I often write on Quora.com, where I am the most viewed writer on financial matters, with over 639.9 million views in recent years.
In the answers below I focused on the following topics and issues:
- I have an option to obtain a US passport, but I don’t want to due to worldwide tax. Are there any benefits to the US citizenship?
- What percentage of companies make over a million dollars net revenue per year?
- What are the best ways to get good at speculation in the stock market?
- Is there a good counter-argument to the Boglehead’s investment philosophy?
- Why is the compounding effect known as 8th wonder of the world? How can people use the power of compounding to the maximum for their investments?
- What happens if rich people are taxed too much?
- What happens when it’s decided an ETF should no longer exist?
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I have an option to obtain a US passport, but I don’t want to due to worldwide tax. Are there any benefits to the US citizenship?
It depends on many factors.
Firstly, the US taxation on worldwide income isn’t just for US citizens.
It is for “US specified persons”, which can include
- A US resident
- A green card holder
- A US entity
Therefore, Americans who renounce tend to renounce as many ties as possible – not just citizenship.
So, if you are living in the US and have a Greencard already, getting citizenship will probably only have positives.
That is unless you plan to leave and pay the exit tax to renounce your citizenship in the future.
If you are living outside the US, gaining US citizenship is likely to be a negative if you have another developed country’s passport.
You can travel to as many places on a Japanese, Canadian or EU passport as a US one. Therefore, unless you plan to live in the US sometime in the future, it isn’t a good move.
You will likely pay more taxes and just as importantly have more hassles with banks and brokerage accounts.
Many of these international banks and brokerage accounts don’t want American citizens living internationally because of rules like FATCA and FBAR.
I often get Americans living overseas approaching me for this very reason – it can be difficult to get good investing options as an overseas American.
If you are from a developing country, on the other hand, there could be benefits to acquiring a US passport.
It also depends on how much you are earning, because the foreign tax exclusion is now well above $100,000 a year.
I would get formal legal and tax advice, which this answer isn’t, if you are serious about getting a second citizenship.
What percentage of companies make over a million dollars net revenue per year?
Globally, about 65% make no profit.
In developed markets like the UK, US and Canada, the estimates are that 5%-9% of businesses turn over a million dollars or more. This is in terms of a million dollars in revenue per year.
However, revenue is vanity and profits are sanity. Making ten million in revenue but spending eleven million isn’t as useful as making two million and getting a net profit of just over a million.
Anybody can raise millions from investing, including friends and family, and get millions in revenue and turn no profit!
Spending a million to get a million back isn’t very impressive!
So, how many businesses make a million dollars a year in net profits?
Do you know the incredible thing? If you Google it, you can easily get the revenue estimates, but few profit estimates. That tells its own story.
I would say the figure is much less than 0.5% in developed markets if not less than 0.2%.
How many one-person-owned businesses, where there is only one owner and one shareholder, are making over a million in profits?
Probably less than 0.1%.
Having $ 1 million in profits as a four-person-owned company that has also given away equity to investors isn’t the same thing as having $ 1 million with one 100% owner.
There is an old saying about lies, damn lies and statistics (Credit for quote, Centre on Constitutional Change)
The same thing is true when it comes to selling business.
“I sold a multi-million dollar business” is something many motivational speakers say on YouTube videos.
However, that could mean you made hundreds of thousands after only people are cut in, or it could mean you made a lot as the only owner.
What are the best ways to get good at speculation in the stock market?
It is best to be an investor and not a speculator.
Speculation, by definition, is “the forming of a theory or conjecture without firm evidence”.
In comparison, investors don’t have perfect information, and nothing is guaranteed, but you are at least looking at the evidence.
Let’s look at a simple example.
Real estate investor A is getting a 7% rental yield and is using leverage in a sensible way (a mortgage).
Real estate investor B is getting 2%, and has bought in cash, in the hope that the real estate value goes up. It is all about location, location, location!
The first investor is investing sensibly, basing his/her decision on what can be yielded from the asset in terms of yield.
Even a small increase in the price will also help when it comes to leveraging the returns.
The second person is a speculator, because they are speculating that the price will go up. They might be right or wrong, but selling something to somebody in the future for a higher price is speculation.
Most people have the gambling urge though.
The best way to deal with this is:
- Have a maximum of 10% of a portfolio put into speculative “bets”.
- If the first tip works short-term, don’t be tempted to invest more into the speculative component of a portfolio, because when it falls eventually, it might fall hard. We can see Cathy Wood’s fund as an example. This graph was shared on Twitter and illustrates this example:
- Take the emotions out of it by using an advisor, company or robot (robo-advisors)
- Automate the process, via setting up a standing order or direct debit connected to your bank account to your investment account, and don’t login regularly to see the valuations. Studies show that those that don’t login regularly get higher returns as they aren’t as tempted to make changes.
- Switch off the media, especially when the market is going up or down more than usual.
Is there a good counter-argument to the Boglehead’s investment philosophy?
The best argument is what I would call the “fat Doctor one”.
More on that later.
Firstly, let’s explain what the Boglehead’s arguments are.
They are basing their theories on the Vanguard founder Jack Bogle.
To simplify the theory, you should:
- Just buy index-linked ETFs or index funds
- Never time the market
- Buy and hold. Or buy, hold and rebalance a portfolio
- Reinvest dividends.
- Don’t try to pick individual markets, like investing in a Paraguay ETF for example. Just have global diversification via the S&P500 or MSCI World.
- Don’t listen to the media and the sensationalism about investing.
To put it succinctly, be more passive. Buy and hold and be diversified.
This is because the vast majority of amateur investors don’t know when markets will increase or decrease, so just stay in the markets, considering they go up long-term.
Let’s face it, few saw the lock downs in 2020 coming. Even fewer saw the quick stock markets rebounds coming.
All of this is correct. This philosophy works for the vast majority of amateur investors if they keep to it.
If they keep to it, they will keep their costs down compared to using professionals, and get decent returns.
There is just one problem – human nature.
Just as many doctors drink in excess, are overweight or smoke, many people can’t follow their own theory.
They think “this time is different” and allows the media to influence their investment decisions.
I saw this on LinkedIn recently:
Basically, he/she is admitting that they are doing the exact opposite of the Bogle philosophy.
The issue is only you care about your money as much as you do.
But caring so much means we are more likely to be emotional about it compared to a machine or investment advisor.
That leads to contradictions such as this person who isn’t just buying and holding, despite knowing that is the best thing to do.
Of course, there can be other counterarguments too, but this is the one that affects the most people.
Only about 20% of people I know that understand Bogle argument can practice what they preach – long-term.
When a crisis comes they panic. Bogle himself admitted in an interview that the biggest sales of Vanguard funds happen during market crashes.
And even Vanguard themselves have conducted studies that have compared advised clients versus do-it-yourself ones.
What did they find? The advised clients did better on average, even adjusted for the fees, as per this chart from Seeking Alpha, taken from Vanguard directly:
It is a bit like going to the gym alone versus using a trainer.
Theoretically it should be easy to learn how to use the machines and do it yourself after a few sessions with a trainer.
That doesn’t factor in the benefits of having somebody hold you accountable.
What happens if rich people are taxed too much?
We can see that right now.
Norway increased its wealth tax recently.
What has been the result? A record number of Norwegians have left this year, so much so that the government is considering an exit tax.
Even the left-leaning Guardian admitted that the result has been lost tax revenue, which has came ‘as a shock’ to the government.
France’s 75% upper tax didn’t work, and they gave up on the idea.
Wealthy people are also leaving the UK. The potential change in the non domiciled rules are probably contributing to this.
Meantime, countries with special golden visas, like Portugal, have received so many people taking advantage of the program that the European Union put them under pressure to close the program.
Taxes aren’t the only thing that wealthy people care about obviously.
Many wealthy people live in Australia, the US and other relatively high tax places.
The issue is when taxes are pushed too high, and especially if they are higher than people are used to.
Why is the compounding effect known as 8th wonder of the world? How can people use the power of compounding to the maximum for their investments?
It is because of a quote from Einstein, which referenced compound interest as the eighth wonder of the world.
The most common way people can use compounding to their advantage is to save small amounts of money from a young age and increase as they earn more.
This graph from US News gives a simplified version of it.
What some people don’t focus on is how compounding can also help private businesses.
Let’s say you have a profitable, and fast-growing, small or medium-sized business.
Last year the profits were $721,000 to give an example.
If that business grew by 40% in the first three years and then 5% for 17 years, it would be making $5,482,447.08 in twenty years.
In comparison, a 15% per year growth rate for 20 years would be $9,089,118.58.
The same is true for things like online traction.
A firm which is getting 500,000 yearly visitors online from Google search, would be getting 6.3 million in twenty years if they increased visitor numbers by 15% per year…..and Google still exists then of course.
The point is, getting lower but compounded returns actually really adds up once a business or person already has a decent amount of traction because there is a multiplier.
People forget that is one of the reasons Buffett got so rich.
In the early days, his wealth increased by a bigger amount. After a certain age, it slowed down, but the compounded returns on a bigger amount of money started to add up.
The graph above from Market Watch shows he didn’t make his first billion until his 50s. He subsequently got to over 100 billion, even though the growth rate in percentage terms slowed down.
Likewise, there are plenty of people who have private businesses that are only known in certain specific circles, as they have niche businesses.
Many of these people just grew fast in the early years and then compounded steadily after that.
Of course, it is easier said than done. Most people get complacent, work less hard or don’t adapt to change if they are in private business, once a certain amount of success has been achieved.
However, the point is you don’t need to have Einstein’s intelligence to work out that compounding small amounts will eventually become something large, and compounding something large can become enormous, even if the growth rate slows.
It was Bill Gates who said most people overestimate how much they can do in a year, but underestimate how much can be achieved in ten years.
What happens when it’s decided an ETF should no longer exist?
The big ones, like Vanguard’s S@P500, will likely never close.
If the smaller ETFs close, the investor is returned their money.
That has negatives such as taxes needing to be paid in some countries.
Most ETFs in UCIT and other good structures have investor protections, which means that investors don’t face a complete capital loss.
The investors are typically returned the value of the investments on the day the fund ceases to exist.
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Adam is an internationally recognised author on financial matters, with over 694.5 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.