stocks

When I was working as a financial advisor I stayed away from individual stocks for a number of reasons but the most important was that stocks did not seem to rise and fall based on any logical reason. The one example that stands out in my mind was silver. I knew early on that digital cameras would not need silver to process film and I knew that the biggest use of silver was in film processing. Logic told me to sell silver short as the price would decline as demand declined. Even though the use of silver in films declined to almost nothing the price of silver rose and this happened with in a 15 year span. While all of this change is taking place Kodak and Polaroid file for bankruptcy but silver use just kept growing. Amazon came out in 1994 and everyone thought this would be a winner but they didn’t make a profit until 2001 and then they paid one cent per share. Many people who bought early did not hold on and missed out on the big run up later. It is not only what to buy but how long to hold. I found the market was much like people who go to the casino. They tell you about the winning but not about the losing. In the market the spectacular winners get the publicity so others try to pick the next big winner.

Spend or cut

It is becoming more obvious by the day that our elected officials have agreed to do what the people want and that is not to reduce any government programs. Do not touch my Medicare or do not touch my social security are cries heard all too often these days. People on welfare say they need the safety net and those getting unemployment need their checks until they find a job. Homeowners demand their interest deductions and farmers want their subsidies. Business wants to deduct health premiums and charities want tax deductible contributions. The list goes on and on so where does that leave us? FDR was the first president to use and economic advisor and when the idea was proposed to him he agreed as long as they could find one with only one arm. He reasoned that every economist he had known always answered every question by saying, one hand you can do this and on the other hand you can do that. FDR said he already knew that. Today we have economist who say we need to keep government spending and keep taxes low on the middle class. They say the government will turn the economy around by spending on things like extending unemployment, hiring teachers and firemen and policemen and financing shovel reading projects like bridges and highways. They do this by either borrowing money or printing money. Other economists say we need to get government out of the way and allow private business to determine how they want to expand. They say the energy industry would take off with a little less interference from government and housing will follow close behind. Well the argument has been settled. The President has chosen the first approach and now dares the congress to propose cuts in spending. He has the people on his side. He says to the public that he wants to take care of those in need and specifies the middle class. The people now have the choice of continuing benefits to themselves or reducing their benefits. I wonder what they will choose. I can give you an example from my experience as a financial planner. I witnessed this with several small businesses that I advised regarding pensions. If you had a business where your employees were mostly young people and you asked them if they wanted you to put aside money in a pension for them or would they prefer a Christmas bonus they opted for the bonus. If you had older employees they chose the opposite. The irony here is that the younger group, when they got older criticized you for giving them the option saying you should have known better than to give them a choice. Our elected officials do not know any better. Our only salvation is for the government spending program to ignite the economy and then through growth we can overcome these difficulties. Let’s hope this works!

Payroll tax

A little over two years ago the president by decree lowered the social security withholding tax from 6.2% to 4.2% giving a 2% raise to everyone who works. This is the way to help low income people if that is your objective. Republicans pointed out that most of these people pay no income tax and the Democrats said that they paid payroll tax. After that a war of words was started over taxation. The Republicans like to separate the payroll tax from income tax so they could say these people paid no tax. The Democrats always include the payroll tax so they can say these people do pay tax. As of January 1st this payroll tax reduction is no longer in effect so starting today the paychecks of everyone will be less. For all of those earning less than $110,000 per year this means a 2% reduction. This has not been covered by the news in all of the talk about fiscal cliff so many will be surprised when they see their check this week, especially those who remember that Obama said he would not raise tax on those making less than $200,000. To explain this, the Republicans will now lump the payroll tax in with the income tax and the Democrats will separate it out. This is an example of Washington speak. Most people will not have any idea of what happened but they will see the reduction in their pay. If a man earns $30,000 per year and is paid weekly his check this week will be $12 less and I can assure you he will notice.

Who pays taxes

Whose taxes will go up is still undecided. If the 3% of taxpayers who earn more than $250,000 ante up like the President wants that will bring in about $80 billion. Since there are 5.6 million in that group that comes to about $14,000 each. On the other hand if all those who pay no income tax were asked to contribute $110 per year that will also come to $80 billion. It might be worth considering to placing a special surtax of $100 on everyone just so everyone has some skin in the game. If a person pays zero income tax they really don’t care if taxes are increased and so polls might indicate that the majority of people do not oppose tax increases.

taxation of options

Taxation of Incentive Stock Options (ISO’s) The company offers a stock option in lieu of salary. The option is the right to purchase stock at a predetermined price called the excise or strike price. The stock can be purchased after a given period of time called the vesting date. The difference between the purchase price and the strike price is the spread. If the spread is positive the gain is taxed as ordinary income but no payroll tax is due. For example if your option price is $50 per share and the stock at the time of purchase is selling for $60 per share then you have a profit of $10 per share and that is taxed as ordinary income. If you then wait more than one year from the time you bought the stock and two years from the time it was offered to you and sell, any profit will be taxed as capital gain. I bring this up at this time because in the news today it was announced that the CEO of Apple received 1.4 million in salary, 2.8 million in bonus and 140 million in stock options that vest this year. In addition he got 175 million in options that vest in 2016 and another 175 million in options that vest in 2012. Lets calculate his tax rate. On the 1.4 million in salary he pays 35% and on the bonus he pays 25% on the first million and 35% on the last 1.8 million. The options are taxed at the capital gain rate of 15% so his total tax due is 35% of 1.4 million plus 25% of 1 million, plus 35% of 1.8 million plus 15% of 140 million. His total tax bill is 22 million and his total gross income is 144 million giving a tax rate of 15.2%. That is how Warren Buffett pays a lower tax rate than his secretary. If you want to tax the really rich you have to change the capital gain rate.

Midlife

When I was going through midlife, I had a number of interesting experiences. I joined a men’s group and we met every Sunday night from 7 PM to 9 PM for four years and I believe I only missed one meeting. I had a series of three reoccurring dreams which in later years I understood and helped me prepare for the second half of life. One of the strangest things was a sudden interest I developed in particle physics and that led to a number of new discoveries about my inner self. Midlife for men is a time when we reconnect with our inner self which we have put on the back burner while we develop a strong ego that can go out into the world and compete. I was trained in the sciences and this leads to logic and reason and these two things are often not compatible with the intuition of the soul. As I tried to combine the assets of my heart with my head, I ran into some difficulties and one of the things that helped me cross the barrier was particle physics. The reason for this is while physics is hard science, quantum physics borders on the mystical. Quantum mechanics does not follow the rules as laid out in regular physics. It presents us with situations that the human brain in its present stage of development cannot comprehend. The rules can be proven experimentally but they cannot be understood even by the most advanced physicist, much like many things in the world of the spirit. As I look back on those transition years I am thankful for the pathways that I was presented with, that carried me through the fog and into the light. There is a certain peace and contentment that comes with the recombining of thinking and feeling. One of the best and most practical results is my decision to be more interested in developing relationships and less interested in being right. In retrospect I can see that being right was merely the folly of arrogance and filled with self-deception and getting past that was a reward in itself. Happy New Year to everyone. PS. I know to most of you women out there that this is all just common sense but remember you gals are much more complex than we men.