Tuesday, March 30, 2010

Pay Your Taxes

Its tax time again. I have been attending free seminars on taxation and investment in the library for the past few weeks. The teacher is an accountant from the nearby university. Basically it’s basic stuff but a good introduction to the US environment for recent emigrants like me. The tax system here is complex and encompassing so one should really understand and take advantage of tax credits or deductions. It’s really an important task because filling tax is a big deal here. Civil wars have been fought in the past and political battles rage today regarding the proper level of taxation. One can get audited and sometimes jailed if one is not exacting. The complexity for me is filing 2 tax returns for 2009.

The library showcases some books to read after the weekend seminars. I borrowed a few and liked Larry Swedroe’s book on making wise investments. He is similar to the author of ‘The Coffeehouse Investor.’ They both agree that the best way to invest is via passive investing, usually by buying index funds and/or ETFs. I agree with their views but in the last minute I decided to buy individual stocks. The reason is that Index Funds or ETF cost more that some really good value stocks out there. In fact, one could invest in companies like Citigroup, GE, Pfizer and Xerox in today’s market with their current price levels. Its taking advantage of the depressed prices of certain firms that have a good upside potential in the future.

I guess I bought because I intend to hold them for a long time. I will not be trading but rather keeping these stocks for the long term. So I guess I am a contrarian, buying value stocks. It is this ease in applying the correct labels that I learned from the seminars. I have borrowed a lot of books too and it’s been very helpful. Now I wonder if the confidence I have in buying individual stocks is warranted. I may be a victim of overconfidence as well the error of looking at the past as a predictor of future events. The new field of behavioral finance has opened up a new perspective for investors who are affected by downturn.

I guess I can describe myself as having a high risk tolerance, with a buy and hold mentality, who focus on value stocks with a contrarian perspective. I hope a got these labels right. Actually I have investing in stocks since my early twenties, having read a stock primer on the Philippine stock exchange. Prior to my meager US investments, I can say that I have invested in the Philippines and Singapore stock market, invested in mutual funds, REIT, ETFs and individual stocks. I have an undergraduate degree in Economics and post graduate degree in business. I have also read my share about investing by reading books by Benjamin Graham, Warren Buffet, George Soros, Robert Kiyosaki, about the stock market, economic theory, history books on banks, financiers as well as attended all sorts of investing seminars.

With this background, I hope that I am not blindsided by any mental bias or overconfidence. At the moment, I have lost some money due to the recent downturn although overall I am OK because of my gains in real estate after selling my flat. It’s only the first time I have invested in US stocks. I think I have also developed through the years a good ability to assess risk. Not necessarily in investment but in my work and life. Most of my bets are good though I sometimes have a gambler’s recklessness. I guess one’s progress in life and work reflects one’s risk assessment skill. Applying this sort of instinctive skill with investment psychology and financial literacy is the key to being a good investor.

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