Independence/treason day, estate tax & Markowitz Legacy

Happy Independence Day! A quick reminder from our former monarchs about the estate tax is in order. Also remembering Harry Markowitz and his legacy. You probably already know the theory, but may not know Professor Markowitz's impact on the way we think of finances and investments today.

July 04, 2023

Transcript

 Hi, happy Independence Day to those in the U. S. For those of you who are in England and the U. K., I suppose you could say happy treason day. I don't think they actually call it that,  I saw this meme posted on social media earlier today. It said happy treason day, and I'm like, that's brilliant. I love that.

 In fact, one of my favorite songs, I listen to this on almost like a regular basis,  and actually my family thinks it's kind of weird that it's on my regular playlist, is You'll Be Back.  King George sings from Hamilton. Awesome. Fantastic song, by the way. And if you get a chance to watch it live, or if you get a chance to watch the recording of it live, the lead singer, and I'm blanking on his name right now, actually sings it and spits when he's singing it.

 Just epic scene, by the way.  But, Happy Independence Day. And let me just take a couple of quick reminders today. So, two things that I want to talk to you about. First was, Independence Day reminds me, you know when a bunch of folks got on a ship or a series of ships and left England and left the monarchy.

They came to the U. S. and one of the theories that they wanted to expand upon, one of the things they wanted to implement, is, you know what, we're not going to pass a bunch of wealth down from one generation to the other. We're going to tax it when it goes from one generation to the next. Now, in theory, you would think leaving a nation where you've been taxed and sort of held subservient, you would try to avoid taxes, but the theory was, we want each generation to have its own wealth.

And that's why many people will say the estate tax actually exists. is, hey, you don't want a bunch of wealth just passed down from one generation to the next. You want each generation to rise on its own. Now, the other people on the other side of the coin,  will say, well, it's not fair because you tax the money when I earn it, you tax it when I spend it, and now you're going to tax it when I die and leave it behind or when I give it away?

So, I'm not saying it's right or wrong, I'm just saying this is one theory why the estate tax might actually apply. And for many people, it's worth taking another look at this, because in 2025, at the end of 2025, if what's supposed to happen actually happens, the tax law is scheduled to go back down to what it was in 2017, or the exemption, I should say, from 12.

9 million to roughly about 6 million, depending on what the inflation adjustment is, assuming Congress does nothing. So, just a quick thing to remind you about on Independence Day. And then sadly,  we just recently lost a titan of finance.  Harry Markowitz, he is the,  he, he proposed, he's a Nobel laureate who proposed the efficient market theory.

So, I remember sitting in finance class at Penn State, Smeal College of Business, and hearing about the efficient market, theory. And thinking, hey, it's When am I ever going to use this? That was one, because obviously I was a college kid. But also thinking, hey, maybe, maybe I should be paying attention here too.

So what exactly is the efficient market theory? So what it proposes is there's this busy marketplace where people buy and sell stocks. And according to this theory, the price of stocks in the market always reflects all information and it quickly adjusts. to reflect any new information that comes in.

It's like any new information that comes in, everybody in the marketplace is really smart and everybody already knows exactly what that stock is worth. So imagine you're in a marketplace where there's many fruits and vendors. If one vendor starts selling apples at a really low price or mangoes at a really low price, then what's going to happen is everybody's going to rush to buy them and the price will quickly go up.

But similarly, if another one sells bananas and the bananas are rotten and he sells them at a high price, nobody's going to buy them and the price will go down because of low demand. And in the stock market, when good news comes out about a new, about a company, like a new product or a big contract or a merger, a lot of people will go and buy up the stock and the price will go up.

And on the other hand, if bad news is announced, like mangoes are going bad, for example, then the company will start losing money and it'll start actually facing legal issues. And then fewer people are going to go out and actually buy the stock and the price will go down. Duh. Right, Neel? Like, why are you telling me this?

It's actually obvious. Well, it's kind of obvious now, but... So, you know, he got the Nobel Prize in part because it wasn't really articulated and he had his own sort of theories behind it. So another thing that, that Professor Markowitz or Dr. Markowitz had actually, proposed is that it's not possible to consistently beat the market by picking individual stocks.

Because all information is reflected in the stock price already. It's like trying to find a hidden gem in the marketplace. We're saying that somebody out there is dumber than I am. Or there's enough dumber people out there so that I can make more money. So even if you think you found a great deal, chances are somebody's already spotted it, and the price is gonna quickly adjust.

So what do we do? yeah, basically incorporating a lot of this is instead of trying to beat the market, it's better to invest in a diversified portfolio of stock. Have both. And if you have this diversified portfolio of stocks and bonds and you're spreading your money across various companies and sectors, this way if one stock performs poorly, others will perform well, balancing out the overall returns.

So this theory that Harry Markowitz put out there It states that the stock market's like this busy marketplace, right? People buying, selling bananas and mangoes and, you know, water bottles and basically everything out there too. It's a, it's a busy marketplace. And what happens is the prices quickly adjust and they're always reflecting all available information.

And because of that, it's difficult to consistently outperform the market because prices adjust so quickly. And remember, he did this before artificial intelligence. He did this before, well, before it was, I mean, it might have been out there already, but before it was like mainstream, like it's been in the past, I don't know, like six months.

And definitely, you know, it, it was one of those things where there was computers, but, you know, this was assuming that there was like information that wasn't fully, Being processed as quickly as it is right now, but just like that bustling marketplace, it's important to be aware of the information available and make wise investment decisions based on that knowledge.

So, a sad loss for the finance world with professor Markowitz, but his legacy lives on with the contribution that he's made. Well, listen I'll close it with the price of freedom is not free. There are many people who have given the ultimate sacrifice and given their lives for our freedom. And I know July 4th represents a special day for America, but, it's never a bad time to honor those who have basically laid down everything for the liberties and the freedoms that we have.

So thank you to those who are in the service. Thank you to those who have served and thank you to those family members who , have lost loved ones and, and ultimately made the sacrifice, so that we can celebrate. And it's not about barbecues. It's not even just about the fireworks or the family.

It's about remembering and really celebrating those, who have actually given everything. I hope you have a fantastic Independence Day. I hope this was helpful. And, you know, I don't know them personally, but obviously sending love and anybody who was touched by the passing of Professor Markowitz.

Bye, everybody!