!) after leaving the White House, mostly through speaking fees (!). Her personal incentives at least have evolved a bit on this issue

Burden of tax compliance

The Jeb! campaign made comprehensive tax reform its central proposal, arguing that the cost of filing taxes added up to $168 Billion per year for individuals and corporations.

The Clinton campaign also mentions this problem in the section on jumpstarting small businesses. Her focus remains small, however, stating “The smallest businesses, with one to five employees, spend 150 hours and $1,100 per employee on federal tax compliance. That’s more than 20 times higher than the average for far larger firms. We’ve got to fix that.”

I’m pretty sure adding loopholes isn’t going to help, and there is not a single specific simplification proposal on her website, but I guess it’s the thought that counts?

Carried Interest

I’m a bit obsessed with carried interest taxes – as a former hedge funder – except my views would not be popular with hedge funders.

Fortunately Clinton says she would eliminate hedge funders’ favorite tax break. This makes me happy.

Progressive taxation

Along a similar vein, Clinton proposes enacting the ‘Buffett Rule’ to ensure that wealthy folks pay a higher proportion of their income than lower earners. Only a monster – or, you know, Steve Forbes – disagrees with the idea of progressive income taxation, so that’s not a surprise.

The real reason Buffett pays a lower tax rate than his secretary is that he earns money on his money through capital gains, rather than through a salary. If you want progressive tax rates, you have to address the favorable taxation of capital gains and dividends, rather than salaried income, because that’s where wealthy people actually make their money.

What is a bit innovative is Clinton’s proposal to incentivize long-term investing through a gradual reduction in the capital gains tax. Under Clinton’s plan, the longer you hold the investment, the less you pay in taxes.

Clinton’s capital gains tax proposal is a bit of behavior-modification meddling, but I mostly forgive that because it rewards the buy-and-hold investor behavior that everyone should adopt.

Next week: An analysis of third-party candidate Trump’s tax policies. Kidding! A genius like Trump knows tax policies are for Losers!

A version of this post ran in The San Antonio Express News.

Please see related posts:

JEB! Tax policies

Death Taxes and Fairness

Shhhh…Please don’t talk about my tax loophole

Adult conversation about income tax

Real Estates Tax Rant

[1] Incidentally, for a wholly new tax proposal, I have no confidence that Clinton’s $20 billion is the right number. It totally depends on how many companies adopt the plan to share profits, and that seems quite unknowable at this time.

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December 11, 2015March 13, 2019

Book Review: Behavioral Investment Counseling by Nick Murray

Murray is the author of one of my favorite investing books of all time, Simple Wealth Inevitable Wealth, and I’m reviewing this later book partly as an excuse to call attention to his earlier book, SWIW.

But Behavioral Investment Counseling by Nick Murray stands on its own quite well.

The book’s bedrock idea – captured right there in the title – is that investor behavior determines an individual’s wealth prospects, rather than “markets.”

Now this strikes me as 100%, Capital T, True, although an uncomfortable truth for many.

Ask me “how are the markets doing?“ and the right answer – as I’m certain Murray would agree – is “Doesn’t matter, how’s your behavior doing?”

Since Murray’s audience for this book is not individual investors but rather investment advisors, the logical lesson is that advisors need to focus on the beliefs and behaviors of their clients, rather than spend much time on asset or manager selection.

I’ve never wanted to be an investment advisor, but the way Murray describes the “behavior investment counselor” makes the profession seem especially noble.

I dig his voice. He’s a wise and slightly weary zen master who has seen all of the investment behavior mistakes possible, and can describe them to you before you even make them.

behavioral_investment_counseling On many an important point he acknowledges the unknowability or unprovability of his point. Nevertheless, not doing what he says – not intuiting the essential wisdom – leads to grievous error. You’re welcome to persist in your own stubborn views, he seems to say, and best of luck to you.

I’m not as old as Murray but I find myself adopting that same attitude at times. I mean, people enjoy their investment fantasies. Who am I to disillusion them?

In my own words, the message of the book is

The entire value of an investment advisor is captured in the making of a plan taking into account the client’s specific situation – and then the occasional behavioral counseling at key moments (mostly when the market crashes, but also possibly when it is on a tear upwards and there’s a need to rebalance back to the original plan.)
Readers of SWIW will not be surprised to learn that the best plans will rely heavily on diversified equities (rather than fixed income) as this is the only way to grow one’s money, and avoid the most important risks – loss of purchasing power and outliving one’s money.

For actual investment advisors, Murray’s book offers what seems to me a tremendous amount of self-evident wisdom about what an advisor does, how an advisor should go about building a practice, and how an advisor should first ‘pitch’ prospective clients.

If you haven’t read any Nick Murray yet, do yourself a favor…

Please see related reviews:

Simple Wealth Inevitable Wealth by Nick Murray

The Game of Numbers by Nick Murray

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December 7, 2015December 14, 2015

JEB!’s Future Tax Policy

I’m going to start this post with the controversial thing, before moving on to the analytical thing.

Now, I know you. You’re going to want to angrily write to me about the controversial thing, and especially how I’m wrong. I don’t care. What I’m hoping is that we can turn quickly to the analytical thing, which is far more important to discuss.

Controversial thing

Jeb Bush is going to be the Republican nominee for President. I mean to say, Jeb!

I know, I know, he’s nowhere in the polls, lackluster in the debates and the exclamation point on his campaign logo can really only be understood ironically. Doesn’t matter.

I write as a “recovering banker” because I think a financial framework is a useful starting point for viewing the world. Jeb! is the only one in the Republican race with $100 million backing him. He will win. I expect all of you who write in an angry note about my controversial statement will also agree to mail me a dollar in Summer 2016 when I turn out to be correct. Ok? Thanks.

Analytical thing

Having said that, I want to talk about the future Republican nominee’s tax policies. Tax policy matters tremendously. Jeb!’s got a 50-50 shot at the White House (I just mean any D versus any R is a coin flip in any quadrennial) We should know what he stands for.

Tax code overhaul

In the second paragraph of his policy statement on taxes, Jeb! calls for a complete overhaul of the US tax code.

He’s troubled by the ‘thousands of special-interest giveaways, subsidies and other breaks” for Washington insiders.

He correctly points out – as have others before him – that the complexity of an 80,000-page tax code leads to unfairness, cronyism, and the need for a virtual standing army of tax lawyers and accountants. Jeb! cites a study that found the cost of complying with the US tax code reached $168 billion per year in 2010 for individuals and corporations. Which is crazy, and infuriating.

All of which is to say, I love where Jeb! is going on simplifying the tax code.

Lower Taxes

Jeb! proposes reducing the number of income tax rates to three, at 10, 25 and 28 percent respectively. Most controversially, the highest tax rate would drop from the current 39.6 to 28 percent. I don’t make a million dollars per year, but if I did, that drop would save me a cool $100,000 in taxes right there, which sounds pretty, pretty sweet.

I don’t have a calculator powerful enough to tell me whether lowering and simplifying income tax rates will leave us closer or further from balancing the federal budget – which remains an important fiscal goal – but I expect some finance nerd in the campaign to fire up their spreadsheets to examine that one. Hopefully before enacting legislation.

Mortgage Interest Deduction

Jeb! would cap that at 2 percent of Adjusted Gross Income (AGI). Yay! While I benefit personally from it, I kind of hate the mortgage interest tax deduction.

Corporate Taxes

The current top corporate rate is 35 percent.

Jeb! would “lower our corporate tax rate to 20 percent – below China’s – to bring jobs and manufacturing back to the United States.”

Ok, stop. I have to call foul on that one. Maybe the lower corporate rates are cool, I don’t know. But that’s going to bring manufacturing back to the United States? From China? No. Labor-intensive manufacturing (the kind that creates those new jobs) is not coming back that way. I’m sorry, but it’s gone. Perhaps if you lowered labor costs in the US to – I don’t know – $2 dollars an hour?

World-wide Taxation

Jeb! proposes eliminating US taxation of corporate income earned overseas. This issue comes up periodically when we read about Apple, for example, holding a $181 billion cash hoard or Microsoft amassing a $93 Billion cash pile overseas (for an estimated $2 Trillion cash-pile overseas among all US corporations) to avoid paying relatively high US tax rates on foreign earnings.

In my deep-dive into this issue (yes, ten minutes = deep dive), I’ve learned that the US is one of only six developed countries that maintains this tax on foreign earnings, down from twenty-five countries, thirty years ago.

A wave of corporate reverse mergers is currently under way in which companies like US-based Pfizer sell themselves to companies like Ireland-based Allergen in order to avoid this tax on foreign earnings.

You can choose to blame greedy companies for acting in their shareholders’ interest. Or you can choose to blame tax policy. Not that other countries are always right, but most of them have eliminated this tax and I can imagine the complicated and inefficient incentives this taxation causes. On balance I’m willing to give Jeb! the benefit of the doubt on this issue about which I’ve just now read a few articles.

This proposal by Jeb! seems reasonable to me, but I could be wrong. You can sort of see why some US multinational corporations might find a Jeb! presidency particularly to their advantage. Not that there’s anything wrong with that.

Estate/Death Tax

Jeb! would eliminate this entirely. Boo! The estate tax is the best of all taxes.

I’ve already written about that and gotten plenty of hate mail on the issue (so feel free to restrain yourselves) but the estate tax is progressive, democratic (with a small D), and distorts consumption far less than other taxes.

Carried Interest Tax

I saw nothing on the campaign website about carried interest tax policy – a favorite pet topic of mine – but I remain interested to learn Jeb!’s views.

Still skeptical that Jeb! will capture this nomination? Just remember, nobody actually liked Mitt Romney either as the Republican nominee in 2012. So, you know, follow the money.

A version of this post ran in the San Antonio Express News.

Next week: The Clinton campaign’s tax proposals.

See related posts:

Hillary Clinton 2016 Campaign Tax Policy

Interview on Mitt Romney and the Death of The American Dream

Adult Conversation about Income Tax Policy

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