Biden’s Capital Gains Tax Increase? What Can You Control? | Erik Averill, Brandon Averill & Justin Dyer | AWM Insights #59

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Episode Summary

Last week, President Joe Biden revealed his proposal to increase the capital gains tax on the wealthy, potentially forcing them to pay up to 43% on investment gains.

The sticker shock is real.

Yet, we believe taxes are not the only risks to investors. It is the failure to control what you can control and making risky decisions that, at best, are hopes and dreams.

Listen in as we discuss what you can control throughout the investment process and avoid the biggest mistakes we are seeing investors make across the public markets, real estate, and crypto.

 
 

Episode Highlights

  • (03:05):The most important question when investing

  • (06:37): The lottery and Dogecoin

  • (08:37): Foundational principles of every successful investment

  • (15:20): Do you want to be Famous or Wealthy?

+ Read the Transcript

Erik Averill (00:00):

Hey, everyone. Welcome back to another episode of AWM Insights. It's your power three, two CPWAs and a CFA. We are Erik, Brandon and Justin. And at AWM, we are a community of athletes, founders and investors on a journey to be the best in the world at what we do. We believe that when it comes to your money and to your finances, you deserve the same. So each week on this podcast we attempt to cut through the noise of what Wall Street is selling you to bring you the knowledge, the skills and the access you need to invest like a pro. Today we're going to tackle a topic that every athlete knows very well of focus on what you can control. But before we jump into that topic, let's recap what's been going on in the markets.

Erik Averill (00:56):

We have had, once again, some exciting news going on across the crypto world, across the public markets, real estate, government and leading off with Dogecoin. They attempted back on 4/20 to try and herd mentality the world to celebrate this specific day by buying up a bunch of Dogecoin and driving up the price. It completely failed. So very interesting. We don't know what the end of that story is going to be, but we'll be talking about it, I'm sure, for the weeks to come. Goldman Sachs is indicating that the SPAC craze is done for now. So we'll see if that really comes to fruition.

Erik Averill (01:49):

But the big news in the headlines is President Joe Biden has proposed higher capital gains tax on the ultra wealthy. This was something that we saw in a potential proposal. To be very clear, this is not enacted law at this point. What he is talking about is changing from the advantageous capital gains rate to ordinary income rates for individuals with earnings of a million dollars or more. So we're going to talk a lot about that here in this podcast and definitely in the weeks to come. Then on the good news front is vaccines continue to roll out. We continue to see unemployment numbers dropping. So definitely some good information on that side.

Erik Averill (02:38):

But with that, let's jump into the conversation that in the midst of seeing these markets where we're at an-all time high last week to all of a sudden we may have some pull back in certain sectors or type of the investments and now taxes, once again, at the forefront of the conversation. As an investor, what really can you control?

Justin Dyer (03:05):

Well, certainly some people believe they can control the price of Dogecoin, which is it's fascinating to watch, to read through the Reddit threads and saying, "Hey, let's drive this thing to a dollar for no reason at all." That is certainly not focusing on something that you can control, in my opinion. If you disagree, let's have a conversation. I'd love to debate that topic. This is a foundational question or a foundational topic, really, for all investing, not just the way we invest. I think one of the most important questions to ask yourself first and foremost is, what are you trying to accomplish? When you're coming to the table to invest, why are you doing that? This question should be applied. Like you alluded to Erik, if you're an athlete, focus on what you can control. In a game, focus on how you train outside of a game. Same thing in the business world. As a business leader, same idea.

Justin Dyer (04:09):

As a husband or a partner or just an individual, don't get so consumed with things outside of your control. So reverting back to this fundamental question of what can I control? I think it ties into what am I looking to accomplish? In our world, what we are trying to really accomplish for our clients is to make sure their priorities, their outcomes are met. We're not necessarily looking to participate in the next Dogecoin phenomenon or GameStop. Let's just take these extreme examples as a case in point, or maybe something a little bit more realistic, Tesla. We're not trying to find the next Tesla. That is a lopsided probability. The odds are not in our favor to do that. We truly, truly believe that. And time and time again, data has supported that belief.

Justin Dyer (05:13):

So what are we trying to accomplish, ourselves, is good returns, consistently, and always taking into account an after-tax lens when we're talking about those returns. And just to tie it back to what's potentially on the table from Biden, that approach becomes ever more so valuable if tax rates go up. I think we talked last week, maybe the week before that, if you're not taking into account taxes, or it's kind of an afterthought, your returns suffer. And if all of a sudden you're paying higher taxes because you're successful and you've really excelled in your chosen arena, whether it be sports or founding a company or a business leader, et cetera, et cetera, your tax rates are probably going up. And guess what? The actual after-tax rate of return from tax aware investing becomes even more powerful to you.

Justin Dyer (06:16):

That's, I think, the table stakes question. We're going to talk about a couple of other aspects of focusing on what you can control. But certainly thinking through that question, asking what you're trying to accomplish and then really everything from there should tie back to the answer to that question.

Erik Averill (06:35):

I think that's cross talk. Go ahead, Brandon.

Brandon Averill (06:37):

I was just going to say, I think that's a fascinating place to be, because there's also a reality that this isn't easy. Focusing on what we can control, for instance, is staying disciplined. It's really setting on a path that says, "Hey, what are my outcomes? What is the consistent, reliable path to have success towards those outcomes?" Take the lottery, for example. All of us know that the lottery, intuitively, we all know this factually, that it's a tax on the poor. It's this hope that some outsized return, some pie-in-the-sky thing may happen to me and that's what's going to change my life. But if we do the math, if we were disciplined and instead of putting 20 bucks towards the Lotto ticket every week, we invested that and we did so in a diversified, disciplined way, that would change our lives potentially. But it's hard. It's hard to look at these big events.

Brandon Averill (07:40):

It's hard to look at Dogecoin and be like, wow, if it would have hit a hundred bucks, that's a hundred X. It was less than... Or, if it hit a dollar, it was less than a penny in January. But if you take a step back, it's not based on anything. It's that illusion. All Dogecoin is, is a tax on... I'm not going to... Well, I'll say it, stupidity, quite frankly, and not using your brain. Because if you really looked at this and said, "Hey, I've got this money and I want to accomplish something," it's much more successful to go on a disciplined quote, unquote boring approach. That's what's going to help propel you forward. But we get caught up in these things. I think it's just good to always remember focusing on what you can control means taking a step back and looking at things objectively.

Erik Averill (08:37):

To build off of that, one of the things that we know in whatever endeavor you're in, whether it's investing in business and professional athletics, is part of focusing on what you can control is bringing awareness to what is success. What are the foundational principles that has led to people being the best of the best at what they do? And when it comes to investing, there are some questions you have to be able to ask is, why are you investing in a given asset class? Whether it's real estate, whether it's a technology company, whether it's crypto, whatever it is, is what is the expected return of the investment and how did you arrive at those expectations? Do you even have a reason why you think something is going to be successful is a very important one.

Erik Averill (09:32):

The other thing is, what are the range of outcomes? What's the worst thing that can happen if I deploy my money? This is something that you've worked extremely hard for, that we want to make sure you're rewarded for the risk that you're taking. And then, how does this fit, back to Justin's point, how does this fit in my overall plan? We, as human beings, we choose to treat things very fragmented at time. Our health, we might be hypervigilant in going to the gym every day, but then we don't sleep and we don't have good nutrition. You are not a healthy individual just because you go to the gym every day. It's the same thing when it comes to your investments. Just because you're focused on, hey, I'm going to make this one investment. Well, your definition of success is actually your net worth. Did my net worth increase? And did my after-tax return increase in aggregate? It's not just looking at them individually.

Erik Averill (10:32):

Really having this foundation to say, "What is in my control?" One of the things that I've found really head-scratching is probably the way to say it, lately is I've had so many conversations around whether it was GameStop or this Dogecoin mania craze, the NFT craze. And a lot of times it's from individuals who I know, by reviewing their past portfolios or tax returns, literally have left hundreds of thousands of dollars on the table, because they didn't actually do what was in their control. They didn't take care of tax-loss harvesting last February. They're trying to get rich quickly. They're always focused on what's the next big investment, yet, literally, real money that they had control that they could have done something about, they've completely laid to waste.

Erik Averill (11:26):

It's like eating your vegetables. This is, to me, the things that are in control are so unsexy in the investment world, but a lot of times it's the biggest impact. Did you get your eight hours of sleep? Did you eat your broccoli? Did you make good, consistent, boring decisions day over day in? And that's where really, when it comes to the investment side, is it's really having a plan, understanding what success is and staying consistently on that path.

Justin Dyer (12:01):

I'm going to get a little philosophical here, where if you take a step back, almost everything we do, at least this is my belief, as humans that's worthwhile, when you look back, hindsight always being 20/20, takes that discipline, takes the focusing on what you can control. It doesn't happen overnight, whether it's your interpersonal relationships with friends or spouses or interpersonal business relationships, it's not just this overnight get-rich-quick hitting, playing the lottery. Applying this to the actual markets, one of our contacts in the venture capital space made a similar comment, where he's talking about diversifying within venture capital, which is still a risky proposition in and of itself, but diversifying still makes a lot of sense there.

Justin Dyer (12:58):

And the rationale, the reason behind it is, hey you speaking through the lens of an athlete, you as an athlete, hit the lottery already once. You guys are at the top of your chosen field. You're being compensated very, very well for that. Why would you go and try and hit the lottery twice by concentrating your wealth in a, whether, in this case it was a specific venture capital investment, a single company or something like that, instead of spreading it out across a number of different companies or a number of different venture capital firms to get even more exposure. Let alone let's not even get into the Bitcoin crypto side of things, because that's certainly top of mind for everyone right now. If you're playing in that game and you're doing so in a reckless way, you're trying to hit the lottery twice, which is an incredibly low probability outcome, an unlikely outcome.

Justin Dyer (13:58):

Again, having a plan in place, focusing on discipline, eating your vegetables, as Erik highlighted, is a great analogy. To really, truly have consistency as opposed to one good return this year, because you picked the right stock, that is what really matters. That consistency. That long-term application. That plan for the next 10, 20, 30 years. And in a lot of the cases of our clients, it's the multi-generational plan. And how do we make sure that this is systematically applied across generations? Regardless of who's in the White House, what tax rates are, it's something we certainly take into account. We're always analyzing and figuring out, okay, is there a better way to address after-tax investing, given the playing field? But let's have a plan in place today that is based on some sort of fundamental due diligence.

Justin Dyer (14:59):

This applies to active managers, as well. If you're going to do that, apply some fundamental due diligence, focus on what you can control. We don't necessarily subscribe to that concept of trying to predict the future, per se, but it applies across, like I'm saying, across both investing in your personal life, your professional life, et cetera, et cetera.

Brandon Averill (15:20):

I think that's a really important point, too. Just really quickly, I think you have to be honest with yourself, too. We're talking about focusing on what you can control. Be honest with what you actually want. I think there's people that want long-term success. I want to be able to provide for my family now. I want to be able to provide for future generations. Then there's maybe not something that we would all agree with, I know we wouldn't agree with. But if you just want to be famous, you want to spend 50 grand a month on your apartment and you want everybody to think you're a baller and you're going to invest the majority of your wealth in some speculative stuff like crypto or individual single companies, public or private, and you're willing to risk it all.

Brandon Averill (16:10):

And you know what? When you're out of the limelight, if it doesn't go well, you're in a two-bedroom apartment that you're renting, because you can't afford anything else. But you had a great time while it lasted, that's at least, it's a plan. And you get to control some of that. I would a venture guess that if you really looked at that, and I'm somewhat saying that tongue in cheek, but there are people that I think that's the value to them. But I think when you take a step back, if you really look at it, is that really what you want? I would challenge people that are living that life, that are not... That's their plan right now. That's the plan that they've chosen to take a step back and say, "You know what? I want a different plan. I know I can do things to control the success of another plan. So let me think more strategically. Okay, let me look at the needs that I actually have. And what plan actually goes into fitting that in making sure I have a successful outcome?"

Brandon Averill (17:06):

And it's going to lead towards making sure, if we turn this directly to investments, making sure you have a structure that exposes you to higher expected returns, that diversifies you globally, that manages for expenses and for taxes and allows you to actually stay disciplined. Because ultimately, that's what creates generational wealth. We hear so many people talk about, "I want generational wealth. I want generational wealth." And then they'll say, "Oh, by the way, I'm going to throw money in this speculative," this whatever. Those don't align. Those aren't within your control. So it's turning back, understanding your plan, what you want, and then controlling for it.

Erik Averill (17:47):

And to Brandon's point, I think the good news for those that are on this journey with us, for multi-generational wealth, believe that money is a tool. It's a tool to have impact first on you as a person, then your family and then, hopefully, the community and the world at large is, there have been foundational principles that said, "This will lead to success if you consistently do this. If you rinse and repeat and you play the long game, you will actually outperform."

Erik Averill (18:19):

So if you head over to awmsights.com, we've been highlighting the last few weeks that you can download the 10 Key Principles to Investing Like a Pro. This is something that the evidence, the data, all the academic research has shown, this is what leads to outperformance. So head over there. Download it if you haven't done that. And, of course, we'd love to hear from you if you have any specific questions. But before I close out, there's one thing that I was taught by a mentor of mine a very long time ago is, a lot of times we look at these outliers and we want to repeat their success. So it was the Kobe Bryant situation is, if I did everything exactly like Kobe, would I turn into one of the best basketball players to ever walk the planet? The answer's probably no.

Erik Averill (19:11):

But if I take a step back, if I look at macro trends and say, "If I look at the best players in the NBA over a hundred years, what are the shared foundational principles?" If I get to work and I do those things, which you realize is a lot of effort, and a lot of hard work, a lot of grit, a lot of determination and making a lot of decisions that the herd mentality is not, it's saying, "You know what? If I want abnormal, if I want different returns from the average, it means that I've got to make different decisions."

Erik Averill (19:44):

So if you play the long game, if you put skin in the game and you choose to do things a little bit differently than what everybody else is doing, you're going to benefit over the longterm. It is no different when it comes to building your wealth. And so until next time, own your wealth, make an impact and always be a pro.

 
AWM InsightsAWM CapitalJustin Dyer, Erik Averill