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,