The Dumbest Portfolio For The Smartest People [View article]
Alex: Am surprised that SA would print your article. If everyone adopted your philosophy there would be no need for SA (or for that matter, WSJ, Barrons, Value Line, Morningstar, etc). Investment knowledge, already low, would disappear as we become investment robots.
I see two big problems with your approach. Taxes--where do you put your global ETFs? If you place them in an IRA or 401K you will be assessed foreign tax on the dividends and have no way to recover those taxes on your 1040. In effect you will get double taxed on those dividends (once by the foreign government and again when you withdraw the funds from your IRA). Qualified dividends and long term capital gains--instead of paying the 15% rate you will pay your marginal tax rate which might be 28-31%. Your foreign bond interest will also get double taxed in an IRA. Main purpose of an IRA is to defer taxes but using your proposal you increase taxes which pretty much offsets the benefits of deferral. I guess you could put all of these investments in a taxable account if you have the resources but then what do you put in your IRA?
Second problem with indexing in general--what happens when management realizes (some already have) that investors are stuck with their stock regardless of how poorly they perform or how the managers abuse their power with oversized compensation and benefits? And the more overpriced the stock, the more of that stock will be held in the index fund. Think of Cisco in 2000, selling for a PE of approximately 1 million. The higher the percent of stock held in index type funds the less management review will occur. Maybe you don't think that is your problem.
Adam: You make the point that "unlike a dividend stock which can utilize a portion of cash flow" REITS don't have that luxury. I think you are wrong by a wide margin. All that REITs need to distribute in dividends is taxable income. In most cases they have plenty of cash flow beyond that (primarily related to depreciation that reduces taxable income). This excess cash they can either distribute as a dividend or retain to expand (buy more real estate). Some REITs play the game of distributing far more than they need to. Long term this reduces earnings. If buyers of REITs understand this game that's fine and they can calculate that into their purchase.
The data can't be debated? That seems a little arrogant. All data can be debated. For example, do the corporate profits include foreign operations, or have they been somehow excluded. If they haven't been excluded then how can you compare global profits (of US based corporations) with what I assume is US GDP? If they have been excluded, how accurate is the distribution of earnings between US operations and foreign, knowing that US corporate tax rates are higher, there would be an incentive to migrate earnings to the lowest tax countries. Globalization has changed many things and maybe your graphs haven't been updated. Lots of things to debate.
The Facts Are In - MLPs Work Great In IRAs [View article]
Picture yourself driving down the interstate at 72mph, with a speed limit of 65, and you pass a cop. Is the cop going to pull you over and give you a ticket? Probably not--cops don't make the traffic laws and the IRS doesn't make tax law. They are both in the position of trying to enforce laws passed by legislatures. Cops and the IRS have to consider limited manpower (peoplepower?) and focus their efforts where they think it makes the most sense. It must seem obvious to the IRS that the issue of MLPs and IRAs is confusing and they could easily make it clear with a very specific publication but they can't tell the public to ignore the legislature any more than the cops can tell you it's OK to speed. I have no doubt (or little doubt anyhow) that "Reel Ken" is correct in his analysis of this issue but for now the IRS is ignoring it so I think we investors can also ignore it as long as we understand that the IRS can change their tune any time they want.
Where I think you are wrong is thinking Republicans still have the power to do much of any blocking. The Democratic majority in the Senate is larger than it was, the Republican majority in the House is less than it was and the moderate half of that majority is no longer afraid of the Tea Party. Sequestration will be reduced to a nit and the debt ceiling debates never result in serious action. The election results told the Republicans that the public wants more spending and doesn't really care about deficits and debt. As long as inflation doesn't skyrocket and as long as the Fed keeps pumping, my guess is the market doesn't correct.
Japan has pretty much avoided immigration to solve it's population problem--their desire for racial purity I suppose. If they don't go that route then it seems like cloning is their only long term solution. That isn't talked about now but my guess is that within 20 years the topic will have to be discussed--and not just in Japan.
REITs: Why The Dividends Are A Mirage [View article]
When I saw the title of your article I assumed you would talk about those REITs that distribute far more in dividends than required by the IRS (think Campus Crest). REITs are required to distribute 90% (really 100% to avoid corporate tax) of TAXABLE income, not cash flow. When they dip into non-taxable income to fund dividends (largely a result of depreciation which isn't taxable income) then to me they are artificially boosting dividends to attract investors or to fatten up the value of management stock options (if there is another motive for the action I have never seen it explained). In those cases your article makes sense--if REITs then turn around and raise more money to offset the return of capital it does the investor no good. .
My Mad Method: Year-End Results 2012 [View article]
Chowder: You might consider comparing your results to the S&P an exercise in futility but the author doesn't seem to agree--he made the decision to compare to that benchmark. Maybe that isn't the best measure but I assume he thinks it is or he would have used another. If you don't compare your performance than how do you know if your system works? Every mutual fund, hedge fund, pension fund, etc compares against some benchmark--for the obvious need to determine if those managers are adding value. My benchmark is a mutual fund--the Vanguard Retirement 2025 fund--that comes closest to my portfolio--if I can't beat it over time I figure I should just go ahead and buy the fund.
Readers: Whenever an author tells you an idea is too silly to even discuss, hold on to your wallet. Hundreds (thousands?) of countries with their own printing presses have had their currency become worthless. That, to me, is a good definition of bankruptcy. How many times has it occurred to Argentina in the last 150 years? Have you been reading the recent U.S. court case about Argentina debt? Germany declared their currency worthless in 1923 and started over--all the old version of the Mark were worthless. France invaded and demanded coal and other hard assets to settle the debt. Just because a country can print money doesn't mean anyone has to accept it. Or lend to it. Any country that relies on large amounts of imports (as the US does) needs to pay for those imports with an acceptable currency. Any country that relies on external debt (like the U.S.) has to be able to attract investors. This stuff is pretty basic. This column was just plain silly.
Joe X: My point is that a lot of REITs have a dividend that is higher, sometimes much higher, than that required by tax law (assume 100% of taxable income). So they do have the excess cash flow and I would prefer they use it as you suggest-to meet their capital expenditure needs (that can be maintenance of existing buildings or purchase of new). Many choose not to and I'm not sure how many REIT investors know this. If the writers of REIT articles would include a simple table for any REITs they recommend showing the dividend, versus FFO, versus taxable income it would soon become clear (I think).
Is There Something Better Than Vanguard? [View article]
Target term funds have one major flaw--they totally ignore the impact of taxes. Since they all have foreign stocks and maybe foreign bonds, if you buy them in an IRA/401K all the foreign tax credit is lost--that income is typically taxed 10-15% by foreign governments (Canada and a few other countries are exceptions)--that can easily cost you hundreds of dollars a year. You end up paying the foreign tax in an account that is meant to defer taxes. If the fund is in an IRA/401K your qualified dividends, which would be taxed at a maximum 15% in a taxable account (and maybe zero) end up being taxed at your marginal tax rate (usually 25-31% currently). Yes, you get deferral of those taxes, but you get that for anything placed in an IRA. If you place the target funds in a taxable account you avoid those problems but end up paying big taxes on the taxable bond component--which is a large percentage of the fund and grows as you age. These funds make a lot of sense for folks that don't want to (or can't) deal with the complexities of investing but for SA readers, we can do better by selecting the index funds or stocks that make sense for taxable versus tax deferred account.
Black Hills: Buy This Small-Cap Utility For Its Large Gas Potential [View article]
I always read SA articles dealing with utilities, hoping to find a second buy to go with my NextEra(nee). I especially like artilces that provide both the pros and cons of an investment. Your article on Black Hills seems only to address what you think of as positives. I will provide a few negatives. (1) earnings per share have gone nowhere in 14 years--in 2001 they were $3.42, in 2007 they were $2.68 and the projected 2013 earnings per share are about $2.25. (2) Stock price has a similar history with the stock peaking out in 2001 at $58. And (3) 38% of electrical generation is (was) from coal and the EPA is trying its best to kill coal. Most of the above numbers are from Value Line and might be slightly out of date. So the investment return for this stock has, at best, been its dividend, and if EPA is successful its future doesn't look promising. I will have to keep on looking for another good utility.
Vanguard Woke BlackRock From Its Slumber [View article]
Awfully tough to beat a not-for-profit like Vanguard if they stay efficient. As they continue to grow and have efficiencies of scale they just keep plowing all of that into reduced fees for their customers--and that brings more customers. Note their $7 brokerage commission and low open end mutual fund fees, etc. My guess is they will continue to take market share.
Why I Bought Linn Energy In My Roth IRA [View article]
I have read many MLP articles and comments on SA over the last year. Some readers have very strong opinions on the proper placement of these investments--maybe it goes beyond opinions, where they might be confusing their opinion with fact. Seems like there are two very different kinds of UBTI--as the author says the first kind appears on your annual K-1 and is (in my experience) generally insignificant or non existent so not an issue for most; and the second kind apparently happens at the time the MLP is sold--the so called "recapture". I would guess the question is whether there can be a "recapture" if there isn't a "capture". In a taxable account you capture the tax benefit of MLPs annually. Do you capture the tax benefit in an IRA? I would GUESS no. But instead of guessing why don't we have one person who gives us something beyond their personal opinion. Is there any reader who has had the IRS tell them they owe additional taxes because they didn't report an MLP recapture in an IRA?
Heinz, Is Anyone Listening Or Is Everyone Blind? [View article]
SSnape: If Heinz was undervalued at $58 it didn't need a Berkshire bid to tell us that. If Mr. Robertson thought it was undervalued (which I don't think it was) it was undervalued with/or without a takeover offer. My guess is that if this merger fails the price will very quickly retreat back to $58. I am guessing the value to the Brazilian company will come from cutting costs--laying off many employees and spinning off some pieces. Buffett will get his 9% interest on preferred and make out like a bandit. You will do OK and Mr. Robertson will whine.
The Dumbest Portfolio For The Smartest People [View article]
I see two big problems with your approach. Taxes--where do you put your global ETFs? If you place them in an IRA or 401K you will be assessed foreign tax on the dividends and have no way to recover those taxes on your 1040. In effect you will get double taxed on those dividends (once by the foreign government and again when you withdraw the funds from your IRA). Qualified dividends and long term capital gains--instead of paying the 15% rate you will pay your marginal tax rate which might be 28-31%. Your foreign bond interest will also get double taxed in an IRA. Main purpose of an IRA is to defer taxes but using your proposal you increase taxes which pretty much offsets the benefits of deferral. I guess you could put all of these investments in a taxable account if you have the resources but then what do you put in your IRA?
Second problem with indexing in general--what happens when management realizes (some already have) that investors are stuck with their stock regardless of how poorly they perform or how the managers abuse their power with oversized compensation and benefits? And the more overpriced the stock, the more of that stock will be held in the index fund. Think of Cisco in 2000, selling for a PE of approximately 1 million. The higher the percent of stock held in index type funds the less management review will occur. Maybe you don't think that is your problem.
Just How Risky Are REITs? [View article]
The Only 20 Companies That Matter [View article]
The Facts Are In - MLPs Work Great In IRAs [View article]
Irrational Exuberance: 2013 Edition [View article]
The A.B.E. Of Economics [View article]
REITs: Why The Dividends Are A Mirage [View article]
My Mad Method: Year-End Results 2012 [View article]
Japan Isn't Bankrupt [View article]
Just How Risky Are REITs? [View article]
Is There Something Better Than Vanguard? [View article]
Black Hills: Buy This Small-Cap Utility For Its Large Gas Potential [View article]
Vanguard Woke BlackRock From Its Slumber [View article]
Why I Bought Linn Energy In My Roth IRA [View article]
Heinz, Is Anyone Listening Or Is Everyone Blind? [View article]