Deferred Taxes: Investment Compounding’s Little Helper

The United States stock market consists of approximately $42 trillion in net worth. Of that, 72% of the wealth is held in what we call taxable accounts. And, once you get past the day traders, the average holding period for a publicly traded investment in the United States in 1.92 years.

Those foundational points are important to keep in mind when you think about the nature of taxation in the United States and one of the most underrecognized benefits of stock ownership—the deferred tax nature of capital gains.

In the United States, it is currently the case that you do not owe taxes on the increase in value of an investment until you sell it. There are logistical and philosophical reasons for why this is the case. Logistically, the value of investments fluctuate so taxation during the middle of your holding period would be difficult to execute. If someone owed … Read the rest of this article!

Tesla, Berkshire Hathaway, and the Foundations of Investments

A common news item this week is that Elon Musk now has a higher net worth than Warren Buffett as a result of Tesla’s meteoric stock price rise from $177 last year to $1,500 now. Setting aside the fact that Buffett has donated tens of billions of dollars to charity that explains the disparity, I think now is an important time to discuss what I call “the foundations of wealth.”

When you own an asset of any kind, there are two components to the investment’s value. There is the productive capacity of an investment (i.e. profits and the portion that can be distributed as dividends) and then there is the future capacity of an investment (i.e. guesses about what types of productive capacity the investment will have in the future that manifests itself in the price of the asset).

Current productive capacity of an investment is always the most stable … Read the rest of this article!

Citigroup: Great Speculation for Five Years (No Idea After That)

Citigroup (C) lost $64.20 per share in 2008. Its Tier 1 Capital Ratio sank below 5%, and it had a portfolio worth hundreds of billions of dollars in loans that it did not originally underwrite that were lent out to people that were terrible risk-adjusted customers over the full course of the business cycle because they would stop payments during the downturn and never pay again. And the commercial loan portfolio wasn’t much better. Large depositors got spooked about the rumors of these non-payments, and started switching their global banking activities to firms on sturdier ground like The Northern Trust. The bank received an immediate $25 billion in taxpayer funds, and then engaged in the disastrous act of quadrupling the share count to stay alive–amputating two legs and two arms to stay alive.

I mention all of this to say that I fully understand the legitimate condemnation that has surrounded … Read the rest of this article!