Joshua's Beginner's Investing Blog

Several readers have contacted me asking to go over the specifics of the two tax plans after the last blog, and how it might affect their investments and family. I took it for granted that most of my readers were familiar with the plans and, in the heat of the moment, forgot to include a link to the actual data so here's the followup. Although at this point, we can only get into general outlines because you never know what type of Congress you are going to have, here's a breakdown provided by both the Tax Policy Center and CNN Money on how the two plans might help (or hurt) your net worth and income:

Obama: "Obama would also introduce new tax breaks for lower and middle-income groups. Such breaks include expanding the earned income tax credit, giving those making less than $150,000 a $500 tax credit per person on the first $8,100 in income, giving those making under $75,000 a 50% federal match on the first $1,000 of savings, and exempting seniors making less than $50,000 from having to pay income tax. The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $160 under Obama's plan. That means their after-tax income would rise by 0.3%.... those in the lowest-income groups would enjoy the biggest after-tax income rise as a percentage of income - between 2.4% and 5.5% (worth between $567 and $1,042). By contrast, the highest-income households - those with at least $603,000 in income - would see a dramatic decline in their after-tax income - a drop of 8.7%, or $116,000."

McCain: "The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $1,200. That means their after-tax income would rise by 2%. But those in the lowest income groups would only see their after-tax income rise by less than 1% (or between $19 and $319). By contrast, the highest-income households - those with incomes of at least $603,000 - would see a boost in after-tax income of 3.4%, or more than $40,000."

Some Thoughts: Warren Buffett has repeatedly stated that when tax breaks are given to those on the lower end of the spectrum, they are going to spend it because they need it. They will go to Wal-Mart or Target or Borders or Home Depot or J.C. Penny to buy clothes, food, put in new carpet, et cetera. When those at the higher end of the spectrum get tax relief, it is almost always, without exception, put to work in the stock market or other investments because they don't need the money. For the sake of kicking up the economy, that's partly why profits rose so heavily under the Clinton - Gingrich era because the average lower class and middle class households saw their purchasing power increase by thousands of dollars. These demographic sectors spend income increases. Those making $250,000 per year don't.

That played a big role in my decision to switch out of my usual party alliances (as many of you know, I'm a Republican who is voting for Barack Obama). Again, here we're only dealing with the economics and investing side of it - you're personal convictions on social issues and other topics don't factor into this and, to be honest, that's not what we're here to discuss at Investing for Beginners so I'll quietly bow out of those issues, if you'll pardon me.

Roberto Goizueta remains one of the greatest executives and managers in history. During his tenure, the Cuban immigrant grew the value of Coca-Cola’s common shares by more than 3,500%, while cleaning up the mess of his predecessor, which had resulted in the beverage company tied up in everything from shrimp farming in South America to manufacturing plastics. He strengthened, consolidated, and spun-off a substantial part of the bottler network in the form of Coca-Cola Enterprises that now forms the backbone of the Coca-Cola system, and focused on capital allocation with such spectacular results that even Warren Buffett would have to stand up in admiration.

In this brief special, we are going to look at some of the lessons Goizueta can teach us from his day-to-day management of one of the most famous companies on the planet. It is our hope that you can take away from it practical, and actionable, ideas to grow your own net worth or improve your life in some meaningful way.

Continue reading about the 9 Lessons of Roberto Goizueta ...

As many of you know, I'm a Republican that is voting for Barack Obama. Actually, I'm pretty sure most of my all-Republican family is voting for Obama. Politics matter to us a great deal, in part because they have very real influence on the economy and your (and my) investment results - witness the wealth that has been created because of the Roth IRA, Traditional IRA, SEP-IRA, and 401k plans. Anyway, last night, after his acceptance speech, I was working on a new specialty retail business my holding company is launching and had Larry King Live on in the background. The guests they had on the show included Ben Stein (for whom I have great respect), and a few other folks.

Once they got into the specifics of the pledge Obama made to cut taxes on 95% of Americans, one guest went on about how most lower and middle class people don't pay income taxes anyway. Sitting here, in the decorum of my office, it would have felt good to yell through the television. That's why the proposal is based on a $1,000 tax credit to offset payroll taxes. For the average employee, who is not subject to self-employment taxes, you're talking about virtually no FICA withholding on the first, say, $10,000 in income. That's not only comparable, but bigger, to the economic stimulus payments that just went out, permanently rippling through the economy. The benefits, of course, are lower for a self-employed person because they have to pay both components of the payroll tax (whereas half the costs are covered for those working for someone else).

As always, though, I appreciated Ben Stein's commentary. I did feel like he was a bit intellectually dishonest (uninformed, I hope) about the abortion issue when he stated that Obama had not even voted against a partial birth ban in Illinois. If you go back and study the issue, it was because the particular law did not include an exception for the health of the mother and wasn't expected to pass judicial muster when brought up on a constitutional challenge. What I want to know is, if I'm sitting here running a collection of businesses and investing full-time yet still study and read all of these papers, what the heck is the average American doing?

Thank goodness I didn't witness the protest debacle. Apparently, there were protestors on television holding signs with faces such as Dick Cheney, Nancy Pelosi, and George W. Bush, demanding that the war come to an end. The people in the group didn't know who Madam Speaker was - not her name, job title, role - nothing.

And can someone please explain to people who talk about "activist judges legislating from the bench" who are "usurping our democracy" that we do not and have not ever lived in a Democracy. We live in a Republic. A Constitutional Republic. This is due, in part, to the wisdom of Benjamin Franklin (a fantastic investor himself! Take note!) who likened a democracy to mob rule; comparable to two wolves and a lamb having a vote on what's for dinner. When you get into issues like gay rights, abortion, prayer in schools, segregation, et cetera, the judges are performing their duty. If we had put the issue of desegregation up for a vote, it never would have passed.

Maybe if I ever put down the stock certificates and pick up a pen by running for Governor or Congress, I'll push to have every high school senior in my state sign an agreement prior to graduation stating, "I understand that I do not live in a Democracy. I live in a Constitutional Republic." Even then, would they realize that individual citizens do not have the right to elect the President, but rather the State Legislatures? And even if the Delegates are sent to the Electoral College, they can change their mind (in most cases) and, if they wanted, elect Oprah Winfrey or Billy Joel as the Commander in Chief an there's not a thing they can do about it?

I'm also fascinated by the issue of polls. They keep saying the race is close, but has anyone pointed out that it isn't even close with those who are 30 years old or younger - yet these are the people who are most likely to have only a cell phone, no land line used by traditional polling groups, and aren't registered anywhere in terms of phone lists, donor lists, etc.? I've got direct access to at least four corporate landlines from near my desk at headquarters - but personally, I don't maintain a landline. Everything goes through my iPhone. My siblings are the same way. The government has got to figure out how to catch up with the paradigm shift that's taken place these past few years.

Image property of the Associated Press

This morning, I had the pleasure of reading what I consider to be one of, if not the, greatest money and business management secrets that has ever been penned by legendary management guru Peter Drucker. Buried more than one hundred pages into his treatise, this concept can revolutionize everything from whether you learn to play the piano or build a $20 million fortune. It can help you see things in an entirely new light by focusing on the one variable that we all seem to overlook - the present. Right now, before you get up, focus on anything else, or get distracted, do yourself the favor and read Drucker's words. It will only take a brief, but possibly life changing moment, for you to discover the secret ...

One of the tricks we've used at my company to build our net worth so quickly is to establish what we call "private reserves". As a private business, we have a lot of flexibility in terms of our structure and in all cases, the investment decisions are entirely at my discretion. Here's how it works:

Despite nearly all of our assets being actively managed by me at headquarters, we have a private reserve portfolio that consists of several carefully selected stocks. Each month, our general bank and brokerage accounts are electronically tapped to directly fund the purchase of additional shares of these businesses based upon the proven long-term success of disciplined dollar-cost averaging plans. We have the plan administrator reinvest all dividends, and keep costs as low as possible. We think of these drafts not as money we are saving but bills that have to be paid - sort of a corporate equivalent of pay yourself first. In no time, these accounts have grown in value far more rapidly than any of us could have anticipated. In fact, while some of our active funds have experienced much greater volatility (that's fine - I've managed to beat the markets substantially over time thanks to a deep value investing approach so we aren't concerned with fluctuations in price but rather "permanent" capital impairment - something we define as an investment going bankrupt or falling to a price that is not likely to reach our cost within a three to five year time period due to some change in the underlying business or our calculation of intrinsic value), the private investment reserves have continued to compound nicely, plowing forward as these boring, and stable, businesses throw off cash to owners.

There's no hassle, the work is all automated, and the plan would be great for the average family trying to build up investments but who aren't sure exactly what to do. Unlike traditional brokerage accounts, we pay only $1 or $2 per monthly automated investment, making the costs as a percentage of our capital commitments a virtual rounding error. It may sound counterintuitive, but the very fact that these shares are purchased on a regular basis, and the reports show up in the mail the old fashioned way, it's much easier to think of them as a real business than it is if they are just parked in a brokerage account as electronic blips on a computer screen that can be bought or sold in a few fractions of a second. You might want to consider the feasibility of such a plan for your own family.

I've been working eighteen hours a day for the past few weeks in preparation of a new business one of my companies is launching. Given the credit crisis, it seemed a perfect opportunity to expand into some areas where competitors have been hit hard, but that required moving very fast and committing quite a bit of time to the project. Unfortunately, my primary job and absolute favorite thing to do - reading, analyzing, and making decisions about which investments to acquire or sell based upon annual reports and other research - has been piling up at headquarters. I've got a General Mills report on my desk in front of me now and I've got to say that I'm seriously considering trading what little sleep I would have otherwise gotten tonight to fit it into the schedule.

It wasn't that long ago that I wrote about how you can utilize the Berkshire Hathaway model in your own life. This economic model, based upon not only intelligently investing in securities but creating or acquiring cash generators such as private businesses, is a great solution to the problems that are plaguing Wall Street because you can focus on bringing in more funds to take advantage of falling stock prices. In our case, some of the bank and food stocks we were purchasing during the fallout a few months ago have been up as much as 56% in only a few short months. That comes from being able to take advantage of opportunities when they arise. As for our holdings that are down, we are systematically adding to our positions and reinvesting many of our dividends.

One thing that I can't help thinking is that those companies that were disciplined enough to protect themselves from the current mess and who have shareholder friendly managements that repurchase stock are going to probably make their shareholders very, very wealthy over the next ten years. Some great companies are priced at levels that we haven't seen in a decade.

If you’ve spent a lot of time on the site, you see that we provide resources on some pretty advanced topics – financial statement analysis, financial ratios, capital gains tax strategies, and more. Our focus, however, is on the new investor. Sometimes I’ll get emails from readers that ask some pretty basic and straightforward questions. One of the perennial favorites is, “How do I actually make money from a stock?” If you’ve ever wondered how the mechanics actually work, print this article, grab a hot cup of coffee, get comfortable in your favorite reading chair, and prepare to learn the basics of common stock. Continue reading ...

For those who have ever wondered about the differences, pros, and cons of investing in life insurance, we offer this brief and informative introduction to help you get some answers. The body of the article also contains a link to a comprehensive guide that might help you determine whether investing in life insurance is something that is appropriate for you and your family.

Great investor Philip Fisher made famous an approach known as the “scuttlebutt”. He said that there was a lot of knowledge about a company that could give insight into its investment merits if the investor could merely find it out and synthesize it into a somewhat accurate and cohesive view of an entire corporation. Peter Lynch, arguably the greatest mutual fund manager in history, engaged in this when he was jumping on beds at La Quinta and driving around town checking out a new food chain known as Dunkin’ Donuts.

This past week, my business partner and I drove quite a distance to checkout some companies that had finally hit our “severely undervalued” targets after years and years of watching the stocks. One of the firms happened to be a confectioner. We spent the day speaking with a small business owner who had extensive experience with this particular company and bought more than $500 worth of products to take back to headquarters, have analyzed, and compare to the other manufacturers in the industry.

Continue Reading about the Scuttlebutt Investing Method ...

There is a special kind of financial instrument on Wall Street known as a repurchase agreement or repo. These allow banks, money market funds, mutual funds, and other institutions to earn rates of return on excess cash through a special kind of contract that you might not have ever heard about that requires one party to buy back something it's already sold. To get information on how these repurchase agreements work, take a few seconds to become more knowledgeable by glancing over this brief article.