With asset valuations at record highs, it’s easy for investors for decide they’re going to move to cash, or change their asset allocations to something more conservative.

Here’s a good video by one of my favorite investment experts, Bill Bernstein. Unlike other TV “experts”, who are always selling doom and gloom on CNBC, Bill is a sound voice of reason who’s basic investment philosphy is always consistent.

I happy to be done with my taxes!

With the tax deadline behind us, we can move on to more pleasant topics – like where to move to save money on our income taxes!

Last year I installed solar panels on my roof, so I was able to benefit from a 30% federal tax credit. This $7,000 tax credit was pretty substantial, but I realized that my marginal state tax bracket was still a whopping 10%.

As of writing,  there are seven states that currently have zero income tax and zero dividend tax, including Florida, Nevada, Texas, Alaska, South Dakota, Washington State and Wyoming.

New Hampshire and Tennessee also have no income tax, but they do tax interest and dividends.

Here’s a nice graphical representation of the average taxes across the US.

Average income tax by state, ordered from low to high

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California has the highest average tax of any state at 10.4%.

Oregon, Minnesota, Hawaii, DC, New York, Vermont, and Maine also have average state income taxes that are higher than 7.5%.

If you’re dumb enough to live in California, you should move!

I suggested to get my wife that we should move to someplace nice like South-East Florida, or any other place with a low tax rate but she immediately shot down that idea.

Just in case you were wondering which states are good for the top 0.1% of income earners, you might want to consider Indiana or Utah.

Illinois, and Massachusettes are also low tax states for top earners, but they have high property taxes, so that isn’t much of a benefit.

Pennsylvania is also a low tax state with low property taxes, but they charge a 1% transfer fee when refinance your mortgage or sell your home. That’s socialist BS, if you ask me! Okay, that may be an overstatement, but unlike income tax rates which drop off when you retire property-related taxes are forever.

Here’s the complete list.

Income Tax Gap by State

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Jim Grant, of Grant’s Interest Rate Observer, has been a strong critic of rampant quantitative easing instituted by the world central banks. In this Bloomberg video, he puts forward some interesting arguments on why this policy is a bad idea, and why you should own gold.

Here are some of his key quotes:

On his degree of bullishness on gold:

“This is not going to be any news, Jim Grant is bullish on gold. The degree I would characterize as ‘very.’ I would characterize gold not so much as a hedge against monetary disorder, but as an investment in it. People will say well that’s a hedge against armageddon, no, armageddon doesn’t happen mostly, but what we are in the midst of is monetary shenanigans, and I see no real chance of being fewer of them, and a great chance there will be more of them.”

On why some Western central banks, like Canada’s, are selling gold today:

“Western central banks to the extent that they are run by people who follow the educational path of Janet Yellen, and Ben Bernanke, and Mervyn King and MIT people I think they have one view which is that gold is a curiosity, it’s like a monetary tonsil. It’s this thing of ancient standing of no immediate relevance so they can’t explain it they don’t know what to do with it.”

“Gold however has its fans in the East and gold is moving from West to the East. When Western central banks do sell as the Bank of England did in the late 90′s, as little Venezuela did in the first quarter and is probably doing now, typically those are moments to pay attention because they’re moments of distress in the world“

“People who hold the view that the stewards of our paper and digital currencies have the answers, that this monetary improv conducted for the past seven or eight years by the world’s Western central banks and certainly Japan, that this is the way forward. I try to understand what they’re saying but I can’t make head nor tail out of it. It seems to me the opposite is so obvious that sometimes I wonder if I’m seeing things.”

And on the benefits of holding cash:

“Cash is invariably a nice thing to have, even though it yields nothing it’s an option, it gives you the flexibility to move and to buy things.”

“Years ago a friend of mine had this conversation with a very wealthy client, and the client said ‘there’s one thing I never want to have to say, that I used to be rich.’ So what cash does for an investor who has some of it, cash allows you to retain wealth with an eye to being opportunistic at that moment that no one wants the things that are now so popular.”

He makes some excellent points regarding why it makes sense why portfolio should own some gold.

Tesla just pre-sold a whopping 325,000 Tesla Model 3s.

Yup, excited buyers gave the company $325 million in an interest-free loan for a car they haven’t seen, or who’s factory still hasn’t been built yet.

Image of Tesla Model 3 in steel grey

The excitement is understandable.

And it’s remarkable that a car company with no advertising, and no dealers can get people to stand in line for hours to buy a car that won’t be ready for over a year. Most of the people in line will have to wait 2 years, and probably won’t receive the $7,500 tax credit for electric cars either.

The key component to the car is the battery. Tesla is still building the gigawatt battery plant in Nevada, and is expected to be a large consumer of global Lithium ion production.

By the time Elon Musk’s prediction of rolling out 500,000 cars rolls around, it will most likely absorb the entire world’s annual Lithium production!

Unsurprisingly, prices for Lithium has soared, doubling this year.

Lithium carbonate spot price chart

This chart from the Economist shows prices up 3 fold from the long-term average of $5,000 per tonne. There are also rumors out of China that prices might double again from here.

If Tesla is absorbing the entire global production what are the other electric car manufacturers going to do, not to mention the makers of power tools, household appliances and rechargeable batteries, that all use Lithium ion as well.

Sounds likes it’s time for a short-term speculation in Lithium exploration/production companies!

While gambling on these sort of things rarely work out, if you’re so inclined, you might want to check out Global X’s Lithium ETF, which invests in the full lithium cycle, from mining and refining the metal, through battery production.

The fund isn’t exactly cheap, with a 0.77% expense ratio, and it owns 25 different companies, with Tesla (TSLA) being one of them. Also, two companies consist of 28% of the fund – FMC Corp and Sociedad Quimica Y Minera De Chile (or The Chemical and Mining Company of Chile, cutely called SQM).

According to Morningstar analysis, FMC is undervalued by about 20%, and SQM is overvalued by 25%. While valuations are highly subjective, Morningstar is a good quality resource at a cheap price.

I’ll probably pass on this fund, despite the fact that it’s an interesting opportunity.

Unless you’ve just woken up from a week-long coma, you already know that Ben Bernanke, Chairman of the Federal Reserve, announced the Fed is going to maintain its Zero-Interest Rate Policy for the next 2-3 years. It is also going to buy $500 billion worth of mortgages every year until the economy improves.

One opponent of this measure was president and CEO of the Dallas Federal Reserve, Richard Fisher. Fisher maintains that buying bonds probably won’t help stimulate the economy. Instead, it will however increase inflation, and expectations of inflation.

As one of the richest members of the Fed, we should probably listen to him. Worth an estimated $21 million, Fisher has worked as a Banker and a Hedge Fund Manager. And he’s been voicing inflation concerns since 2005.

While opposing the Fed’s stance on bond purchases, his personal portfolio is well positioned to benefit from any inflation that might occur due to it.

Fisher owns about $1 million worth of gold in the form of the gold ETF (GLD), $250,000 in uranium, and over 7,000 acres of land in the Mid-West.

In a prior post, I mentioned that everyone’s portfolio deserves an allocation to gold. As a percentage of his portfolio, Fisher’s allocation to gold is sitting at about 5%. In addition to gold, real estate is also inflation hedges. (While I wouldn’t necessarily recommend uranium as an inflation hedge, it is a commodity and thus being somewhat uncorrelated to either stocks or bonds, would provide some value in a portfolio).

So he’s definitely set up his investments to benefit from inflation.

What else does he own? Several million in Texas Municipal Bonds – earning him tax-free interest on his money. And a lot of blue-chip stocks like Eli Lily and Du Pont along with MLPs like Magellan Midstream Partners. You can check out the entire list here.

Nothing like a well-balanced portfolio to live out your retirement years in case your cushy government pension runs out!

I’ve been seeing a lot a recent press warning investors about Financial Advisors.

Most FAs aren’t your advisors. They are just salesmen of financial products. The titles on their business cards don’t mean anything. Financial Advisor, Wealth Manager, Private Wealth Manager, Your Personal CFO….they’re just made up titles with no minimum qualification. See this article in the New York Times cautioning you against advisors with fancy titles.

For the most part, they’re brokers (and thereby fully commissioned salespeople), whose main objective is to make as much money for their firm and for themselves. They do this by “selling” you a financial product like a mutual fund or insurance vehicle with an investment component.

Only they don’t call this “selling”. They call it “investing” your money.

But when someone puts my money in a vehicle with high up-front fees and ongoing expense ratios, I call that selling. Plain and simple.

One of my friends recently had an “advisor” put him in a bunch of mutual funds offered by Mass Mutual. These funds all came with a 5.75% front-end load (or fee) and an annual 1.75% expense ratio. All of the front-end load and part of the expense ratio was a commission back to his advisor.

One of the funds was a unit trust and even came with an expiration date. After a couple of years the fund automatically sells everything and you get the cash value of the stocks at that time. At that point your “advisor” is free to put you in another fund with an upfront fee and restart the whole process again. Read this excellent article about the mutual fund industry’s rating scam.

It’s not uncommon for unsuspecting victims, I mean customers, of such “advisors” to pay 6% in upfront fees and 2% a year in mutual funds fees. And then pay an additional 0.5% or 1% as the advisor fee!

But that doesn’t mean advisors don’t add value.  Here’s a great piece by the White Coat Investor on the benefits of using a Financial Advisor.

Before hiring a financial advisor, or planner, make sure you ask a few important questions.

Are they your fiduciaries?
That is, do they have a a legal obligation to put your interests first? Or does their firm come first?

How are they compensated?
Do they get commissions from any of the products they sell? If so, will it be disclosed upfront?

Ideally, you’d want to use a fee-only advisor – they only get compensated by the fees you pay them and don’t except any commission. This removes any conflict of interest.

What’s their investment methodology?
Do they just put you in a bunch of stocks or mutual funds? Or do they use Modern Portfolio Theory to put you in a well-diversified portfolio where they show you (and take the time to explain) the portfolio’s alpha, beta, standard deviation and sharpe ratio (see definititions at investopedia.com). If they use mainly low-cost ETFs instead of mutual funds, they might be able to pay for their services just by the reduction of fees alone. For example, if their portfolio of ETFs has an expense ratio of 0.4% and they charge 1%, that’s like you buying a mutual fund charging 1.4% on your own. But without the upfront load fees and mis-management that comes with it.

If you’re looking for financial planning advice then you want to make sure they have a background in finance, or a CFP to make up for it if not. Many ex-pharmaceutical sales reps (read pretty blonde women) make a career change and become financial advisors. Don’t just go for the cutest saleswoman. Make sure they understand investing and all the aspect personal finance like estate planning, and taxation.

When looking for a financial advisor, try looking for a Registered Investment Advisor Representative. People with this designation usually have a fiduciary duty and are more often than not fee-based instead of commission based. Go to Brokercheck.finra.org and put in the advisor’s name and you’ll find out whether he’s just a Broker or an Investment Advisor Rep. If he’s both, you definitely want clarification on how he is compensated.Investment Advisor Reps are required to provide prospective clients with a firm brochure called the ADV-2, which describes the services they provide, how they are compensated, their investment philosophy. Brokers are not required to provide this document. Make sure you ask for, and get this document from your advisor.

A trusted advisor can be a great resource. A salesperson can be disastrous to your financial future.

Do you have any advisor horror stories to share?

But despite the panic of 2008, the belief that gold is a foolish “investment” still persists.

I’ve been a strong advocate of gold and silver since 2005. Back then, I sold my condo and used some of the proceeds to buy some gold coins. When I started buying, the price of gold was $495/oz. Today it’s hovering around $1,600/oz.

A lot of people I know complained that gold is relic from olden times. That it has no use in the modern era. Of course, this was before 2008 when it seemed like the entire financial system was about to crumble.

Even Warren Buffett, the Oracle of Omaha, took an opportunity to ridicule gold in his latest shareholder letter.

Buffett wrote,

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.”

“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

While I have a lot of respect for Buffett’s views and also own stock in Berkshire Hathaway, I’m going to have to disagree with him on this one.

Gold has always been a store of value. And a valuable hedge against monetary mismanagement – something we (and Europe) are currently experiencing.

David Einhorn, manager of Greenlight Capital, World Poker Champion and author of Fooling Some of the People All of the Time also disagrees. He had an excellent comeback for Buffett’s derision of gold.

In his recent shareholder letter, he referenced Buffett’s analogy, but with an interesting twist.

“The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us,”

As gold dropped 21% from its peak of $1,921 last summer, to $1,544/ounce in May, the media was quick to announce that gold was in a bear market, and that the massive bull-run in gold over.

But gold isn’t an investment. It’s a store of value. Just like cash. And over the centuries it is more likely to retain is purchasing power than any currency or business.

And despite short-term fluctuations in its price, gold will always be worth something. If you don’t believe me, just ask the Greeks!

Gold is also uncorrelated with other asset classes like stocks and bonds. Owning some in a diversified portfolio helps reduce your volatility.

In the past week, the S&P500 was down over 3%, while the gold ETF (GLD) was up 4%.

While I prefer owning gold and silver coins, owing an ETF like GLD is an easy way to get exposure to gold.

How much gold you should own depends on your risk tolerance and other investments. But as a general rule of thumb, gold should be between 2.5% and 15% of your portfolio. Although, Harry Brown’s Permanent Portfolio has done exceedingly well with an allocation as high as 25%.

Disclosure: I’m long BRK-B, GDX, and gold and silver coins

Here’s an interesting infographic regarding the history of US taxes.

President Lincoln enacted the first taxes in 1862 to pay for the civil war. The lowest tax bracket was 3%, while the highest was 5%. It was later repealed in 1872 until 1894 when it reintroduced again.

In 1913, the highest tax bracket was 7%.

In 1945, the highest tax bracket was a whopping 94%. Why do politicians love other peoples money?

Click on the graphic to make it larger.
History of US Taxes - Infographic

“I’m going to put $10,000 in Facebook’s IPO”.

I was having a conversion with a friend of mine yesterday. He’s a reasonably smart guy. He’s a technology manager at a wireless carrier company and does quite well. At least regarding his income. When it comes to his investments, I have my doubts.

“I think it’s over-valued”, I told him.

“I don’t care. I just want to invest in Facebook. It’s a great company. It’s growing”.

“Yeah, but it’s over-valued”, I argued. “You should go work for them. But don’t buy the stock”.

“I think it will do well”, was his reply. “It’s profitable”.

“Do you know how much it’s worth?”, I countered.

“I think its worth $100 Billion”.

“No, that’s the IPO price. What’s it’s worth? What’s the revenue and profit?”

“I don’t know. And I don’t care”, he admitted.

Apparently my friend is so enamored with Facebook that he’s willing to pay any price to own the stock.

It’s widely believed that Facebook will be offered at a valuation of $100 Billion. With about $3.7 billion in sales and $1 billion in net income, it’s a bit to pricey for me.

The fact that it’s being offered at 30 times sales and 100 times earnings is not relevant to my friend’s decision.

Like most people, he doesn’t even understand what it means when a company sells for a 100 times earnings.

Suppose you were going to buy a sandwich shop. You paid $100,000 to own it outright. At the end of the year, the manager sent you a check for your share of the profits — and it was a only $1,000. Would you invest in that sandwich shop? Well, that’s just like investing in a company like Facebook.

Ah, but what about growth? Surely there’s a lot of growth considering that the whole world will eventually be using FB, right?

Well let’s take a look at that.

Assuming the company has 800 million users, their per customer revenue is about $4.65, with a net income of $1.25.

And let’s assume that even if every person in Asia joins in, they’ll have 5 times the customers.

But these customers only have 1/10th the spending power as Americans. But I’ll be generous and say they have 1/5th the spending power.

So basically, FB’s user base will surpass 5 billion, while their net income will only double to $2 billion. In which case their PE will be 50 instead of a 100. It’s still way too expensive! Using the sandwich shop analogy, you’d now get a check for $2,000!

If it was going public at a $10 billion market cap and paying at least a 1% dividend, I think I might be interested.  But as someone already said, Facebook already went public – only you weren’t invited!

What about your friends? Are they falling over themselves to get in on the FB IPO?