2022 Cheat Sheet & The Fear Index

Nate Crosby |
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Good afternoon, what follows is handy information that hopefully will help you in your charge to the week of April 4th.  Best wishes. -Nate

2022 Handy Financial Information

From the urging of a few clients, you can now download a PDF of our quick reference guide to contribution limits and tax planning for 2022. I like to save a copy to my computer desktop or print one off for my actual desk. It’s also great to have in your back pocket for your next dinner party where you are sure to be the center of attention as you wow the crowd with your knowledge on tax credits and rates! One note to make, while Traditional and Roth IRA contribution limits remain archaically low at $6,000 for investors under 50 or $7,000 for investors over 50 as they were in 2021, base 401k deferral contributions have been increased to $20,500, SIMPLE IRA deferrals increased to $14,000, and SEP IRA contribution limits have been increased to $61,000 or 25% of earnings, whichever is less. Catch-up contributions are available in 401ks and SIMPLE IRAs for those over 50. Self-employed individuals, look at that SEP IRA, it can be a powerful tool for controlling your current tax bracket. Ask us if it is a fit for you.

In case you missed it

  • Tesla announced that it is seeking another stock split. This will be a second split in two years. Like an 8th grade mustache, it's still a bit fuzzy as the deal requires shareholder approval. We anticipate the deal will go through as investors tend to love stock splits. From a value standpoint, as we have discussed, a stock split does not add more value. If we cut an 8-slice pizza into 16 slices we haven’t increased the amount of pizza, we simply made the slices smaller. Smaller slices can help small individual investors add shares to their portfolio. The last stock split Tesla made was followed by an 80% upside run in the stock price. Will that happen again? Tesla is now the 5th largest company in the S&P 500 by market cap (before you correct me, yes Tesla is the #6 largest holding but #4 and #5 are both Alphabet with their A shares and C shares, so Tesla technically is the 5th largest company by market cap), which doesn’t mean it can’t continue to grow rapidly. All anyone needs to do is point to Apple, the world’s largest company by market cap. Apple is still a highly innovative company and a core holding of our individual stock portfolios.  However, there is a wide difference between the valuations of Apple and Tesla. Apple is currently trading at a Price to Earnings ratio of 29 and Tesla is in the stratosphere at 221. If a Price to Earnings ratio of 221 gives you a nosebleed, consider that in December of 2021 Tesla’s Price to Earnings ratio was 1,102. In the meantime, Tesla’s earnings have grown since then make it technically a much better value today than it was in 2020. We mentioned market cap a few times above. Market cap is simply the price per share/unit multiplied by the total shares/units. It lets investors see the size of a particular investment. If you want to lose 5 minutes check out this fascinating website 8marketcap.com. Look out silver, Bitcoin is hot on your tail!
  • Lots of news came from the Oscars. We saw how one terrible decision can derail a career and how acting like a professional can launch one to new heights, but as investors the best news was Apple winning best picture. The award produced immediate results boosting Apple TV viewers by 25%. You can bet there were a few sour faces in meetings last week at Disney, Netflix and Amazon. Apple was already the biggest gorilla in the room and if you are an Apple competitor, that gorilla just got a little more intimidating.
  • Last week an Amazon warehouse in Staten Island voted to unionize and is demanding the company start bargaining in early May. In recent weeks Starbucks has also faced unionization from its baristas in some locations. Amazon’s profit margin is under 8%. It will be interesting to see how the company balances continued reinvestment into future growth with potential increased employment costs. Why might the Amazon situation become interesting? If any company can automate more of its processes, it is Amazon.

Financial Education: What is the VIX or “Fear Index”?

The VIX or by its full name CBOE Volatility Index is a real-time market index representing the “market's” expectations for volatility in the coming 30 days. Remember volatility refers to the extent and speed of price changes (both up and down). How could the VIX index possibly measure what the market (which is you, me and all investors) expects for volatility in the coming 30 days?  The index is derived from the price of the S&P 500 index options with near-term options rates. These options give investors the right to buy or sell the index at a predetermined price. While the formula for calculating the VIX is above my comfort zone, it’s a relatively simple index to read. 

In general, if the VIX is below 20, it suggests that the market believes volatility over the next 30 days to be normal to low.  If the VIX index is above 20, investors feel market volatility will be higher than normal over the next 30 days.  In the Fall of 2008 (housing market crash) the VIX was at 80.  In March of 2020 (COVID Shutdown) the VIX was at 66.  On March 4th of this year (lowest point in the market YTD) the VIX was at 32.  Today the VIX is at 19.63. 

How to use the VIX to invest. In our opinion, the VIX just provides additional information.  As long-term investors we are not making portfolio decisions based on the VIX alone. Rather, it is part of a plethora of information that we take in to get broad view of the investing landscape. However, some contrarian investors use the VIX as a signal to invest.  A contrarian investor is one that moves opposite of the masses. Contrarian investors buy when others are fearful, and they sell or do nothing when others are confident. When the VIX spikes, contrarian investors see that as an opportunity to invest. When the VIX is low they see that as an opportunity to take profits or sit on their hands and do nothing.

Nate recently discussed the VIX in greater detail on the Dynamic Growth podcast and in a Health & Wealth video. 

Weekly Wisdom

Ancient Buddhists believed that anger was a kind of tiger within. One whose claws tear at the body that houses it.  While it is possible for anger to be a powerful motivator, far too often it hurts the owner of the anger far more. We see this in the statement that was spoken without thinking, or the act of violence.  Even if anger is used as a motivator to achieve a goal, even after obtaining the goal, the individual often feels empty, because a goal achieved in anger rarely leads to happiness. We cannot control all events in our life, but we can control how we react to those events. Choose to be positive. Choose to be happy.

This newsletter is for informational purposes only and should not be taken as direct investment advice without a consultation. The articles in this newsletter represent the opinions of CAG.  Investing involves risk including the potential loss of principal.  Carefully consider all risks and fees before investing. Don’t buy or sell a security just because it was mentioned in this newsletter.

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