Wisdom of Rich Dad

Some time ago, I went to my mail box (yes, remember that old thing?) to collect the usual array of shopping catalogues, bills, and even the odd letter stuffed inside. I noticed a letter from my bank, of which I had been a customer for 15 years. My salary went into this account. I even had a home loan with them.

When I opened the letter, the contents were bewildering. I literally couldn’t understand a word of it. Not one. I studied every inch of it and I dipped back into the envelope to see if I had missed an all important page. But the result was the same. I could not understand a single sentence.

Was I going mad? Had I entered the Twilight Zone? Had I suddenly lost my capacity to read?

It was none of the above. I didn’t understand a word because the entire letter was written in Chinese characters.

Sitting at my kitchen table in Sydney, I turned the pages over and over, expecting to find the English translation somewhere. But there wasn’t a single word of English. This was confounding as the (Australian) bank had managed to write to me in English for the past 15 years.

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The ETF industry has long been known for the many advantages that it offers over competing mutual funds and other investment vehicles. One of the most significant upsides that exchange traded products have is their relatively low expenses; investors can gain exposure to asset classes of all kinds for a reasonable price. In fact, cheap ETFs have become so popular in recent years, that issuers have even started competing by slashing expense ratios to try and get a leg up on their more expensive competition, and some evidence shows that the strategy is paying off well. But while many investors are concerned with how much an investment will cost them, few stop to think about what that particular investment yields for its issuer

A number of exchange traded funds in the space have gargantuan assets and some have large expense ratios to go along with it. Perhaps one of the most interesting ways to look at cost efficiency of the industry is to examine how much revenue issuers are taking in off of an individual fund and if this suggests anything about its fee structure. Below, we outline the ten most profitable ETFs in the world, and some of the results might surprise you.

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James B. Stewart wrote about his federal tax rate at the New York Times and dared readers to send in their own tax returns. What he got back is something remarkable: A private equity manager who pays a total effective tax rate – local, state and federal — of 102% on his taxable income.

He lives and works in New York City, which all but guarantees a high tax rate. Nearly all of his income is earned income and thus fully taxable at top rates. (He said that’s not always the case, but given the recent dire condition of real estate, in 2010 he had few capital gains and his carried interest didn’t yield any income.) Unlike me, he can’t make any itemized deductions, which means his adjusted gross income exceeds $1 million, the level at which New York State eliminates all itemized deductions, except for 50 percent of the value of charitable contributions. Mr. Ross said he gave 11 percent of his adjusted gross income to charity.

That means Mr. Ross can’t deduct any interest expense on the money he borrows to finance his real estate investments, which is substantial, nor can he deduct any other expenses or other itemized deductions except for part of his charitable contributions. This means he pays an enormous amount in state and local taxes. Since those are among the deductions that are disallowed when computing the federal alternative minimum tax, Mr. Ross is in turn especially hard hit by the A.M.T.

 

Because Mr. Ross has so many deductions, his tax as a percentage of adjusted gross income, as opposed to taxable income, is 20 percent, which is much lower than mine. Still, all those deductions, such as interest expense, are money out of Mr. Ross’s pocket, which is why he has had to draw on his savings to pay his taxes.

The important thing to note here is that we’re using “taxable income” rather than “adjusted gross income.” Taxable income is what you get after you subtract all those personal exemptions and deductions (charity, etc) from AGI. Romney famously paid a tax rate of less than 15 percent. That was going by adjusted gross income, which was $21.7 million. But his rate on taxable income ($17 million) would have been 17.5 percent.

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

This quote from Benjamin Graham means that over a long period of time, investors will analyze companies’ financials, competitive strengths, and management and accurately “weigh” what a company is worth. But in the short run, markets rise and fall, and investors experience emotions like relief, panic, and joy. In the short run, buying based upon these emotions is “voting.” During the dotcom bubble, investors voted stocks way up, and over time they weighed their value to bring stocks back down to earth.

As Facebook nears its IPO, the analyst and investment community will be busy weighing the value of its shares and trying to judge investor sentiment to arrive at a share price between $35 and $55. Over the long term, Facebook shares will receive a proper price, but in the short term, investor emotions will impact pricing.

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Nearly one in two Americans is now living on the lower end of the income scale, according to theCensus Bureau. For a family of four that’s less than $45,000 a year. These are three families who are falling out of the middle class.

One bedroom for a family of five

Previous pay: $110,000
Current pay: None
Where they live: Staying as guests in a friend’s home

Talia Mobley and her husband Adam have been out of work for more than two years. Adam was a lead technician for Comcast and says, “I had it made.” Taliaworked in customer service.

Collectively, they have sent out 500 resumes but have not gotten one job offer.

Talia went back to school to retrain as a Certified Medical Assistant because she heard health care is where the jobs are. But she still hasn’t been able to find work.

Fifty percent of the unemployed in New Jersey have been out of work for more than six months, and it’s a similar story in Florida, Illinois and Nevada, according to the Brookings Institute.

From six figures to the poverty line

Previous pay: $130,000
Current pay: $15,000
Where they live: Their foreclosed home, awaiting eviction

This family of 5 represents what it can look like when the bottom falls out of the middle class.

They live in Morris County, N.J., where the median household income is $91,403.

Unwilling to show their faces, they still wanted to share their story. The father used to make over $100,000. But then his 6-figure, telecom job of 20 years went to India.

They haven’t paid their mortgage since 2009 and wake up each morning wondering if today will be the day they are evicted.

Not living in poverty but not making it

Previous pay: $40,000 to $50,000
Current pay: $12/hour
Where they live: Family shelter

A mother and her three children in Bergen County, N.J., now call a shelter home. Too ashamed to show their faces, the mother says, “I never thought in a million years I’d be at this point.”

But when she lost her customer service job, she could no longer pay the rent in a county where the median household income is $77,000.

The manager of the shelter sees more and more families like this — stuck in the middle. Not living in poverty but not making it either.

Since we first met her, the mother has been re-hired by her previous employer working in customer service, but only part time.

2011 was a fantastic year for Google’s operating system, Android. Its smartphone market share has been growing rapidly. Accordingly to Gartner, Android comprised about 53% of the smartphone shipments in the third quarter of 2011, followed by 17% with the Symbian operating system and 15% with iOS from Apple. Apple’s market share fell 16.6% from a year ago.

Apps Market
Looking at these numbers, it’s safe to say that Google is currently winning the race for the smartphone market share. That may be bad news for Apple, but they are still very much ahead in the race. Apple leads Android in the apps market, with the Apple Store having 18 billion downloads, while Android has just reached 10 billion downloads in the Android Marketplace. However, Android is certainly catching up, with a growth rate of 1 billion downloads per month. At this pace, it’s just a matter of time before the Android Marketplace overtakes the Apple Store in apps downloads.

While there is a lot of buzz surrounding the growth of Android, the Apple Store still beats the Android Marketplace in a very important area – revenues. Even though Google has a huge market share in the apps field, its Android market doesn’t make publishers nearly as much money as Apple does. The app developers still choose iOS first for launching any app because they see more profit potential. According to Pipar Jaffray, a U.S. investment banking firm, Android developers earn just 7% of what iOS Apple Store earns for its developers.

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