We Need more Bucket Carriers and Pipeline Builders


We used to be a nation with an extraordinary number of pipeline builders.  People who saw a need and found a way to fill it.  People who would come over from Ireland, or England, or Germany, or Zimbabwe, or Ethiopia with just the clothes on their backs  and build a great company.  We had some people who literally swam out of Vietnam or Cuba for a chance at freedom and a better life.

Beyond the pipeline builders who built the great factories, retail chains, banks, and restaurants we also had a great number of bucket carriers.  People who worked hard for eight to ten hours per day for a chance at a better life for their children.  People who moved themselves from poverty to middle class life.  They were able to buy a nice house, a couple of cars, and take nice vacations due to their hard word.  Many sent their children through college even though they were never able to go themselves.

Where have they all gone?  The America of today is nothing like the America that once was.  Young adults, who used to be chomping at the bit to get out of their parent’s house and start their own lives are now content to move back into their old rooms and play video games all day.  The pipeline builders, who once were the objects of admiration are now demonized for their success.

We see protesters at the town squares who set up shanty towns.  They protest although they don’t know why they are protesting, or who they are protesting.  They just feel that someone should come and fulfill their needs.  They never consider that the way to succeed in America is to figure out how to fulfill the needs of others.

The prosperity of society cannot be created by a few people who are willing to carry the buckets for everyone.  Prosperity will not be gained by tearing down the great pipelines that have already been built.  The wealth of society is based on what people are willing to do to create it.  The more people creating wealth, the more wealth we will have.  The more people we have carrying buckets and taking care of themselves at least, the more we will have to take care of those who really need it.  If people are willing to build pipelines and we support them and help them in their efforts, the effects of their work will be seen for generations.

Put down your protest sign.  Quit waiting for someone to come bail you out.  If you are able, go and pick up your bucket and take care of yourself.  If there are no jobs in your town, move to where the jobs are.  If there are no jobs anywhere, find something useful to do that people will pay you for and make your own job.

If you want to be wealthy and have more than the life of a bucket carrier, spend your nights and your weekends building your pipelines.  Sacrifice a bit now so that you can win later.

Don’t make this country like Russia or China, or Cuba, or even France.  This is America.  Start acting like an American.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Maggie Molloy, Website http://www.maggiemolloy.com

How a Tax Hike for Dividends will Affect your 401K


The current class warfare being stirred may have collateral damage well beyond the targets.  While at first it seems like a good idea to raise taxes on dividends (after all, who but an avaricious, Scrooge McDuck-types would collect dividends?) raising dividend taxes may affect everyone who has shares in a 401K or even a pension plan.

Some background:  As part of the tax cut package of 2003, dividend tax rates were lowered to a flat 15% rate.  Before this point they were taxed as normal income, with rates as high as 38%.  The rationale behind having lower dividend tax rates than ordinary income rates is twofold:

1)  Lower rates encourage investing, which in turn lowers the cost of capital, thereby creating economic growth. 2)  The income received by investors is already taxed at rates up to 35% by the corporate tax.

Currently there is a movement to raise those rates back to where they were before 2003.  This would mean that those who pay the highest tax rate would see their taxes on dividends rise to 38% again (or perhaps even higher, depending on the political mood).  Those paying lower rates – mainly the middle class – would tend to pay more than they are now but would pay a lower rate than the highest earners.  For example, if you are in the 20% tax bracket you would pay 20% on dividend income.

So this would just mean that people would pay a bit of a higher amount on dividends, right?  Well, not exactly.

You see, when an investor buys a stock, the price he is willing to pay depends on the relative return of the investment when compared to other, less risky investments.  For example, if a bank account is paying 3% and investment grade bonds are paying 6%, investors might not buy stocks unless the potential return is at least 9%.

Determining the return for a stock is more complicated than determining that for a bank account.  One does not just look at the current dividend, but at what the dividend may be in the future.  Because the more a company earns, the higher a dividend they can pay, stocks tend to increase in price as the earnings rise and fall when they fall.  A stock that pays a $1.00 per year dividend now, but may see earnings double over the next several years, may see the payout of the dividend double as well.  If the stock price is currently $20 per share, the current yield would be 5% ($1.00/$20).  If the dividend is doubled, however, and one bought in now at $20, one would be receiving an effective dividend of 10% ($2.00/$20) when and if the dividend were raised.  The price of the stock may double as well over that time, but that does not affect the effective yield the investor who bought in at $20 is receiving.

Raising taxes on dividends lowers the effective return.  If you receive a 10% dividend but the dividend is taxed at 40%, you are only receiving a 6% dividend after taxes.  The effect of raising taxes on dividends is therefore to make future dividends less valuable and thereby lower future returns.  Investors react to this by reducing the price they are willing to pay for the stock currently, which will cause the price of the stock to drop.

So that will only affect dividend paying stocks, right?  No, remember that the price investors pay isn’t based entirely on current dividends, but on potential future dividends as well.  This is why investors are willing to buy stocks that pay no dividend at all.  They are hoping that eventually the stock will start paying a dividend, and they will then receive a really great return for the amount they originally invested.  All stocks will therefore drop in price, not just those that pay a dividend (although dividend paying stocks may be hurt more since investors may feel that tax rates may be lowered in the future before the stock that don’t currently pay dividends start to pay one).

So this will mainly affect those who make high incomes, right?  No, because the price of stocks will drop, those who own stocks in 401k accounts, IRAs, individual accounts, and even Pension Plans (which are invested heavily in equities) will see the value of their holdings drop.  States with large pension plans and a lot of workers who are retiring soon may need to divert resources to shore up holes created in their pension plans.  Private businesses that have pension plans may need to cut costs to cover increased pension plan payments.

How much will share prices drop?  Predicting an exact amount is difficult since there are many factors that affect the stock market.  If a tax increase is enacted the same week that peace is declared in the Middle East and oil drops to $10 a barrel, stocks may well go up in price.  The effect of a return to 38% rates, experienced without any other events, however, would probably be to cause stocks to decline by 10-20%.  Note that everyone’s rate would not increase to 38%, and there are institutional investors who hold a lot of the shares.  This would mute the effect of the tax increase.

So, be wary of calls for higher dividend taxes.  The effects may well extend well beyond those who own stocks that pay dividends.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Thomas Picard, downloaded from stock.xchng

Is College Worth the Cost?


We all hear the statistics of how much a person will make over a lifetime if one attends college.  For example, some studies suggest that a person with a bachelor’s degree will make $900,000 more in a lifetime than someone with only a high school diploma.  Parents are also willing to fork over huge amounts of money, and students are willing to go hundreds of thousands of dollars into debt, to obtain a college degree.  (Many are not willing to pay off that debt, but that is another story.)

The question I ask today is, “Is college really worth the cost, on a financial basis alone?”  The answer is, no.

But wait!  Isn’t college how you become wealthy?  After all, you make so much more over a working lifetime through a college degree, right?

Well, just looking at the statistics, it is true that a person with a BS or a BA will make about a million more in salary over a working lifetime than someone without a college degree.  But that only takes salary into account.

Most people who become very wealthy (have multiple millions of dollars) do so through starting a business.  The reason is that starting a business allows them to multiply the amount they can earn by a relatively infinite amount.  A person working for someone else, even at a great paying job, is limited to making maybe $50 per hour.  Maybe a few people may make $100 an hour.  Even a CEO who makes $2M per year only makes about $700 per hour.

A person who starts a business, however, has the ability to make much more.  At first the pay may be very low (or non-existent).  If she is able to grow the business, however, she can have any number of people working for her, with her getting a portion of the value they produce.  She can open 50 coffee shops, or 100 coffee shops, or a thousand coffee shops.  With each new store her income grows.

A person who creates something of value that can be duplicated can also experience this multiplier effect.  A person who writes a great book, requiring 1000 hours of work, can get paid $10,000 per hour if he sells 10 million books and is paid $1 per book.  The same holds for someone who sings a song or create software.  He can get paid thousands of times for a finite amount of effort.

But what about people who don’t start a business or sing a hit song?  Won’t they be better off financially by going to college?  Again, no.

If the parents of those children were to simply invest the amount that was to be spent on college and the children simply took even a simple, low paying job, they would end up much better off.  For example:

4-year College Tuition + room and board

(state school) = $80,000

(Ivy League) = $200,000

 

Invested in long-term mutual funds, assuming a 12% return, the funds would be worth:

Age                     State School            Ivy League

18                         $80,000                          $200,000

24                         $160,000                        $400,000

30                         $320,000                       $800,000

36                          $640,000                       $1.6 M

42                          $1.28 M                           $3.2 M

48                          $2.6 M                             $6.4 M

54                           $5.2 M                             $12.8 M

60                           $10.4 M                           $ 25 M

66                            $21 M                               $50 M

72                            $42 M                               $100 M

 

So, in order to make $900,000 more over a working lifetime, one gives up about $21 M if one goes to a state school or about $50 M if one goes to an Ivy League school.  Heck, one would be a millionaire by about age 40 even just by avoiding state school tuition.

The point of this is not that people should not go to college.  The point is that financially it would be much better to simply invest the money instead of spending it on college and then work whatever jobs were available to pay for necessities, allowing the money in your accounts to grow.

The reason to go to college is to be able to do jobs that aren’t available without a college degree and maybe just be a little better person.  When deciding between a state school and an Ivy League, however, consider the difference in lifetime costs.  It would be far better financially to go to the state school and invest the difference (or at least not go into debt to attend Harvard) than it would be to get the fancy degree.  You just can’t make enough money in a career to make up for the cost.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Colin Brough , downloaded from stock.xchng