Asset Values

[GrumpyGranddad]

They never went metric. Beans are sold by the half-skull-full. Still wanna go?

 

[andyinluton]

Err no, your “equity” doesn’t actually exist at this moment does it?

You haven’t made anything until you sell the asset and only then after you’ve paid all the taxes and fees due.

The only time the value of property matters is the day you buy it and the day you sell. At any other time it’s irrelevant.

 

[pjm-84]

Agree with the above. Its paper and leverage.

Similarly if your flat has gone up then the next property that you buy from the assets has also gone up. i.e I made 50k on my property but paid £50k more for the new one.

 

[Velma's Dad]

Whilst we’re here though, can someone answer a question I’ve had for a while please? Who is buying your shares that are falling in value? Seems you can always sell a dud?

People who are buying shares when they are falling are the people who assume that the value at some point in the future will be higher than today's value. The recent direction of the market is not relevant, that's known but is in the past. Tomorrow's values can go down or up.

If you're a long term investor (and by long term I mean ten years or more), buying in a bear market can be a good move. Yes it might go down a bit more yet before the next bull, but it means you're less likely to be buying at the peak of the last cycle.

 

[66tim99]

People who are buying shares when they are falling are the people who assume that the value at some point in the future will be higher than today's value. The recent direction of the market is not relevant, that's known but is in the past. Tomorrow's values can go down or up.

If you're a long term investor (and by long term I mean ten years or more), buying in a bear market can be a good move. Yes it might go down a bit more yet before the next bull, but it means you're less likely to be buying at the peak of the last cycle.

Thanks ... yes but I can’t believe there is ALWAYS a buyer for every share at its current price. But you can always sell. Who buys when they’re not a good investment?

 

[Velma's Dad]

Thanks ... yes but I can’t believe there is ALWAYS a buyer for every share at its current price. But you can always sell. Who buys when they’re not a good investment?

A market price is by definition the price at which there is a willing buyer (leaving aside bid-offer spreads but in a high volume stock market those are very small).

Who says whether they're a good investment or not? It's a judgement. If the company has been under-performing in profitability, it might still have a valuable set of assets making its shares valuable in the case of a merger or buy-out.

Ultimately the value of the shares in a business is the complete stream of future dividends (and/or possible other liquidity events, like a buy-out) from the business, discounted at the opportunity cost of capital. But therein are a huge number of moving parts and uncertainties, some of them external to the business and its industry (eg interest rates).

Of course, on any day there are always people out there who will make what turns out to be a worse estimate of value than you will, and vice versa. Unless you have deep (or insider ) info about the company and its operating environment, it's just going to be dumb luck. (That's why for the most part I don't personally invest in individual stocks, or hold any active stock-picker funds, I aim for market 'beta').

 

[2into1]

All this finance talk reminds me of this:

It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town's prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

This is an interesting story. Where do I find this prostitute who gives credit?

More seriously, it's a great example when trying to explain the differences between a Balance Sheet and a Profit and Loss statement. "Accounts receivable" being treated as valuably as "cash at bank".

 

[Velma's Dad]

This is an interesting story. Where do I find this prostitute who gives credit?

Yes it's a good story, and illustrates that pretty much all money is in fact debt. And also how QE and other types of monetary stimulus work. Sort of.

 

[Bellcrew]

Yes it's a good story, and illustrates that pretty much all money is in fact debt. And also how QE and other types of monetary stimulus work. Sort of.

Income tax is even more absurd.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
[via the Telegraph]

 

[GrumpyGranddad]

Income tax is even more absurd.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
[via the Telegraph]

That’s great

 

[Vagophile]

And that, boys and girls, journalists and government ministers, is how our tax system works.

I've seen this a number of times as my income has fluctuated. It's good to be reminded though.

 

[Vagophile]

Two students become friends at a northern university. On graduation, they both find employment in the midlands and, after a year, both buy houses (with mortgages) for the princely sum of £3,500.
As their careers develop, one moves south, moving house a number of times and finally buying a splendid family home in Sidcup.
The other continues his career in the midlands and eventually acquires a very desirable residence in Kenilworth.
Now both are retired and each decided to downsize and release some capital to enjoy retirement.
Sale of house in Kenilworth releases £500,000.
Sale of house in Sidcup releases £1,600,000.
Observers will say it's the law of supply and demand, but there is something wrong with an economy that skews values in this way.

 

[WelshGas]

Err no, your “equity” doesn’t actually exist at this moment does it?

You haven’t made anything until you sell the asset and only then after you’ve paid all the taxes and fees due.

The only time the value of property matters is the day you buy it and the day you sell. At any other time it’s irrelevant.

Totally agree. Our property, bought in 1995 cost £99,000. A valuation 2 yrs ago was over £1,000,000 or more if I got planning permission for a 2nd property on the plot. But it's all paper money unless we down size.

 

[66tim99]

Income tax is even more absurd.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
[via the Telegraph]

Shame about the last paragraph, but the Telegraph does like to demean. The analogy is flawed (not only) because raising the personal allowance threshold benefits the tenth man as much as the fourth in cash terms.

 

[andyinluton]

Not in the current uk system, once you hit £100k per year income you loose £0.50 of the tax free allowance for every £1 over £100k that you earn, up to approx £122k where your allowance is reduced to zero. So there is potentially no benefit at all to the 10th man.

 

[Bellcrew]

Not in the current uk system, once you hit £100k per year income you loose £0.50 of the tax free allowance for every £1 over £100k that you earn, up to approx £122k where your allowance is reduced to zero. So there is potentially no benefit at all to the 10th man.

And of course any single earner income in a family making over £60000 also loses all their child benefit, oddly this was originally a tax break to alleviate the cost of bringing up children, then converted into family allowance to be directly paid to the "wife", how quaint.

 

[GrumpyGranddad]

Of course anybody feeling guilty about their personal financial good fortune can always gift it to others
And let’s not forget that come the grim reapers inevitable call, unless a person has made appropriate provisions to mitigate inheritance tax, then a whopping 40% of anything over the threshold goes to the exchequer.
Actually if we are unfortunate, death isn’t the most expensive cost as we approach end of life. My dad is currently in a nursing home at £1,200 per week. My mum languished in a nursing home for over 8 years at a similar cost before she passed on. (Somewhere between £400k and £500k in total). Of course if you have no wealth/property over £23k the State pays your bill.
I’ve worked out that it’s cheaper to reside permanently on the Queen Mary 2 than live in a UK care home. So for me, it’s QM2 or Dignitas

 

[Velma's Dad]

Govt shouldn't be thinking of cutting income tax now in any case, it's a pretty weak stimulus as higher income households tend to use tax cuts to reduce debts/add to savings rather than spending more. Cutting VAT is a more effective stimulus as it encourages everyone to spend including people on lower incomes.

By the way, the 'pub case study' ignores (conveniently?) the fact that income tax is only about a quarter of the total tax regime, it just happens to be the most 'progressive' ie geared to income. The top 10% of earners do indeed pay nearly half of income tax, but they pay about a quarter of all taxes.

 

[Amarillo]

Of course anybody feeling guilty about their personal financial good fortune can always gift it to others
And let’s not forget that come the grim reapers inevitable call, unless a person has made appropriate provisions to mitigate inheritance tax, then a whopping 40% of anything over the threshold goes to the exchequer.
Actually if we are unfortunate, death isn’t the most expensive cost as we approach end of life. My dad is currently in a nursing home at £1,200 per week. My mum languished in a nursing home for over 8 years at a similar cost before she passed on. (Somewhere between £400k and £500k in total). Of course if you have no wealth/property over £23k the State pays your bill.
I’ve worked out that it’s cheaper to reside permanently on the Queen Mary 2 than live in a UK care home. So for me, it’s QM2 or Dignitas

Every time I go out with my mum (83) I get her to pay for our coffees and chocolate brownies. My explanation is this: for every pound she does not spend before death she will be charged 40p, so the lattes only cost her 60p per pound. Tax and NI mean that I pay £1.32 for every £1 I spend. The coffee shop bill is less than half price for her.

The argument works every time.

 

[Velma's Dad]

Every time I go out with my mum (83) I get her to pay for our coffees and chocolate brownies. My explanation is this: for every pound she does not spend before death she will be charged 40p, so the lattes only cost her 60p per pound. Tax and NI mean that I pay £1.32 for every £1 I spend. The coffee shop bill is less than half price for her.

The argument works every time.

Exploiting the old 'uns is SO easy. Although if she ends up outliving you, tell her to join the forum and tell us so we can all have a laugh.

 

[andyinluton]

Every time I go out with my mum (83) I get her to pay for our coffees and chocolate brownies. My explanation is this: for every pound she does not spend before death she will be charged 40p, so the lattes only cost her 60p per pound. Tax and NI mean that I pay £1.32 for every £1 I spend. The coffee shop bill is less than half price for her.

The argument works every time.

I can see it now sitting round the table in the coffee shop “ mum those buy to let’s I’ve got are now worth £2millon, I’m fleecing 5 tenants with exorbitant rents, but your going to have to pay for the coffees to save me 40p”
Just watching the muppets Christmas carol with the kids & I can’t quite put my finger on who, but you do seem to remind me of one of the characters......

 

[Wongo]

Income tax is even more absurd.

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.　
So, that's what they decided to do.

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.　

So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.

And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).　
Each of the last six was better off than before with the first four continuing to drink for free.　

But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"　
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"　

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"　

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.　

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!　

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.　

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
[via the Telegraph]

Govt shouldn't be thinking of cutting income tax now in any case, it's a pretty weak stimulus as higher income households tend to use tax cuts to reduce debts/add to savings rather than spending more. Cutting VAT is a more effective stimulus as it encourages everyone to spend including people on lower incomes.

By the way, the 'pub case study' ignores (conveniently?) the fact that income tax is only about a quarter of the total tax regime, it just happens to be the most 'progressive' ie geared to income. The top 10% of earners do indeed pay nearly half of income tax, but they pay about a quarter of all taxes.

 

[Wongo]

The great injustice us tbat investment income is taxed at a lower rate tban earned income, that profits the well off masduvely as those on low incomes have nothing left to invest.

 

[soulstyledevon]

Two students become friends at a northern university. On graduation, they both find employment in the midlands and, after a year, both buy houses (with mortgages) for the princely sum of £3,500.
As their careers develop, one moves south, moving house a number of times and finally buying a splendid family home in Sidcup.
The other continues his career in the midlands and eventually acquires a very desirable residence in Kenilworth.
Now both are retired and each decided to downsize and release some capital to enjoy retirement.
Sale of house in Kenilworth releases £500,000.
Sale of house in Sidcup releases £1,600,000.
Observers will say it's the law of supply and demand, but there is something wrong with an economy that skews values in this way.

The average house price in
Sidcup Dec 2020 is 409640
Kenilworth Dec 2020 is 409286

Need bigger extremes

 

[pjm-84]

The great injustice us tbat investment income is taxed at a lower rate tban earned income, that profits the well off masduvely as those on low incomes have nothing left to invest.

Not quite correct. Tax is payable on dividends. But remember dividend is taken from a taxed amount in the first instance. Pensions are a different matter and a tax free allowance is available plus an offset, but tax is payable once this is taken up and free pay allowance surpassed.

I pay myself dividends. If I paid myself the higher amount, total tax take would be 57.1% made up of 19% corporation tax + 38.1% dividend tax. Salary is a cost.

​