Curated Insights 2019.05.03

James Harden and alpha

Advantage is only an advantage if others don’t have the same advantage.

Do you meet with company management? So do 30 sell-side analysts and 100 buy side analysts and PMs every quarter. Do you build your own, bespoke, earnings models? So does half the buy side. Do you interview competitors, customers, and suppliers? So does half the buy side. Do you pull credit-card history, satellite images, and other big data in real time? So does half the buy side. If you think you have a sustainable informational edge, you’re either deluding yourself, or you have inside information.

We are not playing an information game. Everyone has the information. The question is how objective can you be when you process it, and might Mr Market see the same information with bias?

Vanguard patented a way to avoid taxes on mutual funds

To understand how the process works, consider an investor who owns a portfolio of stocks. If one is sold for more than what it cost, capital-gains tax is due on the difference. Theoretically, owning stocks through a mutual fund or ETF works the same way. If the fund sells a stock for a profit, the taxable gain shows up on each investor’s end-of-year Form 1099. But thanks to an obscure loophole in the tax code, ETFs almost always avoid incurring taxable gains.

The rule says that a fund can avoid recognizing taxable gains on an appreciated stock if the shares are used to pay off a withdrawing investor. The rule applies to both ETFs and mutual funds, but mutual funds rarely take advantage of it because their investors almost always want cash.

ETFs use it all the time, because they don’t transact directly with regular investors. Instead, they deal with Wall Street middlemen such as banks and market makers. It’s those firms, not retail investors, that expand the ETF by depositing assets or shrink it by withdrawing. These transactions are usually done with stocks rather than cash. The middlemen, in turn, trade with regular investors who want to buy and sell ETF shares.

Trading with middlemen presents ETFs a tax-cutting opportunity. Whenever one of these firms makes a withdrawal request, an ETF can deliver its oldest, most appreciated stocks, the ones most likely to generate a tax bill someday.

If the ETF wants to cut its taxes further, it can generate extra withdrawals just to harvest the tax break. A heartbeat is when an ETF asks a friendly bank or market maker to deposit some stock in the fund for a day or two, then take different stock out. Some critics call these trades an abuse of the tax code. But with the help of heartbeats, most stock ETFs, even ones that change holdings frequently, are able to cut their capital-gains taxes to zero.

Thanks to winnings on stocks like Monsanto, the fund reported $6.51 billion of capital gains in 2018. But for the 17th straight year since it got an ETF share class, the fund distributed no taxable gains to investors. The ETF ensured that the vast majority of the gains, $6.49 billion, weren’t taxable. The balance was probably canceled out by tax losses from earlier years.

You’re not getting enough sleep—and it’s killing you

He ran down all the ways in which sleep deprivation hurts people: it makes you dumber, more forgetful, unable to learn new things, more vulnerable to dementia, more likely to die of a heart attack, less able to fend off sickness with a strong immune system, more likely to get cancer, and it makes your body literally hurt more. Lack of sleep distorts your genes, and increases your risk of death generally, he said. It disrupts the creation of sex hormones like estrogen and testosterone, and leads to premature aging. Apparently, men who only sleep five hours a night have markedly smaller testicles than men who sleep more than seven.

Don’t drink caffeine or alcohol. Go to bed at the same time every night and wake up at the same time every morning (even on the weekends). Sleep in a cool room. If you are lying awake in bed, listening to the litany of worries your brain is churning through, get up, go into a different room, and do an activity, then return to bed when you’re ready. “You wouldn’t sit at the dinner table waiting to get hungry, so why lay in bed waiting to get tired,” he told a TED attendee who’d asked for advice. Meditate to calm your nervous system and your mind. Don’t default to sleeping pills, which are “blunt instruments that do not produce naturalistic sleep,” he said. Eventually, he said, he may be able to offer an “affordable, portable” brain-stimulating device that would use transcranial direct-current stimulation to help people have deeper sleep.

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