“I didn’t set out to write a manual for investing. Rather, this book is a statement of my investment philosophy. I consider it my creed, and in the course of my investing career it has served like a religion.”
Howard Marks (Trades, Portfolio) wrote those words in the introduction to his 2013 book, “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor.” It is based on his occasional memos to clients at the Trust Company of the West and then at Oaktree Capital, the company he cofounded in 1995.
The title originated with a client meeting in which Marks explained the most important thing about investment success, only to find himself trotting out a series of most important things—18 of them in total.
Chapter 1 - Second-level thinking
Chapter 2 - Market efficiency
Chapter 3 - The concepts of value
Chapter 4 - Price and Value
Chapter 5 - Understanding risk
Chapter 6 - Recognizing of risk
Chapter 7 - Controlling risk
Chapter 8 - Cycles present opportunities
Chapter 9 - Following the pendulum
Chapter 10 - Bad decisions
Chapter 11 - Catching falling knives
Chapter 12 - Looking for bargains
Chapter 13 - Patient opportunism
Chapter 14 - The hazard of forecasting
Chapter 15 - The Cycle
Chapter 16 - Luck and value investing
Chapter 17 - making money and/or avoiding losses
Chapter 18 - investing pitfalls
Chapter 19 - Second level thinking
Chapter 20 - what returns are reasonable?
Thursday, March 28, 2019
Monday, March 18, 2019
how the rich get richer
from the 1940s through the mid-1980s, the richest one person [that should be one percent] got a much smaller portion of the whole:
That lasted until the late-1970s — and you saw what happened from then on. It's what economists call "The Great Divergence," or a great increase in wealth inequality.
So, what caused this?
Wealthy people began making more of their money from investments and business income
Everyone else continued to make money on salaries and wages.
But since the 1970s, we've significantly reduced how much we tax investment income
The most we've taxed investment income is about 40 percent. That was in the late-1970s. Since then, rates have been much lower. In fact, until 2013, the most investment income could be taxed was 15 percent. It's now about 25 percent.
Keep in mind that, if you're filing as a single person, your salary and wages starting at $38,000 are taxed at 25 percent — and from there the rates only go up.
Since it's the rich who made more and more money on investments, taxing investments less helped them a lot.
American tax and transfer policies are among the worst in reducing inequality, compared to other developed countries
Even though we have a relatively progressive tax system, we now have some of the lowest tax rates in decades. Low tax rates mean the US collects less revenue — and can transfer fewer resources back to taxpayers.
That lasted until the late-1970s — and you saw what happened from then on. It's what economists call "The Great Divergence," or a great increase in wealth inequality.
So, what caused this?
Wealthy people began making more of their money from investments and business income
Everyone else continued to make money on salaries and wages.
But since the 1970s, we've significantly reduced how much we tax investment income
The most we've taxed investment income is about 40 percent. That was in the late-1970s. Since then, rates have been much lower. In fact, until 2013, the most investment income could be taxed was 15 percent. It's now about 25 percent.
Keep in mind that, if you're filing as a single person, your salary and wages starting at $38,000 are taxed at 25 percent — and from there the rates only go up.
Since it's the rich who made more and more money on investments, taxing investments less helped them a lot.
American tax and transfer policies are among the worst in reducing inequality, compared to other developed countries
Even though we have a relatively progressive tax system, we now have some of the lowest tax rates in decades. Low tax rates mean the US collects less revenue — and can transfer fewer resources back to taxpayers.
Tuesday, March 12, 2019
taxing the rich
Everyone, it seems, has ideas about new tax strategies, some more
realistic than others. The list of tax revolutionaries is long. The
short list includes Representative Alexandria Ocasio-Cortez, who wants a top tax rate of 70 percent on incomes above $10 million a year; Senator Elizabeth Warren, who wants a wealth tax; Senator Bernie Sanders, who wants an estate tax with a 77 percent rate for billionaires; and even Senator Marco Rubio, who recently proposed a tax on stock buybacks.
Whatever your politics, there is a bipartisan acknowledgment that the tax system is broken. Whether you believe the system should be fixed to generate more revenue or employed as a tool to limit inequality — and let’s be honest for a moment, those ideas are not always consistent — there is a justifiable sense the public doesn’t trust the tax system to be fair.
In truth, how could it when a wealthy person like Jared Kushner, the son-in-law of the president, reportedly paid almost no federal taxes for years? Or when Gary Cohn, the former president of Goldman Sachs who once led President Trump’s National Economic Council, says aloud what most wealthy people already know: “Only morons pay the estate tax.”
If you pay taxes, it’s hard not to feel like a patsy.
Over the past month, I’ve consulted with tax accountants, lawyers, executives, political leaders and yes, billionaires, and specific ideas have come up about plugging the gaps in the tax code, without blowing it apart.
Patch the estate tax
None of the suggestions in this column — or anywhere else — can work unless the estate tax is rid of the loopholes that allow wealthy Americans to blatantly (and legally) skirt taxes.
That’s because after someone dies, the rules allow assets to be passed on at their current — or “stepped up” — value, with no tax paid on the gains. An asset could rise in value for decades without being subject to a tax.
The Congressional Budget Office estimates simply closing this loophole would raise more than $650 billion over a decade.
Increase capital gains rates for the wealthy
One chief argument for low capital gains rates is to incentivize investment. But if we embraced two additional brackets — say, a marginal 30 percent bracket for earners over $5 million and a 35 percent bracket for earners over $15 million — it is hard to see how it would fundamentally change investment plans.
Even Bill Gates agrees, telling CNN: “The big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that.”
End the perverse real estate loopholes
Whatever your politics, there is a bipartisan acknowledgment that the tax system is broken. Whether you believe the system should be fixed to generate more revenue or employed as a tool to limit inequality — and let’s be honest for a moment, those ideas are not always consistent — there is a justifiable sense the public doesn’t trust the tax system to be fair.
In truth, how could it when a wealthy person like Jared Kushner, the son-in-law of the president, reportedly paid almost no federal taxes for years? Or when Gary Cohn, the former president of Goldman Sachs who once led President Trump’s National Economic Council, says aloud what most wealthy people already know: “Only morons pay the estate tax.”
If you pay taxes, it’s hard not to feel like a patsy.
Over the past month, I’ve consulted with tax accountants, lawyers, executives, political leaders and yes, billionaires, and specific ideas have come up about plugging the gaps in the tax code, without blowing it apart.
Patch the estate tax
None of the suggestions in this column — or anywhere else — can work unless the estate tax is rid of the loopholes that allow wealthy Americans to blatantly (and legally) skirt taxes.
That’s because after someone dies, the rules allow assets to be passed on at their current — or “stepped up” — value, with no tax paid on the gains. An asset could rise in value for decades without being subject to a tax.
The Congressional Budget Office estimates simply closing this loophole would raise more than $650 billion over a decade.
Increase capital gains rates for the wealthy
Our income tax rates are progressive,
but taxes on capital gains are less so. There are only two brackets, and
they top out at 20 percent.
By contrast, someone making $40,000 a year by working 40 hours a week is in the 22 percent bracket. That’s why Warren Buffett says his secretary pays a higher tax rate.
So why not increase capital gains rates on the wealthiest among us?
One chief argument for low capital gains rates is to incentivize investment. But if we embraced two additional brackets — say, a marginal 30 percent bracket for earners over $5 million and a 35 percent bracket for earners over $15 million — it is hard to see how it would fundamentally change investment plans.
Even Bill Gates agrees, telling CNN: “The big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that.”
End the perverse real estate loopholes
One reason there are so many real estate
billionaires is the law allows the industry to perpetually defer
capital gains on properties by trading one for another. In tax parlance,
it is known as a 1031 exchange.
In
addition, real estate industry executives can depreciate the value of
their investment for tax purposes even when the actual value of the
property appreciates. (This partly explains Mr. Kushner’s low tax bill.)
These are glaring loopholes that
are illogical unless you are a beneficiary of them. Several real estate
veterans I spoke to privately acknowledged the tax breaks are
unconscionable.
Fix carried interest
This is far and away the most obvious loophole that goes to Americans’ basic sense of fairness.
For
reasons that remain inexplicable — unless you count lobbying money —
the private equity,
venture capital, real estate and hedge fund
industries have kept this one intact. Current tax law allows executives
in those industries to have the bonuses they earn investing for clients
taxed as capital gains, not ordinary income.
Even President Trump opposed the loophole. In a 2015 interview, he said hedge fund managers were “getting away with murder.”
This idea and the others would not swell the government’s coffers to
overflowing, but they would help restore a sense of fairness to a system
that feels so easily gamed by the wealthiest among us.
Finally, fund the Internal Revenue Service
The agency is so underfunded that the
chance an individual gets audited is minuscule — one person in 161 was
audited in 2017, according to the I.R.S. And individuals with more than
$1 million in income, the people with the most complicated tax
situations, were audited just 4.4 percent of the time. It was more than
12 percent in 2011, the Center on Budget and Policy Priorities reported.
The
laws in place hardly matter: Those willing to take a chance can gamble
that they won’t get caught. That wouldn’t be the case if the agency
weren’t having its budget cut and losing personnel.
Mary
Kay Foss, a C.P.A. in Walnut Creek, Calif., told the trade magazine
Accounting Today what we all know, but is inexplicably never said aloud:
“No business would cut the budget of the people who collect what’s
owed.”
“It encourages people to
cheat,” she said. “We need a well-trained, well-paid I.R.S. staff so
that those of us who pay our taxes aren’t being made fools of.”