Small Portfolio
|
XLF & IAU
|
14.69%
|
|
|
|
|
|
Position
|
Date
|
Return
|
Days
|
DECK
|
6/15/2012
|
-35.53%
|
155
|
RIMM
|
7/16/2012
|
26.90%
|
124
|
SEAC
|
9/25/2012
|
6.98%
|
53
|
CAJ
|
9/25/2012
|
-3.60%
|
53
|
DDAIF
|
9/25/2012
|
-12.60%
|
53
|
WMK
|
10/22/2012
|
-6.48%
|
26
|
CFI
|
10/31/2012
|
-0.65%
|
17
|
CGX
|
11/5/2012
|
12.62%
|
12
|
MO
|
11/8/2012
|
-0.51%
|
9
|
EL
|
11/12/2012
|
-1.51%
|
5
|
|
|
|
|
S&P
|
Annualized
|
0.74%
|
|
Small Portfolio
|
Annualized
|
10.01%
|
|
Large Portfolio
|
Annualized
|
15.68%
|
|
Rotation: selling WMK, buying BOKF
As always, a bad gap (i.e. WMK down or BOKF up) will cancel
the trade.
This week continued the bleeding in the market, while
investors wait for a bottom. The market
is oversold enough for a bounce, but a bounce and a recovery are two different
things.
Do we blame Obama or the Congress? Yes to both.
It takes two sides to compromise.
But there is something even more insidious going on here,
because the President is either misinformed, or he is being deceitful. I’ll give him the benefit of the doubt and
assume he is merely misinformed. So, if
I had the President’s ear I’d walk him through the math with today’s post.
I haven’t calculated the Laffer Curve on income taxes, but
it’s relatively simple to do on stock market capital gains. The Laffer Curve is a truism that a tax rate
of 0% will raise 0 dollars of revenue, while a tax rate of 100% will ALSO raise
0 dollars of revenue. In other words,
would YOU invest if you were guaranteed to have ALL of your gains taxed
away? Of course not. The maximum revenue for the government is at
a rate somewhere between 0% and 100%.
Well, that’s a big “somewhere between” to go through. How to calculate it? Do we just guess?
No.
I used the data for the S&P index from January 3, 1950
through November 15, 2012. It was a
simple matter of creating two columns – one for a hypothetical trading account
starting with the value of the S&P on 1/3/1950 at 16.66. The second column was a running tally on
taxes raised, given whatever tax rate I specified.
Then I ran the numbers 100 times and recorded the results:
Rate
|
Investor
|
Government
|
Aggregate
|
Short
|
Long
|
1%
|
1304.92
|
13.01
|
130.31
|
100
|
60
|
2%
|
1258.06
|
25.33
|
178.53
|
99
|
47
|
3%
|
1212.69
|
36.99
|
211.80
|
98
|
39
|
4%
|
1168.77
|
48.00
|
236.87
|
97
|
34
|
5%
|
1126.27
|
58.40
|
256.47
|
96
|
29
|
6%
|
1085.16
|
68.20
|
272.05
|
95
|
25
|
7%
|
1045.38
|
77.43
|
284.51
|
94
|
21
|
8%
|
1006.90
|
86.11
|
294.45
|
92
|
18
|
9%
|
969.70
|
94.26
|
302.32
|
85
|
15
|
10%
|
933.72
|
101.90
|
308.45
|
79
|
12
|
11%
|
898.94
|
109.05
|
313.09
|
73
|
9
|
12%
|
865.33
|
115.73
|
316.45
|
68
|
7
|
13%
|
832.84
|
121.96
|
318.70
|
63
|
5
|
14%
|
801.45
|
127.76
|
319.99
|
59
|
3
|
15%
|
771.13
|
133.14
|
320.42
|
55
|
1
|
16%
|
741.84
|
138.13
|
320.11
|
51
|
2
|
17%
|
713.55
|
142.74
|
319.14
|
47
|
4
|
18%
|
686.24
|
146.98
|
317.59
|
44
|
6
|
19%
|
659.87
|
150.88
|
315.53
|
40
|
8
|
20%
|
634.42
|
154.44
|
313.02
|
37
|
10
|
21%
|
609.85
|
157.68
|
310.10
|
34
|
11
|
22%
|
586.15
|
160.63
|
306.84
|
31
|
13
|
23%
|
563.28
|
163.28
|
303.27
|
29
|
14
|
24%
|
541.22
|
165.65
|
299.42
|
26
|
16
|
25%
|
519.95
|
167.76
|
295.34
|
23
|
17
|
26%
|
499.44
|
169.62
|
291.06
|
21
|
19
|
27%
|
479.66
|
171.25
|
286.60
|
18
|
20
|
28%
|
460.59
|
172.64
|
281.99
|
16
|
22
|
29%
|
442.22
|
173.82
|
277.25
|
14
|
23
|
30%
|
424.51
|
174.79
|
272.40
|
11
|
24
|
31%
|
407.45
|
175.57
|
267.47
|
9
|
26
|
32%
|
391.02
|
176.17
|
262.46
|
7
|
27
|
33%
|
375.19
|
176.59
|
257.40
|
5
|
28
|
34%
|
359.95
|
176.85
|
252.30
|
3
|
30
|
35%
|
345.27
|
176.95
|
247.17
|
1
|
31
|
36%
|
331.14
|
176.90
|
242.03
|
2
|
32
|
37%
|
317.55
|
176.71
|
236.88
|
4
|
33
|
38%
|
304.46
|
176.39
|
231.74
|
6
|
35
|
39%
|
291.87
|
175.95
|
226.62
|
8
|
36
|
40%
|
279.76
|
175.40
|
221.51
|
10
|
37
|
41%
|
268.11
|
174.73
|
216.44
|
12
|
38
|
42%
|
256.90
|
173.97
|
211.40
|
13
|
40
|
43%
|
246.13
|
173.11
|
206.41
|
15
|
41
|
44%
|
235.77
|
172.16
|
201.47
|
17
|
42
|
45%
|
225.81
|
171.12
|
196.57
|
19
|
43
|
46%
|
216.24
|
170.01
|
191.74
|
20
|
44
|
47%
|
207.05
|
168.83
|
186.97
|
22
|
45
|
48%
|
198.21
|
167.59
|
182.26
|
24
|
46
|
49%
|
189.73
|
166.28
|
177.62
|
25
|
48
|
50%
|
181.58
|
164.92
|
173.05
|
27
|
49
|
51%
|
173.75
|
163.50
|
168.55
|
28
|
50
|
52%
|
166.23
|
162.04
|
164.12
|
30
|
51
|
53%
|
159.02
|
160.53
|
159.78
|
32
|
52
|
54%
|
152.10
|
158.99
|
155.51
|
33
|
53
|
55%
|
145.45
|
157.41
|
151.31
|
35
|
54
|
56%
|
139.08
|
155.80
|
147.20
|
36
|
55
|
57%
|
132.96
|
154.17
|
143.17
|
38
|
56
|
58%
|
127.09
|
152.51
|
139.22
|
39
|
57
|
59%
|
121.47
|
150.82
|
135.35
|
41
|
58
|
60%
|
116.07
|
149.12
|
131.56
|
42
|
59
|
61%
|
110.90
|
147.41
|
127.86
|
43
|
61
|
62%
|
105.95
|
145.68
|
124.23
|
45
|
62
|
63%
|
101.19
|
143.94
|
120.69
|
46
|
63
|
64%
|
96.64
|
142.19
|
117.22
|
48
|
64
|
65%
|
92.28
|
140.44
|
113.84
|
49
|
65
|
66%
|
88.10
|
138.68
|
110.53
|
50
|
66
|
67%
|
84.10
|
136.92
|
107.31
|
52
|
67
|
68%
|
80.27
|
135.16
|
104.16
|
53
|
68
|
69%
|
76.60
|
133.41
|
101.09
|
54
|
69
|
70%
|
73.08
|
131.66
|
98.09
|
56
|
70
|
71%
|
69.72
|
129.91
|
95.17
|
57
|
71
|
72%
|
66.51
|
128.17
|
92.33
|
58
|
72
|
73%
|
63.43
|
126.44
|
89.55
|
60
|
73
|
74%
|
60.48
|
124.72
|
86.85
|
61
|
74
|
75%
|
57.66
|
123.01
|
84.22
|
62
|
75
|
76%
|
54.97
|
121.31
|
81.66
|
64
|
76
|
77%
|
52.39
|
119.63
|
79.17
|
65
|
77
|
78%
|
49.93
|
117.96
|
76.74
|
66
|
78
|
79%
|
47.58
|
116.30
|
74.39
|
67
|
79
|
80%
|
45.33
|
114.66
|
72.09
|
69
|
80
|
81%
|
43.17
|
113.04
|
69.86
|
70
|
81
|
82%
|
41.12
|
111.43
|
67.69
|
71
|
82
|
83%
|
39.16
|
109.84
|
65.58
|
72
|
83
|
84%
|
37.28
|
108.27
|
63.53
|
74
|
84
|
85%
|
35.49
|
106.72
|
61.54
|
75
|
85
|
86%
|
33.78
|
105.18
|
59.61
|
76
|
86
|
87%
|
32.15
|
103.67
|
57.73
|
77
|
87
|
88%
|
30.59
|
102.18
|
55.91
|
78
|
88
|
89%
|
29.11
|
100.70
|
54.14
|
80
|
89
|
90%
|
27.69
|
99.25
|
52.42
|
81
|
90
|
91%
|
26.33
|
97.82
|
50.75
|
82
|
91
|
92%
|
25.04
|
96.41
|
49.14
|
83
|
92
|
93%
|
23.81
|
95.02
|
47.57
|
84
|
93
|
94%
|
22.64
|
93.65
|
46.04
|
86
|
94
|
95%
|
21.52
|
92.30
|
44.57
|
87
|
95
|
96%
|
20.45
|
90.98
|
43.13
|
88
|
96
|
97%
|
19.43
|
89.67
|
41.74
|
89
|
97
|
98%
|
18.46
|
88.39
|
40.40
|
90
|
98
|
99%
|
17.54
|
87.13
|
39.09
|
91
|
99
|
100%
|
16.66
|
85.89
|
37.83
|
93
|
100
|
On 11/15/2012 the S&P closed at 1353.33. At a 1% capital gains tax rate an investor
would have left 1304.92, while the government would have raised 13.01 dollars
in taxes.
At a 100% tax rate the investor would have left 16.66 – in
other words, he would make 0 dollars in profits during those 62 years – while
the government would have raised 85.89 dollars in taxes.
The next thing I did was to speculate why there are
different rates for long and short term capital gains, and this is what I came
up with immediately:
1) Short term capital gains are generated by a
trader who is making a stop loss or taking a quick profit, but is not basing
his decisions on taxes. Therefore, the
government can set the rate at the amount that generates the most tax revenue,
regardless of how the trader is affected.
2) Long term capital gains are generated by an
investor trying to save for retirement.
If the taxes are too high the investor should simply hold forever and
never sell (and thus pay no taxes). Also,
if the taxes are too high then no one would be able to adequately retire, and
therefore EVERYONE would be completely dependent on the government when they
were too old to work. Obviously this
would bankrupt the government even faster than is already happening, so the tax
rate should be set at the maximum aggregate revenue for both the investor and
the government together – which I calculated by giving the square root of the
investor’s final returns multiplied by the government’s total tax revenue.
The maximum short term revenue for the government was
generated at a 35% rate.
The maximum long term returns for the investor and
government together was generated at a 15% rate.
I did not skew these results or rework them. I came up with those figures on the first
try.
I don’t believe it is a coincidence that the Bush tax rates
for capital gains were set at 15% for long term and 35% for short term. I believe someone else did the math and
simply calculated the amount that would raise the greatest possible revenue for
the government. And in fact the
greatest tax revenues ever achieved in any President’s administration were
during the Bush years of 2001-2008.
When President Obama says that he wants to raise the rates
on capital gains to 20% and 40%, he uses the argument that the government needs
more money. However, as I show in the
RANKING of best to worst tax rates (the final two columns), the Obama rates are
in 10th place. They bring in
LESS money than the Bush rates.
By raising the rates, the government will get less revenue –
and that’s assuming there is no effect on either market growth or investor
behavior (which is as optimistic as one can get).
Here’s the chart:
You’ll also note that the optimal rate of 15% STILL cuts
almost 50% from the investor’s pocket at the end of 62 years. He is left with 771.13 instead of 1353.33.
The President is either being deceptive when he says he will
raise revenue or he is misinformed. I’ll
be charitable and assume he is misinformed.
But that means that you, dear reader, are better informed
than the President of the United States!
Isn’t that a little scary?
Shouldn’t HE have better information?
Apparently not.
Enjoy the higher tax rates.
But how does that affect US in our trading?
I’ll save that for another post…
Tim
