Starting Your Own Business To Minimize Taxes

I have taken an interest in studying the operation of family farms and the difficulties that have arisen due to falling crop prices in recent years. Many farmers, who are distrustful of attorneys—can ya blame them?—refuse to meet with one and form an LLC or some other type of business entity that not only could provide some measure of protection against liability arising from a tractor accident or illness-causing crop sale, but also provide immediate tax benefits that are unique to business entities which a person acting in an individual capacity does not enjoy.

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Chicago Native Donates $2 Million Walgreen Stock To Wildlife Refuge

Seventy years ago, a lawyer in Chicago named Russ Gremel invested $1,000 (the economic equivalent of $13,000 in 2017 purchasing power) to buy shares in Illinois’ pharmaceutical giant The Walgreens Co. Over that time, he collected substantial dividend checks and watched that position balloon into over $2 million in value through 11% compounding from the capital gains exclusive of the dividends.

Over the past seventy years, Walgreens stock has been an extreme compounded. Russ Gremel is a Chicago, IL native that actually got to participate in that growth. The media recently caught hold of his investment success as he has publicly disclosed that he is donating $2 million in Walgreens stock to open up a four-hundred acre wildlife refuge. As a personal matter, I like that he made a local donation and chose to take care of the community that created him rather than hunt for what one social scientist dubbed “exotic poverty” to describe philanthropy by individuals trying to impress their friends on social media. 

A few thoughts:

Gremel was able to turn $1,000 into $2,000,000 over seventy years without needing to reinvest the dividends. Had he reinvested into Walgreens stock, his compounding rate would have soured to 14% annualized. That would have turned his $1,000 investment into $14 million.

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Alibaba Stock’s Peculiar Legal Structure

If you are familiar with the e-commerce giant Alibaba (BABA), you might wonder how you are able to purchase shares in the stock given that the government for the People’s Republic of China has substantial bans on foreign direct investment that aims to keep ownership of Chinese-originated businesses in the hands of the Chinese.

These Alibaba executives induced foreign investment by creating a complicated contract scheme to get around China’s harsh laws restricting foreign investment. If you buy stock in Alibaba, you are really making an investment into a Cayman Islands holding company that owns a company that has contracts with the Alibaba operating business that entitle it to dividends, capital appreciation, and voting rights. Your “ownership” isn’t based on being an owner, but rather, is a contract right where you contract away your money while the Alibaba operating business contracts away dividends, capital appreciation, and voting rights.

To receive capital from American investors—or investors anywhere outside China for that matter—Chinese business executives have begun to create variable interest entities (VIEs) that are designed to mimic the effects of foreign stock ownership.

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What If You Don’t Invest In The Best Stocks?

When you review the history of the American stock market from 1926 through the present day, you will find that nearly all of the gains came from just 4% of the publicly traded businesses in existence. For most of the 20th century onward, someone who held shares in Exxon, AT&T, General Motors, IBM, and Apple could claim to represent a meaningful chunk of the stock market.

The data on the poor performance of most stocks ignores the reality that most good businesses merge into the industry titans once they have been successful for a long time and the additional reality that many stocks are too small to provide a meaningful to the S&P 500 performance which is valued at $20.5 trillion.

This data point has been profiled in the working paper of Professor Hendrik Bessembinder at Arizona State University whose work has the non-ironic title “Do Stocks Outperform Treasury Bills?”

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Apple Stock’s Slice of America

About a year ago, Apple stock (AAPL) traded at $92 per share. Right now, it is trading at $155 per share. This significant June-to-June swing of 68%–a little over 70% when you include dividend payouts—gives students of the market much to analyze and reflect upon.

Apple stock has added 70% in shareholder value over the past year. Despite this, its overall profits haven’t changed much and its weighting in the S&P 500 has largely held steady.

My takeaways:

The theory that the stock market is a near-perfect calculator of the intrinsic value of a business is once again debunked. Apple is the largest business in America. Its profits have vacillated between $45 billion and $48 billion the past three years. The new project announcements and cash build-ups have proceeded as expected. There haven’t been any crazy events, such as annexing Google, that would justify a massive reorientation due to unpredictable circumstances.

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