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Buy Signal Of The Year?

"John Moorin, the founder of a medical equipment company near Indianapolis, said he sold about $650,000 in dividend-paying stocks like McDonald's and Coca-Cola a few days after the election, worried about the potential increase in taxes.

"I love these companies, but I'm so scared that now all of the sudden I'm going to get taxed at such a rate with them that they won't be worth anything," Mr. Moorin said."

(NY Times, 11/18/12, "Investors Rush to Beat Threat of Higher Taxes" - emphasis mine)

This guy is afraid that allowing parts of the Bush tax cuts to expire might render stock in KO and MCD worthless. Not just worth less than they are now, but not worth anything.

Further on in the article, a chiropractic business owner describes her fear of crossing the $250K income threshold and becoming subject to a possible increase in the marginal tax rate. Apparently the tax hysteria now extends to fear of increasing your net income!

These people aren't dumb; they are smart enough to be successful. Yet their fear (of losing money to taxation) is causing them to make decisions that are probably going to cost them money. Mr. Moorin is almost certainly saddling himself with a sizeable capital-gains tax bill, as he sells stock at or near the bottom of a market correction, leaving him with a pile of cash to reinvest - most likely after the market has recovered and the same stocks are selling at higher prices. (He also gave up about $20K/yr of dividend income.) The chiropractor is planning to avoid making more than $250K, even though an increase in the marginal tax rate would almost undoubtedly still leave her with more money to spend.

This kind of irrationality is unlikely to persist for very long. At some point, investors realize the world hasn't ended yet, and they still need to invest. Business owners eventually realize they end up with more money in their pockets if they grow their businesses, even if it means paying more taxes along the way. Life goes on; the market rises, falls, rises again. Periods of fear are usually the best times to invest.

Too bad this article didn't come out last Thursday, as it now looks like Friday may have been the best buying opportunity of the year. Today wasn't as good, but I still bought. We'll see how it all goes from here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.