jwithrow, Author at The Phoenician League

The three keys to a bulletproof portfolio

Investing in stocks is a simple game.

That was the subject of yesterday’s letter. And the reason is simple. There are only three variables that control the outcome of any stock investment. This is true regardless of the economic climate.

The first variable is time. How long will we be able to safely hold a given stock?

Of course, there’s no simple answer to this question. It requires some deep analysis of the company and the industry it’s in, as well as educated projections regarding macroeconomic trends.

But for certain companies, it’s not that difficult. Take a capital-efficient consumer goods company like Hershey or Domino’s Pizza, for example.

Do you think people will still be buying cheap chocolate loaded with sugar thirty years from now? Do you think they’ll be buying cheap pizzas delivered on time right to their door for decades to come?

I do. Therefore we could safely hold those companies for at least thirty years… if the other two variables line up for us.

And that brings us to the second variable. It relates to compounding.

Investing is a simple game

We hit peak Fall foliage over the weekend.

Our favorite tree erupted with the most intense shades of red and orange. And the mountains surrounding our humble property lit up into a collage of colors as if someone were playing with the old children’s toy Lite-Brite.

It’s hard to beat Autumn in the mountains.

Shifting gears…

Let’s talk about investing this week. And we’ll start with this – investing is critical for anyone who hopes to achieve financial security and then financial independence.

Of course, there are plenty of asset classes for us to choose from. We cover each (and how to invest in them) in our Finance for Freedom program.

But today I want to talk about stocks… for a few reasons.

Chances are you have exposure to stocks already. Maybe it’s through a 401k. You may also have other investment accounts set up.

I want you to know that investing in stocks is a simple game.

I’ve been immersed in the world of investment research for over ten years now… and I’ve learned that there are only three variables that control the outcome of any stock investment.

And that’s true in any environment.

The Sound Money Solution

We’ve been talking all week about inflation and its devastating impact on civil society. It hollows out the middle class and makes long-term business planning nearly impossible.

And it all starts with a lack of understanding around money.

We are all taught to view money as a medium of exchange and a measurement of value. And sure enough, these functions are critical to civil society.

Money is also a communications system. It allows us to put a price on goods and services in the economy. And those prices communicate valuable information to us about the supply of and demand for scarce resources.

For example, when the price of something goes up, that’s a signal that it has become more scarce relative to consumer demands. This prompts entrepreneurs to devise ways to create more supply or alternatives to the good in high demand.

In just the same way, when the price of something goes down, that’s a signal that the item is relatively abundant compared to consumer demand. And this leads firms to produce less of it. That is, until the price rises again.

This communications system allows an economy to coordinate production across time and space. And it does so according to Adam Smith’s old “invisible hand” principle.

This principle says that individuals making their own decisions based on self-interest drives economic growth. The invisible hand guides firms to produce the highest quality goods at reasonable prices.

It’s all about allocating labor and scarce resources to their highest and best use. Doing so creates a strong economy that benefits all of us.

The problem is, inflation distorts this communications system.

The middle class is under attack

We’re pulling back the curtain on inflation this week… and it’s getting ugly. The middle class is getting wiped out.

And that’s not just an opinion. It’s all in the data. Today I’ve got two tables for you that spell it all out, clear as day.

This table tracks the median price of a new car, ten gallons of gas to put in that car, and five pounds of ground beef going back to 1940.

As we can see, it’s not a pretty picture. Costs have risen dramatically over every ten year period in modern history.

That said, we have to compare these costs to the median income to get a better feel for the story. And that’s what this next table does:

Here we’re tracking the median home price compared to median annual incomes going back to 1940.

And again, we can see that home prices have risen significantly over every ten year period. But incomes have too… so it’s that third line that we need to focus on. It shows us exactly what percentage of the median home the average guy’s salary can cover.

The median home costs $430,300 today. The median annual income is $74,580. That means the average person’s salary can only cover 17% of the median home price.

War and the middle class

And it begins.

Yesterday we talked about the real threat of war… especially wars on multiple fronts. Now we have confirmation that it’s happening.

The US just committed troops to the Middle East. And US Treasury Secretary Janet Yellen publicly stated that she believes the US can afford to aid the war efforts in both the Ukraine and Israel. By the way, I pulled back the curtain on Yellen’s motivations and her allegiances in my new book Beyond the Nest Egg.

As we discussed yesterday, governments can only finance wars by printing money.

Technically, that means Yellen is right. The US can afford to support both war efforts. They can just create new dollars out of thin air to do so. But this is going to further erode the dollar’s purchasing power… which will drive our cost of living higher and higher.

So ultimately it’s the average person who must pay for these wars. But we don’t pay for them directly. Inflation is a stealth tax that steals our purchasing power away from us.

This chart tells the story perfectly:

The Real Threat of War

I got very concerned last week.

By now I’m sure you know all about the conflict in the Middle East… and that the US government has gotten involved.

I’m not here to comment on the politics of it all, other than to say that there’s nothing more stupid than war. Like governments and bureaucracy, it’s a relic of the Bronze Age. We’ll need to put it in our past if we wish to build a civilization geared towards human thriving.

That said, war is a major threat to our economy and our finances.

Some of these threats are obvious. Potential supply chain issues and rising oil prices are easy to anticipate.

But the biggest threat is hidden in the shadows… and they will never be honest about it.

The Promise of Financial Freedom

All week we’ve explored ways to maximize our after-tax income by leveraging the secrets hidden within the US tax code.

I know some of this may sound tedious—it’s far easier to simply work a W2 job and take the standard deduction. But if you’re willing to do a little bit of tax planning, a whole new world can open up to you. That is the world of financial independence.

Imagine what life would be like without the need to earn employment income. No more commuting to a job you may not find fulfilling. No more answering to bosses and corporate bureaucracies. No more scrambling to pay the bills.

Instead, picture having complete control over your time and schedule. Waking up when you choose. Pursuing creative passions. Volunteering for causes you care about. Traveling the world with family and friends. Simply enjoying each day as you desire.

This is what financial independence looks like. It’s about no longer being dependent on a paycheck to make ends meet. Time freedom. Location freedom. The flexibility to live life on your own terms.

Of course, this doesn\’t happen by accident. It requires us to diligently construct multiple income streams and then maximize the after-tax income from each. We’re talking passive income from well-chosen investments.

This is the promise of financial independence. And with the right roadmap, it\’s possible to get there sooner than you think.

For a much deeper dive on how it can all come together, check out my new book Beyond the Nest Egg. You can find it on Amazon right here.

See you on Monday.

-Joe Withrow

The Deepest Secrets of the US Tax Code

The rich play the game of money very differently. The rich know that the real way to wealth is via cash flow, and if managed properly, cash flow can be both substantial and tax-free. -Robert Kiyosaki

We’re talking smart tax-planning this week. And it all starts with understanding the true nature of the US tax code.

Simply put, the tax code was designed to help entrepreneurs and investors minimize their tax liability. I know that’s not what we’re led to believe in school. But it’s clear as day.

Consider this – the federal tax code consists of over 70,000 pages. Yet, less than five percent of those pages are about paying taxes. The other 95 percent are all about how to avoid paying the taxes that the first five percent says we owe.

This is what Kiyosaki’s quote above speaks to. If we understand the tax code, there are countless ways to reduce our taxable income.

The Power of Tax Write-Offs

Autumn continues to descend upon us up here in the Virginia highlands.

Temperatures dropped down into the 40’s for the first time this past weekend. It was a blustery Saturday morning.

From the comfort of our great room we sat and watched many leaves pull free from their trees and gradually flutter to the ground. To me, no television show could ever match that level of entertainment.

This image tracks Fall’s progression up here. The picture from the left is from last week. The one on the right is from yesterday.

We should see peak foliage within the next few weeks. Stay tuned for that.

Shifting gears back to finance…

It’s not what you make…

It’s not what you make, it’s what you keep.

I stumbled upon this old adage many years ago. It’s a simple thing. But it’s always kept me focused on what’s truly important when it comes to money and investing—the bottom line.

This saying means that financial success isn’t just about how much money you earn. It’s about how much of it you are able to keep after taxes and other expenses.

If you want to build wealth over time, you must maximize your after-tax income. That’s the name of the game.

Fortunately, the U.S. tax code makes this easy to do. There are endless deductions we can take. That is, if we’re investing in the right assets and doing things the right way.

Deductions, also known as tax write-offs, reduce our taxable income. They enable us to lower our tax bill by subtracting eligible expenses from our total income. The more deductions we can qualify for, the less taxes we’ll owe.

For example, suppose you earn $100,000 this year. Given current tax rates, you’ll owe $17,400 in federal income taxes. Ignoring state and local taxes for simplicity, this gives you a net income of $82,600. That’s what you keep.

Now, let’s suppose you can qualify for $35,000 in tax write-offs.