My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Spring 2023

The topic of “Investment Rules” came up in an email exchange a while back, and I wrote a quick list of mine. These are just my simple, and perhaps arbitrary, rules. I’m mostly trying, as Charlie Munger said, to not be stupid: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be intelligent.”

1. No sector investing – I generally don’t have enough sector expertise to have a better opinion than the market.
2. No zero-sum asset classes (derivatives) – I don’t want to be reliant on someone else losing for me to win. They undoubtedly think they are smarter than me, and there is no obvious reason for me to disagree.
3. No investments where a negative opinion (shorts) can’t be expressed (IPOs, PE) – When only bullish opinions can be reflected it would be hard for prices to be attractive, or even reasonable.
4. Don’t buy things with high expense ratios – expensive is, of course, relative, but why have headwinds?
5. Don’t buy things that are illiquid – I am unconvinced that an illiquidity premium reliably exists. (And Cliff concurs.)
6. Don’t buy things where the counterparty can change the rules against you in the middle of the game (many insurance products).
7. Don’t buy things that are expensive (even if it might seem justified) – mean reversion is a real thing (even if folks are confused about what it means).
8. Don’t buy things that have no possibility of cash flows (i.e. zero dividend stocks are fine, but no NFTs, art, gold, cryptocurrencies, etc.) – there is no way to value such a thing that doesn’t end up being a psychological exercise (“people seem to like it/have always liked it so it must be worth something”).

The short paper here is about what “loopholes” should be closed to raise revenue. Consequently, it is also a great guide to those perfectly legal strategies. Many of these may be closed eventually, but until then it’s a good guide. Here’s the list of strategies:

• Zeroed-out GRATS
• IDGTs
• Minority interest discounts
• Gifts over bequests (tax exclusive vs. tax inclusive if done more than three years before death)

Also, see this. While written from an anti-wealth perspective, the wealthy (and those who intend to join them) can view it optimistically: punitively high taxes have always been avoidable and avoided.

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Winter 2023

The recent higher inflation has dampened enthusiasm for this somewhat, but I hope with a short explanation to drive a stake through its heart.

(If you have no idea what this is, see this and this – or just go and enjoy your life!)

This is a very simple explanation that glosses over a little of the detail, but I don’t think misses anything essential.

Assuming the global economy grows there is a need for more dollars (global, not domestic, because a lot of dollars are held elsewhere). Right now, to increase the money supply, the Federal Reserve (the Fed) buys Treasurys. Those holdings of Treasurys are basically permanent (unless the global economy shrinks at some point or the dollar is no longer used as much). The Fed uses the interest from those to pay its expenses and then remits the rest of the interest to the U.S. Treasury. So if we think of this as a household, you find some money (the amount the Fed prints, which we will assume is exogenous) and redeem some debt (pay down your credit card) and then have the extra funds to spend (the interest is now less) on stuff. If you just spent the funds directly it isn’t different. (I.e. assuming the spending is the same, the level of credit card debt is eventually exactly the same. Just in one case you pretend to pay down your debt and then run it back up, where in the other you just spend it directly.) So, for MMT, if the level of money printing is held to the same level that the Fed would have created with open market purchases it leads to the same place.

It appears that the MMT proponents don’t realize that you are still constrained by the normal growth of the money supply or you will have higher inflation. They seem to believe it is a “free lunch” of some sort. The problem (IMHO) is that “borrowing” to buy stuff feels/seems worse than “printing” to buy stuff. Since I think the problem is the expenditure level is too high, I don’t like anything that makes it easier to tax/borrow/spend even if it’s just a change in mental framing. I would love it if there was no withholding allowed, no sales taxes at point-of-sale, etc. Everyone should have to write a check every April 15th for their total contribution to the commonweal. That would lead to a very different level of expenditure and much better debates on taxes and spending! Withholding was originally Friedman’s idea but he wished it didn’t last.

TANSTAAFL!