I hate buying light bulbs. When did something so simple turn into something so complicated and confusing?
Oh, yes, when Uncle Sam got involved.[ad#Google Adsense 336×280-IA]Last week, my wife sent me to the store to buy a replacement bulb for a light in our kitchen.
Oh boy, what a treat. Soft white, cool white… or daylight? LED, CFL… or eco-incandescent? And what shape was that thing?
Needless to say, I got it wrong.
The light I brought home was dim, didn’t fit right and cast a glow that made it feel like a thunderstorm was ready to roll through the kitchen.
I ask again, how did things get so complicated? You know the answer.
Thanks to the Energy Independence and Security Act of 2007, the light bulb aisle at the hardware store now offers as many choices as the paint aisle.
The simple light bulbs we all grew up with are now illegal.
My point here is to illustrate the side effects of meddling with the free markets. Light bulbs are obviously a light-hearted example. But as the world watches to see what the governments of Greece, China and Puerto Rico do next, we’re given a valuable lesson in economic independence.
It’s a critical lesson if you truly want to be an educated investor.
As we examine our own path to “liberty through wealth,” it’s a vital topic. Understand what’s happening and you can largely steer clear of – and even profit from – what’s going on. Get it wrong and, well, you may suffer from many of the same wrongs Chinese investors face today.
They’ve learned a painful lesson in government intervention.
Over the last week, we’re told Beijing has asked companies to take one of five unprecedented and, frankly, incredible measures:
- Make major shareholders buy more shares
- Buy back shares of their own stock
- Make corporate insiders buy shares of their companies
- Incentivize employees with shares of company stock
- And/or introduce employee stock ownership plans.
After several weeks of surging volatility and plunging stocks, the Chinese government introduced these half-cocked measures in a desperate attempt to stop the selling. They say this sort of buying sends a positive signal to potential investors.
Yes… insider buying, buybacks and high-volume buying are signs of a strong stock price. But not when the government forces folks to buy.
The plan is simply stupid.
Like we said, investors who don’t pay attention to what’s happening could get steamrolled by these sorts of asinine moves… or they could understand it and take advantage of it.
That idea takes us to one of our favorite charts.
This is a chart that we originally showed readers in an article about tax inversion – the popular corporate trend that will keep some $19.5 billion out of Uncle Sam’s pockets over the next 10 years.
Over the last five years, nearly 50 companies have officially moved their mailing addresses overseas. When they do, it dramatically lowers their tax rate.
It’s proof that the companies wise enough to minimize their tax burdens (something The Oxford Club begs all its Members to do) tend to significantly outperform their peers. Bad news for Uncle Sam? Sure. But it’s just more evidence that his oversized hands tend to skew the economy in ways our political leaders often don’t expect.
After all, based on a 2002 law that aimed at dissuading companies from inverting, these firms should face much larger obstacles as they try to secure government contracts.
But alas, the Obama administration now says the law is unfair, meaning these “corporate deserters” (a term penned by Rosa DeLauro, the liberal congresswomen from Connecticut) are privy to the same trade agreements as other foreign entities.
It’s yet another example of government not understanding the consequences of its own rules and laws. Instead of fixing the overreaching tax rates that have sent these companies overseas, Washington tried a Band-Aid solution… that backfired.
The solution, of course, is to understand what’s happening and to invest in companies that have a business that’s strong enough and a management team smart enough to overcome the obstacles.
After all, the companies represented in the chart above aren’t outperforming the market merely because they’ve secured a lower tax rate. No. They’re doing well because they are well-run companies with a strong business and a management team smart enough to make the right decisions.
If you want to get rich and stay that way… those are the companies to invest in. They don’t depend on government backstops. They don’t need support from Washington. And they certainly aren’t afraid to do whatever it takes to maximize shareholder value.
Even so, I bet even they can’t find the right light bulbs.
Source: Investment U