Weekend Reading 2-16-14 – Taxes, Emerging Markets, Financial Statements and More

Here are some articles that caught my attention this past weekend. Topics include taxes, emerging markets, financial statements, lack of accountability in the investment world and more.



Quote of the Week:


Its almost tax time. So for this week I am including a quote from Warren Buffett (from his 1989 shareholder letter) that tells a perfect example of the importance of investing wisely.


“Because of the way the tax law works, the Rip Van Winkle style of investing that we favor – if successful – has an important mathematical edge over a more frenzied approach. Let’s look at an extreme comparison.


Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad.

If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.”


Smart investing means more than just IRAs (though they are very important as well). There is so much more you can do to help your money grow and compound over time. I love this example given by Mr. Buffet, because it shows that even if you can get returns greater than the general market by actively trading (very few do)…you still can’t produce higher long term returns after taxes. Whether you invest in stocks, ETFs or mutual funds the point still stands. Find great long term holdings and stay the course.


1) Credit Suisse Global Investment Yearbook 2014 :


The Yearbook is an annual publication filled with great research by the Credit Suisse team. The publication is over 80 pages in length, so I won’t quote the whole thing here. Topics include emerging markets, asset allocation, and in depth looks at all the major emerging and developed countries.


From Pages 14-15:

“Contrary to many people’s intuition, investing in the countries that have recently experienced the lowest economic growth leads to the highest returns – an annualized return of 28% compared with just under 14% for the highest GDP growth quintile. Once again, standard risk adjustments do not explain this finding. This does not imply that economic growth is either unimportant or perversely linked to equity returns. Indeed, as shown in the next chapter, stock prices are a leading indicator of future GDP growth. “


I wouldn’t say to get up and run with this idea by buying the “worst of the worst” tomorrow morning, but I think it goes to show how strongly emotions control our investing decisions.


“30 years ago, emerging markets made up just 1% of world equity market capitalization and 10% of GDP. Today, they comprise 13% of the free float investable universe of world equities and 33% of world GDP. These weightings are likely to rise steadily as the developing world continues to grow faster than the developed world, as domestic markets open up further to global investors, and as free float weightings increase. Emerging markets are already too important to ignore. “


From page 35:

“Equity investors earn, on average, returns that are well below those of the index. One of the determinants of this performance drag is the tendency to buy after the market has risen and to sell after the market has declined. This drives asset-weighted returns below time-weighted returns. We can trace this behavioral bias to the part of our brain that links cause and effect.

More than 40 years ago, Daniel Kahneman and Amos Tversky suggested an approach to making predictions that can help counterbalance this tendency. In cases where the correlation coefficient is close to zero, as it is for year-to-year equity market returns, a prediction that relies predominantly on the base rate is likely to outperform predictions derived from other approaches. This suggests that investors should avoid getting too caught up in short-term results and rather focus on an asset allocation strategy that takes a long view. The Yearbook provides provide (sic) well-researched, long-term data that serve as the foundation for such a long-term strategy.“

The last half of the yearbook is profile pages on all the major markets in the world. Incredible source of information for investors. Just one example:






2) Investing Successfully is Really Hard




A good collection of research and facts proving just how hard it is to consistently outperform the general market. From Wall Street pros to individual investors at home, the vast majority fail to match returns of a simple index fund. That is why we spend most of our time on Begin To Invest looking for great low cost, passively managed index funds in our Fund Spotlight Series.


“The latest Dalbar QAIB data shows that over the past 20 years, the average equity investor has suffered an aggregate underperformance of nearly 50 percent while the average fixed income investor has suffered an aggregate underperformance of nearly 85 percent.”

“As Charley Ellis has pointed out, “research on the performance of institutional portfolios shows that after risk adjustment, 24% of funds fall significantly short of their chosen market benchmark and have negative alpha, 75% of funds roughly match the market and have zero alpha, and well under 1% achieve superior results after costs — a number not statistically significantly different from zero.””




3) Fresh Mistakes, Every Year


The investment world is full of self-promoting egomaniacs, and what makes it worse is that there is almost no accountability for piss-poor advice. More than half of the guys year hear on CNBC under-perform the markets every year, and give bad investment advice every day to boot. But that doesn’t seem to be stopping them from getting more air time.

That’s why it’s refreshing to see someone like Barry Ritholtz publish his annual “review of blunders” .


“Solution: We should be primarily concerned about things within our control. Markets correct, volatility happens. The key takeaway is to stay focused on what is within your ability to manage — our portfolio allocation, how much we contribute toward retirement, how much debt we accumulate. Time spent on things beyond our control is wasted.”


The article includes links to several other columns by him. If you aren’t a regular reader of his blog, “The Big Picture Blog ” you are missing out.


4) 10 Ways to Save Money



I’m including this one as there are some great last minute tips on savings money before you file your taxes. FSAs, HSAs, 529 plans, 401ks. Here is a quick rundown on how using them wisely can save you some money.




What I’m Reading this Weekend

Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage


There have been some great books published on reading financial statements, but none that let you look through the eyes of Warren Buffett while doing so. The book is a quick read if you were to just sit down with it. I see it more as a desktop resource, something you should always have handy when sifting through financial statements.

There is much more than just defining key terms in this book. The book focuses on how Buffett uses the numbers to identify a company with a competitive advantage, one that will continue to make profits for decades to come.


The book has a layout just like Ben Graham’s book “The Interpretation of Financial Statements”, another classic (See our resources page for more info on this book, and many others). Each line on the balance sheet, income statement and cash flow statement has its own chapter. Some are just a paragraph, others are pages long detailing how to use the data to your advantage.

Have this book handy if you are ever going to be researching individual companies.



That’s all for this week! Happy investing.


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