For many of us, our first introduction to the stock market came from playing some version of the stock market game in high school. The game typically works by giving students a hypothetical capital amount to start with. The winner is the student whose capital base is the largest at the end of the game. To be sure, there are some great things about this game. First and foremost, it engages students in investing, which is something that is badly needed to help battle our woeful savings epidemic in this country. Second, it teaches some semblance of financial literacy, which is often never addressed with our young students leaving them unprepared for life outside of school.
But I think the benefits stop there. These games can start students on a path of bad behavior when it comes to investing. In fact, almost all of the objectives of the game are counter to what we preach at Greenspring as “successful investing”:
- An all-or-nothing mentality- with the objective being to accrue the most money over a very short period of time, students learn that buying just a few stocks (and the most volatile ones at that) gives them the best chance of success.
- Risk isn’t real- when you lose $100,000 of play money it is a lot different than losing it in real life. God forbid the student is successful at the game. They may start thinking that they are skillful at picking stocks versus the more likely reality…they got lucky.
- They don’t understand who they are competing against- if they are playing a stock market game using the real market for artificial buys and sells, these high school students are competing against hedge fund managers, professional traders and teams of analysts. As we’ve said before, trading is a zero sum game. Is it likely they will come out on the winning end of these trades consistently?
- It sends a message that you can get rich quick in the stock market- in my 17 years in this business, I’ve yet to meet someone who got rich quick by trading stocks. I’m sure they are out there, but I just haven’t found them yet. What are we saying to our kids about investing when their first introduction is a game to try to make as much money as possible by taking extraordinary risks that no sane person would ever do with their own money?
I am not totally living under a rock. I get that children are going to be much more engaged trying to make ten times their money in a month versus learning about finance, but teaching someone that trading stocks is a good idea also flies in the face of reason. My suggestion would be to teach the kids the basics without the stock market game. Focus on things like how active management is a losers bet, that small and value stocks have a long track record of outperformance and how much costs matter to long-term performance. If they do want make a real different focus on things these children have control over- namely their budget. If they can focus on strategies to minimize their expenses and maximize their income, they’ll be way ahead of the game.
The proposal for tax reform is out, but unfortunately it is light on details. Having reviewed the proposal, we have a few thoughts:
- The process for Reconciliation (basically passing the law) is extremely complex and based on the proposal outline almost impossible to pass under its current form without Democratic support. Tony Nitti at Forbes has an excellent analysis on this. You can read it here.
- It is too soon to say exactly who the winners and losers will be, but we'll take a stab.
- The really high income earners (1%'ers) should experience quite a windfall since they are seeing their top rate go down from 39.6% to 35%. Even with losing some deductions someone making $1 million + should see a massive tax cut
- Those on the fairly low end of the income scale could see a cut since the standard deduction is going to double, meaning more people may be in the 0% bracket
- Those families with lots of dependents could be worse off since personal exemptions (basically a deduction per person in the household) are removed
- Individuals in high tax states could be worse off since state taxes are no longer deductible (think NY, CA, NJ, MD, etc) in this proposal (mortgage interest and charitable contributions remain as itemized deductions)
- Small business owners with high incomes in pass through entities (S-Corps, LLC, Partnerships, etc) could see a gigantic tax cut. This is pretty much all small businesses. The highest proposed pass through rate will drop from 39.6% to 25%. There are no significant details on this but previous comments made state that this may not apply to service companies (which make up about 85% of the US economy). If this passes, another huge win could be tax planners, attorneys and consultants working out how to exploit this loophole.
- Families with large estates could be big winners- the proposal eliminates the estate tax
- There is no mention to many things that will impact our clients- at what income do the rates start? what is happening to the tax on capital gains and dividends? Are the Obamacare taxes going to be kept intact?
At this point it is just to early to tell. The numbers don't add up so there will have to be significant changes to this proposal. Also, whenever you change the code you create winners and losers. The losers usually have lobbyist that will come out in full force (real estate industry, Wall Street, etc). Once they realize they could be on the losing end, expect some backlash. There is a reason we haven't seen major tax reform since 1986. It is a hard process due to the literally hundreds of competing interests involved. It should be interesting to see how this plays out…
At Greenspring, our core purpose (why we exist) is to “Improve lives by helping people make better decisions for themselves and those who depend on them” and our very first core value (how we live) is to “Love your neighbor”. We we take seriously our responsibility to be good stewards of the resources entrusted to us by our clients and we believe that part of that responsibility involves giving back to causes and organizations that support those in need. As a firm, we commit to give 10% of our profit to charity each year through the Greenspring Charitable Fund, the Greenspring Grant Program and other charitable endeavors. Since inception, we have given more than $500,000 to charity and we have a 20-year goal of giving in excess of $15 million.
Over the years we have developed a national client base of both individuals and companies we serve with many people in areas like Florida and Texas that were hard hit by Hurricanes Harvey and Irma. As a show of support and unity with those affected, Greenspring is proud to have recently made separate contributions of $5,000 to both relief efforts through the American Red Cross. To see how the American Red Cross is supporting efforts those in need please visit:
To our clients, we are grateful for the support and confidence you place in us and hope you know that translates into doing good for others. For those of you who have been impacted by these disasters, please know we stand with you and are here to support you in any way we can. And if you are interested in supporting the American Red Cross you can do so by visiting:
Yes and No. How’s that for an answer?
In all seriousness, yes, we feel that the risk of identity theft is strong enough that you should make changes. However, you should not make changes solely due to this particular situation. Even if this Equifax breach had not occurred (and for those of you not impacted this time), we would recommend most of these same tactics to help prevent identify theft. There are so many headlines about security breaches each year that it pays to take a few minutes and take action now. Here are a few things you can do:
- Alerts: Most credit cards and banks let you set up alerts. For example, I get immediate text notices when any of these things happen: a) any transaction over $1,000, b) any ATM withdrawal, c) any foreign transaction, and a few others. You can check with each bank/credit card to learn how to set up these alerts and to determine how to customize them as you please.
- Credit Monitoring: You could subscribe to a service that monitors your credit report and alerts you to changes or new requests for credit. You can do this at any of the three major credit agencies (Experian, TransUnion, and Equifax) as well as other firms such as https://www.creditkarma.com/. For this particular Equifax breach, you can sign up for one free year of monitoring services by visiting https://www.equifaxsecurity2017.com/.
- Free Credit Report: The official website to check your credit reports for free is www.annualcreditreport.com. You can check each report once per year. Some people check all three at once. Others retrieve each one every four months so that they check each on a rotating basis. If you notice any errors, you can then report it.
- Passwords: It’s best to have a unique and complex password for each of your financial institutions (e.g., banks, investment accounts). Furthermore, many institutions allow for two-factor authentication where they send you a code via text message after you log in. We would advise you to enroll in this enhanced authentication.
- Opt-Out: You can opt out of prescreened credit card offers by calling 1-888-567-8688 or visiting www.optoutprescreen.com.
- Shred: Shred important documents that have account numbers or other identifiable information instead of just throwing it away.
- Credit Fraud Alert: Placing a fraud alert means that a business is supposed to (but is not required to) verify your information more thoroughly before issuing credit. It is free, and if you place it with one agency, they will report it to the other two. The downside is that there can be a bit more hassle when you truly want to get a credit card, loan, etc.
- Credit Freeze: More severe than the fraud alert, a full credit freeze makes your credit report unavailable and therefore prevents new companies from issuing credit. There will likely be a small charge ($5 to $10, though you can try to get this waived with proof of identity theft), and you must initiate the freeze with each of the three credit agencies. The downside, of course, of the freeze is that it will create difficulty for the legitimate needs of someone to pull your credit (e.g., if you get a new cell phone plan, if you change banks). You will be issued a PIN and would need to contact each agency to lift the freeze. You can learn more about freezes and alerts here – https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs. Note that even after placing a freeze, your existing lenders and creditors can still access your report, so it’s important to follow some of the other suggestions here as well.
Good luck, and let us know if you have any questions or if you utilize other tools and techniques to help keep the bad guys at bay.
One of the more damaging pieces of advice to the average investor is Warren Buffet’s famous investment rule:
“Rule No. 1: Never lose Money. Rule No. 2: Never forget Rule No. 1”
While this folksy wisdom has a great ring to it, it can be easily taken out of context. I think what Buffet is trying to say is not to gamble with your money and be prudent in your decision making. Many investors read this rule and believe that they should literally attempt to not lose money when they invest. Over the past 20 years, Buffet’s own company, Berkshire Hathaway, has had 6 losing years, with one of them erasing approximately 1/3 of his shareholder’s value. That means over the last 30 years, he has broken his own rule 30% of the time!
Investing involves risks. Those risks aren’t just theoretical. Historically, the stock market goes down around 1 out of every 3 years. For those who are trying to follow Buffet’s rule, how are they going to deal with this simple fact? Unfortunately, we tend to see it manifest itself in market timing, the act of trying to get in and out of the market at the right times. No one we know of has been able to do this consistently enough where you could attribute their performance to skill versus just plain luck. Buffet himself eschews the practice of market timing. He once wrote that his, “favorite holding period is forever”.
Those investors who want to follow Buffet’s rule have three strategies they can lean on to help them implement this idea of not losing money:
- Time period- over one year periods, the stock market has negative returns about 30% of the time. Conversely, there has never been a 20 year period in the S&P 500 where returns have been negative. The longer time you have, the lower the probability of losing money.
- Diversification- when you buy one or two companies, the risk of loss is high. In fact, we wrote about this in a prior post. Since 1983, 39% of all publicly traded stocks have lost money. You must spread out your bets to ensure you don’t pick one or two losers that can cause permanent losses.
- Discipline- there will be bad times. Probably the easiest way to violate Buffet’s rule is to sell your investments AFTER a loss. Having the discipline to stick with your investment strategy after a difficult period is a key factor in avoiding permanent losses.
I think amending Buffet’s rule would be immensely helpful. Here is how I would word it:
“Rule No. 1: Don’t lose money, permanently. Rule No. 2: Never forget Rule No. 2”
By implementing the three strategies we’ve listed above you have a much better chance of following that rule.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.