Learn 5 simple steps to avoid making bad investment decisions.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190.
Disclaimer
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. No advice may be rendered by WWM Financial unless a client service agreement is in place.
A Conversation About The 2021 Biden Tax Plan and Federal Tax Proposals
In this episode Catherine and Rachel Ivanovich discuss the 2021 Biden Tax Plan proposals including, the child care tax credit, long term capital gains, tax gains at death, 1031 exchanges and more.
Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ and Managing Partner at WWM Financial in Carlsbad California.
Rachel is the founder and Chief Leadership Officer of Easy Life Management, Inc. She is a business coach, an Enrolled Agent and earned an MBA from San Diego State University with an emphasis in Finance and Taxation in 2010.
Learn 5 simple steps to avoid making bad investment decisions.
WWM Financial is an SEC Registered Investment Advisor.
Transcript of video below:
Catherine:
Welcome to our podcast on financial planning. I’m Catherine Magana, a Certified Financial Planner™ professional. Today, we’re going to focus on an important topic of financial planning, which is tax planning. Tax planning, we really look at financial situations from a tax perspective. We actually want to find an efficient way of using the tax code and look at financial planning, and they really do go hand in hand together. So we thought it was important for us today to cover the 2021 Biden tax plan and federal tax proposals. Even though there are several items that we’re going to talk about today that aren’t even approved yet, we thought it was important to start the conversation and start thinking ahead.
Catherine:
So we’ve collaborated with an enrolled agent and tax strategist, Rachel Ivanovich, with Easy Life Management, for today’s talk. So thank you for joining us. We’re really happy to have you here with us today. Let’s go ahead and get started, and maybe we can talk a little bit about kind of some of the income taxes that may come up with these changes. Any thoughts on that?
Rachel Ivanovich:
Thanks, Catherine.
Catherine:
You’re welcome.
Rachel Ivanovich:
Thanks for having me today. It’s really great to be here. Honestly, like you said, these are proposals.
Catherine:
Yes.
Rachel Ivanovich:
Tax planning, as you said, is a very important topic, and I believe that a lot of people don’t consider this until it’s too late. So given that these are just proposals, I think it’s really important also to differentiate between what has already been enacted and what is potentially coming down the pipeline at us. As you were saying, it’s really hard for us to know, is it going to be next month? Is it going to be six months from now? Is it actually going to be retroactive, if it actually then does take effect before the end of the year? Let’s just have a conversation kind of about what proposals are on the table.
Catherine:
Sure. No, I would agree. I mean, I think you get a lot of calls. I get a lot of calls, and everybody wants to know what should we be doing now.
Rachel Ivanovich:
Absolutely.
Catherine:
I think it is important to cover some areas that are critical or we think that might be servicing. One in particular, I think, that’s come up is kind of the childcare tax credit. I think that’s definitely something that’s-
Rachel Ivanovich:
Absolutely.
Catherine:
… prevalent.
Rachel Ivanovich:
It’s top of mind because the advance payments are starting to roll out this month. It’s July of 2021. People are excited, a little extra cash in their pocket. We’ve been chatting with clients about does it make sense to take the money right now, or does it make sense… Because these are advance payments, and that’s really important to understand, because if you take and receive the payment now, you won’t be able to use that to offset tax next-
Catherine:
Later.
Rachel Ivanovich:
Yeah, next spring.
Catherine:
Oh, okay.
Rachel Ivanovich:
I think that’s a really important factor for people to consider because you can opt out of receiving the advance payments. Why would you do that? I don’t know. Honestly, I think a lot of people want to have the money, and it’s going to stimulate the economy, they say. But at the same time, tax planning is what we’re here to talk about. If you’re thinking… currently for 2021 only, and this is already law, so we’re going to talk about proposed versus actual.
Catherine:
Okay.
Rachel Ivanovich:
In the past, the child tax credit… there are two credits that were kind of on the table here. One is the child and dependent care tax credit, and the other is the actual child tax credit. In the past, the child tax credit was $2,000 per child, and it expired… Basically, you got the tax credit up until the child turns 17. So that’s to differentiate between this new enhanced child tax credit that’s on the table currently for 2021.
Catherine:
Got it.
Rachel Ivanovich:
So in the past, you’d get the $2,000 credit, a portion of which was considered refundable. The other portion is non-refundable. To explain the difference between those two and why it’s important to understand why this is a great feature for the enhanced child tax credit. The refundable credit functions like a payment, whereas a non-refundable credit just reduces tax liability. Oftentimes, you’ll have a tax situation and you’re doing planning. If you’re looking at what your tax liability is, that non-refundable credit would reduce your tax to zero, but then the remaining portion of the credit, if it’s refundable, you’ll actually get a refund.
Catherine:
Oh, okay. Excellent.
Rachel Ivanovich:
Okay? Yeah. There are two different kinds. This new enhanced child tax credit makes it completely refundable, so it’s money in your pocket.
Catherine:
Nice. Definitely good to think about and know. Especially, like you said, down the line, if you’re planning to do your taxes and if you’ve already taken the credit, then you don’t want to do it twice.
Rachel Ivanovich:
Yes, absolutely. You’re looking at the credit, and previously the credit was $2,000 per child. Now the credit is, if your child’s under age six, you’re getting $3,600, which is a great benefit. Then also, the enhanced child tax credit is $3,000, but it’s up until age 17, including age 17. So I think this is a great benefit for families.
Catherine:
Another one that I’ve heard a lot about and it really affects some of the clients that are investing or have properties and investments are there’s a long-term capital gains and dividends being taxed at ordinary income with taxable income over a million dollars. That’s kind of a big deal.
Rachel Ivanovich:
It’s huge. Yeah, it’s huge. Okay, so just to differentiate, this is proposed.
Catherine:
Correct, yes.
Rachel Ivanovich:
Who knows what’s actually going to happen? What I’ve heard is for individuals whose taxable income or income is under $400,000, there will be no changes. That’s a sigh of relief for a lot of people, a lot of families. But if your income is over $400,000 and if you are approaching that million dollar mark, you definitely want to start thinking, “Should I start planning ahead?” Clearly, a lot of clients have called the office who have… they work for a corporation, they receive a large amount of their compensation as stock options. It may be time to diversify. Meet with a financial advisor and really look at your portfolio, and should I sell now?
Catherine:
Well, and some other things I was thinking about is perhaps between now and the end of the year, if it does come into play, then there’s some tax loss harvesting. Are there things that maybe… Are there some losses that you can take?
Rachel Ivanovich:
Absolutely. It’s definitely a really good time to meet with your financial advisor to look at your portfolio. Because, as you were saying, this proposed rate, they’re looking to tax long-term capital gains and qualified dividends as ordinary income. What that translates into is currently there are three long-term capital gain rates or preferential rates. If you hold assets more than a year and a day, then the gains on those assets are taxed at lower rates. Therefore, currently, if you make less than $40,000, which you don’t pay anything. There’s a 0%. If you are up to, I want to say from 40-ish thousand to 446,000, if you’re single, you’re going to be paying 15% on those long-term capital gains and your qualified dividends.
Catherine:
Yikes.
Rachel Ivanovich:
Over that, it’s 20%.
Catherine:
Correct. It’s really those that make over a million that are really going to get dinged on this.
Rachel Ivanovich:
Yes, and really need to start planning and/or thinking about planning. Because the other thing that they’re talking about, they’ve proposed, is bumping the highest tax bracket from 37% up to 39.6%.
Catherine:
Yeah, that’s a big deal.
Rachel Ivanovich:
Yes. It is a big deal. Definitely want to look ahead and… It isn’t law yet, but it’s hard to say what’s going to happen.
Catherine:
Yeah. Another one that comes up a lot is the tax gains at death for unrealized gains. Being above a million dollars, that you’re now going to be taxed.
Rachel Ivanovich:
Yes.
Catherine:
Kind of taking a step back and know that, once again, this is being proposed, so it’s not in effect yet.
Rachel Ivanovich:
Absolutely.
Catherine:
Currently, if somebody gets an inheritance, then there’s a step up in basis, and they can use that step up or the six-month date of death valuation.
Rachel Ivanovich:
It is really important to look at this because they have put this on the table. It’s hard to say if it’s actually going to happen. But currently, as you were saying, the step-up in basis, they are talking about taking that off the table. The step-up in basis is if you hold assets and you bought it for, I don’t know, $5 a stock, and now it’s worth $100 when you pass away, whoever inherits it, their basis or what their investment in it is that date-of-death value. They’re thinking of taking that off the table.
Catherine:
Which is a big deal.
Rachel Ivanovich:
It’s a big deal.
Catherine:
Once again, so the new proposal then is if it’s over a million dollars, then at that point, they’re going to be taxed.
Rachel Ivanovich:
Correct. Then there are a couple of different proposals that I’ve heard, and therefore, that’s why it’s really hard to do the planning and to dig into it. I guess at the end of the day, the question is, well, what should I do now?
Catherine:
Yeah.
Rachel Ivanovich:
As you mentioned previously, tax loss harvesting and really taking a hard look at your portfolio and looking at what is in there. Is it diversified? What can I do based on the current law? Because even though they’re proposing certain things, it doesn’t necessarily mean it’s going to come to fruition. I mean, also they’ve thrown out 1031 exchanges may go away.
Catherine:
Yeah, I saw that or over $500,000.
Rachel Ivanovich:
Correct.
Catherine:
Which is another big deal-
Rachel Ivanovich:
It’s huge.
Catherine:
Because a lot of people have real estate, and they’re doing 1031 exchanges. So once again, here we are.
Rachel Ivanovich:
The question is should I sell? Should I do a 1031? So a 1031, for those of you who aren’t familiar, is if you hold rental real estate and you have appreciated a property and you sell at a gain, you can buy another rental property, which is like-kind… They’re sometimes called like-kind exchanges.
Catherine:
Correct.
Rachel Ivanovich:
It’s been a great tax planning tool for those who own real estate.
Catherine:
A lot of people own real estate-
Rachel Ivanovich:
Yes.
Catherine:
Especially real estate’s gone up so much in value.
Rachel Ivanovich:
Absolutely.
Catherine:
So that’s a really, really big deal.
Rachel Ivanovich:
Yes.
Catherine:
The other thing that kind of comes to mind with some of these potential proposals are revisiting maybe life insurance or your estate plans.
Rachel Ivanovich:
Yes, absolutely.
Catherine:
Those are some areas I think that can be looked at. Perhaps we can talk a little bit about kind of the estate planning aspect of some of the proposals.
Rachel Ivanovich:
Estate planning is definitely a topic that people should be considering right now, even if the proposals that are currently on the table don’t go through the current lifetime exemption. Every individual has what’s called a lifetime exemption, which is $11.7 million. Current law is it will go down at the end, or what they’re saying, the language is it’s going to sunset back to pre Tax Cuts and Jobs Act, which was the end of 2017. It’s supposed to go from $11.7 back down to $5 million. What’s on the table currently is that it’ll even go down further to $3.5 million. Definitely looking at different planning tools and charitable remainder trusts.
Catherine:
I think one of the things that… Yeah, grantor remainder trust.
Rachel Ivanovich:
Exactly.
Catherine:
One of the things that we often see is the annual gifting. So the $15,000 per donee per year, and if you’re married, then you can give-
Rachel Ivanovich:
30.
Catherine:
… up to 30. I think those are some things that may be revisiting.
Rachel Ivanovich:
Those are absolutely huge to consider right now, is to really look at that $15,000 annual exclusion. There’s zero reporting requirements for that. As you mentioned, you can give $15,000 to any one individual. A lot of people should be thinking about 529 accounts, which are a great, great investment tool. They’re governed by gift tax rules, meaning you can put up to $15,000 per individual per year. You don’t have to file a gift tax return for that. So definitely something-
Catherine:
Yeah, 529 plans, especially of those that have grandkids or even kids or want to gift money-
Rachel Ivanovich:
Yes, nieces and nephews.
Catherine:
Yes, and it grows tax deferred-
Rachel Ivanovich:
Tax free.
Catherine:
And it comes out tax free if they use it for education.
Rachel Ivanovich:
Exactly, yeah.
Catherine:
There’s definitely some amazing benefits there.
Rachel Ivanovich:
What I’ve also heard, and I don’t know if this is… Well, clearly proposed. I mean, I’ve heard so many things, but I have heard that large gifts… It may be a good time to be considering larger gifts at this point, because if you look at gift and estate tax planning over the years, you’ll have that lifetime exclusion amount and the gift… Or if you make a large gift, if it is over the $15,000 annual exclusion where there is no reporting requirement, it’ll just carve away from your exclusion. I have heard that those large gifts, that if you give them pre American Family Plan actually being enacted, you may be grandfathered in under the old rules. I do think that’s something to consider if, if you’re thinking about making a large gift to a family member or a child.
Catherine:
I know we talked a lot about the unknowns, and we’re getting a lot of questions, and we do think, yes, we want to plan ahead. I know I’m a planner. You’re a planner.
Rachel Ivanovich:
Yes.
Catherine:
It is hard when we don’t have the actual information or know for sure.
Rachel Ivanovich:
Absolutely.
Catherine:
A lot of things might get retro or grandfathered and we don’t know. In the past, we’ve also seen things get approved last minute, and so I think it’s just being mindful of what’s to come. Are there some things that perhaps you may want to do, maybe along the way as you know things might come down the line? But part of this is also maybe planning, but then waiting to see what comes up.
Rachel Ivanovich:
Absolutely. As we all know, there are certain tools that are already in place that you can use. You can plan for Roth conversions. I think it’s a case-by-case situation. Every individual really wants to look at if you have money in an IRA account, is this a good year to do a conversion?
Catherine:
I absolutely love Roth conversions as well. Once again, it is case by case, but for those that are potentially in some gap years for retirement or collecting Social Security or Medicare and just different things that perhaps you factor that in. I think it is… there is potential ways to reduce your… taxes now than later.
Rachel Ivanovich:
Absolutely. Yeah, and maybe if your businesses is having a down year, it might be a good year to consider that as well, to do that conversion in a year when your income’s a little bit lower.
Catherine:
Is there anything else that we didn’t touch on that maybe-
Rachel Ivanovich:
We didn’t mention the net investment income tax, because that is something that you can plan for. I do think that working with a tax advisor, a tax strategist, working with your financial advisors, because as we were saying, the long-term capital gains rates currently do have that preferential treatment of the lower rates. If that does go up to be taxed as ordinary income, you’re not only looking at the 39.6%, but you’ve also got the additional 3.8 net investment income tax to consider. And if you’re in a high income state, such as California, New York, New Jersey, you may be paying 51% in taxes on long-term capital gains and qualified-
Catherine:
That’s a big change from what we’re used to.
Rachel Ivanovich:
It’s a huge change. If you actually look, that would put the United States as the highest, yes, country in the world for-
Catherine:
For gains?
Rachel Ivanovich:
… for long-term capital gains.
Catherine:
Oh, interesting.
Rachel Ivanovich:
Yeah, it was very interesting for me to see. It’s hard to say what’s going to happen.
Catherine:
Yeah. Well, I thought today we wanted to talk a little bit about tax planning. Once again, doing financial plans, it all goes hand in hand. Rachel, thank you for your time today.
Rachel Ivanovich:
Absolutely. It’s my pleasure.
Catherine:
Is there a way that people can contact you if needed? Do you have a phone number, email or anything?
Rachel Ivanovich:
Absolutely. They can reach out to me at Rachel@elmtax.com or they can call me at my office 760-730-1817.
Catherine:
Great. Well, thank you so much for joining us today. We hope you learned something and it was worthwhile for you. Thank you, and you’ll hear from us again. Thanks.
In this episode: Steve Wolff discusses how excided he is about the investing opportunities in this techno-digital revolution.
Full transcription below:
Steve Wolff:
Hello everyone, this is Steve Wolff with another edition of Steve’s Stock Stories. I’m here with my
cohort, producer and friend Joscelin Magaña.
Joscelin Magaña:
How’s it going everybody?
Steve Wolff:
This is one of my favorite topics. I am so happy to be alive at this point in time, because we are going
through a technological digital revolution. This must be what it felt like to be in the industrial revolution,
when you went from the horse and buggy to cars. Of course, eventually putting men on the moon. But I
mean, all the things that happened in that time are happening now only they’re happening digitally.
Joscelin Magaña:
I feel the same first feeling when I saw the world change in a dramatic way where I was so excited. Two things that I remember surfacing, the mobile phone and the internet.
Steve Wolff:
Oh, yeah.
Joscelin Magaña:
Remember when the movie The Saint came out? That little phone was amazing. He had video on there, he got text messages. I thought, “Oh my gosh, if that could ever possibly happen.” Then we have way better phones than that now, you just throw that little toy away. Right? The other big thing that I saw was the internet. When I was in college, we were just using email at the time. There were these things called websites. I remember thinking, “Wow, we’re going to be able to buy stuff on the internet
someday.” I remember telling somebody, “Hey, this is going to be an amazing space because we’re just
going to be buying stuff on the internet.” And they’re like, “Who’s going to buy stuff on the internet?
You just go to the store. Why the hell are you going to-?” Okay. One technological advanced before this, which kind of wasn’t, but everybody thought was crazy, was when everybody started buying bottled water; but that’s a whole other subject.
Steve Wolff:
Well you talk about phones. I remember watching the movie Wall Street with Michael Douglas and he
had a mobile phone, but it was probably, I don’t know, 12 inches.
Joscelin Magaña:
Oh, yeah. They were big.
Steve Wolff:
They were huge.
Joscelin Magaña:
They were big, like a shoe box.
Steve Wolff:
Right, they were big. You could make a phone call on there today, my goodness, you could do just about everything. You can turn on your car, you can-
Joscelin Magaña:
You can turn on your sprinklers in your house, you can see your front door. It’s amazing.
Steve Wolff:
What they have in that little phone is way more powerful than what IBM first came up with when they had that first computer that took up, I don’t know, three rooms or something. With vacuum tubes and whatever, it’s just incredible.
Joscelin Magaña:
I guess where I’m going with this is that I’m as excited now as I was when mobile phones were becoming more accessible and the whole mobile phone revolution and the internet. I remember my first job we didn’t even have computers on our desks…
Click on the image above to watch this podcast episode.
Podcast Episode 12: Value vs Growth Stocks
Let’s talk a little bit about value stocks and growth stocks. Over the last year or so with all the COVID stuff happening, certain stocks did really well, and other stocks didn’t. It was really a bifurcated market and what really did well were growth stocks. So, we want to explain what the difference is because value stocks have caught up a bit with growth stocks.
What is a value stock? Basically, a value stock is where you believe that the value of the company is greater than the stock price today. Now I could tell you that growth stocks can be value stocks in that their stock price may be less than what you think they’re really worth.
Growth stocks are companies that have the potential to really outperform the overall market over time. Generally speaking, growth stocks have a higher price to earnings ratio and they are a little bit higher risk than a value stock. Before providing an example let me preface this with a disclaimer. We are not suggesting you buy any of the stocks we mention in this article, these are for educational purposes only. An example of a growth stock is something like Apple Computer over the last many years. Many of the technology stocks are considered growth stocks.
Growth stocks are focused on growing the share price and not so much worried about dividends. Value stocks are a bit more worried about paying the shareholder through dividends, which come through earnings. With growth stocks, a lot of the earnings, go back into the company, because they are reinvesting, investing in new technology, in new land or new whatever, so that they can grow. Which one is better? Really, there is no one that’s better or worse. It depends on where you are in life and how much risk you’re willing to take, because generally growth stocks carry higher risk than a value stock. You can imagine a stock like Proctor & Gamble (this is not a recommendation), but a stock like Proctor & Gamble is a value company and is not expected to grow by more than 2-5% a year. Whereas you get a stock like Google (this is not a recommendation) and you may expect them to grow by 10 or 15% a year, or maybe some of these microcap stocks. They may grow at 20 and 50 and a hundred percent a year. You go up the risk scale with growth stocks.
In the long run, which does better? It’s kind of a toss-up. Value stocks have outperformed the growth stocks by a little bit, but it also depends on what timeframe. Probably because of the dividends that they pay, especially if you reinvest the dividends. Over the last, maybe 10 years or so, really since the ’07, ’08, ’09 disaster with real estate, growth stocks have really outperformed. Especially in the last few years, in particular last year when you had the COVID problem where nobody was going out of the house, and everybody was online and getting things delivered.
The growth stocks, specifically the technology stocks just went up like crazy. By the way, there’s nothing black and white about this. Some stocks that people consider growth stocks, you also could say they’re value stocks or a value stock could be kind of growthy. The way Morningstar gets around it is they have three different classifications and Morningstar classifies these things you’re either growth, value or blended.
In summary there are basic differences between value and growth. Growth is just saying, “Hey, we’re going to grow at a much greater rate than a value company would grow. We’re not going to pay a lot of dividends”, certainly not in the beginning, in time, they do. Eventually the good growth company becomes a value company because you can’t grow a battleship twice as fast as a rowboat. You can turn that rowboat a lot faster than you can a battleship. Small companies grow faster than large. A great example is Sears back in the last century. In the 1900s, Sears was the biggest retail company in the world, and it was growing like gangbusters. Today, Sears went into bankruptcy, I think there may be a few stores left.
That’s what happens with stocks. That’s why there’s a time to buy and a time to sell. That’s why you have to know when a value stock is no longer appropriate or a growth stock is no longer a good thing to own, that’s a whole different discussion. Sears is a great example of one that went from growth to value to out of business. And believe me, most companies eventually go out of business. It’s hard. I look at a GE for instance, which has been around for forever and it’s still there, but the company keeps morphing. That’s what you need to do. You need to stay with the times.
This is just a summary of the podcast and does not include the Johnson & Johnson story. To watch the complete episode click on the image above.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190.
Disclaimer
This commentary on this website reflects the personal opinions, viewpoints and analyses of the WWM Financial employees providing such comments, and should not be regarded as a description of advisory services provided by WWM Financial or performance returns of any WWM Financial Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. WWM Financial manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Click on the image above to view Podcast Episode 11.
What is going on with GameStop?
Today, we’re going to talk a little bit about what the heck is going on with GameStop and Reddit and some of the other stocks that have gone crazy on the stock exchange over this last week. So, the story right now is that there seems to be a fight between the short-sellers and the buyers of GameStop, and there are other stocks that are doing the same thing. But let’s talk about GameStop because that seems to be the focal point of what’s happening.
Basically what’s going on is that there is a forum called Reddit, and Reddit is a discussion site on the internet where people talk about many things, but one of the the areas is called WallStreetBets. WallStreetBets has been pushing people to buy shares of GameStop. Why? Mainly they’re doing it because the stock was so heavily shorted.
Now, what does short-selling mean? Short-selling means you borrow stock from someone, you then go and sell it on the market, and eventually you have to go buy it back again. So theoretically, there is no limit to how much you can lose because when you buy it, you’ve got to buy it at whatever price the market’s at, and if the market keeps going up, and up and up you’re losing more and more and more. That’s exactly what was happening to some of these hedge funds, specifically Melvin Capital has been pointed out as one that has just been brought to its knees. It had a heavy position that was shorting GameStop. So they expected the stock to go down. Remember they borrow the stock and they have to buy it back at some point. So what they really want is for that stock to go down, they buy it back, and they’ve made money. But what happened is now that all these people on WallStreetBets are saying, “Buy GameStop, buy GameStop, buy GameStop,” and there’s more and more and more people driving the price of GameStop higher, eventually the short-sellers are saying, “Well, wait a minute. I’m losing my rear end on this, so I better start covering that short.” By covering, that means they have to buy it back. But meanwhile, they’re losing more and more money.
On the WallStreetBets site, there are a lot of people who’ve been just cheerleading this, and so a lot of the members of of this particular forum are saying, “We’re all gonna buy it and we’re going to stick it to the hedge funds.” Well, in fact, that’s exactly what they’ve done. And part of me says, “Yay,” because I don’t like it when stocks that I own get shorted, but there’s a reason that stocks get shorted. Mainly it’s because of valuations. A lot of people thought that GameStop was a very poor company and that it really wasn’t worth much at all. I think even some people who are on Reddit right now who are buying the stock might tell you the same thing. But they don’t care.
Now, I will tell you that I think that’s a dangerous game. And why is it dangerous? Because the last one in is going to get their head handed to them, and it’s almost a short squeeze in reverse. So a short squeeze, again, is when a company is shorted, lots of people go in and buy it, the price goes up and the shorts have to cover. When you’ve got lots of people who are buying a stock and it’s going up from what was at $5 or $10 a share to $500, $607 a share, those people who were buying at five or six or $700, they could be exposing themselves to a lot of loss because at some point in time, there has to be a real value for what the company is worth. If the company’s not making money, if the company is not doing well, at some point, that stock price should go down in a normal market. So, be very, very careful if you’re out there doing those things.
Now, the way this is really affecting the rest of the market is that those hedge funds are big. So when they’re losing money, what they have to do is because they’re borrowing money, they’re leveraged, and leverage is always the thing that hurts people. They’ve got to come in and either bring more cash in to cover those positions that they had shorted or they need to sell if they don’t have the money or sell other positions that they have to raise the money. So, what’s happening now is a lot of these hedge funds are starting to sell their winners. Their good stocks, the stocks that a lot of you may own. So there is some danger in that. Now, is it illegal? So far from what I’ve seen, it’s not necessarily illegal, but it’s pushing it because basically what they’re doing is saying, “Let’s all band together to move the price of the stock without any relationship to whether that makes sense or not.” Still not illegal, but I think it skirts the issue. So, the SEC is, of course, going to be investigating.
Meanwhile, one of the firms, Robinhood, which is one of the brokerage firms that a lot of the young people have been on, decided that they were going to stop trading in GameStop and some of these other stocks. The people on Robinhood were very upset. And I don’t blame them. All of a sudden the broker says, “Hey you can’t buy anymore.” I’m not sure that that’s fair.
So, basically what’s happened is you’ve had a giant short squeeze. Be careful though. If it were me, I would not be playing in this particular game because when it goes the other way, it’s going to go fast and this will not end pretty, one way or the other. So, as far as the overall market is concerned, this may be a cause for the market retracting a little bit as some of these stocks are being sold. I don’t think we’re in a recession or anything like that because so far the economic numbers that have come out have been pretty good. Most of the earnings numbers have been pretty good. So, not sure I would get too worried about what’s going on with the whole market. I do expect at some point there’s going to be a retracement of some of these gains. Nothing goes straight to the moon, including GameStop. So, be careful out there. And of course, if you have any questions, you can always give us a call or you can always contact me at WWMFinancial.com.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190 or click on the following link to contact https://wwmfinancial.com/contact-2
WWM Financial is an SEC Registered Investment Adviser. The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC-Registered Investment Advisor
