How to Gain From the Economy’s Pain

Billionaire Warren Buffett urged Congress to raise taxes on the nation's wealthiest individuals to help cut the U.S. budget deficit, saying it won't inhibit investment or job growth. "My friends and I have been coddled long enough by a billionaire-friendly Congress," the chairman and chief executive officer of Berkshire Hathaway Inc. wrote in an opinion article published in the New York Times. Adam Johnson and Scarlet Fu report on Bloomberg Television's "InBusiness With Margaret Brennan.

Enough with all the scrimping and saving, the austerity plans, and the slowly disappearing retirement accounts. Here’s how regular people can make like Buffett and win big in these roller-coaster times.

“Everything dropped ridiculously low as a knee-jerk response” when the S&P downgraded U.S. debt in early August, says financial adviser Ric Edelman, author of The Truth About Money. “I think everything is unfairly valued.”

He’s not alone. Plenty of the best financial advisers, money managers, hedge funders, and economists will tell you there’s opportunity hidden in the pain of economic downturns.

This is not about taking more risk than is appropriate for you. Instead, it’s a chance to do two things: First, fix your mix—in other words, rebalance your portfolio. And second, remove cash you have from the sidelines and put it to work in sync with that asset allocation.

There’s just one caveat: we are talking about investing for the long term here. Money that you need in the next three to five years doesn’t belong in the stock market now—or ever. With that out of the way, here’s where the experts say to put your money to work.

“When the S&P 500 experiences a day where all 500 stocks decline, it’s a pretty clear indication that the market is oversold,” says Edelman. “So buy the S&P 500.” That’s the appropriate advice for investors who have made the decision to hold broad, diversified—and, by the way, low-cost—index funds and exchange-traded funds rather than sectors or individual stocks.

The minutes from last week’s meeting of the Federal Open Market Committee described the economy (and its offshoots) using these words: “flattened,” “weak,” “deterioration,” and “depressed.” That was in the first five lines alone. Financial adviser Nathan Bachrach plans to make some money for his clients by amping up their ownership of high-quality, defensive stocks. Among his picks: Intel and the “oil patch,” including Chevron, Royal Dutch Shell, and ConocoPhilips, because “I don’t see us deciding to unhook ourselves from our gas-driven cars quite yet.”

Maybe you’ve always wanted to own Apple? Maybe Google or Netflix? A rapid dip in across-the-board prices may be your way in. Just be sure they’ve gotten cheap enough. “I find it helpful to maintain a list of the things you want to own and the prices at which you want to own them,” says Karen Finerman, president and cofounder of Metropolitan Capital Advisors. “That takes some of the emotion out of each decision that you have to make.”

No, I’m not suggesting you buy a car. But many other people are going to be buying them, says Mesirow Financial chief economist Diane Swonk. Not only is there a huge amount of pent-up demand for cars (we’ve been driving them for longer than ever before), but also the auto industry is one of the few that’s seen subprime financing come back. People who can’t qualify for credit cards are able to buy cars, Swonk explains. That, coupled with financial incentives on par with those before the crisis, means better prospects for the beleaguered industry.

Finally, assuming you believe we are going to avoid a full-blown double-dip recession, you may want to give real estate another look, particularly if you wouldn’t mind being a landlord. There’s a big opportunity in buying single-family homes and renting them out, says Swonk. “People can’t qualify for a mortgage, but they want the lifestyle, the fence, the dog in the backyard. So while you can’t go in and flip to sell, you might want to flip to rent.

Warren Buffett Tells Congress To Raise Taxes On Wealthy

Warren Buffett’s got a piece in the New York Times today. A piece in which he makes a very strange claim about the rate of tax that he pays.


Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.


What he says, with the qualifications he uses, is true as far as it goes. It is, however, extremely misleading, because he’s left out the effect of the corporate income tax.


There are essentially two conceptual ways in which you can tax dividends. You can tax them as income to the people who collect them: this was the system in the UK, my home country and is effectively the system now. Or you can tax the profits at the corporate level and then dividends are tax free to the recipients. Several continental European countries use this system.


The United States is different: it has elements of both systems. First, corporate profits are subject to the corporate profits tax, some 35% currently as the headline rate. Then dividends are taxed again in the hands of the recipients at the rate of 15%. This means that the effective tax rate on Buffett’s dividends from Berkshire Hathaway was not the 15% that he’s using in his calculation above (the 2.4% to take the total to 17.4% is presumably referring to the capped social security taxes and the income tax on his salary, not dividends).


Buffett, who has spoken out in favor of raising taxes on the rich multiple times, urged the super-committee to increase income taxes for the 236,000 people who earned more than $1 million in 2009, including taxes on investment profits such as capital gains and dividends. For the 8,000 people who made more than $10 million in 2009, Buffett suggested an even higher tax increase.


The billionaire said he paid about $7 million in payroll and income taxes last year. That is about 17.4 percent of his taxable income, a lower proportion than any of the other 20 people in his office whose tax burdens range from 33 percent to 41 percent, he said.


"My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice," Buffett wrote.


In the July 23 Republican weekly remarks debt super-committee member Rep. Jeb Hensarling, R-Texas., said higher taxes could "destroy even more jobs."


But Buffett disagrees. The third-richest man in America said he yet to meet a wealthy investor who would pass up a good investment because of the tax rate on potential gains.


"People invest to make money, and potential taxes have never scared them off," Buffett wrote in his op-ed.


Nevertheless, every GOP presidential candidate has spoken out against raising any taxes.


Republican presidential candidate Michele Bachmann told the Wall Street Journal's Stephen Moore in June that if elected she would abolish the capital gains tax, which Buffett said should be increased, and amend the tax code so every American pays income tax.


By eliminating the capital gains tax, which is currently 15 percent, the Tax Policy Center estimates that about 23,000 millionaires would no longer have to pay income tax because their only income comes from capital gains. This move would add $11 billion to the federal deficit, according to Forbes.


Massachusetts residents have historically had a one of the highest tax burdens in the country, consistently ranking in the top 10 states, said Joseph Henchman, the vice president of state projects for the Tax Foundation. When Romney was in office the state dropped out of the top 10, falling from having the eighth-highest tax burden in 2005 to the 13th highest in 2006.


Rick Perry, who announced Saturday that his is running for president, is the longest-serving governor of a state that levies no personal income tax.


At a fundraiser for Missouri Republican Gubernatorial candidate Peter Kinder in June, Perry said all states should mirror Texas and abolish personal income taxes.


"There is a reason that Missouri is not as competitive as it should be. Want me to tell you what it is? It's called an income tax. A personal income tax. You've got one and we don't! You get rid of your personal income tax and then you can come compete with us," Perry said.


Former Utah Governor Jon Huntsman revamped the entire state tax code when he was in office from 2005 to 2009. He swapped a more complex six-bracket tax system for a flat 5 percent income tax.