Taxes and Stamkos

*Update: 35 minutes after posting its reported that Steven Stamkos resigned with the Tampa Bay Lightnings.

I written two pieces in the past on professional athletes and money, The Montreal Tax and Broke Athletes.

My brother, Hugh, sent me this great article from TSN on the possibility on Steven Stamkos signing with the Toronto Maple Leafs. You need to listen to Bob McKenzie’s analysis of the situation, he’s one of the best. Toronto fans are getting all excited since he’s a kid from the Toronto area (Markham) and signing this elite player would change the faith of the franchise. That’s the team that finished last and the proof of their last Stanley Cup conquest are black and white pictures.

Steven Stamkos is the biggest NHL free agent to hit the market in years. Mr. Stamkos is likely to command one of the highest salary in the NHL. While there are many factors that go into this decision we don’t exactly know what exactly is driving Stamkos’ decision. It’s actually pretty hard to read. If it was purely money, he would have resign with the Tampa Bay Lightnings. If it was team success, he would have also resigned with the Tampa Bay Lightnings since the team is one of the best in the league. From what I heard, and that again are purely rumors, he was offered the same contract than Patrick Kane and Jonathan Toews. I believe the contracts are worth $10.5 million each per season for eight years. Another theory is that he’s waiting to see what the others team are offering to have TB match the terms. This is the first time and maybe the last time (big money years anyway) that Stamkos gets to be an unrestricted free agent and test the market.

Talking about dollars, we love to speculate on how much money one player makes but one area we often overlook is after tax dollar that is left. We don’t talk about it because it’s not sexy and complicated but taxes play a huge role in the decision a player has to make when it comes to picking a city. The Canadian cities are clearly at a disadvantaged when it comes to attracting top talent. Let’s face it, $10 million in Toronto is not same as $10 million in Tampa Bay. According to the article, if he was paid $10 million (U.S.) a season by the Maple Leafs, he’d only take home about $3.8 million annually, compared to about $5 million if he re-signed with Tampa Bay according to estimates provided to TSN by the Gavin Management Group. These amounts also include deductions for agent fees and an 18% escrow.  Florida also doesn’t have a state income tax while Canadian teams need to offer more money to compensate for the high taxes. And with a salary cap environment that plays against you.

The Tampa Bay Times did an analysis on how an $8.5M Lightning contract keeping Steven Stamkos in Tampa is better than $10.5M to leave (see table below). The article states that if Stamkos takes $8.5 million with the Lightning, it would net almost the same annually as $10 million in New York, presuming he’d be a New York City resident. He’d net roughly $500,000 less annually than $10 million deals in St. Louis or Detroit, due to city and state taxes, but take in more money over the length of his contract. In Toronto, Stamkos’ hometown, there’s a proposed 53.53 percent federal/provincial tax if he’s a Canadian resident. So even if the Maple Leafs offer $10 million annually, Stamkos would net $7 million less total over the length of the deal compared one at $8.5 million annually in Tampa Bay, partly thanks to an eighth year.

One money advantage that Toronto offers is more endorsement opportunities. But then again you lose a lot of that revenues to taxes of course. If Stamkos wants to play the hometown hero, then Toronto is the place but he will be giving up a lot of money. If he’s after money, he should stay in the sunshine state.

Source: Tampa Bay Times
Source: Tampa Bay Times

Another Opinion on Brexit

Brexit cartoon

Now that the Brexit vote has shocked the world, anybody with a social media account is now an expert in geopolitics. I guess that makes me one too. We were all under the impression that the United-Kingdom was staying inside the European-Union (EU). Before the vote the market and the British pound was up, a sign of confidence even though the polls were pretty close. We know what happened next. The “Leave” vote won and the wheels came off. Calm turned to chaos and $3 trillion of market value evaporated.

Global markets around the world got blindsided and panic took control. There are lot of uncertainties in the markets and markets hate incertitude. We love to know what to expect tomorrow and now nobody does. The uncertainties derive from the fact we have no idea what Brexit means. There are no answers to the cost, penalties, terms and benefits. The only thing that is certain is that nobody has a plan for what comes next.

Now you have the uncertainties. Uncertainties affect business confidence. Less confidence means less investment, and less investments means fewer jobs. Business decisions will be delayed. It’s possible that the U.K. falls in a mini-recession. There’s talk about moving fast to settle the exit and issues. In this case, fast means a couple years.

The vote was a national catastrophic error of judgement. A lot of folks who have voted for Brexit already regret it. Worse, the “Leave” campaign was being carried under false promises. Many proponents for Brexit have already backpedaled on their promises, notably Boris Johnson who might be the next Prime Minister. Remember that thing about stopping immigration? Well there’s still going to be immigration. And remember that “Leave” campaign bus painted with the audacious claim “We send the E.U. £350 million a week, let’s fund our N.H.S. instead,” a reference to the country’s healthcare service.  Well that was just a slogan and has been removed from the campaign website after the election. One Brexiteer politician said that it was only an inspiration. The leader of the UKIP party, Nigel Farage, the face of the Brexit movement, said that the pledge to fund the NHS was a mistake. The two biggest arguments for leaving have been boiled down. “A lot of things were said in advance of this referendum that we might want to think about again,” Liam Fox, a former cabinet minister, told the BBC. The victory can be attributed to a campaign of misinformation and even deception. The leaders of the Brexit campaign are now trying to manage down expectations.

350 million pounds NHS
That was a lie.

For many the vote was a referendum on immigration. It’s a very emotional and important issue. Many Brits wants sovereignty over the issue. The free movement of people inside the EU is one of the 4 tenets of the EU. The other three are the free movement of goods and services, and capital. Boris Johnson already said he promised that Britain would maintain free trade and free movement deals with Europe. So even though he’s for leaving, he’s 75% in agreement with the EU principles.

No matter how twisted this is, we need to respect the result of the vote. It should be noted that the vote is non-binding. That means the UK doesn’t have to exit the EU. For Britain to formally exit the EU, they need to trigger the EU’s Article 50, the law that would start the process of the country’s political divorce from the EU. Once it’s triggered, they have two years to exit.  David Cameron, who is leaving soon, will not trigger Article 50. It will be up to the next Prime-Minister and parliament to make that decision. I personally think the UK will have a 2nd referendum once they know the cost, terms, and penalties of leaving.

I’m in the camp that everything will be all right. Even with a lot of tough talk coming from the EU camp that wants to penalize the UK, I think they will find a common ground that is satisfying for everyone. The UK is linked to the EU no matter what. The most important thing is that all the leaders work together to provide as much stability and certainty as possible. We need to let the dust settle and start thinking rational. In the end, I wouldn’t be surprised once the political games are over that the UK stays in the EU.

Berkshire Hathaway Decentralized Organizational Chart

Berkshire Hathaway is the 4th largest company in the U.S. measured in revenues. BRK is the master of decentralization. There’s only 24 people working at head office. BRK delegates everything down to its CEOs and managers. BRK’s role is to allocate capital. This is the management model to follow for the 21st century.

Berkshire Hathaway Organizational Chart

Chart via Larry Cunningham’s Twitter account:

Common Stocks and Uncommon Profits

Common Stocks and Uncommon Profits by Phil FisherI reread the classic Common Stocks and Uncommon Profits by Philip A. Fisher. The original edition was published in 1958 and is still as relevant today. The book is ranked up there among the best investment book of all-time. It’s worth picking up once in a while to reread certain sections. I have the updated edition, which includes the perspectives of the author’s son Ken Fisher, a respected investment guru in his own right. You can find some of Ken’s writing at Forbes and books at Amazon.

It’s not a big book but you can’t slam it. There’s a lot of material to digest, although pretty straightforward. Phil Fisher well-known for having a major influence on Warren Buffett’s investment style. Buffett went from Graham’s “cigar butt” approach (dirt cheap companies with one more puff in them) to pay up for quality and hold it forever. Warren Buffett once said his investment philosophy was 85% Ben Graham, 15% Phil Fisher. Today if you look at Buffett’s past investments I think he’s more Phil Fisher than Graham. Fisher was all about companies that could grow, grow and grow. Phil Fisher’s strategy was to buy well-managed, high-quality growth companies, which he held for the long term.  This is not a message to go out and buy growth at any cost. His philosophy calls for making a relatively small number of investments but only in unusually promising companies. He’s looking for signs of growth potential in the companies he’s studying. The book provides a fifteen points guide on what to look for in buying a common stock. Fisher is also an advocate of the scuttlebutt method.  The scuttlebutt method is when researching for investments you need to go beyond the annual report and talk management, employees, former employees, customers, supplier, the competition and more. It’s a lot of work but that’s one way of finding outstanding investments opportunities. The book also provides a list of “what not to do” such as don’t invest in a promotional company instead of “what to do”. If you can avoid pitfalls and mistakes you are already ahead of the game. Remember that the key is no to lose any money.

I won’t go into details about the book since there’s plenty of resources available online. However I will provide this golden nugget of knowledge, which I think summarizes the book: “What are you doing that your competitions aren’t doing yet?” This question is a home-run to me. It’s a powerful question. The company or individual that’s always asking itself that question never becomes complacent.


Are Financial Advisors Professionals or Salesman?

Are financial advisors professionals like lawyers and doctors? Or is it a mere salesmanship gig like a used car dealer or insurance salesman? As a former investment advisor I do have some input.

The industry struggle with that question because it operates in an obvious conflict of interest. Advisors have a fiduciary duty to put their client first and to look after their best interest. This comes in conflict with how the advisor is getting paid and his duty to the firm/bank.  Remember that financial advisor doesn’t get paid for giving advices. Advices and retirement plan are free.  A financial advisor gets compensated by selling products that has fees. When markets are down, it is not a win for the client because they lose money.  When markets are down and the clients are losing money, the financial advisor and the financial institution still get paid.  Maybe they get paid less but they still get paid.

Financial advisors see themselves as professionals but have an image problem. It doesn’t help that the industry aggressively lobbied for the lower “suitability” standard, with less transparency and, of course, higher — often much higher — fees. It also doesn’t help that the bar to entry is very low. The exam is way too easy and banks are pushing anybody to take it so they can have more people on staff selling their products.  When I broke into the business they required everybody in the office (future financial advisors and support staff) to pass the exam because they didn’t want problem with regulators. Well I can’t remember anybody not passing. As a result the firm had a whole floor of people ready to sell mutual funds. The problem for the client is that it’s too hard to distinguish between a real professional financial advisor versus the guy that decided to pass the exam because he heard the money is good.  For example, in hockey you have the major, senior and amateur league. Your talent decides what league you are in. In the investment business everybody is in the same league, good and bad, wearing the same suit and credentials. My suggestion is that if the industry wants to be taken more seriously and respected they should have higher standards. I’m sure professional financial advisors would welcome that.

Should advisers do what a client wants, even when the adviser knows it is not in the client’s best interests? If you don’t, he might take his business elsewhere. After all you are paid by the client and he won’t hesitate remembering you that it’s his money. You have to say “no” to your client when he insists on a service that you know defies common sense and works against his or her long-term interest. If this means that you will lose an account, so be it. It’s better to lose some short-term business than having to face career ending problems later on. And that “later” might come pretty fast once Mr. Client sees his net worth meltdown because you didn’t protect him. You failed at being a professional. You failed at looking after your client’s best long-term interest. That money that was supposed to be there for retirement, a vacation, the children’s education or project xyz is now gone. You were supposed to protect him and you didn’t. A financial professional should not be an order-taker or clerk; they should be trained professionals working on behalf of a client’s best interest. Even if that means saying no to clients.

To prevent that from happening I used to tell my client to take 10% of this money and open self-brokerage account. I never had a problem with that suggestion. Everybody has a little bit of a gambling side inside them and that way the need for action is being feed. Go enjoy an expensive gamble but leave your retirement out of it. So take 10%, have fun and good luck. After a while, if there’s any money left, it comes back.

There seem to be a false perception that advisors will push their client into taking on more risk than is prudent, buying the hot new thing, using excess leverage, catching the latest IPOs, or following the advice of pundits or talking heads. This perception is false. There might have been a time when business was conducted that way but it’s hasn’t been the case for a very long time. I used to be an advisor and portfolios were very plain vanilla boring. A mix of equity and bond funds, that’s it. The reality was that it was the client that kept pursuing the latest investment flavor of the month. It was my job to say no to my client because pursuing the latest media fixation was not in his best interest. My job was to protect the client from himself. That’s the main role of the financial advisor.

Not every client is the right fit.  Usually if you have problems later on it’s because something didn’t click at the beginning of the relationship. Either you didn’t adequately explain your philosophy and approach or you signed the client just to get business.  Usually it will cost you more money and headaches in the long run and nobody will be happy out of it.

For Mr. Client reading this, no financial advisor, or anybody in the world, has any idea what world market is going to do best next. Nobody! If Mr. Advisor stars yapping away about where interest rates are going and market timing, it’s better that you take your money elsewhere. The reason why I managed other people’s money it’s because I didn’t know what is going to happen next.

The answer to the question, are financial advisor professionals or salesman, is really comes down to how the advisor sees himself.  This article may appear to be tough on financial advisors. There are some good financial advisors out there but unfortunately the bad ones really spoil the industry.

Jim Collins Interviews Jorge Paulo Lemann and Gisele Bündchen (well sort of)

Jim Collins (Good to Great) got to interview business genius Jorge Paulo Lemann from 3G Capital (Dream Big) and supermodel Gisele Bündchen, which also happens to be Tom Brady’s wife. One is interesting to listen to and the other is interesting to look at. I will let you guess who’s who.  I’m not sure what connects Jorge and Gisele, but they are both Brazilian and they are both have a lot of success globally. After all this was the Brazil Conference at Harvard & MIT. I read a lot about Jorge and his story. It’s incredible what he and his group has accomplished. He’s also really close to Jim Collins. Jorge is usually not big on media stuff, so this interview is a very special one. I don’t know too much about Gisele but I think she is (or was) the highest-paid model in the world. In 2015, Forbes estimated Bündchen’s annual income at $44 million. I think she’s making more money than Tom Brady.

For more on Jorge Paulo Lemann and 3G Capital, be sure to check out my post on Dream Big.

Here’s some inspirational notes from the video:
Jorge Paulo:

“Dreaming big or dreaming small take the same amount of effort so you might as well dream big. So that is easy. The people factor is something that you really have to work hard at. Most people think of business as selling a product or you have a very good product to sell or you have a very special strategy. After I began attracting very good people to work for me, I found that was more powerful than what you were doing or what the product was. Just getting the right people on board then you would find something interesting to do. It is a continuous effort though.”

Jim Collins:

“Most of us come at life as a series of ‘What’ questions. What am I going to do? What career? What company? It’s about what…What? What? What? And I think what Jorge Paulo shifted to early in his life was that the first questions are always ‘Who?’. Who are you going to allow to mentor you? Who do you want to spend your time with? You can be doing a lot of ‘Whats’ with your life, but if you’re not doing it with people you love doing it with, it’s really hard to have a great life.”

Jim Collins:

“Luck favors the consistent. You’re going to have good hands and bad hands in life. And you might get a bad hand early. You might go broke at 26. You might have come from a difficult place. If you see life as coming down from a single hand, then it’s very easy to lose. Because what if that’s a bad hand? But if you look at it as ‘Life is a series of hands’, and the key is to play every hand to the best of your ability; sometimes you get good hands, and sometimes you get bad hands. But you’ve got to stay at the table. You’ve got to stay in the game and keep playing.”

Jim Collins:

If Steve Jobs would have quit after he was fired from Apple, none of use would have iPhones.

Here’s the video. The video audio out of my speaker wasn’t excellent but it works fine with headphones, so I think its the video. Jim is the host and the setup is a conversation between two friends. Gisele is only interviewed for only about 5 minutes. She starts in Portuguese then realizes Jim Collins doesn’t speak Portuguese and switch to English.