Wintry Efficiency

Every year about this time, my family and I sit down and decide our annual giving plan: how much can we afford to donate this year, and to which charities will we give? When the kids were small we told them what we were doing so they’d appreciate their good fortune, that most people don’t have what we have and many simply don’t have enough, and that these folks depend in part on people like us to help. As the kids got older they found causes of their own— spinal injury research, protecting dolphins and tigers, addressing climate change— and we encouraged them by donating in their names to those as well. 

When most people give to a non-profit, for the sake of simplicity they write a check or just put the donation on a credit card. But did you know that many non-profits, particularly larger ones with more healthy and updated infrastructure, accept gifts of stock directly? 

Sounds weird and complicated; what's the point? If you sell a stock during the year which is worth more than you paid, you’ll be on the hook for capital gains taxes on that sale. Sure, you can then use the proceeds from that sale for charitable giving. But you will have paid capital gains tax on investment dollars to be given away, making your gift that much more costly. And you can write off the dollar value of the charitable gift itself, but not for the difference between that and the value of the sold shares.

 
If instead you donate appreciated stock shares directly, you’ll pay no gains tax (you didn’t sell it, so you never realized the gain) and you can deduct the entire value of that stock gift at the time you gave it from your taxable income. In other words, depending on your gains tax rate, most of us would save 15-20% right there, plus the charity gets a gift of larger total value. Then the non-profit can choose to hold those stock shares for future gains, or sell it themselves for the cash. Read more details here.
 
So when you are researching the charities you like online, look for those that can accept donations of stock.. sometimes that option requires a little digging. Or locate a live chat or donation hotline and ask. 
 
Give as much as you can. Do it efficiently for them as well as for you. And do it every year. 

 

Your Portfolio's Year-End Needs

Your Portfolio's Year-End Needs

Today I want to discuss some of the things you want to do as the year comes to a close: specifically, cleaning up your portfolio.
 
In the life of a patient and talented investor, a year is a short time. I say here repeatedly that you should be thinking at least 3-5 years out when adding a business (or an ETF, or a fund) to your portfolio. It often takes that long to see how that investment will turn out. 
 
But life moves faster than that. Things pan out differently than you expect. Sometimes your expenses rise rapidly— graduate school, medical bills, a dying car. Sometimes the market goes your way quickly, and suddenly you’re worried about having more dollars than you planned invested in a single business. And sometimes you own a stock which is not showing the value growth you’d expected, so you want to move some of your money around. The end of the year is a good time to comb through your portfolio looking for the obvious winners and losers, taking note of your performance and perhaps making some adjustments.
 
As I’ve written about in a previous post, there are exactly 4 reasons to sell a stock. 

1. Thesis incorrect: you bought stock in a business expecting it to rise in the near future but even after a year or more, the investment has done poorly and now you want out.
2. Rebalancing: when one business in your portfolio has increased in value far more than others you hold and is now a larger share of your total investments than you’re comfortable with.
3. Opportunity Cost: the stock you own did well for a time but now has stopped growing, and you’d frankly like to place the money somewhere else: into a different stock, towards a child's tuition, on Taylor Swift tickets ..
4. Loss Harvesting: you have taxable income elsewhere— your paycheck, profits on stock sales, you sold your house, etc— and you want to unload a loser stock to offset those gains.

I’d like to spend a few minutes going through these one at a time and personalize them for you with my own recent experience.

 

Thesis incorrect: Personally I have always got one thesis or another that has proved or is proving wrong. Earlier this year I bought Peloton because it was so beat up since the end of the pandemic— down 95% from its high— that I thought, with a high quality and addictive product, they’d find a way to recover. Or at least they’d get bought by Apple, Nike or some other giant. Instead, as of last week Peloton was down another 20% from my purchase. It was a small, “play money” position I held, so I simply gave up and dumped it. Some of the best things just make bad businesses.

 

Rebalancing: Once you been managing even a modest portfolio for a while, you will at some point own a business which, in a given year or two, wildly exceeds your expectations and certainly beats all your other holdings. Since January 1^st of 2023, Nvidia has climbed 220% as of this writing. That staggeringly fast growth is a bonanza for investors, of course. But it means
now I hold considerable risk that I was not exposed to at the start of the year. Just one critical employee departure, or a flawed high-value product, or a particularly stringent ban of one of their more advanced chips … then the stock drops and my portfolio takes a sizable hit. So I sold about 20% of my holdings in Nvidia (like Buffett says, “Be fearful when others are greedy”) and put that money to work elsewhere, keeping my upside— minus taxes— and diversifying towards safety.

 

Opportunity Cost: I’ve owned Starbucks for years. In fact Starbucks was one of the first companies I ever invested in, the day it went public in 1992. I sold it 6 months later for a huge 90% gain— huge mistake is more like it as today it’s worth 30,000 times more than my 1992 purchase price. I got over it, buying again in the late 90s, and have held it since. But Starbucks’ growth has slowed as others in the US copied the business model, as the company has tried and failed at adjacent lines of revenue, as the CEO chair has rotated out of, and into, and back out of Howard Schultz’s hands. Today the company faces union issues in the US and Chinese competitors are coming fast. So I decided it was time to scale back my holdings and put those dollars into younger, more energized businesses. I sold down about 70% of my Starbucks stock over the past year. 

 

Loss Harvesting: As you know, of course, you are taxed on money you make. In the US federal tax code, the converse is also true: generally speaking, when you lose money trying to make money through investment, a portion of those losses can come back to you in the form of what are basically tax credits. 
 
Stay with me. Let’s say that you bought Stock A two years ago. It’s been climbing, and you’d like to pocket your initial investment to reduce single-company risk and reinvest elsewhere to diversify— no different than taking some winnings off the blackjack table. In our example let’s say you bought Stock A for $5,000 (your ‘cost basis’) and now it’s worth $10,000, a ‘capital gain’ of $5,000 if you sold all of it. If you sold $5,000 worth of Stock A, pocketing $2,500 profit in the process, the IRS would ultimately expect you to pay a 20% tax on your gain, or $500. 
 

But let’s also say you additionally had Stock B, which since your purchase has dropped in value. Assume you purchased Stock B for $5,000 and now it’s worth $2,500. If you sell Stock B, your $2,500 ‘capital loss’ on Stock B will offset the $2,500 capital gain from Stock A. So, no tax due. And if your capital losses exceed your capital gains in a particular tax year, you can carry those losses forward into future years to offset gains there. 
 
In my case, I owned Zoom Video which I bought in late 2021. For two years I watched as this capable business failed again and again to capitalize on its obvious popularity through the pandemic. They released fancy new products and features, but they had no obvious response to competition from heavyweights entering their business, and they ultimately lost value steadily. So late in 2023, in light of my Nvidia sale (a substantial taxable gain) I opted to harvest the Zoom loss by selling out completely. Those losses will largely offset my Nvidia gains this year. 

 

Naturally there are several particulars involved in nailing this strategy, such has how long you owned Stock A (a year or more is optimal), how much you can offset in a given year, and a rule which says you can’t repurchase Stock B for at least 30 days or face a wash sale violation. But by and large, loss harvesting is a handy cost saver to ease your investing mishaps.

As always, reach out with questions. I'm always available at robin@zagaco.com,

"Investing Behavioral Hacks" by Barry Ritholtz

I wanted to show you all a recent blog post from Barry Ritholtz. Barry is the co-founder and chief investment officer of Ritholtz Wealth Management. He is a profoundly sane and reasonable money manager, a trusted financial journalist and blogger, and respected financial expert. He also manages to explain modern investing and business in understandable terms. 

I don't agree with everything he says here (I do love to pick stocks and have more of my assets in those individual businesses than I do in ETFs— but that's not the best strategy for most folks), but I do agree with the following: Behavioral management may be the single most important aspect of successful investing. No matter what assets you hold, if you can avoid selling in a panic each time you see your holdings drop beyond a comfortable level, you'll likely be okay over time. 

a link to his post is here, and I've reprinted the text below.

https://ritholtz.com/2023/11/investing-behavioral-hacks/

Like Banging Your Head Against the Wall

If you’re wondering why the stock market seems a little stuck

 

Stocks are a mess. if you’re invested right now and you have been for months or years, you’re aware it’s been a time of stomach-churning volatility and lack of forward progress since July, what Wall Street calls ‘trading sideways.’ There is not one cause for all the market chaos, there are many. We are in an unprecedented time. 

 

Foremost in the minds of US investors, we have yet to crush inflation. The primary tool used to tame inflation is interest rates, currently higher than they’ve been for over two decades. The Federal Reserve bank is considering yet another rate hike at the end of this year, increasing the likelihood of a recession next year (though clearly there’s been talk of a recession for over 18 months now). All of which will decrease corporate profits, which reduces the forward-looking value of stocks. 

 

Then there’s the political and sociological polarization which has gripped the country. Liberals versus Conservatives versus MAGA Republicans (not the same as Conservatives!). Though most Americans have far more which unites them than which divides them, we are in a critical moment where that commonality seems astonishingly difficult to find.

 

Add to that the debt ceiling fight in Congress early last summer, which spooked investors both in and out of the US, as much of America’s debt is held overseas. Then there was the budget fight early this month among Congressional Republicans, nearly shuttering the US government, which even the Wall Street Journal commented was “part of a clever plan .. to cut off their own heads.” Add a Supreme Court with some clear ethical issues and vastly reduced public respect and trust. Add full-on corruption charges on the left for Senator Bob Menendez, on the right for Congressman George Santos, and on former president and likely Republican nominee Donald Trump. Add President Biden’s family practice of trading on the family name for favors and access. Americans right now are thoroughly disgusted by their government. 

 

All of these events affect confidence, which affect the public markets. When things look sunny and positive, stock prices rise; when they look grim or scary, prices fall. 

 

But we’re far from finished. Covid-19 deaths among the elderly and the unvaccinated continue. Auto workers, health care workers and half of Hollywood went on strike to demand better wages and more secure working conditions now and into the future (yay unions!), but at the cost of a work stoppage making TV and movies, reduced access to necessary medical services, and reduced car inventories and higher prices (boo unions!). Three of the world’s most powerful tech companies, the very source of what market growth we’ve seen this year, are being sued by the US government for anticompetitive behavior. AI recently got genuinely smart and a number of individuals we consider tech geniuses are now genuinely worried. The planet’s climate is warming, and even if you deny human causation, it’s hard to argue with the results: more global weather disasters of greater severity, warming oceans and dying coral, massive deadly fires, drought and searing temperatures with no clear solution.

 

You can just begin to see the fear investors have of stock values over the next couple of years. 

 

Oh wait, I nearly forgot: in 2022, Russia moved to capture Ukraine, and after thousands dead and probably a hundred billion dollars in damage, that fight continues. China is threatening Taiwan and much of the South China Sea— most of which does not belong to them. India, the most populous country in the world, has gone full nationalist. Israel’s government went extreme right. Then last week Israel was brutally and mercilessly attacked by terrorist group Hamas, with backing from the government of Iran, and is now embroiled in a huge military conflict along the Gaza Strip.

 

The new world order is no longer America on top and everyone else in sliding order of importance. We are now a multipolar global ‘community,’ in which several heavy hitters vie for economic, technological and military dominance. Markets definitely do not like wars involving US allies or raging global fear.

 

So investors are wrestling with increasing economic pressures, worsening climate crises, incompetent government, a global trend toward bigotry and fascism and dysfunction, and full scale war on two continents. Serenity is down, sleeplessness is up.

 

I told you all that to tell you this: the markets are a train wreck. There is no certainty. No predictability. No trust, no real comprehension. We watch or read the news to understand what’s going on, and to learn what to expect in the economy, in the housing market, in our schools, in our leadership, on the battlefield, on our streets, in our stock market. But still we can’t. If anything, given what’s going on we should be pleased with ‘trading sideways’ instead of panic selling across the board. We should be happy to have a few weeks of economic confidence and share buying, followed by a few weeks of fear and share selling. It’s Groundhog Day for investors. But it could be a lot worse. 

Remember that the fundamentals of investing haven’t changed. The American economy over the long term will grow. Successful businesses over the long term will appreciate. If you’re invested, stay the course. When you get a little cash, buy shares. Don’t know what to buy? Bet on the S&P. This might take a while, but all the weirdness eventually peters out. There is a lot of investor money right now in savings, in bonds, in homes which owners are not ready to sell. Eventually it gets freed up and it heads back into stocks. All those great businesses you own will bounce back. Investing is the slow, slow, s—l—o—w way to build wealth. Be patient. 

 

Call me with questions or concerns. I love to talk shop.

"This is Why You Stay the Course" -Ben Carlson

I am always talking in here about why it's so important to think long-long term, and to avoid selling into fear or panic. About holding your positions through the inevitable down cycles. About having the stomach for the nausea-inducing roller coaster of modern stock investing.

So here, speaking clearly to that point, is a wonderful blog post by one of my favorite go-to analyst/advisors, Ben Carlson of Ritholz Wealth Management. Enjoy.

Robin

https://awealthofcommonsense.com/2023/06/this-is-why-you-stay-the-course/

This is Why You Stay the Course

Posted June 13, 2023 by Ben Carlson

Last year was one of the worst years ever for financial markets.

Call it recency or loss aversion or some other Daniel Kahneman bias but for some reason, our brains are hard-wired to assume big losses will be followed by additional losses (just like we assume big gains will be followed by additional gains).1

The thing about big losses in the stock market is sometimes they are followed by big losses…but sometimes they’re followed by big gains.

Just look at every double-digit down year for the S&P 500 going back to 1928 along with the ensuing returns in the following year:

Historically after a bad year you’re looking at feast or famine. You either got a huge rally or further soul-crushing losses.

It was not a foregone conclusion that stocks would rally this year as much as they have — the S&P 500 is up almost 14% while the Nasdaq 100 has gained nearly 27% this year. It could have gotten worse if inflation stayed high or the Fed broke something or we went into a recession or some other risk came out of left field.

Regardless of the outcome, this is a good lesson in the power of staying the course as an investor. And I believe staying the course was the right move whether stocks cratered even more or took off like a rocket ship.

Why?

What’s the alternative? Guess what will happen next? Good luck with that.

Even the pros have no idea what will happen next in the market.

Heading into the year, Sam Ro published a list of S&P 500 year-end price targets from 16 of the biggest Wall Street firms:

The S&P 500 ended 2022 at around 3,840 so there were a handful of strategists who expected mild losses in 2023 while most were expecting mild gains.

It makes sense that Wall Street was tepid coming into the year considering the stock market fell almost 20% in 2022.

We’re only halfway through the year so it’s still a little early to offer a full report card for these predictions but the stock market has outperformed expectations based on where we sit today.

As of this writing the S&P 500 is trading at roughly 4,370.

So the stock market has already gone up more than any of these strategists, save for Deutsche Bank, predicted for the whole year.

But they’re not waiting around to see if those original forecasts could come true. Now that stocks are up double-digits for the year many Wall Street strategists are revising their forecasts higher.

Wall Street strategists get pessimistic when stocks are falling and optimistic when stocks are rising. I don’t share this with you to poke fun at Wall Street.

The point of this exercise is to prove how difficult it is to make predictions about the future, especially as it relates to short-term movements in the stock market.

When stocks fall, our emotions make us think they will fall even further. And when stock rise, our emotions make us believe they are going to rise even more.

This is why I’m such a big proponent of having an investment plan that you can stick with through a wide range of market and economic environments.

Staying the course means going against your own emotions at times.

Staying the course means thinking and acting for the long term even when it doesn’t feel right in the short-term.

Staying the course means preparing not predicting.

Staying the course means doing nothing when that’s what your plan calls for.

Unfortunately, doing nothing is hard work because markets are constantly tempting you to make changes to your portfolio.

There’s an old parable about a locksmith who had a tough time picking locks when he was just a lowly apprentice learning on the job. He would have to use all sorts of tools and it took him a long time to open doors when people locked themselves out of their cars or homes. But people saw him sweating it out and the effort was evident so they tipped him quite well.

But as he slowly but surely learned the tricks of the trade he was able to pick locks quicker which much less effort. The problem is his tips went down because he got people into their vehicles or houses much faster. He made it look too easy.

There is a good investing lesson in this story.

Intelligent investors realize effort is often inversely related to results in the market. Just because you do more or try harder doesn’t guarantee better results. In fact, doing more is more often than not damaging to your investment performance.

Doing less or doing nothing at all most of the time is the right way forward for the majority of investors.

This is why you stay the course.

Further Reading:
2022 Was One of the Worst Years Ever For Markets

1This is not all of us, of course. There are always going to be contrarians who go against the grain.

 

A Strange Time to Be an Investor

It certainly is a strange time to be an investor in the public markets. There is a lot going on, and much of that is fairly unprecedented, so its impact on the market is likewise difficult to predict.

What I Know

We are probably already in a recession, though it’s a strange one. We’re seeing strong corporate profits and a tight labor market. We have unusually flush consumers— thanks to pandemic economic stimulus— but they’re spending more on experiences like travel and dining out than they are on cars and clothing, and their collective debt is breaking records. We’ve got inflation, rising interest rates, collapsing banks. We are fighting a proxy war against Russia via Ukraine. We have ongoing diplomatic mayhem with China. There are the culture wars and the now normal political division and resulting semi-paralysis of Congress. Plus a Supreme Court potentially in moral decline, raging climate change, the long tail of Covid-19, and an impending election contest shaping up to be between the two oldest and whitest men ever to run for the job. Net result: a lot more uncertainty and huge volatility.

The stock market is having a better time in 2023 than it did in 2022, but that’s mostly a result of massive AI (or AI-adjacent) companies and their collective impact on the markets. Many of those businesses are the ‘big tech’ firms you always hear about, so their performance has outsize impact on the returns of the broader market— the Nasdaq, the S&P 500, Russell 2000, etc. They’re carrying everyone’s water. If your portfolio is up this year, it’s likely because you own a couple of those individual companies, or you own comprehensive stock indexes.

All of which means that a huge number of the individual businesses you or I might own stock in are still seeing their share prices down from 2020 as a result of the big pullbacks in late 2021 and throughout 2022.

It also means that if you’re a stock picker like I am, your job is harder. You can’t simply choose businesses that have enormous market share or are promising an exciting new product or are flush with cash or have brought in talented new management. The businesses you choose also have to be able to thrive and grow in this market, and I for one have no idea how to see what’s coming next— never mind how that thing will affect my companies.

Things may not get better from here; it is entirely possible we have not seen the bottom of the stock market yet. The 2020 stock market launched a scary and speedy fall at the same moment that Covid froze the economy. Everything stopped— work, school, bars and restaurants, travel, gyms, shopping. But in spite of the pandemic, markets bounced back quickly and went on to have a shockingly good year, showing sizable gains in many areas. Manufacturing and fulfillment (packaging and shipping millions upon millions of orders around the world) began to sputter late in 2020, and 2021 was a mixed bag. And as I said previously, 2022 was pretty awful for investors. Then 2023 opened with big spikes in oversold tech stocks, then spiked again, with ugly volatility, around AI. But with all the economic, political, legal and climate uncertainty, no one knows for sure what comes next. Ten minutes on the internet will introduce you to dozens of theories and warnings. Believe none of them.

Nevertheless, there are also glimmers of light in the markets. As I mentioned above, the shares of a great number of excellent businesses remain below their 2-year high water mark. Even if we assume things got a little heady in those mid-2020 pandemic days and knock 20% off their then-value, plenty of companies look ready to climb again. Recession or no, there doesn’t appear to be anything structurally wrong with these businesses. So even if the overall market falls in the next 12 months, in theory these will do well in the longer term.

What I Don’t Know

Where are those glimmers? 100 stock analysts will give you 85 answers to what’s the next big growth story, or where the value is now. (10 will say It’s all about AI now and 5 will say The whole thing’s going to crap! Sell!)

How long will it take for the market overall to recover? The short and unhelpful answer is, I don’t make projections of duration or price at all, ever— I’m terrible at it. The only slightly more helpful answer is it will depend on which corner of the market you’re talking about, what will happen with all those external-event unknowns. Some industries and businesses are already returning to normal, or better than normal, like travel, but many of those companies’ stock prices do not yet reflect that resurgence— most likely because investors are cautious and what they expect from the companies they buy has changed.

How impactful will the pandemic-era ‘meme-stock’ trend be going forward? If you’ve been paying attention, you’ll know that multiple unlikely companies saw shocking share price rallies in the middle of the pandemic shutdowns. AMC Entertainment theaters, GameStop video game stores, Bed Bath and Beyond homewares stores (now in bankruptcy) and others all saw crazy price gains over the span of a few days for no obvious reason. Hertz car rental declared bankruptcy during the travel stoppage, and then its share price surged wildly. Ultimately it was a social-media driven movement of individuals who coordinated efforts to move a stock price. Gambling resulting from pandemic boredom? My hope is that the trend will wither as our lives re-normalize. However, multiple analyses now suggest that the recent collapses of Silicon Valley Bank and First Republic Bank, among others, is a result of a related— if reversed—dynamic. The possibility exists that the potential virality of social media has fundamentally changed some of the reasons markets move, and the suddenness with which they do it.

What I want to end with is some specific takes on my own investing direction of late. I won’t call them recommendations because I lack the official certification to do that and stay out of hot water. But here are some things I’m thinking about:

Nvidia is too hot. While I ‘m a fan of this chipmaker and have very much enjoyed its recent success, I also believe AI has become its own sort of mini-bubble. Nvidia is the poster child of the movement and is now way too expensive. I have already sold down about 15% of my holdings and will likely do so again if it continues its rampage.

AirBnb will begin to surge post-summer. Above I mentioned companies that are seeing a lot of business but whose share prices do not reflect that; AirBnb is a perfect example. I can’t see the growth of the travel industry taking place without this rental platform front and center. AirBnb now has more available rentals worldwide than all the rooms of several of the major hoteliers combined, with homier feel (Kitchens! Sitting rooms!), a lower consumer cost per square foot and— as they do not own their properties— a vastly less expensive business model.

Shopify is the biggest online selling platform after Amazon. But again the stock price does not reflect the size or scope of this business. If you’ve ever bought something online from a ‘direct-to-consumer‘ (D2C) business, based on a recommendation from a friend or resulting from an ad on social media, you’ve probably done it through a website and payment process provided via Shopify. And if you’re a new business owner looking for a place to host your goods on the internet, Shopify is your first stop.

Moderna will change the way we treat disease. This pandemic darling has seen wild share price swings in sync with the up and down level of demand (presold) for vaccinations. It might take time for markets to realize the potential of the company’s patented mRNA based vaccines, maybe even several years. But it will change medicine and that will ultimately be reflected in the price.

JP Morgan Chase will continue to grow as it cleans up the mess that’s become of regional banking. The company is led by Jamie Dimon, a man so expert and so respected in financial circles that he’s often the first call for CEOs, members of Congress, Treasury officials, and presidents. JP Morgan is the literal definition of ‘too big to fail’, and it’s going to keep getting bigger— and richer.

Disney is totally mispriced. Disney’s share price has become too much a factor of its unprofitable streaming service, rather than its much larger sister businesses. Investors mistakenly believe Disney’s primary corporate competition comes from Netflix and Warner-Discovery, who operate entirely in a much narrower industry. It may be some time before the market remembers that the future of this company is not about its losses from streaming but about profits from Disney World guests, Disney (+ Marvel + Star Wars) movie fans and Disney Cruise passengers.

Peloton at this price is a long shot success story. The fitness platform has been flailing since their mid-pandemic overexpansion, and the stock price is down about 95% from its December 2020 high. Yet most users still love the products and wouldn’t dream of giving up their bike and going back to some other workout. The bikes are good, the onscreen workout classes are first rate and the whole thing might actually be addictive. There is value here: either the company will turn it around or a buyer will step in… then again I’ve been saying that for quite a while.

Thanks for reading! Also thank you for your belief that I’m worthy of your valuable time.

As always, email with questions or ideas you want to kick around. I never tire of examining this stuff from different angles. And share this article with a friend. 

Robin Rifkin
Zaga Investment Co
June 2023