Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.
Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
The data released by the U.S. Commerce Department concerning the rise in household income in March really caught my eye this morning.
Household income rose an incredible 21.1% in March as we can see in the chart below. The extraordinary spike is the result of stimulus checks and other government aid related to the relief package.
While consumer spending also moved up, the gap has continued to widen since 2015, which shows that consumers have been saving more than usual.
To put this spike in personal income in perspective, it is the largest monthly increase on record since 1959.
Oddly, we have been reading about a shortage in applicants for the labor market. One would think that everyone would want to get back to work as things are rapidly returning to normal.
One recent article I read was about a McDonald’s in Florida that is offering $50 for anyone who just shows up to a job interview.
Other businesses are simply having to operate with reduced hours because they simply can’t hire enough people to stay open as normal.
Now we know why.
When the economic incentives to work, be productive, and contribute to society are removed, these kinds of unwanted consequences happen.
And these artificial economic distortions can only be maintained with the unfettered printing of money out of thin air, which in time will only result in runaway inflation and the radical devaluation of the U.S. dollar.
If that happens, everyone loses.
Hopefully, cooler heads will prevail, and we can return to a state of fiscal responsibility. Is it too much to ask to have a balanced budget?
One thing I’m certain of is that if we ran our household budgets like most governments around the world, we’d all be bankrupt.
Here’s to fiscal responsibility and a great weekend.
Now let’s turn to our mailbag…
Let’s begin with some questions on tax hikes:
Dear Jeff, I hope this email finds you and your family well. I just wanted to ask your thoughts on the new tax hikes the Fed wants to apply this year. Do you think the Senate will pass them?
I just read an analyst from Goldman saying that historically, when there have been tax hikes in the past, like in 2018, billionaire households have sold off 1% of their equity assets to avoid more taxes, and growth stocks with big gains like the ones we have in your other services are the first to be sold off. I’m a little concerned about what is going to happen to the stock market and our stocks if this happens.
I hope you can respond to my letter, I’m sure this issue is at the back of everyone’s mind. Best regards,
– María N.
Hi, Jeff, I am a Brownstone Unlimited member, I am under 30 years old, and I look forward to building and growing my wealth with your analysis and recommendations. I am worried about the recent Biden announcement regarding changes to capital gains.
I still don’t make $1 million a year (very far from it), but that is what I’m working towards. How do you think this change in capital taxes (assuming it passes in Congress) will affect our overall investments here at Brownstone Research and the equity markets?
Thank you and keep up the great work!!
– Louis R.
Hi, María and Louis. Thank you both for writing in with your questions on this topic. I share your concerns.
If these measures are pushed through, they will have a deep and very negative impact on the economy, as well as a damaging effect on all Americans – not just those that make $1 million a year or more.
For any readers who missed it, this Wednesday the Biden administration provided details on its plan to raise taxes for the top 1% of American earners from 37% to 39.6%.
The changes would also increase capital gains and dividend tax rates for those who earn more than $1 million a year.
These increases are how the administration intends to pay for part of its massive spending, including another $1.8 trillion in the latest “American Families Plan” proposal.
And it follows on the heels of the Biden infrastructure and jobs plan, which would also raise the corporate income tax rate from 21% to 28%.
While these hikes may not immediately impact most people, if they pass, they are likely the start of a slow grind of tax increases from the Democrat-controlled Congress and president.
And that’s sure to have a negative impact on the markets… and potentially hurt the very people the administration says it wants to help – American families. It would smother the current post-COVID economic recovery.
Together, the administration’s plans ultimately reverse much of former President Trump’s Tax Cuts and Jobs Act (TCJA) reform, which lowered the corporate tax rate from 35% to 21% and the top individual income tax rate from 39.6% down to 37%.
Lowering taxes provided an immediate and very material boost to the economy, which we could clearly see in the market action in the years that followed.
From December 2017 – when the TCJA was signed into law – until December 2020, the S&P 500 rose 38%. The tech-heavy Nasdaq Composite did even better, rising nearly 84%. And those gains happened even with the March 2020 crash due to COVID-19.
So I’m not optimistic about the economy or the markets if these proposals pass. A common misunderstanding is that an increase in corporate taxes, or taxes “on the rich,” will not negatively impact normal Americans. This simply isn’t true.
Large increases in corporate taxes will result in less spending on future research and development. They will negatively impact employee salaries and benefits, negatively impact shareholders, and result in reduced economic activity, which means less opportunity for the workforce.
And for those who make $1 million or more, they will reallocate their investments out of equities where they would be subject to Biden’s proposed 43.4% long-term capital gains tax.
Money would shift into investments like tax-free municipal bonds, investments into early stage private companies, and into alternative assets like timberland or art. These asset classes are long-term holdings. They can afford to sit on them for four years or 10 years until the politics change and the capital gains taxes are lowered again.
Money flowing out of equity markets and into investments like the ones that I mention above are largely not going to create economic opportunity for normal Americans.
If you couple that with rapidly rising inflation and a U.S. dollar that is rapidly losing value, then the assets of all Americans will decline in value. We’ll also see a major economic contraction.
Needless to say, my team and I are monitoring this situation very closely.
We may need to start taking a more defensive posture in the markets if the above dynamics become reality. But I doubt that will happen this year.
And the outcome of the 2022 mid-term elections will be very important in determining what the next few years look like.
As for the Brownstone portfolios of investment recommendations, we may eventually rotate out of certain sectors that are more negatively impacted by these changes.
At some stage, we may even sell and take profits off the table in the majority of our open positions.
But there is one thing to keep in mind… There are always sectors and investment opportunities that will grow at a pace that is faster than inflation. There will always be equities that represent attractive near- and long-term investment opportunities.
And there will always be asset classes that work better in different economic environments.
And that’s exactly why we’re here – to help our subscribers navigate these economic environments and be well-positioned in equities and assets that will help preserve and grow wealth over time.
Next, a couple of readers want to know more about portfolio management:
Jeff, I understand you cannot give specific investment advice. However, I’m hoping you might give a general answer to the following question. I own approximately 35 stocks, typically 100 shares in each, and I often feel as if I’m managing an ETF! I’m wondering if I’d be better served consolidating my holdings into a dozen or so, diversified across various industries. Can you please give me your general thoughts on what might be an optimal number of positions? Best Regards,
– George D.
Hi Jeff, I have been an Early Stage Trader member since January 2020 and joined Brownstone Unlimited last summer. Overall, I am quite pleased with the paper returns across your portfolios. However, except for five exits over this year and a half, they are all “paper” gains/losses.
I have been investing equal amounts in all my trades and buying every recommendation over this period. At recent count, I have around 85 open positions across my six services, which includes Outlier Investor with Jason Bodner, with a portfolio value of around $250,000. Isn’t this too many positions to be carrying?
How are subscribers supposed to cull out positions to a manageable count? Not asking for personal advice, but most advisors seem to advise against holding this many positions. Thanks in advance for some feedback. Keep up the good work, as we should certainly reap real profits at some stage. Best regards,
– George B.
Hi, George D. and George B. I’ve grouped your questions together since they both cover the same topic. Thank you both for being diligent subscribers.
As you’ve both noted, we currently have quite a few open positions across our various portfolios. In part, this is due to 2020 being such an unusual year.
Following the market crash in March, many of our companies pulled back due to COVID-19 lockdowns. We decided to remove stop losses, which enabled us to ride the market recovery and ultimately experience strong gains in most of our positions.
And that wasn’t the only unusual dynamic in the markets last year. We saw incredible amounts of institutional money flowing into the markets in 2020 and the first part of 2021. That’s another part of the reason we’ve continued to hold so many positions. We didn’t want to miss out on additional gains by selling too early.
As a result, our model portfolios are currently holding more positions than usual.
But to address your questions specifically, there is no “right” number of stocks for an investor to hold in their portfolio. That will be a personal decision that investors can make with the help of a financial adviser if needed.
Officially, though, at Brownstone Research, we will generally sell only when our investment thesis plays out or market conditions warrant it.
In portfolios like The Near Future Report and Exponential Tech Investor, we often plan to hold at least a year in order to ensure long-term capital gains.
Since each research service provides a new recommendation every month, longtime investors who buy every new recommendation could easily see their portfolios grow to 20 or 30 stocks or more from those services alone over time.
But this shouldn’t concern us. In fact, the success of our portfolios often depends on holding a “basket” of companies with outstanding investment return potential.
They all won’t move up together at the same time. Some will have major growth spurts while others are building their momentum.
This is where having a well-balanced portfolio is advantageous. At the right time, we’ll be able to harvest those positions once their investment theses have played out, which will give us the opportunity to allocate capital into new recommendations.
This is how we tilt the odds in our favor. And this is certainly part of how we can routinely beat the markets and best hedge funds with my research services.
And I will always send out appropriate alerts whenever it’s time to sell any of our portfolio holdings. There will be a point in time where we will have much smaller portfolios.
My analysts and I are constantly monitoring the companies in our portfolios on our subscribers’ behalf. We’ll keep investors updated any time we recommend taking action.
Let’s conclude with some feedback on portfolio optimization:
Hi, Jeff: A Brownstone Unlimited member here. Many, many thanks for all the work you do on your paid newsletters and The Bleeding Edge! I want to add my two cents on some trading-type thoughts others have brought up in your mailbags.
One is to sell after big run-ups, hoping for a chance at catching a top in price and picking the shares back up later after some drop. I have holdings in my portfolio that are shares in companies that I have held and sold in the past. Nearly all are up on the repurchase, and it really does feel great when the repurchase was at a lower price than the prior sale. But not all are this way, and some I would have been much better off just holding through the downdraft…
Intentionally trying to time near tops and bottoms is difficult – as you have remarked yourself – and not necessarily in keeping with the thesis and valuation approach of your services.
A second suggestion I have seen is selling half when an investment returns 100%. This sounds good on the surface. At that point, you “can never lose” on the initial investment, and any further gains on the retained half are a “free ride.”
But on the other hand, we are not really investing in a single stock but rather a portfolio. There will inevitably be some investments that not only never reach 100% but that actually don’t play out and we sell for losses. So we rely on winners, including big winners, to balance these out… That means that there is an argument for fully riding our winners, as long as the investment thesis is intact and we can justify the current valuation.
I am a bit agnostic on this one… I’m particularly thinking that for more volatile investments, where we count on some big winners to overcome losers, it would make less sense to throttle back on stocks that are doing well. Maybe for a portfolio of more stable, sleep-well-at-night stocks, it might be okay to grab a 100% whenever you get one. Just some ideas.
– Scott G.
Hi, Scott, and thanks for writing in to share your thoughts. I think you’ve got a good handle on our strategy here at Brownstone Research.
Regarding your first point, timing short-term run-ups or tumbles in stock prices is a risky game. It’s all too easy to miss a big surge or buy into a dip that keeps falling.
That’s why our strategy focuses on our investment thesis for each company. We buy the best companies at reasonable valuations and hold as the thesis plays out.
When we have sold and rebought companies in the past, we have done so with this strategy in mind. We are not aiming to “time” the market. Rather, if the market presents us with a fantastic opportunity to profit from a company a second or even third time, we’re happy to do so.
And as for your second point, you bring up a fair question. I can’t give personal investment advice, but I always encourage subscribers to use my research in ways that work for their individual situations.
In some cases, this may involve investors selling half once a stock reaches 100%. This is certainly a reasonable strategy that works for some people.
But we rarely do this as an official recommendation in my research services for the very reason you noted. We don’t want to cut short the gains from our big winners.
As long as our investment thesis is intact and market conditions are reasonable, we’re aiming for the best gains possible. And that means we want to ride our winners to the end.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a good weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
