Transcript
Paul Winkler: Welcome to the Investor Coaching Show, a podcast to help you get an insider’s view of the financial world and escape common investment traps. We look at the financial news of the day and help you make sense of it.
People Will Make Predictions
You know, that to me is, well, you know, if you look at how much of, of our GDP is driven by exports and imports and those types of things, you know, there’s certain countries now from an investing standpoint, this does have, I think there’s a serious note to be had here. You know, what, who will predict these types of things? You know, this is an example of something that could be a market driver for something, some companies, and you have to predict that they’re going to have a ship that goes cargo ship. That kind of goes maybe 30 degrees diagonal and shuts off all shipping, where they have to send ships around. And who’s affected by that. Well, only companies that actually ship things.
Right. Which, which leads me to one thing that I thought was I was looking at before the show started and there was an article and it was entitled if you’re expecting traditional value stocks to outperform growth stocks, you’re going to wait forever, says this fund manager. And you know, of course, bigger companies grow up more growth-oriented companies, you know, is what he’s talking about here are going to be the outperformers going forward. So I sometimes I’ll take articles like this and I’ll cut them out and I’ll keep them in and just hang on to them for a little bit and just take a look at ’em at what ends up happening, you know, just because it’s kind of fun to, to just see, you know, where things actually land.
Well, if you look at what this person talking about that the rate of return for value stocks was going to be outperformed by growth. You’re going to have to wait forever, or you’re just going to have to wait, you know, two months, because over the last two months, since that article came out, you have small value stocks up 16% and small growth stocks up 9%. If you look at large value stocks and that may be what this person is actually talking about more is large value stocks, more than anything but large growth stocks are up 3.7%. Okay. Well, you know, you look at that go, well, it’s going to, you have to wait forever for valued to outperform.
What was the return of value over that same point in time, three times as much over three times as high of a return over that series over that period of time? You know, so it is a futile thing to try to figure out what’s going to happen next, where things are going to go next. And some of it’s driven by these types of things. You know, for example, you’ll take a smaller company that may not do as much shipping overseas. They may not have as much international travel. So they wouldn’t be affected by this kind of not going to seeing value versus growth stocks. That was the difference in, you know, the Suez Canal was the difference. We knew value versus growth, but it’s just an example of many, many, many that can drive returns.
And you know, it’s just funny to me when I look at the data on these things and it’s okay, so you’re going to have to wait forever and you have all these different market segments, you know, like for example, you know, you’ll, you’re going to have, you know, international as well. You know, international stocks are up 1.5, 2% over that same period of time. You know, from that point at the time that article came out till yesterday’s close now, w what are international value stocks up well about four? Well, actually make that six times the return. So, you know, you’ll look at that and go, Whoa, that’s a pretty big difference in return.
And this person would be somebody that would be writing for a major financial publication, managing a lot of money, basically saying, this is what you can expect in the future. Let me tell you what’s going to happen. And it’s really pertinent because this is what people do. And this is what passes as investment advice. What’s going to happen next. I mean, where things are going to go, Hey, how are, how are tax increases going to affect stock markets? Well, the reality of it is tax increases. Matter of fact, one of the questions that came in this week, and thank you by the way, folks that are sending questions, this is really good stuff.
Listener’s Question
And one of the questions that came in this week was Ted asked this, who says, well, I realized that no one could provide a definitive answer on this question, but in your opinion, how do you envision the current administration negatively impacting the markets with large tax increases now? So it’s automatically assuming that it’s going to negatively impact the stock market. Number one is one of the things I want to point out here. So tax increases and why would that be?
Why would somebody come to that conclusion? Well, for pretty good well-founded reasons. I mean, you know, you think about it, you know, why would tax increases possibly reduce the value of socks? Well, because one of the costs of doing business is taxes. You know? So when I run a company just to L let’s run through this, I sell something. I have sales. I have to when get to my earnings. Cause that’s what I’m buying. When I buy stocks, right? I’m buying the rights to the earnings of the company. What do I have to subtract from my sales in order to get down to earnings? One would be expenses operating expenses. Yeah. Which would be include what? Salaries, salary, shortages, and operating expenses, light bill, telephone, electricity, and then cost of goods sold transportation costs.
Well, yeah, getting caught in a Suez canal. So instead of having be able to forecast that was your expected expenses. Now it increases because yeah. And then of course, don’t forget Uncle Sam. Okay. So that would be taxes.
Now, you know, you also have cost of goods and stuff like that, like, you know, and, and those types of things, but yeah, let’s get down to taxes. So we have to take our sales. And part of what we have to remove from that is taxes, which would decrease earnings purportedly right now, a lot of that depends on what, if you are a target of those taxes, not all companies are going to have to pay taxes if Biden gets his way, because there are certain companies that, you know, they’re doing things that, you know, maybe they’re operating overseas. Maybe they’re operating companies where they’re not necessarily dealing with the repatriated taxes, you know, where the money coming back to the United States is taxed.
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Taxes and Investment Performance
It may be that, you know, they’re not necessarily dealing with the corporate taxes that you might be hearing about that they’re not having to pay those things. But now one of the things that we look at are taxes, of course, but there are so many other factors that drive investment performance that have nothing to do with it. You know, for example, you might have technology, you might have, you know, some, some companies may be benefiting from technology changes more than others. You might have maybe differences in taxation, in some areas taxes may go up, but other areas they may go down, you know, like for example, tariffs may be, as I’m changing in one place versus another, you may have companies that have been dealing with COVID and they were hit with it in a terrible, terrible way last year.
And in the future, they’re going to be coming out of it and it’d be fine, you know, and they’re, they’re actually going to increase their, their returns and their earnings in the future. And some are given incentives. Sure, absolutely. Yeah. So you’re going to have some that are going to get get incentives from the government to, you know, boost their performance in the future.
Absolutely. No question. So, you know, another thing that can happen is, well, you’re looking at, okay, so what else could happen? Oh, guess what investors already sorta knew what Biden was going to do. Right. Cause he said, telegraphed it and literally talked about it, the entire campaign, we’re going to increase taxes. We’re going to get people to pay their fair share right there. And a lot of this information is already in stock prices. So, you know, you would have to have known something that nobody else knows, right.
He did say that he is going to increase corporate taxes incessantly. So, you know, and the other thing you can do is look at this, look at history. Here’s another thing is kind of interesting. If you look at history, if you, there there’s an interesting article in the Atlantic. I was going through the last tax increases by the president and they looked at the tax increases in a really kind of an ingenious way, looked at it as a percentage of GDP. You know, so just not what the overall percentage of the increase was, but what was the percentage as a percentage of GDP or gross domestic product or what the country puts out now, the largest tax increase, we have to go back to 1951.
A Bit of Tax History
And what happened is, well, let me do this, let me, let me go to more, a smaller tax increases in and do it the other direction, because it’s more fun that way. So if we look at, and I’m just going to start with the 1993 tax increase, the Clinton tax increase that occurred in 1993. Now you remember when Reagan was president, we dropped all the tax rates down to 15 and 28. And, you know, the 1980s was a pretty doggone good period in time in history. Right. But you know, if you look at the 1990s, it wasn’t terrible either. And what was happening during the 1990s, that was kind of different?
Well, I remember I got my first laptop computer in 1989 and we were actually sending applications for life insurance over the internet in 1989, 1990. Oh, really? Yeah. So it goes way back in, okay. And computer technology was making us far more efficient and we were taking those efficiencies and we’re passing them on, in cost savings to clients. So 1993, a claim comes in and there is a rise in taxes that occurs. And, you know, you had the Bush tax increase in front of that, but, you know, so you also had 1993 and you look at the year 1993, well, what happened?
Well, you had over the next seven years, the average annual rate of return of the S&P 500 was 21.5% a year per year, 21.7% return per year, small company stocks about 17% per year over the next, over the next seven-year period. If we look at the tax increases that occurred, and this next biggest one coming in here is 1966, there was a tax increase. And you did have a return that was negative for the market in 1966. But how much of that could have been attributed to the Vietnam war? You know, if you look at that, we may have had something attributed to that.
If you look at the tax increases that happened, there were some tax increases in 1982. And, and you look at that and go, well, what happened then? Well, we had a 21% return in the S&P 530% for small companies. What happened? Well, you had the S&P went up about 31% small company. Stocks went up 39%. And in the picture here, tax increases don’t necessarily mean that we’re going to have stock going down in value.
The new act, 1951, what happened 24% return for the S&P 14% for small company. And the next year you said, well, what did it just drop the next year? No, actually up another 18% up 10% for small companies again. So you look at both of those. You can go, Whoa, wait a minute. Tax increases don’t necessarily mean what we might think that they would mean. And why, because there are so many other factors that drive stock prices. And it’s never, you can never forget that when we have these types of tax increases, they don’t come out of the blue. It’s not a complete surprise. You know, that information is talked about, talked about incessantly, people, sit out there and go, well, what do you think might happen?
There’s all kinds of Monday morning, armchair quarterbacking on what may happen, where the tax taxes, what may pass, what may not pass, right? Yeah. It’s not, it doesn’t take effect immediately.
That is another part of it is it may not take place immediately. Therefore companies have time to adapt to them and they can go and change what they’re doing.
What Are Companies Doing Now?
Yeah. Yeah. And, and if we look at, if we look at what companies are doing now, a lot of them are operating over. There was that article. I talked about a couple of weeks ago where companies were operating out of Ireland and the reason being that they had lower taxes for operating over there. So you can have benefits of doing that, but, you know, it’s, it’s those types of questions, Ted. I love it. Great question. Thank you so much. And you know, what happens with arch tax increases the very largest one? I think we can look at the very largest ones in all of history. And I went through, you know, about almost 10 of them actually ended up in stock market increases most of the time. So using this type of information to try to predict what might happen in the future is a few it’s futile.
And if you think about it, if we have tax increases over here in America, America is not the only place I’m invested. I have a lot of my assets over in other countries around the world. And if let’s say we have tax increases in America, that makes our companies less competitive, then maybe it just makes some of the other countries around the world and their companies more competitive. And it may be a really good reason to make sure that you’re diversified in those other folks.
This is Paul Winkler, host of The Investor Coaching Show podcast, a podcast to help you get an insider’s view of the financial world and escape common investment traps. If you have any questions about today’s episode or how our approach can help you, we’d love to talk to you. You can schedule a call by going to Paulwinkler.com/call. Or you can simply click on the link in the show notes until next time. I’m Paul Winkler reminding you that I believe that more educated investors are more confident investors and confident investors are more successful. Investors. Have a great one.
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