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One of the most important realizations I've had recently is the investing motto: "You can't beat the market, but you can beat the tax man". Don't try to be sma

One of the most important realizations I've had recently is the investing motto: "You can't beat the market, but you can beat the tax man". Don't try to be smart about your investments from the point of view of share pricing, P/E ratios, EBITDA, etc, etc. The legions of Harvard and MIT quants working on Wall Street are going to be better than you at figuring out what the stock price should be. Instead, get smart about how the tax code works. Figure out the difference between long-term and short-term capital gains. Figure out how to do tax loss harvesting. Figure out what a back-door IRA is. Figure out how to take out a loan on your 401(k). The benefits from those investigations are going to be much more reliably beneficial than trying to be smart about pricing and timing the market.

0xcafefood 3y ago
William Bernstein's books, e.g. "The Intelligent Asset Allocator," makes a similar point about chasing beta instead of alpha. Beside that, on top of minimizing tax burden, he also emphasizes minimizing fees that fund managers charge.
epolanski 3y ago
> The legions of Harvard and MIT quants working on Wall Street are going to be better than you at figuring out what the stock price should be. This is not completely true. Legions of Harvard quants most likely do not possess your circle of competence, whatever it may be. E.g. as a customer of various cloud services I am much better positioned than any quant at understanding cloud vendor's product and business, because I'm a user and customer so I can understand how some offerings are just better than others and I can safely predict winners in long term. You could likely predict AWS meteoric rise as a sysadmin in 2010. E.g.2 people following the semiconductor market in depth knew from years that Intel was on its way down since the blatant issue of the 10nm node appeared in 2015+ and had many years to act on it. As a MBP Pro user yourself you could quickly see that the boiling hot trackpad burning your fingers combined with Apple's declared intention of moving to in house socs, combined with the comeback of AMD in data center market combined with cloud vendors working on their own socs put Intel more and more in the corner. And what did quants do? Kept buying Intel because they looked at balance sheets, not products. Everyone has its circle of competence and can combine it with learning balance sheets and do their math. Point is almost no one does and does not go through the analysis part to value and price a business. Finance moreover changed. 30%+ of stocks out there are held by passive funds. Even investment managers which are consistently pressured to stay in a delta from the benchmarks. Investment opportunities are out there, what is needed is to practice continuous due diligence, stay in own's circle of competence and be patient. You can't be right consistently for the reasons you listed, but you only need to get it right few times.
- twelve40 3y ago
  > You could likely predict AWS meteoric rise as a sysadmin in 2010 this and Intel you mentioned are pretty unique and rare insights, maybe like a one-off windfall, not a consistent way to make money. I've been in tech for decades now and I'm still having a hard time reliably telling who will flop and who won't. Only in a very few cases it's so convincing to me that I would be willing to bet money on it.
  - epolanski 3y ago
    > a consistent way to make money Who said it was? As per my last sentence my conclusion was that you only need to be right few times over your life time to buy a very good company that is mispriced for whatever reason and that retail investors hold often deep understandings of key industries that professional analysts don't. If you're willing to do due diligence (and learn to do so which is far from trivial) and act you can definitely see good long term returns on a good number of picks. Point is, stock markets only beat bonds in the long term, if you are in the stock market to do + some % in a short time it's gambling.
PopAlongKid 3y ago
> Figure out how to do tax loss harvesting. Figure out what a back-door IRA is. Figure out how to take out a loan on your 401(k). I'm not convinced any of those things is "smart". For example, if LT cap gains is your lowest-rate taxable income, why would you want to offset it? I make sure when I have a cap loss for the year, I have no LT cap gains and keep it to around $3K (which offsets higher-tax-rate ordinary income). Loans against 401(k)s are rarely a good idea, you shouldn't put in money in the first place if you need it before retirement. And I've always thought that (assuming I have any pre-tax Trad IRA money, which would be the case if a ever leaving a job and rolling over the old 401k), it's more effective to use my annual $6K after tax money to pay tax on a larger Roth conversion than to simply go though extra steps to get the $6K into the Roth (greater leverage).
- Paul-Craft 3y ago
  Re: long term capital gains, the point of tax loss harvesting is to defer capital gains, so you can also defer the capital gains taxes. Re: 401(k), you are assuming knowledge of the future that nobody has. Re: extra steps to do a Roth conversion, it's something that can be done in literally under 5 minutes, at $0 cost, if you have no other money in traditional IRA accounts, so I have no idea what you're talking about.
  - PopAlongKid 3y ago
    > the point of tax loss harvesting is to defer capital gains, so you can also defer the capital gains taxes. No, it's not. It is to recognize both taxable cap gains and deductible cap losses in the same year, to net the tax to zero. Nothing is deferred with tax loss harvesting. My point was, why waste a cap loss offsetting low-tax-rate LT cap gains, when instead with planning it can be used to offset higher-rate ordinary income. >Re: 401(k), you are assuming knowledge of the future that nobody has. No. The context was, "beat the tax man". Using 401k loans for tax planning is near the bottom of the list. Using 401k loans for an unexpected emergency is something else entirely. >extra steps to do a Roth conversion The "extra steps" again was not my point. My point was, if you have $6K aftyer tax money to invest, would you rather get $6K into your Roth, or more like $20K into your Roth by paying the tax on a conversion of pre-tax Trad IRA (which presumably you have accumulated after earnings in your first decade or two of work).
itake 3y ago
I moved from CA to WA for this reason. With lower salaries, I wonder if this was the right move.

0xcafefood 3y ago

William Bernstein's books, e.g. "The Intelligent Asset Allocator," makes a similar point about chasing beta instead of alpha. Beside that, on top of minimizing tax burden, he also emphasizes minimizing fees that fund managers charge.

epolanski 3y ago

> The legions of Harvard and MIT quants working on Wall Street are going to be better than you at figuring out what the stock price should be. This is not completely true. Legions of Harvard quants most likely do not possess your circle of competence, whatever it may be. E.g. as a customer of various cloud services I am much better positioned than any quant at understanding cloud vendor's product and business, because I'm a user and customer so I can understand how some offerings are just better than others and I can safely predict winners in long term. You could likely predict AWS meteoric rise as a sysadmin in 2010. E.g.2 people following the semiconductor market in depth knew from years that Intel was on its way down since the blatant issue of the 10nm node appeared in 2015+ and had many years to act on it. As a MBP Pro user yourself you could quickly see that the boiling hot trackpad burning your fingers combined with Apple's declared intention of moving to in house socs, combined with the comeback of AMD in data center market combined with cloud vendors working on their own socs put Intel more and more in the corner. And what did quants do? Kept buying Intel because they looked at balance sheets, not products. Everyone has its circle of competence and can combine it with learning balance sheets and do their math. Point is almost no one does and does not go through the analysis part to value and price a business. Finance moreover changed. 30%+ of stocks out there are held by passive funds. Even investment managers which are consistently pressured to stay in a delta from the benchmarks. Investment opportunities are out there, what is needed is to practice continuous due diligence, stay in own's circle of competence and be patient. You can't be right consistently for the reasons you listed, but you only need to get it right few times.

twelve40 3y ago
> You could likely predict AWS meteoric rise as a sysadmin in 2010 this and Intel you mentioned are pretty unique and rare insights, maybe like a one-off windfall, not a consistent way to make money. I've been in tech for decades now and I'm still having a hard time reliably telling who will flop and who won't. Only in a very few cases it's so convincing to me that I would be willing to bet money on it.
- epolanski 3y ago
  > a consistent way to make money Who said it was? As per my last sentence my conclusion was that you only need to be right few times over your life time to buy a very good company that is mispriced for whatever reason and that retail investors hold often deep understandings of key industries that professional analysts don't. If you're willing to do due diligence (and learn to do so which is far from trivial) and act you can definitely see good long term returns on a good number of picks. Point is, stock markets only beat bonds in the long term, if you are in the stock market to do + some % in a short time it's gambling.

PopAlongKid 3y ago

> Figure out how to do tax loss harvesting. Figure out what a back-door IRA is. Figure out how to take out a loan on your 401(k). I'm not convinced any of those things is "smart". For example, if LT cap gains is your lowest-rate taxable income, why would you want to offset it? I make sure when I have a cap loss for the year, I have no LT cap gains and keep it to around $3K (which offsets higher-tax-rate ordinary income). Loans against 401(k)s are rarely a good idea, you shouldn't put in money in the first place if you need it before retirement. And I've always thought that (assuming I have any pre-tax Trad IRA money, which would be the case if a ever leaving a job and rolling over the old 401k), it's more effective to use my annual $6K after tax money to pay tax on a larger Roth conversion than to simply go though extra steps to get the $6K into the Roth (greater leverage).

Paul-Craft 3y ago
Re: long term capital gains, the point of tax loss harvesting is to defer capital gains, so you can also defer the capital gains taxes. Re: 401(k), you are assuming knowledge of the future that nobody has. Re: extra steps to do a Roth conversion, it's something that can be done in literally under 5 minutes, at $0 cost, if you have no other money in traditional IRA accounts, so I have no idea what you're talking about.
- PopAlongKid 3y ago
  > the point of tax loss harvesting is to defer capital gains, so you can also defer the capital gains taxes. No, it's not. It is to recognize both taxable cap gains and deductible cap losses in the same year, to net the tax to zero. Nothing is deferred with tax loss harvesting. My point was, why waste a cap loss offsetting low-tax-rate LT cap gains, when instead with planning it can be used to offset higher-rate ordinary income. >Re: 401(k), you are assuming knowledge of the future that nobody has. No. The context was, "beat the tax man". Using 401k loans for tax planning is near the bottom of the list. Using 401k loans for an unexpected emergency is something else entirely. >extra steps to do a Roth conversion The "extra steps" again was not my point. My point was, if you have $6K aftyer tax money to invest, would you rather get $6K into your Roth, or more like $20K into your Roth by paying the tax on a conversion of pre-tax Trad IRA (which presumably you have accumulated after earnings in your first decade or two of work).

itake 3y ago

I moved from CA to WA for this reason. With lower salaries, I wonder if this was the right move.