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This is a publication by Scott Anderson Financial. Scott K. Anderson, CPA, CFP®, EA is a Registered Investment Advisor in Newport Beach, California.
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Scott Anderson Financial

In This Issue

Trivia

Is Washington DC really built on a swamp?​​

Click here for the answer.

Quote

Pundits forecast not because they know but because they are asked.
- John Kenneth Galbraith

Now You See Them, Now You Don’t

Each semester there are usually one or two out of about 120 students in my various accounting classes who are interested in the course because they either want to start investing or are investing and want to understand what they are doing.

It is rather sobering for me to tell them about the Efficient Market Theory that says that no one can consistently beat the market so their study of accounting to make themselves better investors may, unfortunately, not prove to be as fruitful as they expected.

The challenge of investment analysis and “stock picking” is compounded by the declining number of public companies in which to invest, which has the further unintended consequence of making historical statistics somewhat irrelevant. There were 7,355 US public companies in November 1997 according to the Center for Research in Security Prices at the University of Chicago’s Booth School of Business. Nowadays there are fewer than 3,600 per Jason Zweig, one of my favorite writers in The Wall Street Journal.

According to the Center for Research in Security Prices, there were more than 2,500 small cap stocks and nearly 4,000 “microcap” stocks in November 1997. At the end of 2016, fewer than 1,200 small stocks and just under 1,900 microcap stocks were left as reported by Zweig. Several factors spell out the shrinking number of stocks according to Zweig including the regulatory red tape that discourages smaller companies from going and staying public, the flood of venture capital funding that enables young companies to stay private longer, and the rise of private equity funds, whose buyouts take shares off the public market. 
 
“The companies that have survived have tended to be fewer, bigger, older, more profitable, and easier to analyze making stock picking much more competitive” wrote Michael Mauboussin in the same article with Zweig.  Mauboussin is an investment strategist at Credit Suisse Group AG in New York who wrote a report this past spring titled “The Incredible Shrinking Universe of Stocks.”

Consider small-stock funds. Often, they compare themselves with the Russell 2000, an index of the U.S. stocks ranked 1,001 through 3,000 by total market value. “Twenty years ago, there were over 4,000 stocks smaller than the inclusion cutoff for the Russell 2000”, wrote Lubos Pastor, a finance professor at the University of Chicago. “That number is down to less than 1,000 today.”

So what is an investor to do?
 
I asked Riley the Golden Retriever with whom I share an office. She looked at me and rolled over on her back for a tummy rub.  Ah Riley, you are so right! Stick with the simple things that are easy to understand.  So that is why my equity investments are in ETFs which tend to follow the S&P 500. It also helps that ETF’s have lower internal management costs than mutual funds. The S&P 500 is an index of the 500 largest stocks based on the market capitalizations of 500 large companies having common stock listed on the largest American stock exchanges.  For dividend-focused equity ETFs, the choice again is stocks with long histories of consistently raising dividends – which are inevitably included in the S&P 500 list as well. 
 
The fact that the number of publicly traded companies is declining is worrisome.  Like many things these days, the regulatory effort to protect investors from every possible and conceivable risk has had the unintended and unfortunate side effect of shrinking the investment universe in which wealth can be created and grown. 
 
This is not good.  
 
We hear about the Silicon Valley Titans who sit atop large public companies.  Those companies create large numbers of jobs directly and indirectly. Those companies were small once.  With fewer smaller companies going public, the opportunity for growth and wealth creation in which employees and investors can participate is reduced and we are all the poorer for it. 
 
Given my stage of life and my client mix, it is prudent for me to stick with my S&P 500 focus, but the companies in the S&P 500 index do not exist in a vacuum.  The more the economy grows, the more the S&P 500 companies will grow. To paraphrase Ronald Reagan on a different subject: “Congress! Tear down those growth inhibiting regs!”
All the best,
Scott K Anderson Jr., CPA, CFP®, EA
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IRS Summarizes "Dirty Dozen" List of Tax Scams for 2017

WASHINGTON — The Internal Revenue Service today announced the conclusion of its annual "Dirty Dozen" list of tax scams. The annual list highlights various schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. Taxpayers need to guard against ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.

"We continue to work hard to protect taxpayers from identity theft and other scams," said IRS Commissioner John Koskinen. "Taxpayers can and should stay alert to new schemes which seem to constantly evolve. We urge them to do all they can to avoid these pitfalls – whether old or new."
 
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By The Numbers

Economic Update
By The Numbers
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Answer: Not really.
 
As with most things dealing with government, the location of Washington DC was a compromise. The Compromise of 1790 was made between Alexander Hamilton on the one hand and Thomas Jefferson and James Madison. Hamilton won the decision for the national government to take over and pay the state debts incurred mostly by the northern states during the American Revolution which was opposed by the southern states. Jefferson and Madison obtained the national capital (District of Columbia) for the southern states which the northern states opposed as being too far away and out of their influence.
 
Once ratified by Congress, the actual location of the capital was picked by George Washington. The general area of what we know today as Washington D.C. would more properly be called a low-lands where creeks fed into a larger body of water (i.e. the Potomac River) thus providing a fresh water source for the city, an active harbor for commerce and waterborne access to the city (Georgetown), and moving water to carry away sewage. So, Washington D.C. was not really built on a swamp with lots of stagnant water and soft, mushy, unstable soil like the bayous of Louisiana (think Pirates of the Caribbean) or in the Everglades of Florida.
 
The great hopes for Washington D.C. to become a major commerce site were eclipsed by Baltimore.  Until recently, Washington, D.C.  was the only national capital in the world to grow up as the capital of a nation instead of a major city in which a nation’s capital is located.  As a result the largest industry in Washington D.C. is politics and not commerce and industry.
IRS Circular 230 Disclosure: if this newsletter contains any type of tax advice, please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to the matter.
Copyright © 2017 Scott Anderson Financial, All rights reserved.​

P.O. Box 7463 | Newport Beach, CA 92658 ​| (949) 200-7111


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