Early Bird Gets the Tax Worm

Comment on “The Individual Investor’s Guide to Personal Tax Planning 2018,” by AAII Staff, in the December 2018 AAII Journal:

From the wrong end of the bell-shaped curve: Thanks to the tax cut act, my federal income tax (both total amount and effective tax rate) more than doubled. I encourage everyone to compute their tax bill as early as possible to avoid possible penalties.
—Michael from Washington

Desired Broker Features

Comment on “Comparing the Most Popular Online Brokers,” by Jaclyn McClellan, CFA, and Charles Rotblut, CFA, in the January 2019 AAII Journal:

Good article comparing brokers! Here are two additional factors for future comparisons.

• Two-factor authentication (2FA) is very important for account security today. Fidelity, Vanguard, Schwab and E*Trade have it. TD Ameritrade, when I last checked, doesn’t.
• E*Trade is the only broker I’ve found that provides free Morningstar reports on exchange-traded funds (ETFs) and mutual funds when you log in. This is a nice perk for those who read Morningstar.

—Paul Lenz

Retirement Savings & Inflation

Comment on “Majority of Retirees Regret Not Saving More for Retirement,” by AAII Staff, in the February 2019 AAII Journal:

I’m one of them. I was not well taught about the effects of inflation on retirement savings targets. The Federal Reserve Bank target of 2% per year results in needing twice as much money 35 years from now just to maintain today’s buying power. So, a 40-year career will require even more just to have the same buying power.

Likewise, the concept of what to do with all that savings wasn’t emphasized either—saving enough to be able to live on the interest/dividend income, at twice today’s levels (2% inflation), without touching principal.
—Ned Dodds from Nevada

Shadow Stock Sell Rules

Comments on the Model Shadow Stock Portfolio:

Kindly explain why Aceto Corp. (ACET) and Amira Nature Foods Ltd. (ANFI) remain on the Shadow Stock list. Many thanks.
—Dave Beatson

Wayne Thorp responds:
Aceto and Amira Nature Foods remain in the Model Shadow Stock Portfolio because they did not meet the portfolio’s sell rules at the time of the last quarterly review (end of November 2018). Neither has reported interim/quarterly results with negative earnings since their trailing 12-month earnings went negative. For the complete Model Shadow Stock Portfolio Rules, please visit www.aaii.com/model-portfolios/portfolio-rules.

Views on Share Buybacks

Charles Rotblut’s February 7, 2019, weekly Investor Update gave a defense of share buybacks from the perspective of the investor, after their recent criticism in the press by two U.S. Senators. His commentary elicited many responses from AAII members. Here are their comments, edited for space.

A comprehensive analysis would/should have investigated how government policy supported those buybacks, CEO bonuses, etc., at taxpayers’ expense.
—Dennis Wagner

Several key issues were overlooked in this piece.

1) Inequality—and the concentration of wealth into fewer hands. Share buybacks do just that. This is the primary weakness of true capitalism—in the end there will only be one winner holding all the wealth.

2) Conflict of Interest—most CEOs in the modern era are handsomely rewarded with generous stock options and grants. Their friendly boards of directors keep upping the ante to keep up with their “competitors” in a rigged game. However, what may be a few extra dollars per share for ordinary shareholders could mean extra millions of dollars in benefit to the corporate officers—including the board of directors. And there’s no determination if this is in the best interests of “all” shareholders in the long term.

3) Financial Engineering—share buybacks can hide poor corporate performance. However, for long-term shareholders, this may not be the best use of capital instead of using the money for investing in the business or diversifying.
—Dennis Clark

I can appreciate that economics and investing is more complex than we imagine, as pointed out the not-so-obvious reasons buybacks could be legitimate. When considering ethics, I speak from a philosophy/science point of view, an additional dimension comes into play that might override any technical discussion. The concept of “fairness” can’t always be quantified in economic policy, but that doesn’t mean it doesn’t exist. My concern is monopoly, oligopoly and monopsony.
—Jon Holler