When you sell your primary residence in the USA you are able to exclude $250,000 in capital gains (or $500,000 if you file jointly). The primary test of whether it is your primary residence is if you lived there 2 of the last 5 years (see more details from the IRS). You can’t repeat this exemption for 2 years (I believe).
It doesn’t matter if you buy another house or not, that exclusion of up to $250,000 is all that can be excluded (you must pay tax on anything above that amount – taxed at capital gains rates for long term gains).
For investment property you can do 1031 exchanges which defers capital gains taxes. Otherwise capital gains will be taxed as you would expect (as capital gains).
When you inherit a house the tax basis will be “stepped up” to the current market rate. So if you then sell your basis isn’t what the owner paid for it, but what it was worth when it was given to you.
The 10 publicly traded companies with the largest market capitalizations. Since October of last year the top 20 list has seen quite a bit of profit for stockholders (mainly in Apple and Chinese companies).
|4||Exxon Mobil||USA||$352 billion|
|5||Berkshire Hathaway||USA||$346 billion|
|6||China Mobile||China||$340 billion*|
|7||Industrial & Commercial Bank of China||China||$306 billion**|
|8||Wells Fargo||USA||$292 billion|
|10||Johnson & Johnson||USA||$273 billion|
Apple’s market cap is up $115 billion since the last list was created in October of 2014. That increase is more than 50% of the value of the 14th most valuable company in the world (in October 2014).
China Mobile increased $100 billion and moved into 6th place. Industrial and Commercial Bank of China (ICBC) increased $78 billion to move into 7th place.
Exxon Mobil lost over $50 billion (oil prices collapsed as OPEC decided to stop attempting to hold back supply in order to maximize the price of oil). Alibaba (the only non-USA company in the last list) and Walmart dropped out of the top 10.
The total value of the top 20 increased from $5.722 trillion to $6.046 trillion, an increase of $324 billion. Several companies have been replaced in the new top 20 list.
The next ten most valuable companies:
|11||JPMorgan Chase||USA||$250 billion|
|12||China Construction Bank||China||$250 billion**|
|13||Novartis (NVS)||Switzerland||$246 billion|
|14||Petro China||China||$237 billion|
|19||Hoffmann-La Roche (ROG.VX)||Switzerland||$231 billion|
Market capitalization shown are of the close of business last Friday, as shown on Yahoo Finance.
The current top 10 includes 8 USA companies and 2 Chinese companies. The 11th to 20th most valuable companies includes 4 Chinese companies, 3 Swiss companies and 3 USA companies. Facebook (after increasing $21 billion), China Construction Bank (increasing $68 billion – it is hard for me to be sure what the value is, I am not sure I am reading the statements correctly but this is my best guess) and Tencent moved into the top 20; which dropped Procter & Gamble, Royal Dutch Shell and Chevron from the top 20.
A few other companies of interest (based on their market capitalization):
I believe a huge amount of money will be made due to self driving cars. Figuring out who will make that money is not easy.
The value of being able to use the time you are moving to your destination instead of concentrating on driving is huge. And the reduction in deaths, serious injuries, injuries, damages, frustration and waste of time caused by accidents will be a huge benefit to society. Many people attempting to focus on phone calls or whatever else instead of driving create lots of that damage due to accidents.
There will also be big restructuring in how the economy works. Car sharing (such as Zipcar) will greatly increase I think and Uber and Lyft will likely be big players in a move to driverless cars. It sure seems like fewer cars will be needed. Space wasted on parking cars should be greatly reduced. Deliveries will likely see big changes. The impact on the economy will be huge. Even the health care system may see billions in savings.
Toyota is an amazingly well managed company. They should capitalize on any important shifts in the auto industry. But will they do so for driverless cars? Will there be a decrease in demand for cars so large that Toyota losses more than it wins? My guess is the decrease in demand globally will not be huge for the next 10 years (of course I could be wrong). My guess is Toyota will do well, but may be caught a bit behind, but then will come back strongly.
For those that don’t think Toyota can innovate, remember the Prius. Also they have been big investors in robots. That they haven’t turned robots into a big business yet though may be a sign of weakness (related to turning innovation into business profits).
I think Toyota will do the best of the large traditional car companies at taking advantage of this opportunity. Honda would be my second pick.
Google has been at the forefront of the driverless car efforts; I first wrote about self driving cars in 2010 about Google’s efforts (on my Curious Cat Engineering Blog). They are willing to take big gambles. They have a very good engineering culture. They are very profitable. They haven’t done much at creating profitable businesses outside of search and ads though. Still I think they may be huge winners in this area. I would guess by licensing technology to others, but things are involving quickly we will see how it plays out.
Tesla has a great engineering culture with a priority given on innovation and customer focus. They are in the car industry though I don’t lump them with the “traditional car companies.” I give weight to the value Elon Musk will bring them. They have big potential to be one of the big winners in a self driving car future. But they have yet to create much profit. Will they be able to turn promising engineering and leadership into a huge business? I think the odds are good but that is still a difficult challenge. Others have much more money than Tesla. Apple has so much money they could even buy Tesla easily.
Elon Musk recently spoke about the current state and near term future:
Musk also stressed that the new Tesla autopilot system, which uses radar, ultrasonic sensing and cameras to create a sort of super-smart cruise control, obstacle avoidance and lane-keeping system, is not the same as a self-driving car.
Apple seems like a long shot to me. It doesn’t seem like the type of business Apple has gone into in the past. The argument for doing so is the huge pile of cash they have (over $170 billion which is an absolutely huge number – it is also a bit fake in that they have started borrowing tens of billions instead of spending that cash). The moves with the cash are based on 2 circumstances. First they would have to pay large amounts of taxes to use that cash in the USA (taxes are delayed as long as they hold it overseas). And second interest rates are so low, borrowing money hardly costs them anything.
I continue to believe the choices for investors are much more challenging than they normally are, as I have written about several times. Though maybe soon, this will just be the new normal (in which case investors won’t have the fairly easy choices they have had for much of the last 100 years).
In previous posts I have discussed the value of real estate investments in this investing climate. Real estate is one way to cope with the challenges of extremely low yields today.
There are many advantages to city property, in the right city. When I was looking at my first house I looked for something that would be easy to rent out. The most important factor to minimize vacancy is high demand. If there is high demand, the worst you should face is the need to lower your asking price.
An additional consideration in buying condos (your only option in large urban centers like New York City, seen in my photo of the Empire State Building) are condo fees. Fees and taxes can make positive cash flow a challenge and they continue when the property is vacant thus creating more risk for the investor. Of course, in popular markets and good times rents are very attractive for owners and price increases can make them great investments.
During downturns rental property that is not in high demand can be vacant no matter the price. And those properties with some, but not overwhelming, demand will face the need for dramatic rent decreases to minimize vacancy (and large declines if you need to sell). My purchase was 3 blocks from a metro stop (close in to Washington DC). All housing near metro stops in DC have high demand and that close in to the city has even higher demand.
In over 10 years I have had maybe 2 months of vacancy – the first year I messed up; I was new to trying to rent places out and believed people were going to sign the lease because they said they would but then they backed out. I think I may have had 1 more month sometime, but maybe not, I can’t really remember.
I have considered tourist property but have decided against it so far. The rental yield are higher but you have higher vacancy rates, which is manageable, but also much more property management issues to deal with. In order to cope with that you need to hire a property manager, for example, Summit Vacations Property Management Company, very carefully. You need to carefully check their experience, reliability and competence.
And even for residential real estate the hassles of dealing with the property management yourself may lead investors to use property managers. This cuts into the advantages of direct real estate investments and so if you are going to use property managers then looking at REITs has to be considered. I believe if you are sensible direct real estate investments would normally return more but the risks are significantly higher and the hassle is somewhat to significantly higher. Likely the decision on whether to use direct real estate investing is more about personal preference than just a decision on which option would be a better investment.
I was recently interviewed on equities.com, read the full interview – Financial Blogger Profile: John Hunter. Some quotes from the interview:
John Hunter: I look for good individual investments, but I also weigh my guesses about long term macroeconomic conditions in making investment commitments. I think there is much more risk to the drastic measures central banks have been making for the past few years than the market is factoring in. I think the poor job regulating risk in the financial system is also very risky at the macroeconomic level.
I don’t have any real idea of what the chance of massive economic failure is, but I am much more worried today than I have been. Pretty much, my worry has remained the same over the last few years. We did avoid an immediate meltdown, though we still had plenty of economic pain. Yet, in my opinion, the risk has remained very high for the last few years, but people seem to think central banks can continue this extraordinary behavior without consequences; I see a great deal of risk in the economy.
Three macro-economic factors make healthcare an appealing investment. First, the aging population should provide a booming market. Second, the huge increase in rich people globally that can afford very expensive medicine again provides an ever-growing market. Third, the broken healthcare system in the USA results in exceedingly high-priced medical care in a very large and rich market.
I also close out the interview with some tips I have shared on this blog over the years
John Hunter: I can’t pick one, but I can pick a few short pieces of advice:
- Save 15%, or more, of your income and invest it wisely. If you want to buy more, then earn more, or save extra until you can pay for it with the extra savings.
- Minimize costs on investments, use Vanguard or similar low fee funds. Buying individual stocks reduces even the costs of Vanguard. There are tradeoffs to diversity of your portfolio when buying individual stocks.
- Pay attention to the overall risk of the portfolio, and even beyond that, your entire financial picture. For example, in the USA we have extra healthcare expense risk that is outside our portfolio risk, but is part of our entire financial picture. Building your portfolio with extra-portfolio risks in mind is wise. Don’t get fooled into thinking about the risks of investments taken individually, even though that is what you will continually be bombarded with.
I think those that find this blog worthwhile will also enjoy the interview so I hope you read the full interview.
One thing for investors consulting historical data to remember is we may have had fundamental changes in stock valuations over the decades (and I suspect they have). Just to over simplify the idea if lets say the market valued the average stock at a PE of 11 and everyone found stocks a wonderful investment. And so more and more people buy stocks and with everyone finding stocks wonderful they keep buying and after awhile the market is valuing the average stock at a PE of 14.
Within the market there is tons of variation those things of course are not nearly that simple, but the idea I think holds. Well if you look back at historical data the returns will include the adjustment of going from a PE of 11 to a PE of 14. Now maybe the new few decades would adjust from PE of 14 to PE of 17 but maybe not. At some point that fundamental re-adjustment will stop.
And therefore future returns would be expected to be lower than historically due to this one factor. Now maybe other factors will increase returns to compensate but if not the historical returns may well provide an overly optimistic view.
And if there is a short term bubble that lets say pushes the PR to 16 while the “fair” long term value is 14, then there will be a negative impact on the returns going forward bringing the PE from 16 to 14. That isn’t necessarily a drop (though it could be) in stock prices, it could just be very slow increases as earning growth slowly pushes PE back to 14.
Another thing to consider is another long term macro-economic factor may also be giving long term historical returns an extra boost. The type of economic growth from the end of World War I to 1973 (just to pick a specific time, there was a big economic slowdown after OPEC drastically increased the price of oil). While that period includes the great depression and World War II, which massively distorts figures, from the end of WW I through the 1960s Europe and the USA went through an amazing amount of economic growth.
This richest 1% continue to take advantage of economic conditions to amass more and more wealth at an astonishing rate. These conditions are perpetuated significantly by corrupt politicians that have been paid lots of cash by the rich to carry out their wishes.
One thing people in rich countries forget is how many of them are in the 1% globally. The 1% isn’t just Bill Gates and Warren Buffett. 1% of the world’s population is about 72 million people (about 47 million adults). Owning $1 million in assets puts you in the top .7% of wealthy adults (Global Wealth Report 2013’ by Credit Suisse). That report has a cutoff of US $798,000 to make the global 1%. They sensibly only count adults in the population so wealth of $798,000 puts you in the top 1% for all adults.
$100,000 puts you in the top 9% of wealthiest people on earth. Even $10,000 in net wealth puts you in the top 30% of wealthiest people. So while you think about how unfair it is that the system is rigged to support the top .01% of wealthy people also remember it is rigged to support more than 50% of the people reading this blog (the global 1%).
I do agree we should move away from electing corrupt politicians (which is the vast majority of them in DC today) and allowing them to continue perverting the economic system to favor those giving them lots of cash. Those perversions go far beyond the most obnoxious favoring of too-big-to-fail banking executives and in many ways extend to policies the USA forces on vassal states (UK, Canada, Australia, France, Germany, Japan…) (such as those favoring the copyright cartel, etc.).
Those actions to favor the very richest by the USA government (including significantly in the foreign policy – largely economic policy – those large donor demand for their cash) benefit the global 1% that are located in the USA. This corruption sadly overlays some very good economic foundations in the USA that allowed it to build on the advantages after World War II and become the economic power it is. The corrupt political system aids the richest but also damages the USA economy. Likely it damages other economies more and so even this ends up benefiting the 38% of the global .7% that live in the USA. But we would be better off if the corrupt political practices could be reduced and the economy could power economic gains to the entire economy not siphon off so many of those benefits to those coopting the political process.
The USA is home to 38% of top .7% globally (over $1,000,000 in net assets).
|country||% of top .7% richest||% of global population|
|other interesting countries|
Oxfam published a report on these problems that has some very good information: Political capture and economic inequality
The Center for Retirement Research at Boston College is a tremendous resource for those planning for, or in, retirement. The center created the National Retirement Risk Index (NRRI) to capture a macroeconomic level measure of how those in the USA are progressing toward retirement.
Based on the Federal Reserve’s 2013 Survey of Consumer Finances the Center updated the NRRI results (the entire article is a very good read).
The lower the risk number in the chart the better, so things have not been going well since the 1990s for those in the USA saving for retirement.
As the report discusses their are significant issues with retirement planning that defy easy prediction; this makes things even more challenging for those saving for retirement. The report discusses the difficulty placed on retirees by the Fed’s extremely low interest rate policy (a policy that provides billions each year to too-big-too-fail banks – hardly the reward that should be provided for bringing the world to economic calamity but never-the-less that transfer of wealth from retirees to too-big-to-fail banks is the policy the Fed has chosen).
That exacerbates the problems of too little savings during the working career for those in the USA. The continued evidence is that those in the USA continue to spend too much today and save too little. Also you have to expect the Fed and politicians will continue to make policy that favors their friends at too-big-fail banks and hedge funds and the like. You can’t expect them to behave differently than they have been the last 50 years. That means the likely actions by the government to take from median income people to aid the richest 1% (such as bailing out the bankers with super low interest rate policies and continue to subsidize losses and privatize their winning bets) will continue. You need to have extra savings to support those policies. Of course we could change to do things differently but there is no realistic evidence of any move to do so. Retirement planning needs to be based on evidence, not hopes about how things should be.
Related: How Much of Current Income to Save for Retirement – Save What You Can, Increase Savings as You Can Do So – Don’t Expect to Spend Over 4% of Your Retirement Investment Assets Annually – Retirement Planning: Looking at Assets (2012) – How Much Will I Need to Save for Retirement? (2009)
The 11 stocks for 10 years portfolio continues to do very well. It consists of stocks I would be comfortable putting away for 10 years. I look for companies with a history of large positive cash flow, that seemed likely to continue that trend.
In fact it is doing so well I am a bit worried about the valuation of some of the stocks. Or, in the case of Apple, I was heavily weighted in it and it has risen so much that, combining those two factors, it is now 20% of the portfolio. That seems excessive, so while I still like Apple – at these prices, I will sell a bit of that position.
Since April of 2005 the portfolio Marketocracy calculated annualized rate or return is 8.75% (the S&P 500 annualized return for the period is 8.55%). Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund. Without that fee the return beats the S&P 500 annual return by about 220 basis points annually (10.75% to 7.55%). I also often have a bit held in cash, 5% now, for example which lowers the return.
Since the last update I have added to the Abbvie position (part of the former Abbot which was split into two companies in 2013) and sold off Tesco. I will sell TDF from the fund (I include it in the table below, since I haven’t sold it all yet, I am waiting to get a bit better price).
The current stocks, in order of return:
|Stock||Current Return||% of sleep well portfolio now||% of the portfolio if I were buying today|
|Amazon – AMZN||556%||8%||8%|
|Google – GOOG||*||18%||15%|
|Apple – AAPL||131%||20%||16%|
|Danaher – DHR||126%||9%||9%|
|Templeton Dragon Fund – TDF||120%||2%||0%|
|PetroChina – PTR||88%||4%||4%|
|Intel – INTC||78%||8%||8%|
|Toyota – TM||65%||8%||12%|
|Abbvie – ABBV||43%||5%||7%|
|Cisco – CSCO||31%||4%||4%|
|Templeton Emerging Market Fund – EMF||29%***||5%||7%|
|Pfizer – PFE||25%||5%||5%|
The current marketocracy results can be seen on the Sleep Well marketocracy portfolio page.
I make some adjustments to the stock holdings over time (selling of buying a bit of the stocks depending on large price movements – this rebalances and also lets me sell a bit if I think things are getting highly priced. So I have sold some Amazon and Google as they have increased greatly. These purchases and sales are fairly small (resulting in a annual turnover rate under 2%).
I have been giving loans through Kiva for many years now. I enjoy the opportunity to help out entrepreneurs around the world. And the web site is well done to give you a psychological boost – photos of the entrepreneurs, stories on what they will do, etc..
I often have difficulty finding real entrepreneurs (many of the loans are for things like education, fixing up their house, buying motorcycle/car, etc. that may well be very important but are not really related to entrepreneurship in most cases). That is fine, in this session I had 3 loans to entrepreneurs and 2 loans for solar energy solutions for people’s homes. Improved energy, cooking or water access are some things I am happy to lend to that are not entrepreneur related. Though usually the water loans are – to an entrepreneur that will sell clean water to a neighborhood and sometimes the solar energy ones are, though not in this case.
Kelly in Medellin, Columbia is starting a shoe business.
The write-ups on Kiva are often fairly well done; targeting those interested in making loans. Kelly’s:
She works as a saleswoman in different shoe stores in the municipality of Medellin.
She wants to start her own business making and selling shoes of all styles. She wants to start this activity because she has the desire to generate the resources she needs to support herself and her education, in addition to helping with expenses at home.
She is a young, very disciplined entrepreneur. She is requesting a loan to buy a wide range of materials such as leather, soles, adhesives, and fabrics. With these elements, she can start this business and improve her quality of life.
I often screen the data on delinquencies and defaults for the partner bank in making loan decisions. It isn’t because I am worried about losing my loan (I just re-lend what I get paid back). But if I lend to organizations that are having more failures I increase their supply of money to make loans which don’t seem to be working out for borrowers as well as another lender). I want my money going to help people, not get people into a mess.