Taxes

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this.

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80. The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers? How could they divide the $20 windfall so that everyone would get his fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20,"declared the sixth man.
He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a Dollar, too. It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.


I borrowed this from this guy when he posted it in a comment on a Kiplinger article:
http://pulse.yahoo.com/_QT4UCZQAN7BVW3HPJVQEFDM62Q


Thanks D.e.m.M.

Best Buy

I am slightly torn on Best Buy at the moment.  The uncertainty of the future is the only thing that keeps me from going all in on this issue.  Best Buy is conservatively financed with long term debt equal to less than one year of earnings.  Earnings have increased or held steady every year for the past 10 with the exception of 2009 when very few companies increased earnings.  Even with 2009 the year to year increase in earnings over the past 10 years has averaged 14%.

Return on Equity over the past 10 years is 20.9% which is well over the level of 15% that I like to see.

The price/earnings ratio for Best Buy has gone from 30 to 12.  Any company with 14% earnings growth year to year that is selling at 12 times current earnings is almost a no brainer.

While earnings have continued to rise over the past 10 years the share price has been on quite a ride.  The current share price at just under 35 is the same as it was in 2000, 2002, and 2003.

If Best Buy continues to perform over the next 10 years as it has over the past 10 I would expect the share price be somewhere between 200 and 333 which would work out to a yearly rate of return of 19% - 26%. 

So the decision comes down to whether or not I believe Best Buy can continue it's earnings increase.  The sheer fact that Best Buy is still standing (and thriving) is a testament to itself.  When I look at consumer electronics as a whole I see the biggest threats to Best Buy to be the superstores such as Wal-Mart, Target (both stocks that I like) and the like.  Personally i do not see this as a huge threat.  Best Buy has prices that compare very favorably with these stores and their selection is far superior.  Unlike many of the rental video stores I don't see Best Buy becoming obsolete with the increase of internet based entertainment.  People will continue to need the equipment to enjoy this entertainment and where better to buy that equipment than from Best Buy.

Best Buy is the best positioned company to increase it's market share with the void left by the recent bankruptcy of Circuit City.  I also see room to grow as my home town with a population of 20,000 has a Wal-Mart and a Home Depot, but still no Best Buy.

Maybe new management takes over and decides to concentrate more floor space to PCs while America drifts closer and closer to Steve Jobs.  Apple decides to stop allowing Best Buy to sell it's computers while it continues to open Apple stores across the country and Best Buy slowly fades into oblivion.  In that case I am happy I hold shares in Apple, but otherwise I see Best Buy as an excellent buy now.

My thoughts as of 8/1/2010 are that Best Buy is an excellent buy at $35 and a good buy at $55.

New Format

I've been somewhat lazy in my musings on this particular blog so I'm changing things around.  For the foreseeable future I am going to be publishing posts on various companies as I contemplate stock purchases.  I plan to update the individual posts as my thoughts on them change.  The reason for this is to have a notebook of sorts to record my thoughts on why or why not to purchase a particular issue.  The reason to do this in blog form is that I will then have access to my thoughts at any place I may be.

Should I feel some strong desire to air my thoughts on our country's treatment finance or healthcare I will continue to do that as well.

Faith in Stupidity

Vivus Inc is a pharmaceutical company that is currently in phase 3 trial of a new weight loss drug.  The results of the studies done so far are encouraging and everybody knows that a pill for weight loss is a gold mine.  If it works as well as they are touting a few people may get very rich as the BMI of America decreases.

At the moment Vivus stock (VVUS) is up 16% in morning trading.  That's not to be unexpected and it gives me a lot of hope.  It confirms to me that there are still a lot of stupid speculative investors out there.  For one thing the new drug that Vivus is marketing is nothing more than phenteramine and topiramate.  Both of those drugs have been on the market for a while.  If this new drug does become something of a money pipeline it will be for one of the big pharma companies after the rights are purchased from Vivus.  Will Vivus make money off the deal?  Sure they will, but not enough to cover the losses they have had over the past 9 years.  The last time Vivus declared a profit for their shareholders was 2000.  In the 9 years since then Vivus has had a combined net loss just shy of $100 million.

Even if this new drug is all it says it is, it will be years before it becomes profitable, once again for another company.  If it does work we're all just going to be prescribing the equal doses of phenteramine and topiramate that will both be generic by the time this new wonder drug is approved for release by the FDA.

As long as there idiots out there throwing money at companies like Vivus there are deals to be found for long term investors.  Certainly a great boost to the efficient market theory (don't even get me started on that).

Recovery or Bubble?

I'm starting to get depressed about this economic recovery. Overall I'm glad to see the country emerging from last fall, but the speed of the stock market upswing is unreal. I'm up over 60% this year and I feel somewhat like I did 2 years ago when nothing looked appealing. Investing has been easy for the past year. Throwing darts would produce a sizeable return, but now the bargains are drying up. I fear we may be heading into another bubble. At this point one of my greatest hopes is that this upswing might be sustained by the massive amount of money that will continue to flood the market as employers start to reintroduce the company match on retirement contributions.

As for now, I'm still bullish on Nike, Harley Davidson and I'm starting to take a closer look at Buffalo Wild Wings (you gotta admit the commercials are catchy), though I've never eaten there so I may have to do that before I lay down any investment money.