Rich people have access to money-making opportunities that everybody else does not. That's been true for one, two, five-thousand years. Get over it. Don't use the facts of life as an excuse for passivity. Like I often tell my teenage son, recognize what's right in front of you. You, the small investor, have a couple of advantages over the big boys and girls.
There are two types of big money investors: those who use other people's money, and those who put their own money at risk. Non-index mutual fund managers and pension fund managers are two examples of big investors with a boss. They are constantly monitored and rated, most likely on a quarterly basis. They must always show up for work and do something, whether or not it's the right thing to do.
I manage my own money. Besides not having all the talking head stock analysts running around, having no organization chart and no impatient boss are huge advantages. I have invested in the natural resources secular bull market that began roughly in 2000. However, I sold all my gold stock investments between January and March 2008. For several weeks I was 100% in cash in my brokerage IRA. I could have done that indefinitely. By contrast, Mr. Jeff Vinik, former manager of the Fidelity Magellan Fund, got fired for a market timing strategy even milder than mine.
I sold because stocks were underperforming gold, and a seasonally weak precious metals period approached. I made the decision alone. Moreover, I could have sold for any reason. Who could question me? Any given year, I can "go away in May" to watch the Astros all summer if I want to. With cash in this one account, I could (and still do) wait for the "fat pitch" in natural resources stocks that I think will come later this year. I'm looking for a sale in GLD, GDX, CEF, XLE, and SLV exchange traded funds. If I'm wrong, I’ll just make less money than other commodity fans. I won't lose my job because I underperformed some stock index. A money manager with a boss cannot afford to do what I did.
Do you worry about taxes when you invest? Even though I've made several profitable trades this year, I won't pay taxes on them. How can that be?
There are two types of middle class people in the U.S. Type 1 consists of those who spend their paychecks and contribute to their 401k/403b plans at work; type 2 consists of those who spend their paychecks and don't put any money in retirement plans. Food, gasoline (= CIFTWEAD, Core Inflation for Those Who Eat and Drive), car payments, housing, insurance, utility bills, clothes, and health care consume whatever makes it into the checking account. Often the Type Ones have a chronically short emergency reserve fund that life left behind over the years. The fund contains miscellaneous items such as a CD valuable enough to replace the refrigerator, savings bond bought at work, an old credit union account no longer used because of a job change, and a cash value insurance policy bought in childhood by a relative. Type Twos are not too busy to find a way to blow every single penny and then some.
I belong to middle class Type 1 more closely than Type 2. Therefore, by definition, all of my investments are in tax advantaged accounts! Anything else, again by definition, falls under the "miscellaneous" category in case of a family or natural disaster. I don't have to care about taxes when I buy or sell a mutual fund in my IRA!
I can hear the objections out there, "But Sir, you will have to pay taxes eventually on your IRA withdrawals." First of all, that's not an accurate criticism. Withdrawals from Roth IRAs are tax-free. That's why they're so popular. Withdrawals from other tax-advantaged accounts such as rollover IRAs, and changes to tax laws, are issues I won't have to worry about for decades. With a wife, a teenager, a "pre-teen", and a cat, I have enough to worry about this year. Meanwhile, my IRA balance compounds tax-free.
Oh, and by the way, my house is NOT an investment. It's not a tax shelter or a savings vehicle. It's a money pit in which I happen to live. Those who disagree can buy it for the appraised value, and suffer a heart attack when they receive the property tax and insurance bills. We all live and learn.
Those big investors who invest their own money must worry about the tax implications of their transactions. The complication seriously distracts from the goal of profit. The focus I have when trading funds in my rollover IRA boosts returns. In this way, investing is like baseball; keeping my eye on the ball results in a higher percentage.
The small investor has an advantage with convenient tax shelters. While deep pocket investors might have these accounts as well, as a percentage of their portfolio, their 401k is relatively insignificant. For the little guy or girl, all of their investments are in tax advantaged accounts. Simplicity is power.
Too many people complain that "it takes money to make money." There is a kernel of truth to that. Private placements, hired help, and lower transaction costs constitute perks of the rich. However, financial tools exist for the small investor. I have pointed out two for you. Be resourceful and use them.
Everything in life has an analogy in baseball. Investing is no exception. Many small investors would rather swing big than hit singles and doubles on the way to a comfortable retirement. They bet 100% on TIC (Three Initial Corporation), strike out, and then play the lottery. As for me, I'd rather perform like Tony Gwynn than Barry Bonds any time.
Copyright © 2008 Chuck DiFalco
