Yes, Tax status or competence is a kind of investment edge. Perhaps it should be a category on its own. Knowledge of the tax code and its applicaiton to investing is a kind of process edge, and having clients that are tax exempt changes one’s risk tolerance (by making some returns large enough on an after tax basis that it makes sense to pull the trigger).
Even if there’s no tax benefits, there are other benefits to having a CPA do some “structure analysis”.
EG - Client A has $5m in his brokerage account. One night, he gets drunk, drives home, hits a family of four and kills two of them and permanently cripples two others. He gets sued for $5m and loses every penny he owns.
Client B has $5m in his LP, which consists of nothing but a brokerage account. One night, he gets drunk, drives home, hits a family of four and kills two of them and permanently cripples two others. He gets sued for $5m, but he doesn’t have any money. His LP has $5m in it, but that’s not his money. That money belongs to the LP.
(As abhorrent as it may seem, my job is not to pontificate on the morality of the situation. My job is to protect my client’s wealth.)
^ Definitely value there. I suspect a lot of that value is US specific… I’ve looked into this sort of stuff up here and there is very little you can do structure wise without huge tax consequences.
Is a lot of that not more legal/lawyer stuff than CPA stuff though greenie?
Here’s another not-so-hypothetical situation:
John Doe, 52 years old, receives a 1099 for a $120,000 distribution from a 401k. At a 35% tax bracket, John Doe owes $42 in taxes plus $12k in penalties.
Starting in June, I called John Doe no fewer than five times asking him about this, and I never hear a response. (Yes, this happens in real life.) Finally, on October 14, I can’t wait anymore and file the return as it is.
Shortely thereafter, John Doe calls me back and very politely asks why the F*** he owes an extra $52k in taxes. After all, he rolled that over into a qualified IRA at his bank. The answer is simple–because he never told me he rolled it over.
Now this situation is easily rectified, assuming that he rolled it over in a timely manner. All we have to do is file an amended 1040. But if I were his investment advisor, it wouldn’t have happened.
Good points, ohai. Being able to be systematically on the opposite side of a trade that your counterparty has to be on for some institutional reason is a source of edge, provided that you are somehow special or privileged in your ability to do so (low transaction cost, privileged access to the trade, etc.).
This brings up the idea that edges need to be some kind of competitive advantage, which basically means that it has to be something that is difficult for others to replicate (or at least quickly or at low cost). Otherwise, you are simply bringing up an advantage that is easily competed away by anyone else with the desire to do so.
It also brings up that some edges are “organizational,” having to do with how the team is constructed and what kinds of things the organization has access to - these absolutely have to be competitive advantages, which basically mean that they have to be some kind of incumbent advantages (or, alternately, disruptive technologies).
The alternative is that there are some “edges” that are strictly personal - having to do with the knowledge or experience level of the investor as an individual. These are the kinds of edges that you might answer as your selling points in job interviews. These don’t have to measure up to quite the same stringent standard of competitive advantage as an organization, I suspect, since often “competence” is sufficient, but ideally there is some synergy between what you are competent in and what the organization requires to lock in their competitive edge.
Yes and no.
An attorney has to set up the business entities, whether they be single-member LLCs, corporations, or limited partnerships. A CPA can’t do that, because they can’t practice law.
However, a lot of financial planning can be done before you get to the attorney’s office. After you’ve been in the business for a few years, you already know what kind of entity structure and trust agreements (etc. etc.) your client is going to need. You can even e-mail the attorney with all the appropriate information. You just can’t actually draft the document.
You don’t have to re-invent the wheel with every client. Basically, most people who run small businesses have some form of the basic “Limited Partnership with a 1% corporation as the General Partner and John Doe as the 99% Limited Partner”. Of course, it starts to branch out from there, and that’s where the details start to kick in.
They definitely exist elsewhere, and, if you layer in a time arbitrage dynamic, there are even more of these. Many are not even that hard to see if you have a basic sense of what to look for, it’s just that most investors can’t invest until right before the earnings are about to increase, which in practicality means they are buying after the earnings have increased and the stock is already 30-50% higher.
So far, I think one big skill is pain tolerance. When your biggest holding is down 15% in a week, are you willing to dig in and buy more? Or maybe, when you do the valuation, and the stock looks fairly undervalued to you, but everybody is saying the stock is overpriced, because “has a PE of 50, its at an all time high etc etc”, are you willing to trust your analysis? Say you buy it, and the stock misses earnings…are you going to buy more or continue to hold or will you bail?
I think you need to be extremely stubborn, but very open to absorbing new information. It’s hard…
“Own” nothing, control everything. Amen.
Thanks bchad. Not my blog but I think this is succinctly put: http://www.whopperinvestments.com/the-one-key-to-generating-alpha-and-beating-the-market
great thread BCHAD
adding to what Palantir said, at what point do yall cut your losses on an investment?
been reading a lot of loss aversion lately and it seems to be one of the biggest biases out there
If you have an “edge” this means that you have defined for yourself under what conditions the odds that the outcome will be favorable are good. It also means you have defined the size of the reward that you expect. If you expect a certain size reward out of your positions in general then you know what size loss you can afford (a function of expected win rate and risk/reward). Therefore you cut the loss when it has hit the critical level of your risk/ reward schedule OR you cut it when the conditions that define your edge have dissolved and you no longer have the odds in your favor. Bottom line: if you don’t understand the conditions of your edge or your risk/ reward schedule, it is impossible to properly manage positions.
not sure what i just read but if youre down 50% ano nothing changed fundamentally, do you keep holding?
not talking size loss that i can afford, i can afford 100% loss
Not sure what the target profit on this was, but it sounds like this loss is larger that what you expected to make… maybe even twice as much? What makes you think you are smarter that the current sentiment on this position? Perhaps I am the wrong person to ask since I am thinking as trader where the set of results is more important than any individual position. An investor with a few positions is different since the sum of the positions is a small sample.
I ask myself what my thesis is. And I look at the evidence to see if it’s more or less likely. If nothing has changed, then I’d probably seek out bear opinions to make sure I understand what is going on. If I am not convinced, I hold. If something has changed enough, I’d sell.