Sunday, December 10, 2017

Tax Plans Stranger Than Fiction

 Generally, well-compensated employees should pay income tax at higher rates than business owners and investors. 

However, certain high-income business owners should pay tax at a marginal rate of 85.2%.

Haste and input from billionaires have produced weird taxation possibilities.

Friday, December 08, 2017

Don't Like the Parrot? How About Bitcoin?


Eager investors are getting rich quick with Bitcoin. But  Bitcoin reminds an Economist blogger of  a certain parrot. A real live currency it ain't.
It seems that every day, Bitcoin seems to hit a new high. But the reported price can move up and down by $1,000 or so within a few hours. This might have made it a great investment for those who got in at the right price and are nimble enough to get out in time. But it doesn't make it a useful means of exchange. When the price is rising fast, those who use bitcoin will be reluctant to part with it; when the price falls, those who sell goods will be reluctant to accept it.

Thursday, November 30, 2017

Inheritance REDUCES Inequality?

As great wealth spreads from generation to generation, it provides more and more people with smaller and smaller inheritances.  Maybe, The Times (London) suggests, inheritance actually reduces inequality.  Not likely, but there's some interesting Swedish research.

Wednesday, November 29, 2017

Death Taxes on Life Support

Estates of the newly deceased have long been a tax target. Augustus, the first Roman emperor, imposed the vicesima hereditatium or "20th of inheritance" in 6 AD. 

Have death taxes finally run their course?

Could be, according to The Economist. Australia, Canada, Russia, India, Norway and Sweden are among the countries that have abolished their death duties.

Although the US Congress seems unlikely to abolish the federal estate tax this year, the exemption might be raised high enough to eliminate tax for families that are not at least entry-level rich.

Wednesday, November 22, 2017

Happy Thanksgiving


We borrowed this image of a Currier and Ives print,  G. H. Durrie's "Home for Thanksgiving," from a Yale Art Gallery post. Durrie was a Connecticut artist, born in Hartford in 1820. He died in New Haven, where he had a home on Temple Street, in 1863. That year Currier and Ives published two of his winter scenes. They became popular (nothing like death to enhance an artist's career) and Currier and Ives reproduced six more Durrie paintings.  "Home for Thanksgiving," issued 150 years ago, was the last.

Monday, November 20, 2017

The Ivies push back

Apparently, Harvard thinks a 1.4% tax is too much for it to pay.

It's because they understand the "camel's nose" phenomenon.

I'd much prefer we simply end "nonprofit" status for everyone, and ditch the charitable deduction to boot.  But it's a start.

Thursday, November 16, 2017

The Incredible Shrinking Stock Market

In 1996, writes Jason Thomas of the Carlyle Group in his WSJ($) op-ed, there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671. The Wilshire 5000 is down to around 3,500 companies.
Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996.
Successful new companies prefer to stay private to avoid hassle. Thanks to eased rules, they can acquire plenty of capital and hundreds of direct or indirect shareholders without going public.
The trend away from IPOs has benefited private market players at the expense of everyday investors. With companies like Uber, Airbnb and other successful startups delaying their IPOs for so long, there is little prospect for public returns on a scale similar to those enjoyed by Amazon’s early stockholders.
Yesterday’s growth stocks have migrated to private portfolios. As a result, stock pickers have slimmer pickings. Investors in index funds face leaner returns. "Today," Thomas asserts, "it isn’t possible to assemble a portfolio with the same makeup as the stock market of 1997 without exposure to private markets."

Another drawback, not mentioned by Thomas: Investing in nonpublic stocks through private equity partnerships or hedge funds is way more expensive than buying an index fund. Private investors face high fees and must hand over a share of the profits.

The world of everyday investing is in transition. Over the next decade or two the changes are likely to be drastic. Now if we just had 20-20 foresight….

Related post: The Stock Market is Disappearing Before Our Eyes.

Wednesday, November 15, 2017

Art Appreciation

Approximate sales prices for a damaged, heavily restored painting now considered to be the work of Leonardo da Vinci:

1958
$125

2005
$10,000

2013
$80,000,000

2014
$127,500,000

2017
$450,000,000



Sources: Washington Post, The Wall Street Journal, The New York Times

Tuesday, November 14, 2017

Harvard Will Invest the Yale Way

In a move Jim Gust has frequently deplored, some years ago Harvard laid off its endowment's "overpaid" investment whiz. The endowment's returns have suffered. Now Harvard has decided to try the Yale model: a small in-house staff overseeing the efforts of carefully selected outside investment managers. (The system works great when the selecting is done by Yale's David Swensen.)

Take a second look at the Yale Daily News article linked above. Strikes me as pretty professional. Better than I'm likely to read in our local paper.

Who's Jinghi Cui, the student journalist? Glad you asked. She's a Yale soph who graduated from the Experimental High School attached to Beijing University. You pronounce her name JING-ee SOO-ee.

Here's another example of her reporting, this time on the pension burdens borne by Yale and other universities. Does any large private or public employer not have a pension problem?

Fun and Taxes

The tax legislation being hurried through Congress is serious business. Still, haste sometimes makes humor.

Reinventing the bubble that killed the 1986 tax reform
Back in '86, last-minute tinkering increased the nominal top income-tax rate from 28% to 33%. But it was just a "bubble" – for the highest incomes, the rate dropped back to 28%. Without this silliness, the '86 reforms might have survived longer

So what did House Republicans just come up with? A new bubble that would raise the current top tax rate of 39.6% to 45% before dropping back to 39.6%. (Members of Congress will do anything for a laugh.)

Before-tax loss, after-tax gain
Senate Republicans propose delaying the 20% corporate tax rate for a year while allowing immediate deductions of some business expense from income taxable at 35%. Professor Dan Shaviro of New York University Law School gave the NY Times an example of the fun possibilities:
Normally no one would invest $100 to earn only $90 back. But under the Senate plan, where some business expenses could be immediately deducted at a 35 percent rate, you would get $35 back in 2018. So your actual cost is $65. By the time your $90 earnings are paid in 2019, though, the tax rate would be 20 percent. That would cost you $18 in taxes, and leave $72 in your wallet. So even though your investment lost $10, you are still coming out ahead: with $72 on a net investment of $65.)
Best new tax acronym
"To reduce their home tax bill, " the Times reports, "companies like Google and Pfizer, for instance, often relocate patents and copyrights in tax havens and then sell use of that intellectual property back to their American subsidiaries at eye-popping prices." This Global Intangible Low-Tax Income is known as GILTI. 

The tax bill will seek to cut off GILTI, but the restrictions could prompt companies to move more research and manufacturing off shore.

Friday, November 10, 2017

This Year 50 to 80 Family Farms or Businesses Face Estate Tax

Most owners of family farms or businesses needn't worry about federal estate tax. Most, but not all.

The Center on Budget and Policy Priorities estimates that 50 estates consisting mostly of a farm or business will pay the death tax this year. Data from the Tax Policy Center suggest the number is 80.

Repeal of the estate tax would make life easier for those 50 to 80 families. But repeal would also allow more than 5,000 other wealthy families to retain their diversified wealth tax free.

At the moment, chances of repeal have dimmed. The House version of the tax bill leaves the federal estate tax in place for seven years, albeit with a doubled exemption. The Senate version deletes the delayed repeal.

Wednesday, November 08, 2017

If It Smells Like a Tulip . . .

This year…

The value of Bitcoin has increased by more than 600 percent.

One hundred hedge funds have been set up to invest exclusively in Bitcoin.

And as of the end of last month, nearly a third of Bill Miller's hedge fund was said to be invested in Bitcoin.

Nathaniel Popper of the Times provides a lucid introduction to this year's steaming hot investment.

“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank," says one trader. But that appears to be a minority worry. Almost everybody frets about a possible collapse of stock prices. Almost nobody, aside from grumps like JPMorganChase's Jamie Dimon, seems to think that Bitcoin will wilt in the heat of irrational exuberance.

Tuesday, November 07, 2017

The Agonies of Wealth

Why can't I be sure I won't go broke?
Why can't my money buy love?
Why doesn't my money boost my self esteem?
Is everyone after my money?

The average member of Tiger 21 has over $87 million in investable assets. (It takes a minimum of $10 million to join.) Yet the Tiger 21 member mentioned in this NY Times story finds wealth a source of anxieties and insecurity.

Many Times readers, including your obedient blogger, find it hard to sympathize with the burdens of life as an UHNWI.

Wealth managers, on the other hand, welcome the new-business opportunities offered by traumatized Gilded Agers. Wealth worries also help support groups such as Tiger 21 and (minimum wealth $30 million) the Institute for Private Investors.

$300 million per year

That is how much will be raised by the scant 1.4% tax on the net investment income of private university endowments.  So if it were 14%, as it should be, it would raise $3 billion per year.  Real money.

However, this estimate is probably high, for two reasons.  First, the tax has already been watered down--initially, it applied to endowments of $100,000 per student and more, but now it applies only to endowments of $250,000 and up.  So Harvard and Yale still pay, but many schools have been let off the hook.

More important, what is "net investment income"?  It's not the same as total return.  I'm sure the endowments will adjust their investment strategies for maximum tax avoidance.

Saturday, November 04, 2017

I don't like tax bubbles

The new tax legislation has one, for those earning $1 million and more in a single year.

Why I support the tax reform bill

I've been arguing for this for years:

Some endowments will be taxed.

The tax rate is too low, but the camel's nose would get into the ten.

Tuesday, October 31, 2017

Famous Owner? Bigger Bucks!

Three factors are said to determine the value of real estate: location, location, location.

When art and collectibles are auctioned off, the prices they fetch also reflect three factors: provenance, provenance, provenance.

This BMW Z8, for example. At an upcoming auction it might sell for $200,000. But because its first owner was Steve Jobs, it may fetch as much as $400,000. (If Steve had been more of a car buff. expectations might be even higher.)


Paul Newman drove race cars. His wife gave him a Rolex Daytona. How much did that provenance add to the value of the watch? A lot. This month the coveted chronometer sold at auction for $17.8 million.


Monday, October 30, 2017

Tax Reform‘s Fierce Foe

Alarmed by talk of lost deductions for mortgage interest and state and local taxes in the Republican tax bill, the National Association of Home Builders flexed its lobbying muscle to promote a homeownership tax credit. No luck, apparently, but give the builders full credit for chutzpah.

Homebuilders don't like the current effort at tax reform any better than they liked the 1986 version. They blame the '86 act, explains Damian Paletta, for discouraging real estate investment and thus triggering the savings and loan crisis.
There were numerous causes of the savings and loan crisis, but the home builders aren’t the only ones that think the 1986 tax law is a precipitating factor. During congressional testimony in 1991, then-real estate developer Donald Trump made the same argument. He called the 1986 tax law an “absolute catastrophe.” 
"It has taken all the incentive away from investing in real estate," Trump complained. Nevertheless, he soldiered on for another twelve years before launching his career on reality TV.

Even Dogs Diversify

A guy we know received this birthday card from his financial adviser.


Monday, October 23, 2017

The Sound of Trial Balloons Popping

Every Congress has to learn the lesson: Cutting income tax rates is easy; expanding the tax base is difficult. Every tax break has beneficiaries who claim they can't live without it.

Legislators seeking ways to limit the cost of President Trump's tax plan  realize that citizens regard deductions for mortgage interest and charitable gifts as inalienable rights.

Could SALT, the deduction for state and local taxes, be a candidate for elimination? Nope. Republicans from high-tax states wouldn't hear of it.

Next trial balloon: a suggestion that the annual limit for contributions to 401(k) plans be cut from $18,000 to $2,400. Pop! After widespread criticism, that idea has suffered death by tweet.


Back in the Reagan years, cutting tax rates was relatively quick and easy.  Cutting rates and broadening the tax base in the 1986 tax reform act was not.

At Last! Family Farms Worth Taxing

Opponents of the federal estate tax habitually warn that it imperils family farms. But they've hemmed and hawed when asked for examples. Now some family-owned farms actually may be large enough for death tax. Two thirds of our national agricultural output, the WSJ($) reports, comes from super-sized farms with annual sales of $l million or more.

Example described in the article: a Kansas farm that stretches for over 30 miles and encompasses more than 30,000 acres.

Saturday, October 21, 2017

Guardianship

I have routinely written in my trust articles how a living trust avoids the need for guardianship, in the event of incompetency.

This article from the New Yorker puts that idea in a whole new light.


Wednesday, October 18, 2017

Was Tulip Mania Fake News?

For generations, economists and financial writers have illustrated the folly of investment bubbles by referencing the 17th-century  tulip mania. As colorfully described by Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds, Amsterdam went nuts over "broken tulips," bidding astronomical prices for virus-inflected bulbs that produced exotic blooms.

But we may have to find another financial frenzy with which to scare investors. There was no tulip fever, Smithsonian asserts. Prices for "hot" bulbs did soar and eventually crash, but trading was largely limited to urban upward strivers, eager to obtain the exotic status symbol of the day. Mackay fell for tall tales told by Dutch moralists dramatizing the evils of trying to get rich quick.

For the moment, looks like we'll have to settle for the millennial dot-com bubble to illustrate the dangers of irrational investor exuberance. But have patience – bitcoin mania may have legs.
Like to learn more? Peter M. Barber's Famous First Bubbles can be read online here. YouTube offers numerous treatments of tulip mania – this two-parter will tell you more than you may want to know.

Tuesday, October 17, 2017

No sir, Reagan did not need years for tax reform

From Tax Notes:
Trump alluded to former President Ronald Reagan’s long journey to pass tax reform, noting that he has been in office for only about nine months. “I would like very much to see it be done this year. . . . If we get it done, that’s a great achievement. But don’t forget, it took years for the Reagan administration to get taxes done,” 
This is not accurate.

Reagan "got taxes done" with the Economic Recovery Tax Act in 1981,  enacted in the first year of his Presidency.  That law slashed the top income tax rate from 70% to 50%.  How did that happen?  Reagan made it a priority right out of the gate, he didn't defer all legislative action until after the August recess.  As the Republican Congress did.

I am generally a Trump supporter, but this comment makes me wonder if the President has any idea what he is talking about.

Oh, I suppose Trump might be referring to the 1986 bipartisan tax reform, the law that briefly brought the top rate down to 28%.  That was an historic achievement, and the country would be well served by simply re-enacting that legislation, word for word.

But it was ERTA '81 that ignited the stock market and the economy in the 1980s. The boom was well under way by the 1984 election, which was two years before the 1986 tax bill.

Trump needs to get this done.  Republicans need to stop dithering.

Saturday, October 14, 2017

Dartmouth 14.6, Yale 11.3 – But Not Exactly

Dartmouth's football team beat Yale, 28-27. Dartmouth's endowment has won more convincingly. For the fiscal year ending last June, Dartmouth achieved an investment return of 14.6%. Yale lagged at 11.3%.

In reality, there's less to all those numbers than meets the eye. Yale's one-point football loss resulted from an erroneous out-of-bounds
 ruling on an end-zone catch that video showed to have been a touchdown. As for the endowment returns, their precision is partly the result of accounting fiction, as Yale School of Management's Roger Ibbotson has pointed out:

"When you have private equity and venture capital assets that are not priced every day, it is difficult to know exactly what the real performance is. I don’t really like ranking the endowments annually because there’s such a significant measurement error."

Long term, the investment performance of Yale's endowment remains remarkable: an average of 12.1% per annum over the last 20 years.  The endowment's domestic equities returned 12.2%,  trouncing the benchmark return of 7.5%. Makes you wonder why David Swensen allocates only 4% of Yale's endowment to shares in U.S. companies.

Friday, October 13, 2017

“Death Cleaning”

From the WSJ ($), here's an idea executors and heirs should applaud:
If your family doesn’t want your stuff when you’re alive, they sure won’t want it when you’re dead. 
That’s the blunt assessment of yet another self-help author from abroad who is trying to get Americans, who have an addiction to collecting and storage units, to clean up their acts.

The latest volley in the decluttering business comes from Stockholm, where 80-ish artist Margareta Magnusson has just published a slim yet sage volume, “The Gentle Art of Swedish Death Cleaning.” The book will be published in America in January.
In Sweden, it seems, custom requires senior citizens to declutter before they pass on. Splendid idea, but wicked difficult to execute. Although your obedient blogger knows he's reached decluttering age, progress comes hard. Soon as you get rid of some stuff, more stuff shows up.

Out in our garage, we still store containers of miscellaneous nails, miscellaneous screws and miscellaneous odd bits of metal that my thrifty father figured might come in handy some day.

Throw them out? How can I? They might come in handy.

Thursday, October 05, 2017

A death tax cloud over family businesses clears

The IRS has promised to revoke the Section 2704 valuation rules, proposed last year, after getting 28,000 negative comments on them.

The rules were projected to raise taxes on family business by $18 billion over ten years, a massive and targeted tax increase.  Why them?  Why was that a good idea?  Why single out family business for punishment?

That revenue projection was from the Obama administration, so I'd take it with a grain of salt. I can't imagine that valuation adjustments to family businesses come to over $3 billion every year (roughly the amount needed to generate $1.8 billion in annual tax savings). Still, it was an obviously terrible idea, one that galvanized small business owners around the country.

Sunday, October 01, 2017

When Deficits Meant Tax Hikes, Not Cuts

From half a century ago, August, 1967, comes this Life magazine editorial. 

"The case for a tax increase…is a persuasive one." Although the U.S. had run deficits in nine of the previous 10 years, "the sheer size of the one now confronting the nation is fearsome."


Current deficits run bigger, in terms of GDP, than they did half a century ago. Can you imagine our president or any member of Congress proposing a tax increase? 


Life also mentions the need to restrain high inflation? How high? Three percent, a level today's fiscal engineers seek to promote.

You're right, Dorothy. We're not in the 20th century any more. 

Thursday, September 28, 2017

Tax Legislation, Anyone?

Last spring the Trump administration came up with a vague, one-page proposal for revising the Internal Revenue Code. After months of reportedly serious effort, a six-man task force has expanded  the proposal to a vague, nine-page plan.

But "it's not really a plan," as Catherine Rampell points out in The Washington Post:
At best it’s an outline, offering barely more detail than the bullet points the Trump administration released in April. It doesn’t even specify the thresholds for the individual income-tax rates it proposes. It also doesn’t identify a single individual tax preference it would kill, despite claiming to simplify the code and close lots of “loopholes.” Even the state and local tax deduction, which administration officials have talked about eliminating, isn’t explicitly mentioned.
While we wait for Congressional Republicans to come up with an actual tax bill, there's plenty to wonder and worry about. How can abuse of the proposed 25% tax rate on income "passed through" businesses such as partnerships  be prevented? What if repeal of the estate tax (which affects almost nobody) exposes millions of Americans to capital gains tax on inherited assets?

Thursday, September 21, 2017

Wealth Management Clients Should Be Careful with Their Checks

Frank Abagnale Jr. ("Catch Me If You Can") in a WSJ interview:
Think about this: You go into a convenience store today and write a check for $9. You have to hand the clerk the check with your name and address, phone number, your bank’s name and address, your account number at your bank, the routing number into your account. That’s your wiring instructions. Your signature that’s on the signature card at your bank. And then the clerk has written down your state driver’s license number on the front and your date of birth. You don’t get the check back. You can get an image of the check; the physical check goes to [the store’s] warehouse, where eventually, six months from now, they will destroy it. 
In the meantime, anyone who would see the face of that check—from the clerk who took it at the counter to the one that made the night deposit—could draft on your bank account tomorrow, would have all the drafting instructions. Or they could go online [and order checks] that look exactly like your checks, but put their name on it and put your account number on it. So every check they write gets debited against your account. It’s so simple to do. 
It’s amazing to me that people are writing $9 checks from their wealth-management account, their private banking account, and giving them to some stranger in a store.

Wednesday, September 13, 2017

Ray Dalio's “Slightly Better” Returns

Now that real life has blended with reality TV, you can't blame the Main Stream Media for stressing out. Still, this lengthy NY Times piece on Ray Dalio, who runs Bridgewater, world's biggest hedge fund firm, seems a bit snarky. For instance:
Since it began, Pure Alpha has made investors an annual average return after fees of 11.9 percent, slightly better than the 9.5 percent average yearly return for the Standard & Poor’s 500.
Slightly better? Any stock picker who can beat the S&P by one percentage point over long periods is
Bridgewater's Westport, CT headquarters
exceptional. Two percentage points? Almost miraculous. With Pure Alpha Dalio has done better by 2.4 percentage points. Compare:

At the S&P's 9.5% average annual return, in ten years a $100,000 investment grows to 247,823.

At Pure Alpha's 11.9%, in ten years a $100,000 investment grows by an additional $60,000, to $307,823.

Over extended periods, that "slightly better" return will make you seriously richer.

Monday, September 11, 2017

Should We Tax Gifts the British Way?

Forsyth
(English Wikipedia)
Bruce Forsyth, the British TV icon who died last month, disliked the 40% U.K. inheritance tax. So he left everything to his wife tax free, thanks to the U.K. equivalent of our unlimited marital deduction. Wilnelia, his widow, will have the task of distributing some or most of Forsyth's £17-million estate to his numerous children and grandchildren.

And a quick glance at the U.K. inheritance tax rules suggests she can do it at little or no tax cost.

Instead of taxing gifts when made, the U.K. requires lifetime gifts to be added back into the estate taxable at the donor's death. Thanks to Forsyth's unused inheritance tax exemption and her own, Wilnelia can give or bequeath £650,000 without tax.

But she should be able to do better. Much better. The U.K. counts lifetime gifts as part of the donor's estate only if they are made within seven years of death. As a relatively young widow, Wilnelia presumably has time to parcel out millions of pounds tax free to Forsyth's descendants.

Even if Wilnelia should die within seven years of fulfilling Forsyth's estate plan, some tax might be saved. "Taper relief" reduces the tax rate on gifts made more than three years of death.

Should the U.S. adopt the British approach to taxing lifetime transfers of wealth? Or would it unduly favor those wealthy enough to give millions tax free?

Wednesday, August 30, 2017

Fifty Years Ago, Married Women Got a Charge Card

Those "Her reaction is Chemical" ads we showed you "might have a place in Ms. magazine's hall of shame," Jim Gust suggests. Actually, the idea of a woman hiring her own investment adviser probably raised a few eyebrows among old-school males.

Here's a better candidate for the Ms. hall of shame. This 1967 Carte Blanche ad assures the traveling man with a wife back home he'll be glad "to have someone with influence looking after her while they're away."


But remember the context of the times. Married women were routinely denied credit because it was assumed they had no income. Carte Blanche comes to the rescue by offering them a card of their own, though surely backed by their husbands' credit – and it's pink!

Monday, August 28, 2017

The Little Woman and the Tire Guy

 Kathleen Thomas heads a successful advisory firm that holds our securities for us. Heightwise, you might describe Kathleen as a little woman. (And you might be surprised to learn she's run in seven Boston Marathons.) While on vacation recently, she took a damaged tire to be repaired, and the tire guy . . . well, read her story for yourself.

Tire guys prey on men, too, but the complaints I've heard have come from women.

And it's not just tire guys, of course. Male financial advisers have been known to condescend to "the little woman." Perhaps that's one reason Kathleen and her mostly female staff are doing well.

Saturday, August 26, 2017

Men, Women and Investing in 1967

How do men and women differ? As a Google engineer discovered recently, that topic may be too hot to handle. Yet financial marketers have long believed in the need for sex-specific messages.

Here are examples from Chemical Bank's ads fifty years ago. 

The ad agency's perception: Men care about process: an investment adviser who works hard. 


Women care about results: investment peace of mind.

Wednesday, August 16, 2017

Popular Books on Investing

Had time to kill the other day. Dropped by Barnes & Noble to check out new books for investors.  As always there was a fresh crop of informational guides, but the two featured volumes were venerable classics: the latest revised editions of Benjamin Graham's The Intelligent Investor and Andrew Tobias's The Only Investment Guide You'll Ever Need.



https://www.barnesandnoble.com/w/only-investment-guide-youll-ever-need-andrew-tobias/1100303275?ean=9780544781931Graham's masterwork, which advises us to buy stocks offering a margin of safety, also ranks third at the moment on Amazon's list of best-sellers on investing.

Amazon's number one, interestingly, deals with psychology rather than p/e ratios. In Mindset, the New Psychology of Success, Carol W. Dweck argues that some people have fixed mindsets while luckier people have growth mindsets. The fixed mindsets fear failure. The growth mindsets see failure as a learning experience.

Is your fund lagging its benchmark? Cheer up. You're not failing, you're getting educated.

Wednesday, August 09, 2017

Death Should Not Be a Taxable Event

The basic argument against the estate tax is moral. It taxes virtue - living frugally and accumulating wealth. It discourages saving and asset accumulation and encourages wasteful spending.
Milton Friedman's 2001 open letter urging the abolishment of the federal estate tax was signed by 276 of his fellow economists. Now, eleven years after Friedman's death, the letter has been revived, signed this time by more than seven hundred economists, including four Nobel Prize winners. 
To whom it may concern: 
Spend your money on riotous living - no tax; leave your money to your children - the tax collector gets paid first. That is the message sent by the estate tax. It is a bad message and the estate tax is a bad tax.
The basic argument against the estate tax is moral. It taxes virtue - living frugally and accumulating wealth. It discourages saving and asset accumulation and encourages wasteful spending. It wastes the talent of able people, both those engaged in enforcing the tax and the probably even greater number engaged in devising arrangements to escape the tax. 
The income used to accumulate the assets left at death was taxed when it was received; the earnings on the assets were taxed year after year; so, the estate tax is a second or third layer of taxation on the same assets. 
The tax raises little direct revenue- partly because the estate planners have been so successful in devising ways to escape the tax. Costs of collection and compliance are high, perhaps of the same order as direct tax receipts. The encouragement of spending reduces national wealth and thereby the flow of aggregate taxable income. These indirect effects mean that eliminating the tax is likely to increase rather than decrease the net revenue yield to the federal government. 
The estate tax is justified as a means of reducing the concentration of wealth. However, the truly wealthy and their estate planners avoid the tax. The low yield of the tax is a testament to the ineffectiveness of the tax as a force for reshaping the distribution of wealth. 
The primary defense made for the estate tax is that it encourages charity. If so, there are better and less costly ways to encourage charity. Eliminating the estate tax will lead to higher economic growth, which is the most important variable in determining the level of charitable giving. 
Death should not be a taxable event. The estate tax should be repealed. 

Sunday, August 06, 2017

Trumping Death and Taxes

President Trump, in his WSJ interview:
When George Steinbrenner died, like with the estate taxes, the estate paid nothing. And if he would have died like two weeks later, they would have paid 50 percent of the Yankees. That would have been the end of the team, right?
Nope. Steinbrenner died on July 13, 2010. Had he died on July 27 (or even December 27) his estate would have escaped federal estate tax.

And even if Steinbrenner had died in 2011, when the estate tax reappeared, most likely the Yankees would still be around to trail the Red Sox.

Fact-checkers tend to label Trump talk fibbing. He prefers hyperbole.

Thursday, July 27, 2017

Could the Ideal Estate Tax Rate be 100%?

If the Republicans ever agree on a tax bill (dream on!) the federal estate tax may die for longer than it did in 2010. But the urge to tax inherited wealth never dies – especially, it seems, in the U.K.

Yes, the desire to pass on property to your descendants may be natural – but why should we be slaves to our biology? Social progress has frequently depended on our ability to transcend individualistic urges and work together for the common good.
***
Cultural norms teach us that the inheritance of private property is the default and any expropriation of this wealth must be justified. It should be the other way round.
***
A 100% estate tax (perhaps with a small allowance for objects of sentimental value) isn’t a policy we can expect to see in a party manifesto any time soon. It’s well outside the current spectrum of mainstream political opinion. Questioning the status quo is always going to be a somewhat uncomfortable process, though, and all kinds of major social changes seemed impossible until suddenly they weren’t.
The crack about "slaves to our biology" is interesting. Would adopted children still get inheritances?

Confiscation of wealth at death would promote every possible method of lifetime transfer. With lifespans lengthening, that might not be such a bad idea. Why should someone age 70 still be waiting for his parents to part with their worldly goods?

Thursday, July 13, 2017

Johnny Depp's Lost MIllions

In Brewster's Millions, a movie I remember fondly, the hero receives good news and bad news.

The good news: His uncle has left him $8 million.

The bad news: He must spend the first million in two months, without keeping any assets, or lose the entire inheritance. Back in 1945, when the movie was made, spending a whole million quickly wasn't that easy.

If Hollywood plans a new remake, Johnny Depp deserves the starring role. Over the years the gifted actor has made $650 million. But his gifts as a spender – and perhaps his disinterest in wealth management – have left him in a financial crisis.

Wednesday, July 05, 2017

Chase Manhattan's Recycled Nest Eggs

From late 1966, here's what appears to be one of the last of Chase Manhattan's iconic nest egg ads.


But the ad agency must have had a couple of photos left over. Rejects, perhaps – shots never used because they looked too proletarian.  (Real wealth-holders had gardeners.) 

So here are the leftovers, recycled in the spring of 1967 to promote … savings accounts!



Weird, isn't it? For all those years Chase promoted the idea that wealth is a drag, made tolerable only by the bank's custodial and advisory services. Now Chase wanted ordinary folks to believe that maybe getting richer isn't so bad after all. 

Monday, June 26, 2017

The Stock Market is Disappearing Before Our Eyes

Sometimes you know what's happening but still need reminding that it's HAPPENING. This chart comes from Jason Zweig's WSJ column($), Stock Picking Is Dying Because There Are No More Stocks to Pick.


Zweig's column draws upon a revealing Credit Suisse report. Welcome to a world where mutual funds and accredited investors invest freely in billion-dollar companies without going near the stock market. 

Sunday, June 25, 2017

“Fearless Girl” Wins Fame and Awards

Photo: AP
At the Cannes Lions International Festival of Creativity on the Riviera, where the frozen rosé slushies flow like, well, slushies, State Street Global's "Fearless Girl" has won several awards for confronting Wall Street's bull.

State Street commissioned the sculpture to nudge publicly-traded companies toward enlisting more women for their boards of directors. 

In these contentious times, State Street's ploy was sure to draw critics. They're outnumbered by "Fearless Girl" fans. Even the bull, who has been hanging around since the 20th century, is probably happy to have company. 

Friday, June 23, 2017

We hate taxes. The Internal Revenue Code is our punishment

Every four years. it seems, a fringe presidential candidate jumps on the same populist platform: “Abolish the IRS!”

We Americans hate and despise taxes. Yet we know we can’t get rid of them. So we dream of doing away with the tax collector.

The punishment for our tax hatred? An incredibly convoluted Internal Revenue Code. Thousands and thousands of rules and sub-rules and exceptions and exceptions to the exceptions. Our federal income tax is infinitely more complicated than it ought to be.

Instead of a rational system, we have a tax code made monstrous by Congress. Yet every time Congress adds another complication it is merely doing our bidding, as summed up by Russell Long: ‘Don’t tax you, don’t tax me. Tax that other fellow behind the tree.”

Could we have a less hateful tax code? Yes. In A Fine Mess T. R. Reid points out that fiscal engineers around the world have determined the most tolerable tax system: BBLR. Broad base, low rate. Some describe the ideal as a modest tax on income, broadly defined, plus a consumption tax such as a VAT.

Whoa! If you think Americans hate the income tax, try mentioning a Value Added Tax. The levy offers no escape. If the purchase of a Tesla is subject to a VAT, every Tesla buyer has to pay it – you, me, the fellow behind the tree, the neighborhood drug dealer, everybody!

Yet a VAT could be almost likable in terms of fairness. And a simple, broad-based income tax would make filing tax returns child’s play.

Within living memory, Congress has attempted serious tax reform only once, in 1986. Even that effort produced nothing like a truly simple BBLR system. Could our hatred of our current tax mess ever lead to full-fledged reform? Seems like an impossible dream.

As Theodore Roosevelt once observed, “Americans learn only from catastrophe and not from experience."

Monday, June 12, 2017

What $150 Million Will Buy

Roy Lichtenstein’s “Masterpiece” (1962)
To raise money for a philanthropic fund aimed at shrinking the alarmingly high percentage of Americans who spend time in prison, the president emerita of the Museum of Modern Art has sold her prized Lichtenstein for $150 million ($165 million including fees).

The buyer: Steven A. Cohen, the once-and-future hedge fund tycoon. After scraping past insider-trading charges but being temporarily sidelined from the hedge fund business, Cohen's next masterpiece will be a new, $20-billion hedge fund to be launched next year.

Wednesday, May 31, 2017

Art as an Investment Class? It's Tricky

This Basquiat painting of a skull just sold at Sotheby's for over $110 million. Wow! Maybe investors really should regard art as an asset class, along with junk bonds, private equity and such.

But as White House advisers Jared Kushner and Ivanka Trump have learned, the notion of art as a serious wealth component can have unintended consequences. The other day they got criticized for failing to declare their art collection as a financial asset on the disclosure forms required for government work.

Conservative investors and their advisers may prefer to follow Northern Trust's advice and think of art collections as more akin to a second home or a yacht-charter business. Adam Lindemann. a prominent collector, blames the "art as investment asset" movement on the proliferation of art advisers: "There are almost as many of them as yoga instructors."

Lindemann's advice to investors? Buy art for art's sake.
Back in 2005, I asked Larry Gagosian if he believed art was an investment. He answered laconically: “Art is an investment, but that doesn’t make it a good investment.” At the time I thought his response was genius, but I’ve now changed my view, because investing requires cold analysis and objective thinking, and there’s no art in that. Art collecting is a different thing, it requires interest, patience and hopefully some passion, or at least intellectual curiosity.
What do you think? Will somebody ever be willing to invest more than $110 million in that skull? 

Tuesday, May 30, 2017

Tax Reform – The Impossible Dream?

To dream the impossible dream
To fight the unbeatable foe
To bear with unbearable sorrow
To run where the brave dare not go

                * * *
This is my quest, to follow that star,
No matter how hopeless, no matter how far. . . .
– Joe Darion, "The Impossible Dream (The Quest)"

Those in the know say the chances of meaningful tax reform this year are none to negative. Worst case: a tax bill that leaves the complexities and lowers the tax rate for regular income that's filtered through Limited Liability Companies and other "pass throughs." (The president is reported to have hundreds of LLC's.)

Yet the need to prune and simplify the Internal Revenue Code persists. Even if meaningful tax reform remains a dream, it's worth pursuing.

Start by joining me in reading T. R. Reid's A Fine Mess. The Washington Post reporter explores how other countries handle taxation. Sometimes they goof; more often they manage to separate taxpayers from their money in simpler, friendlier fashion than we do.

Monday, May 22, 2017

Stock Picking, Fifty Years Ago and Now


"Some facts will not come to us," reports this 1967 Merrill Anderson ad for U.S. Trust. "We hunt them out and bring them back – alive."

Today, stock pickers need not hit the road. The digital revolution offers access to zillions of facts in the form of big data, and quants use algorithms to massage the data and generate investment decisions.

"Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street," The Wall Street Journal($) recalls. "That time has arrived." Quantitative hedge funds "are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013,"

WSJ subscribers can view the anatomy of an investment algorithm here.

Sunday, May 21, 2017

The Generosity of a Reformed Stockpicker

After trying and failing to pick stock winners himself,” a retired ophthalmologist in Washington, D. C., “made his fortune by investing in the funds in the Standard & Poor's 500-stock index.”

Unmarried and living modestly, the retiree has used the fruits of his investing for philanthropy, dispensing millions to area charities. He agreed to tell his story to The Washington Post “to encourage others to invest wisely, research thoroughly and support those doing good work that will make a difference in peoples’ lives.”

Will the publicity cause the wise indexer to be inundated with requests for handouts? Not likely. He says he would never donate to an institution that approached him first.”

Friday, May 12, 2017

Mother's Day

A wealth manager we'll call Ed just sent a financial-workshop invitation to my mother. The mailing arrived today, May 12, exactly 26 years after my mother died on the eve of her 95th birthday.

A little late, Ed!

Ed's off-the-shelf web site could use more care, too. When boilerplate copy calls for inserting your company name, the text should not still display the place marker "(DBA as)."

Whether breeding dogs or judging horticultural exhibits, my mother was conscientious in her work. Marketers of wealth management do well to follow her lead.

And for Ed's sake, clean up your mailing lists every quarter century!

HAPPY MOTHER'S DAY!

Thursday, May 04, 2017

Today's Trusts Explained

From a Massachusetts law firm comes Demystifying Trusts, a guide to currently popular trust arrangements. They include revocable living trusts, special needs trusts and trusts designed to maximize Medicaid eligibility for trustors in nursing homes. Also, ILITs.

Wednesday, April 26, 2017

What Percentage of Investment Advisers are Women?

After reading that only 16 percent of brokers are women, one wonders whether the ranks of registered investment advisers are more gender neutral.

The answer seems to be yes, but the data are elusive. This 2014 article indicates 30 percent of RIAs are women, and you would guess the percentage is higher today. 

But counting RIAs proves difficult. Do you include hybrids who work for fees but also collect commissions? What about hedge fund managers? 

Even the fuzzy figures indicate that the hundreds of thousands of brokers (aka financial advisers) vastly outnumber RIAs. 

Monday, April 24, 2017

Google Finance

Now in beta, Google's financial site offers easy access to investment news and basic market data. Special Google twist: Google domestic trends, a feature that charts the rise and fall in the number of searches in various categories, including financial planning.

Sunday, April 23, 2017

Scammed by a Scot

How venture capitalist William Icon, who probably doesn't exist, fleeced international investors.

Saturday, April 22, 2017

Irene in Blue

Irene Heitzman (1938-2017) in client-entertainment mode, at a trust conference in San Diego.


Thursday, April 20, 2017

Irene Heitzman, R.I.P.

Irene Heitzman, the wife of Merrill Anderson's superstar salesman Sam Heitzman (also President and Chairman), died yesterday. Irene worked briefly in our Stratford office, but her major contribution to the firm was as hostess or co-hostess of our customer events at sales conferences.  She and Sam were well matched—outgoing, friendly, well read, insightful, never at a loss to carry a conversation.  A great sales team.

Here is Irene's obituary:

Irene Angi Heitzman resident of Charleston passed away peacefully on April 19, 2017 at St. Francis Hospital in West Ashley.
Irene is preceded in death by her parents William and Priscilla Angi, sister Betty Gabriel, brothers Tom and David Angi, and brother Desi Racz all of Dayton, OH. She is survived by her husband of 58 years Sam (Hud) Heitzman, her son Jordan Heitzman, daughter Darcy Guthrie and her husband Chris Guthrie and triplet grandchildren Ethan, Charlotte and Will Guthrie all of Charleston, SC.
Irene enjoyed her teaching career in Piqua, OH, but longed for the warmer weather in California and South Carolina; she lived in both of these states three times each through the course of her life.
Irene was an avid Duplicate Bridge Player and played regularly in Westlake Village, CA and Hilton Head Island, SC while her husband travelled for work. After Sam retired and they moved to Charleston they became full time duplicate bridge partners. Irene achieved Silver Life Master.
Irene always said she never met a cruise she did not like. She travelled the world on different cruises, but her all-time favorite cruise was taking the triplets along with Darcy and Chris on a cruise.
Irene also enjoyed reading and crossword puzzles. Irene was a beloved wife, mother, grandmother and friend. She never knew a stranger and always had a kind word and a smile for everyone she met.
Services will be private at the request of her family. In lieu of flowers, the family asks that you consider a donation in her memory to the Charleston Bridge Center, 1740 Ashley Hall Rd., Charleston, SC 29407.
Arrangements in care of Charleston Cremation Center And Funeral.
To send flowers or a memorial gift to the family of Irene Angi Heitzman please visit our Sympathy Store.

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Wednesday, April 19, 2017

Massacre of the Stock Pickers

Investors who use index funds to invest in the stock market usually do better than stock pickers. That's become conventional wisdom.
According to new 15-year data in SPIVA's 2016 scorecard of stock fund performance, "usually" should be changed to "almost always."


Fewer than one large-cap stock fund in ten matched or beat its benchmark over the last fifteen years. More than 92% underperformed. 

Some say indexing itself has dulled the price moves of large caps, making stock pickers' job harder. Perhaps the pickers did better with mid caps? No, they did worse. A whopping 95% of mid-cap funds underperformed. So did 93% of small-cap funds.

Note that some mid-cap and small-cap funds may have beaten the S&P 500 even though they fell short of their more challenging benchmarks.

If actively managed mutual funds can't  beat the market, can highly-compensated hedge fund managers do better? That's the theory Warren Buffett put to his now famous test.  He bet that, over ten years, Vanguard's low-expense S&P-500 index fund would outperform a portfolio of five funds of funds, invested in more than 100 hedge funds. After nine years the results are clear: Another massacre of the active investors.


Buffett observes that the defeat was virtually pre-ordained. Some 60% of the funds-of-funds' gains were paid to the hedge fund managers and fund-of-fund packagers.
As long as "nobody wants to be average," active stock picking will live on. Hope springs eternal, as The Wall Street Journal($) reports: Active Managers Stage a Comeback.

Wednesday, April 12, 2017

Happy Blogiversay!

This blog was started on this day in 2005.

Many thanks to JLM for his persistent erudition.

Thursday, April 06, 2017

An Annual Report Worth Reading

JPMorgan's CEO, Jamie Dimon, offers frank comments on the state of our nation in the company's annual report. American education, for instance, is "a national emergency."

The annual report is also worth skimming as a guide to banking trends. On the wealth management front, JPMorgan Chase plans to offer "inexpensive" automated advice and digital transactions to both retirement and personal investment accounts.

Ordinary investors really need investment help, according to this graphic from the report.

Sunday, April 02, 2017

Cross Selling at Bank of America

Megabanks want customers to use more of their financial products and services. They emphasize cross selling (to a fault, in the case of Wells Fargo).

Why then would a big bank go out of its way to trash its reputation and stink up its brand?

Latest example, Bank of America and a couple who were unfortunate enough to have the bank buy their new mortgage, which they hoped to modify.

For torturing the couple, Bank of America has been fined $45 million by Judge Christopher Klein of the U.S. Bankruptcy Court. His decision begins like this:
Franz Kafka in 1910

Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America. 
The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violation foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.
The Great Recession triggered the couple's woes. Most likely they'll recover their financial footing and return to prosperity, and one day a Merrill Lynch broker from Bank of America may ask for their wealth management business.

Will they welcome him with open arms?

Or will they pick up sticks and  beat him like a piñata?