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Good book, but is this correct?

Discussion in 'General Investing Discussion' started by GG, 9th Sep, 2010.

  1. GG

    GG Active Member

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    This book: Jason Zweig Your Money and Your Brain
    Very good, but near the end I wasn't sure about this bit:


    "Remember that this stock has to go up more than 14% just for you to break even after paying at least 2% in brokerage costs and 10% in capital gains taxes."

    Well, it's USA taxes
    But do you think this is a correct statement?
    If you haven't time to explain the meaning of it, could you still just answer "correct" or "wrong"

    Many thanks!
     
  2. Chris C

    Chris C Well-Known Member

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    In regards to how he adds to 14%, maybe he meant you pay 2% buying in and 2% when you sell...?

    ...but of course that is completely irrelevant if you consider that capital gains is normally only paid on the profits - therefore you should only ever be paying 10% on the "profits" therefore, you make a profit as soon as you exceed the 4% cost in brokerage.

    That's my logic.
     
  3. Waimate01

    Waimate01 Well-Known Member

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    The maths is incorrect.

    He is assuming you pay the 10% tax on the total holdings after the 14% gain and the 2% coming and 2% going. In fact you only pay the 10% on the gain.

    Eg: You invest $100
    Pay 2% brokerage going in
    Now have $98 invested
    A gain of 14% means your $98 has grown to $111.72
    Pay 2% ($2.23) brokerage going out
    You now have $109.49
    Your gain was $9.49
    Taxman wants 10% of that, which is $0.95
    You now have $108.54


    Looks like Jason Zweig should stick to his day job.

    But moreover, his assumptions are somewhat dubious. You're more likely to pay 0.3% than 2% brokerage.

    And most importantly, capital gains tax is an OPTIONAL tax (one of the very few optional taxes we have). You only pay if you sell. Warren Buffet says his preferred holding time is "for ever", and many investors maintain a buy and hold strategy, especially for things like STW.

    So if you buy and hold, you can forget about the capital gains tax and the brokerage on exit. That becomes a matter for your executor and inherritors.

    The yield, of course, tends to increase over time so the increased value does do you some good even though you 'never' sell. For example, a stock bought for $1.00 today and paying $0.05 in dividends, 20 years from now might be worth $5.00 and paying $0.25 in dividends. So your original $1.00 investment is now paying you $0.25 every year, with no capital gains tax paid along the way.

    Caveat: an overwhelming desire to avoid capital gains tax can have the undesirable side-effect of causing you to stay invested in something when the better course of action might be to cut and run. Nobody ever went broke taking a profit and there are way worse things in life than paying tax!
     
  4. Chris C

    Chris C Well-Known Member

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    I'm pretty sure his day job is as a psychologist anyway... it's meant to be a good book actually. It's on my to read list!

    This is more the sort of thing Jason would talk about - the weird psychological stories we tell ourselves that ultimately have us making bad financial decisions.

    :D
     
  5. GG

    GG Active Member

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    Thanks Chris, Waimate01
    It's surprising that something that wrong can get into such a good book. Doesn't anybody read it before publication, I wonder.

    I started thinking that there must be something that I really don't understand, so I'm relieved with your answers!