It’s Time to Go Clubbing 

I’m not usually the type of man who wants to be in a “club.” In fact, I generally eschew membership in social organizations, political parties and other artificial constructs that humans create to feel kinship with one another.

However, there is one club of sorts, or more specifically, a list of individuals, that I would love to count myself a member of. That club, if you will, is the group of individuals profiled in what has been described as a “bombshell” story by investigative journalism organization ProPublica last summer.

Here’s the headline of the article that captured the attention of the mainstream media, as well as progressive and populist websites around the globe: “The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax.”

The story, which is an interesting read for a variety of reasons, is basically an analysis of the taxes paid by the richest Americans. The analysis is based on the private tax returns that ProPublica says it received from an “anonymous source.” The organization also claims that disclosing this very private information about American citizens is in the greater “public interest,” and this, they’ve concluded, outweighs privacy considerations.

So, who is in this “club” of the richest Americans, and what’s all the fuss about?

Here are some of the top names mentioned in the ProPublica article: Jeff Bezos, Elon Musk, Warren Buffett, Carl Icahn, George Soros, Michael Bloomberg, Bill Gates, Rupert Murdoch and Mark Zuckerberg. According to the report, the tax data “shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.”

The article goes on to claim that “taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.”

Ok, let me unpack that statement, because it’s riddled with a few bad insights.

First, as my friends at Reason.com point out, “For the 2018 tax year, the last year for which we have data, the top one percent paid over 40 percent of federal income taxes, despite earning just under 21 percent of total adjusted gross income (AGI). The bottom 50 percent of taxpayers earned 11.6 percent of total AGI, but paid less than 3 percent of income taxes.”

So, while the elite club of richest Americans profiled in the article show that they often paid very little or no income taxes in some years, the wider point is that the oft-vilified “top one percent” pay far more into the federal tax system than any other group. So, in a way, the ProPublica article unwittingly got it right in the sense that this is definitely not “fair,” i.e., not fair to the top one percent of Americans who pay far more into the system than other groups.

The other point here from ProPublica is that the records show that the wealthiest can pay “income taxes” that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

The problem here is that the growth of one’s fortune via such things as share price appreciation of assets, including shares in a company, or real estate or a business, is not “income” until those assets are sold. And then it’s not the same as ordinary income, but rather more like a capital gain.

Here again, I’ll let Reason.com do the explaining:

“ProPublica, however, tries to make the case that the wealthy are getting away with murder through the tax code, so they do a calculation that has never been done before, comparing growth in wealth over the course of a year to taxable income. They use this to calculate an individual’s ‘true tax rate,’ which is sort of like handing out wins in a baseball game in the middle of the early innings and calling it the ‘true outcome’ of the contest.

“It’s hard to overstate how nonsensical this comparison is (which is perhaps why it’s never been done before). Our tax system rightly does not tax growth in one’s wealth until it is realized as income. After all, the alternative is a monstrously complex and unfair system of wealth taxation that developed countries have avoided.”

Ah, but you see, here is where the progressive and the populist dream “wealth tax” comes in, one where the most successful among us are taxed on our investment prowess and our ability to accumulate appreciating assets. That tax would not just be on our incomes, but on what we own. We know this because Senators Elizabeth Warren and Bernie Sanders have already piggybacked on the ProPublica article to buttress their argument in favor of a wealth tax.

But let’s put this into perspective that most of us can relate to. A wealth tax would, in effect, consist of tax authorities coming to you and taking an annual inventory of your stock portfolio, 401(k), home value, automobile values, collectibles, art, furniture, etc., and then determining a figure of how much you are worth. Then, they would send you a tax bill on that amount each year. It doesn’t matter that you haven’t sold these items. The tax is just based on their overall value.

In essence, the ProPublica “exposé” is, in my view, just another attempt to try and vilify the rich for doing what we all should be doing — using the money we’ve accumulated via our productive achievement and investing that money in appreciating assets that can flourish into enormous wealth.

So, one day I hope to be in that exclusive club, the club where my tax returns reveal that I paid little or no taxes in a given year on income because all of my wealth was tied up in the best stocks, real estate and business investments that I made with the expert knowledge of the markets that I’ve accumulated over the years.

To me, the ProPublica article was a financial form of a Tony Robbins seminar, one that has motivated me to be a subject of the next ProPublica on how the super-rich legally avoid paying Uncle Sam.

If you want to “go clubbing” alongside me as a future member of this exclusive wealth club, then I invite you to check out my newsletter advisory services today. Together, we can get on our way to being the subject of the next ProPublica wealth piece.

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ETF Talk: Reviewing a ‘Boring’ ETF

If there is a saying that expresses the mood of the market right now, it is “what is old is new again.”

In short, the high price-to-earnings (P/E) ratio technology stocks that were the darlings of the market not too long ago have now fallen out of favor, largely due to rising Treasury note yields curbing the speed of economic growth. Since the technology companies were, as I have argued elsewhere, “priced to perfection” and had the assumption of continual growth baked into their share prices, something had to give.

Now, investors’ attention has shifted to value stocks — stocks that are priced low relative to their earnings — such as banking, health care and utilities. While these stocks were previously dismissed by some investors as they are not the most cutting-edge entities on the market, they still produce goods and services that the economy desperately needs. In short, boring is sometimes good.

One exchange-traded fund (ETF) that epitomizes utilities stocks is the Utilities Select Sector SPDR Fund (NYSEARCA: XLU). The fact that this ETF invests in utilities companies that are included in the S&P 500 is both good and bad. The good news is that this ETF is a giant in its sector in terms of assets and volume. The bad news, however, is that its portfolio is often dominated by very large companies. Thus, investors who are interested in broader exposure to the sector may want to look elsewhere.

Currently, the fund’s top holdings include NextEra Energy (NYSE: NEE), Duke Energy Corp. (NYSE: DUK), Southern Company (NYSE: SO), Dominion Energy (NYSE: D), Exelon Corporation (NASDAQ: EXC), American Electric Power Company (NASDAQ: AEP), Sempra Energy (NYSE: SRE) and Xcel Energy Inc. (NASDAQ: XEL).

This fund’s performance has been problematic, especially when including the damage done by the COVID-19 pandemic. As of Jan. 18, XLU has been down 1.29% over the past month and up 6.24% over the past three months. It is currently down 4.21% year to date.

Chart courtesy of www.stockcharts.com

The fund has amassed $13.11 billion in assets under management and has an expense ratio of 0.12%.

In short, while XLU does provide an investor with a way to profit from utilities stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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Reeducating America, Conceptually

You often hear that education is the key to success. And while I agree with that statement in principle, it’s important to understand that it is the kind of education one gets that really matters.

In the new episode of the Way of the Renaissance Man podcast, I speak with Ed Thompson, a man whose mission is to help reeducate America, conceptually. 

Ed is the founder of the Conceptual Education Project, a group spearheading an effort to reform the education system by guiding it away from the current “progressive” philosophy first created by John Dewey, and into a more “conceptual” philosophy.

Jim Woods and Ed Thompson talk “conceptual” education.

The basis of the organization’s program is to help train intellectuals who can articulate and advocate a rational approach to primary and secondary education, with a view to radically influencing how teachers’ colleges teach.

If you are concerned with the current state of the anti-conceptual approach to education that pervades America’s K-12 system, and you want to find out how you can help make things more philosophical, and more conceptual, then this episode is a great place to start. 

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In case you missed it…

How A Philosopher Taught Me to Trade Options

Alright, I know what you’re thinking. How the heck did a philosopher teach me how to trade options?

Well, if you’ve been a reader of The Deep Woods for even just a short time, you likely know that I am a huge advocate of cultivating and integrating all kinds of knowledge about the world — and not just knowledge that’s directly related to stocks, bonds, exchange-traded funds (ETFs) and options.

The way I see things, it’s important to cultivate and integrate knowledge from wherever you find it, including from sources such as pop culture, literature, science, religion, music, history, art, biology, psychology — and especially philosophy.

Doing so makes you a better, well-rounded human, and I think it also makes you a better investor. The reason why is because the more you know about why you’re doing things, the better you get at doing them.

Still, what do I mean when I say a philosopher taught me how to trade options? Well, to understand this, we must go back about 2,500 years ago to pre-Socratic Greece and learn about the man named Thales of Miletus.

Thales was a brilliant philosopher and one of the first real Western thinkers and scientists (although “scientist” wasn’t a term that was used at the time). He is best known for his thesis that “all things are water,” which we know now to be erroneous, but was a groundbreaking thought, given the scientific infancy of 6th century B.C. Greece.

Moreover, Thales was among the first thinkers to make hypotheses that were testable and falsifiable, both bedrock principles of scientific inquiry today, but absent among his fellow thinkers at the time.

According to the Internet Encyclopedia of Philosophy, none other than the great Aristotle identified Thales as the first person to investigate basic principles, the first to question the origins of substances and matter and, therefore, the founder of the school of natural philosophy.

Among his accomplishments was the successful prediction of an eclipse of the sun that occurred on May 28, 585 B.C. Although it’s not known exactly how Thales was able to predict this event, the most likely explanation is that he studied the solar and lunar cycles.

Yet still, what did I learn about trading options from Thales?

To answer that, we must realize that Thales was a philosopher and a man not particularly concerned with the accumulation of monetary wealth. And because of his lack of finances, he often was criticized by the elites of Athenian society. To prove the elites wrong, and to demonstrate the power of reason and natural philosophy, Thales did something that should put him in the investing history books.

Based on his study, assessment and knowledge of the Greek climate, Thales reasoned that there would be a particularly good harvest for olives one year. But rather than sit on this information, Thales had taken the next step and put deposits down on all the olive presses in Miletus over the preceding winter.

Thales basically cornered the market on olive presses for a small investment. Stated in modern trading terms, Thales bought call options on olive presses and paid a small amount for the right to control those presses (i.e., he paid a small premium for the options).

When his prediction of a bountiful olive harvest did indeed come to pass, Thales’ bet paid off handsomely. The boom harvest created heavy demand for the olive presses, and because Thales held a virtual monopoly on these presses, he was able to rent them out at a huge profit.

In my opinion, this was perhaps one of the most important events not only in market history, but in the whole of human history.

The reason why is because Thales demonstrated that “science” and the accumulation of wealth really are connected. And, as the old saying goes, knowledge is power. He also demonstrated that if you know what your competition doesn’t, you will have a tremendous advantage over them.

It is for this life lesson, as well as the accompanying investing lesson of Thales and the olive presses, that we should be thankful for the man from Miletus.

I know I am thankful for him, as his foresight and virtual creation of the concept of options trading has allowed me to help investors make some serious profits. And that’s precisely what we have done already in my new High Velocity Options advisory service.

In fact, in the first three weeks we have banked realized gains of 59.47% in Peloton Interactive (PTON) put options, 81.56% in the Invesco S&P 500 Equal Weight (RSP) call options and 88.75% in Western Alliance Bancorp (WAL) call options — all in about three weeks!

Hey, it’s no wonder why we decided to call it “High Velocity Options.”

To find out more about my new trading service, and how you can start making big options profits fast, then I invite you to check out my “High Velocity Options” advisory service right now.

Finally, the next time someone asks who taught you about investing, instead of naming someone conventional such as Warren Buffett, Ray Dalio or John Templeton, tell them about Thales of Miletus.

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Reality and Dreams 

“You know you’re in love when you can’t fall asleep because reality is finally better than your dreams.”

— Dr. Seuss

The writer and illustrator Theodor Seuss Geisel, better known as “Dr. Seuss,” was a unique genius who has touched just about every young man and woman with his brilliantly creative work. Yet in this quote, he reminds us that he also was filled with profundity about adult relationships, and in particular, the nature of love, happiness, dreams and what makes life worth living. As a kid, I always loved Dr. Seuss. As an adult, I love him even more.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.