art and investments

Ethan and Sharon are taking an art history class this semester. The first session was this morning. When Blair and I picked them up after class, they told us about a conversation. The professor was talking about art as an investment, and said that it’s like stocks, bonds or any other investment. Ethan said something along the lines of “not really…” And they were off to the races.

Ethan is absolutely right. As investments go, there absolutely is a fundamental difference between art (or other collectibles) and stocks, bonds or other financial instruments. But I suspect that he didn’t do a good job of explaining it; he and Sharon reported that he didn’t convince anyone. With that in mind, I’m going to take a shot at the explanation. Of course, brevity will require some oversimplification.

Financial instruments such as stocks and bonds produce income. Or at least that’s the hope. Bonds represent debt, and the issuer is obligated to pay the borrowed money (with interest). A share in common stock represents an ownership interest in a company and, with it, a share of that company’s future income. The value of a stock or a bond is, essentially the present value of future cash flows. It gets complicated because there can be considerable uncertainty around those future cash flows. And a hundred different investors may have a hundred different assessments of the value. And those assessments may be constantly changing. But stocks and bonds have value because, fundamentally, they are expected to produce income.

A painting doesn’t produce income. Its only value is in people wanting to own it for its sake. I suppose there may be people who buy art to rent to others, or to display for a paying audience. But that’s not what the professor was referring to.

To put it more simply, if you buy art to collect with no intention of ever selling it, you will never make any money from it. If you buy a share of stock with no intention of ever selling it, you still expect to get cash flows from the dividends it will pay.

tax return blues

This year, for the first time, Ethan had to file a tax return. No biggie. The accountant who does Blair's and my return was only too happy to add on Ethan's return. For a small fee, of course. It was a simple return which he filed in late March, and Ethan had refunds due to him from both the IRS and New York State.

The IRS duly sent him his refund. But he still hasn't gotten his state refund. When he looked online, he learned that the state has some questions about his return, and has sent him a letter indicating as much. We can't seem to get any more information from the state's website, which is very user unfriendly.

So we just have to wait.

Meanwhile, we can agonize over the pending questions. Like these folks:

question of the day: how did bernie do it?

Speaking of Bernie Madoff, there's something I don't get. What kind of reports was he providing to his clients? Based on my limited experience with money managers, I just don't see how Madoff could have kept his scam going for any length of time.

Before she met me, Blair entrusted money with an investment manager who opened a brokerage account and traded on Blair's behalf. As with any brokerage account, we get trade confirmations, monthly statements and year-end summaries (which include tax documents). Years ago I used to help out my father, who was an accountant, with the paperwork for some of his clients. I recall a couple who similarly had money managed by professionals. They also received all the usual paperwork from their money managers.

In these cases, it would be impossible for the money managers to falsify returns. If an account went down, you can't simply say it went up; the trail of statements and confirmations wouldn't support it. You just couldn't falsify the returns with any kind of expectation that none of your clients would look at the ticker symbols and history and figure out that something is wrong.

So how did Bernie do it?

capital gains tax: a modest proposal

I have a little idea here. I make no claim that I am the first to suggest this -- or at least this general idea. I haven't seen it suggested anywhere else, but I haven't actively searched.

Anyway, I see people argue that capital gains should be taxed as regular income rather than at lower capital gains rates. As background, capital gains is the money you made on investments you held for more than a year. If I buy stock for $1000 and sell it for $1,500, I've made a $500 profit, and have to pay taxes on it. If I held the stock for less than a year, the that profit is taxed as regular income. So if I'm in a 22% marginal bracket, I have to pay $500 × 22% = $110 extra tax on it. But if I held the stock for more than a year, the profit is a capital gain, which may be taxed at 15% -- in this example, that would be $75 in tax.

At first glance, there's a certain intuitive appeal to taxing capital gains as regular income. It's income, so why treat it differently? But that treatment completely ignores the effects of inflation. Consider a world with a constant 3% inflation. Because of inflation my actual gain is less than the difference between what I paid for an investment and what I sold it for. If I buy stock for $1000 and sell it fifteen years later for $1500, I've actually lost money. To break even (after inflation), I'd have to sell the stock for $1558. And yet, despite breaking even I have to pay taxes.

In fairness, I should acknowledge that I have no idea if inflation is the reason for capital gains being taxed at lower rates than regular income. If so, what we have is a piss-poor arrangement. The effect of inflation can be very different in times of high inflation than in low. And the effect can be very different for a security held for just over a year than for a security held for decades.

Which brings me to my idea. The tax code should be changed to include adjustments for inflation when securities are held for more than a year. This could be accomplished by having an index with one value for each year -- to reflect inflation. If you buy a security in year X and sell it in year Y, the cost basis would be multiplied by the ratio of the index in year X to the index in year Y. That way, you would only be taxed on the gain after accounting for inflation.

I realize that the above is kind of a broad-stroke prescription, and a lot of details would have to be filled in. But it's a start. or at least it would be if the congresscritters would see it.

amex follies

Blogger's Note: This is not meant to be financial advice and it should not be interpreted as such. I also don't swear that I am getting all the details right. I am writing this to bitch about something that annoyed me on a call with American Express. Do not use this post as the basis for your financial decisions. Doing so could lead to your doom! Or worse!!!

I was on the phone with American Express today. I had a question about an account. And the customer service rep did a fine job answering my question. Well, maybe not a fine job. Adequate is more accurate.

Whatever.

But then he went into a sales pitch. He wanted me to convert my "Blue Cash" card to a "Blue Everyday Cash" (or somesuch) account.

Like so many other credit cards, the Blue Cash card gives cash rebates. I don't remember all the specifics -- maybe I should -- but I do recall that it gives 5% back on some purchases: supermarkets, drugstores and gas stations, as I recall. The catch is that those high levels of rebates only kick in after I've met some minimum spend amount for the year. Until I reach that spend, the rebate rate is much lower. The Blue Everyday Cash card (or whatever it's called) has lower cash back rate, but they don't rely on my meeting a minimum spend level. So, if I switch, I'd only get 3% back on supermarket purchases. But I'd get it on all supermarket purchases.

So, of course, the phone rep emphasized the cash back, listing the different categories and rates. He elided the fact that those rebate levels are lower than what I get with the current card. And when I pointed out that fact, he pivoted to the fact that the new card's high rebate levels start at dollar one. "So it's win/win" he told me.

That's where I got annoyed. It's not win/win. And when I reminded him of that he confidently played down the effect of the rate being lower. Which really annoyed me.

Look, I'm not saying that the new card would be worse for me. It may in fact be better. I spend less on the Amex Blue Cash card than I used to, and its advantage over the newer card kicks in at higher levels of spending. I really can't know right now which card is better for me. I don't know why Amex is pushing this switch. It may have to do with customer loyalty. Or maybe they did some analysis that tells them I'll get less rebate if I switch. They could simply force me into the new arrangement by telling me there are "changes" to the rebate program. I assume they'd be within their rights to do so. Hell, they can eliminate the rebates altogether. But I guess they're better off talking me into enthusiastically making the switch than forcing it on me.

But don't insult my intelligence by implying that there's no downside to switching when there clearly is.

I don't blame the phone rep for any of this. He probably had to try selling me on the new card. And he probably was following a script that told him how to counter any of my objections.

But I don't like being lied to, or feeling like I'm being manipulated.

I may end up making the switch. But I will also probably use the Amex card less.

three minor commerce-related events from my day

I have three commerce-related observations from today.

• I was at the annual LIDS luncheon. I have a job within LIDS to handle sales of marker stakes -- metal poles you stick in the ground to mark what plants are planted where. I bring boxes of stakes to the meetings and put them out on a table with a cash box. People who want the stakes are supposed to take what they want and leave the money in the box. It's an honor system. Today, after the meeting, I went to pack up and found that people had paid a total of $21.82. The stakes cost $1.50 each. Someone please explain.

• While Blair and I were at the LIDS luncheon, the kids walked to Qdoba for burritos. When they got there, they noticed that the cashier was a guy who was rude to them the last time they went. And that wasn't the first time he was rude to them. Today, when they saw him they turned around and left. They went to Five Guys for lunch instead. Good for them.

• On the way home we went to Costco. I had with me the certificate for our annual rebate. When I went to pay, I gave the cashier our Costco-branded credit card and the rebate certificate. He asked if I wanted to take the amount on the certificate out of the bill and pay with the rest with the credit card. I started to say yes, but then the light went on.
  
  "Can I get the rebate in cash and put the entire bill on the card?"
  "Sure"
  "Then let me do that."
  
  So I paid for everything with the credit card. Then he rescanned the card and rebate certificate. And then he gave me the rebate in cash. It doesn't really make much of a difference, but it does mean an extra $7 and change on my next rebate. Ka-ching!

bitcoin not for me

Warren Buffet, the brains behind Berkshire Hathaway, has said that he doesn't invest in companies if he doesn't understand what they do. There's a lot of sense in that.

Which is why I do not and will not invest in Bitcoin.

Other, mainstream investments I understand. Equities? Bonds? Mutual funds? Options and other derivatives? I understand the basic principles. And, on the macro level, I understand the risks and rewards. And what drives prices up and down.

But Seriously...I don't get it. As near as I can tell, there are two reasons to invest in it:

• To hide money, income or transactions.
• All those great stories of other people who got rich as Bitcoin traders. Berkshire Hathaway ain't gonna get me a lambo.

The first reason doesn't apply to me. No more elaboration needed. The second? Yeah...It's kind of tempting to try to make an easy fortune. But there's that risk/reward tradeoff. Too much is at stake. I suppose, in theory, I could invest a little bit of money in the things and forget about it. Then, some years later come back and see what happened. But I seem to recall reading about someone who lost a large bitcoin investment because he threw away the hard drive where he stored some critical information. Is it seriously the case that it's that easy to screw up and lose your investment? Like a winning lottery ticket? No...I can't believe that. I gotta figure there are some kind of services that will track your investments for you, through which you buy and sell. Aren't there? That guy who lost everything -- he was just being a dumbass. Right? Please tell me I'm right?

But, anyway, the fact that I have to seriously ask that question indicates how little I know about the Bitcoin Market. So, yeah, it's artificially-created currency, tracked on computers through some kind of (presumably) tamper-proof coding to ensure the accuracy of record-keeping.

Other than that?

Is "bitcoin" synonymous with "crypto-currency"? Or is it a subset?

Are there different types of bitcoins whose prices move differently? Or is it all the same?

What drives prices? Is it seriously just supply and demand? If so, are we talking tulip bulbs or something more real?

I hear talk of "mining" bitcoins, which I assume means there's some means of creating new ones. How in the hell does that work?

I suppose I can look it up on Wikipedia to get some answers. WHich should not be interpreted to mean that I'm actually going to invest in the things. Just that I'm curious about the mechanics.