Extending time to qualify for the long-term capital gains tax to overcome short-termism

For the past few years I've been advocating that the long-term capital gains tax rate of about 15% (to move up if the Bush tax cuts expire) be shifted so that the "long-term" holding requirement is 5 or even 10 years rather than 1 year. The tax rates should be staggered so that very short-term trading is taxed high (more than the income tax, perhaps by 10%), 1 year is taxed less (perhaps 5%+ of the income tax), and so on. Of course, there are other things that need to be addressed - for example, shareholders and institutional investors have to rise up and start voting their shares instead of leaving the managers to essentially own companies with a high turnover in ownership. This is one of the reasons I like extending long-term capital gains tax: it encourages people to stick with a company and act like an owner, and therefore hold management accountable to the long-term stability and profitability of a company.

I haven't heard many people repeating the idea. A while back I heard one guy on Bloomberg say that maybe there should be an 80% tax on short-term trading, and saying that his comrades on the Street would probably kill him for saying that. However, I was very happy to see the Aspen Institute's Overcoming Short-Termism report released in September 2009.

Of course, there are other things that need to be done - executives and employees doing risky deals (e.g., traders on Wall Street) should be rewarded with restricted stock or, if options are necessary, LEAPS (plus clawback arrangements). But I tend to think that these things can happen if more individual investors take long-term stakes in companies. The recent SEC rule which allows investors to access the proxy statement is nice, but really it's not such a big deal with the notice and access rules which allow investors to spend a relatively small amount of money to mount a proxy contest. Steve Nieman and Richard Foley have run proxy contests against Alaska Airlines in the past few years with only a few hundred dollars, and his votepal website offers some guidance on how to do it. He hasn't won, but that's probably more because he runs a slate of director composed of himself and his friends and family. Plus he seems to want to turn the company into a cooperative. I've been thinking about running a proxy contest, but generally I don't hold onto companies where there's reason to be highly dissatisfied.

Audience measurement, Nielsen's validity, and surveying

A couple weeks ago I got in a debate with someone on the internet about Nielsen ratings. He said something to the effect of: "of course these are basically accurate; after all, the advertisers and networks rely on these for billions of dollars of expenses". I responded that comparable amounts of money were involved in the mortgage crisis - and he responded that that was "entirely different" and "involved collusion". I thought this was naive, but it sparked my interest in the topic.

I set about to learn more about ratings. According to Nielsen's website, it measures 40% of the world's TV viewing, and in the United States it has 25,000 meters. I didn't really understand what that means and tired of Nielsen's website quickly, so I went to my next source: Google Scholar. There I found an interesting, but rather lengthy Master's dissertation by Seles (Audience Research for Fun and Profit: Rediscovering the Value of Television Audiences). Seles referred me to the book Ratings Analysis, but I hadn't finished the first chapter before I wandered to the Wikipedia page - where I should have started, and which covers the gritty process details decently - and read this passage (referenced to a USA Today article):

The number of U.S. television households as of 2009 is 114,500,000.^[12] As a result, the total number of Nielsen homes only amounts to 0.02183% of the total American television households, meaning that 99.97817% of American households have no input at all into what is actually being watched. Compounding matters is the fact that of the sample data that is collected, advertisers will not pay for time shifted (recorded for replay at a different time) programs.

Further, these sampled households self-select into this group. These are people who apparently care less on average about privacy. I'm not sure if they are being paid, if they are that would suggest they are also lower income. Seles points out that digital set-top boxes allow for an enormous amount of datamining which is much more valid than Nielsen ratings, but a confluence of factors have not led to these being fully exploited. As an odd sidenote, this 2004 Wired article reports that at that time, Nielsen was using diaries from samples of 500 to assess viewing. Diaries from 500 people, in the 21st century! It's worth noting that television networks should not be necessarily bothered by inaccurate data so long as the data overall does not underestimate viewers; it's only the advertisers that are screwed.

I've commonly heard people say that television advertising is more expensive than online advertising, but a 2009 eMarketer report abstract puts tv advertising at 13 cents/hour and online advertising at 17/cents hour. This suggests that advertisers are willing to pay up for the relatively rich and interactive data (e.g., click throughs and purchases). It's a topic which I need to become familiar with as I look into the media sector for investments, but like all these sectors it's mysterious at first. I've been looking at television networks (content owners) as a value alternative to the relatively "hot" area of Netflix, although I haven't gotten deep into it as of yet.

In my investigation into this topic, I ran across Reg Baker's The Survey Geek blog. This is an apparently honest, critical look into the survey industry which lays out the issues which I've suspected lie in the area: telephones increasingly difficult to access, surveytakers unresponsive, self-selection bias, etc. I'm still not clear on how the political surveys are accessing cellphone only users like myself. UPDATE: as I finish a survey on 9 Nov 2012, I have to say I didn't expect the surveys to be so terrible or tedious. There's really a lot of self-selection bias. I got $30, but not for sending it in (at least it's not biased towards poor people). Clearly this is only targeting really old-school cable; apparently the intelligent set-top boxes still haven't rolled out. Since I didn't have cable, I plugged my Hulu Plus shows but probably for no reason.

The Contrarian Investor

I wish I had written this book. Although it was published in 1979, the topics it covers are still the bleeding edge of investment science today -- behavioral science and the herd effect, value investing, low price-to-earnings, and cash flow.

The only area in which I differ with David Dreman is in technical analysis. He cites a fair amount of academic evidence against technical analysis. I haven't looked at that research, but studies of technical analysis are easily cherrypicked and misinterpreted. The fact that 90%+ of professional Forex traders use technical analysis is evidence enough of its usefulness. However, Dreman points out the ridiculousness of the other extreme, the efficient markets hypothesis, and the truth is that much of technical analysis is of dubious use.

Since much of this stuff is review for me, I skimmed it. He cites plenty of interesting information, including some psychology literature that I'd never heard of such as Gustave LeBon's The Crowd and Irving Jarvis's Victims of Groupthink, and a bunch of studies showing that experiments frequently make mistakes. Other literature was familiar, such as Muzafer Sherif's light experiment (when "confederates" in a study estimate the distance of light from them, the subjects yield to the judgment of the crowd) and Tversky and Kahneman's look at cognitive biases and judgmental heuristics.

Since the book was written in the 70s, the last chapter of the book is devoted to inflation. Conventional wisdom of the time was that inflation made stocks a poor investment. Dreman particularly focuses upon the Modigliani and Cohn position that professional investors just don't understand how inflation impacts equities.

First, investors confuse nominal and real interest rates (real interest = nominal - inflation). Since bonds pay high nominal rates in inflationary times, such as 9 percent in 1979 when inflation was 7 percent, investors look for rates of return from stocks in excess of 9 percent (the excess to adjust for rate) instead of in excess of the real rate of 2 percent. (UPDATE 2009-10-7: This paragraph doesn't make any sense to me right now. Why would investors looking for higher rates of return from stocks lead to them outperforming bonds? Outperformance occurs when an investment is not valued highly enough...)

Second, investors don't account fully for the effects of inflation. Inflation may create inflated profits (under the last-in first-out accounting method) and depreciation is exacerbated, but corporations benefit from being able to pay back their debt on much cheaper terms -- since the debt is relatively fixed and their income is being inflated.

Put together, these two factors make equity investments much better than bonds -- generating something like twice the return over a 10-year period.

Another Philosophy Graduate

I mentioned that I met a philosophy major working at Safeway here, and I thought I'd mention another that I found today: Carl Icahn. Admittedly, he graduated from Princeton. Today he's worth billions. Philosophy-type people should do well in investing. They can look at the big picture rationally, have the patience to read SEC filings, and, if they study economics, can easily grasp the fundamental concepts of sunk cost and marginal benefits. Then it's buying companies when they're cheap (support) and selling them when they're high (resistance).

Socially Responsible Investing

I hear some people say you should be a "socially responsible investor." But does buying a company's stock really have any impact on the performance of that stock? If it does, can you please explain how to me?

If it does not, then why should I invest responsibly? Why not make money off a dirty company and use that money to buy something good, like solar panels?

Stocks

JASO has shot up 13% for the third day in a row. I bought $1000 around 17, sold it at $20, then bought $5000 worth at 23.15. Now it's at 28.

So I've made a cool 1130 bucks in the past few days. Put the original $1000 (now $1130) from JASO into another stock, which didn't look like it was going anywhere, so I took it out and put it into SOLF at 15.79. It was up 22% at the time and will likely have another breakout today tomorrow.

Now is the time to be invested in solar, although you have to be careful not to invest in pure momentum when it's at the top.

UPDATE: At the end of the day SOLF is 17.68 and JASO is 28.20. I know that SOLF is going up tomorrow, not sure about JASO.

Spring Break Trip

Just got back from driving a few hundred miles to see some friends and I'm exhausted. During the trip I bought $1000 worth of JA Solar Holdings. Most of the trip was spent talking and drinking alcohol. One thing I learned: don't discuss God with Christians.