Category: Investing

Some folks are using Zoom stock as an example of the pain that some Americans would suffer if the Democrats’ plan to tax unrealized capital gains were implemented. They posit a prescient investor who paid $100 for the stock just as coronapanic was unfolding, then got taxed based on the $337/share price at the end of 2020, and just held onto the stock for the ride back down below $100 (remember that the loss in real dollars is even more severe; adjusted for purchasing power, the $100 paid in 2020 had a purchasing power of closer to $200 today, e.g., for a house):

Today’s topic is not the wisdom of forcing successful Americans to pay their fair share, but on how the Zoom price today can be lower than the Zoom price before coronapanic. Zoom was worth $92 per share in August 2019, for example, before SARS-CoV-2 had infected even a single human, with or without a cloth mask to protect him/her/zir/theirself.

Given that Zoom was a curiosity in 2019 and is something that hundreds of millions of people today still use regularly, how can the company be worth less?

Let’s also consider the purportedly efficient market and the purported wisdom of crowds of investors. Zoom had potential, so it was worth a lot in 2019. What would have been an impossible dream for Zoom investors? How about governors all around the U.S. making it illegal for people to meet in person (except at liquor and marijuana stores in California, Massachusetts, etc.)? U.S. state and local governments did more for Zoom than investors could ever have hoped for and yet the company still hasn’t lived up to the expectations of 2019.

How did the investors of 2019 get it so wrong?

“When Wall Street Rolls Out the Red Carpet for You, Who Pays?” (Wall Street Journal, March 8):

Edward McQuarrie, an emeritus business professor at Santa Clara University who studies long-run asset returns, recently analyzed how mutual-fund investors have fared since the 1920s. His goal was to measure their returns not in theory, but in real life.

He found that a $10,000 investment in 1926 in the index that became the S&P 500 would have grown to just under $198,000, 30 years later, with all dividends reinvested. But you couldn’t have invested directly in that index; it was only a hypothetical measure, without commissions or other costs.

In the real world, where mutual funds charged sales loads of up to 8.5% plus annual expenses, a $10,000 investment in 1926 would have grown to less than $99,000 over three decades. In the real world, costs ate up half the wealth you could have achieved in theory.

Over the next 30-year period, through 1986, fund investors captured only 71% of the cumulative wealth that the S&P 500 hypothetically generated.

(None of these results account for the toll of taxes and inflation.)

That last sentence is brutal. Unless you live in a tax-free environment, e.g., as an EU citizen resident in Italy, It might be better to follow Hunter Biden’s example and enjoy whatever money falls to hand rather than trying to invest!

How about the alternative investments that savvy college endowments buy into?

A recent study found that, on average, for every dollar of return they generated from 1995 through 2016, hedge funds harvested 64 cents in management and performance fees. Lately, at some leading hedge funds, expenses have even risen—to as much as 5% to 7% annually.

Of course, this analysis is presented by the same newspaper that reported on the high effectiveness of lockdowns, mask orders, and school closures as means of preventing COVID-19…

One of the mantras of an index fund investor is that you can’t predict which companies or which economies will do best. (Or at least you can’t predict better than other investors, so obviously promising stocks are already priced high to reflect that promise.) Therefore, you should try to invest in a way that mirrors the domestic economy or, if you expect to spend time in other countries, the world economy.

Let’s have a look at the Vanguard all-US fund (“Total Stock Market”) “total returns” (reflects reinvestment of dividends, but not taxes).

12.17 percent return over 10 years. After federal taxes, this is 10.1 percent, says Vanguard. They don’t estimate the effect of state income taxes, but with California at at 13.3 percent on the successful, this could fall to less than 9 percent for a Californian.

How about the Vanguard all-foreign fund (“Total International”)?

In an efficient market, the returns should have been about the same. But the investor enthusiastic about broadening his/her/zir/their investment base got destroyed. The 10-year total return on non-US stocks, in U.S. dollars, has been 4.68 percent. After federal taxes? 3.88 percent. After California state taxes? Perhaps around 3.5 percent. Foreign bonds would have paid better than foreign stocks, I think.

Scanning the headlines, I see the Mega Millions is up to $1.55 billion. That’s a fake number because it is pre-tax and adds up an annual payment without discounting? Let’s assume that it isn’t a fake number. The odds of winning are 1 in 302 million and a ticket costs $2. So we should definitely play! We expect to get $5.13 for every ticket that we buy (ignoring any less-than-jackpot prizes).

But of course, the number is fake. CNBC says that the one-time lump sum payment is $757 million. This analysis says that the lump sum in a state such as Florida with no personal income tax is worth only $477 million after federal income tax. The odds of winning on a $2 ticket are 1 in 302 million. So I think one gets back only about $1.50 in expected value from the big jackpot. But maybe the lesser prizes are what make the expectation positive? This analysis adds up all of the lesser prizes. The expected value of a $2 ticket was only about $1.10 after taxes when the jackpot was $521 million and fell to about 77 cents for players who chose the lump sum option. On a $1.55 billion jackpot if you pick numbers that nobody else picks maybe it would be worth buying tickets? Would it make sense to use a random number generator? Use numbers that the Chinese consider unlucky? Pick the birthday of a 17th century scientist whom nobody cares about?

Who has purchased some tickets for what could now be a rational activity, depending on your level of risk aversion? What are you planning to buy if you win?

(I would use my winnings to buy housing for every currently unhoused resident of the U.S., to pay for immigration lawyers to help migrants prevail in the 10-year asylum process, to finance Democrats running for office (stepping in where Sam Bankman-Fried of FTX has withdrawn), etc. With any leftover money, beyond the obvious aviation items, how about a bus-based RV (about $3 million fully pimped-out). And, of course, a driver. I’d be able to watch Barbie and Oppenheimer over and over while sitting in traffic. And would have a nice place to sleep at Oshkosh!)

Separately, and speaking of Sam Bankman-Fried and crypto glory, how about this Bitcoin criminal who stole $4.5 billion? That’s way more than Mega Millions and he just hung around in New York City for years until he was arrested. From the WSJ:

If you get a lottery-style windfall, but it is illegal, wouldn’t it make sense to move to some country where they won’t extradite?

Related:

• California says inequality is bad and also participates in Powerball? (recent)
• If inequality is bad, why does the government run Powerball? (2016; before the rich were hugely enriched by coronapanic cash, thus dramatically increasing inequality)