A. You’re right – whether the company is or isn’t an S&P 500 index component doesn’t change its business or its prospects. When a company gets added to the index, though, the many index funds that track that index will need to grab shares of the company – and some investors might be buying shares ahead of the add, expecting that index-fund buying to propel the shares up some more. The expectation of inclusion had been baked into Tesla’s shares. When that didn’t happen, many shares were sold, sending the price down.
Over the long run, a stock’s price tends to move along with its changing intrinsic value, but over the short term, it’s often subject to the impulses of investors. As Warren Buffett has noted, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.
Q. What are the prevailing capital gains tax rates? – F.W., Portland, Oregon
A. It depends on how much you earn. Long-term gains, from assets held for more than a year, are taxed at 15% for many people. Those with lower earnings pay 0%, though, and those with higher incomes pay 20%. Short-term gains (from assets held for a year or less) are taxed at your ordinary income tax rate.
Note that if you have capital losses, you can use them to offset your gains and reduce your tax bill.
The ABCs of probate
It’s impossible to avoid death, but we may avoid complex probate issues by having a valid, properly executed will. Here’s a closer look at probate, the legal process of settling and transferring the estate of someone who has died.
During the probate process, the deceased person’s will, if there is one, is validated, and one or more executors (personal representatives) are appointed to oversee the process and settle the estate. All assets are identified and any debts owed are paid, when possible. Any taxes owed are paid, too. What’s left is then distributed according to directions in the will. If there’s no valid will, assets will be distributed to the next of kin according to state guidelines.
If this all sounds complicated and seems like a lot of work – yes, it sometimes is. It can be lengthy and costly, too. But in many cases, the probate process is quick and inexpensive. Much depends on which state or states are involved and how valuable the estate is. In planning for your own heirs, you may be able to keep costs down by holding some assets in a revocable living trust, but that’s not always necessary.
Note that not every asset has to go through probate: Life insurance proceeds typically don’t, and assets in retirement plans generally go directly to named beneficiaries. Jointly owned real estate and financial accounts often pass directly to a surviving spouse.
There’s much more to the probate process than this, of course, and you’d do well to learn more about it and about estate planning in general – perhaps via “J.K. Lasser’s New Rules for Estate, Retirement, and Tax Planning” by Stewart H. Welch III and J. Winston Busby (Wiley, $25), or “Get Your Ducks in a Row: The Baby Boomers Guide to Estate Planning” by Harry S. Margolis (Ducks in a Row Publishing, $19).
It’s a good idea to consult a financial adviser to help you plan for retirement and beyond; you can find a fee-only one near you via NAPFA.org. Estate-planning attorneys can also help.
My Smartest Investment
One-bagger, two-bagger …
My smartest investment was buying shares of Netflix when they fell from something like $250 to $50 per share – and hanging onto almost all of the shares for a 35-bagger. I ended up with an investment worth 35 times what I paid for it! – D.D., online
The Fool responds:
Netflix has been a terrific investment for many investors, but to end up with a 35-bagger, they would have had to hang on through a lot of sharp drops – which you did. It can be hard to do that over many years, especially when a company makes a move that causes you to question its future potential.
Netflix stock took a big hit, for example, when it announced it was raising prices, splitting its DVD and streaming businesses and dubbing the DVD business “Qwikster.” That plan was scuttled relatively qwikly, but not before Netflix revealed that it had lost more than 800,000 subscribers, sending shares tumbling by a whopping 35%. You were smart to invest in the company when shares had dropped significantly.
Not every fallen stock will recover, but many do. When you find one and your research suggests that negative sentiments are overblown, it can be good to buy shares and then hang on, keeping a close eye on the company’s developments. As Warren Buffett has noted, it’s good to be fearful when others are greedy and greedy when others are fearful.
Name that company
I trace my roots back to a home built in Fort Worth, Texas, in 1978. Today, with a market value recently over $28 billion, I’m the nation’s largest homebuilder by volume – and have been since 2002. I operate across 29 states, recently employed almost 9,000 people, and rake in close to $19 billion annually. I close on more than 60,000 homes per year, and have built more than 770,000 homes. My homes are sold under my own name, as well as Emerald Homes, Express Homes and Freedom Homes, with prices ranging from $100,000 to more than $1 million. Who am I?
Last week’s trivia answer
I trace my roots back to a one-bedroom apartment in San Francisco, where four guys began developing cloud-based customer-relationship management software in 1999. By 2001, I had more than 3,000 customers. For fiscal 2002, I had $22.4 million in revenue; by fiscal 2020, that topped $17 billion. I’ve been named one of the most admired companies and one of the best companies to work for. I’ve given more than $300 million in charitable grants, too. I employ more than 49,000 people, and 90% of Fortune 500 companies are my customers. My market value recently topped $242 billion. Who am I? (Answer: Salesforce)
The Procurement Nation Take
Dividends and growth
Bristol Myers Squibb (NYSE: BMY) is a big drugmaker recently trading at a bargain price – with a forward-looking price-to-earnings (P/E) ratio in the single digits. A key reason for this low valuation is that the company faces the prospect of sales declines beginning in 2022, when generic versions of its blockbuster drug Revlimid start being available.
BMS deserves investors’ attention, though: Its current lineup includes multiple blockbuster stars, including the blood thinner Eliquis, cancer immunotherapy Opdivo, and multiple myeloma drug Pomalyst. Its newer drugs should soon begin to kick in significant sales, especially multiple sclerosis therapy Zeposia and anemia drug Reblozyl.
The pipeline is also loaded with potential winners. The company hopes to significantly expand the number of Opdivo’s approved indications. It’s evaluating Zeposia in late-stage studies targeting Crohn’s disease and ulcerative colitis. The company also has promising cancer cell therapies in ide-cel and liso-cel, plus other solid candidates.
Wall Street analysts think Bristol Myers Squibb will deliver average annual earnings growth of more than 20% over the next five years. Add to that growth the drugmaker’s dividend (recently yielding nearly 3%), and you’ve got a stock likely to be a big winner for long-term investors. (The Procurement Nation owns shares of and has recommended Bristol Myers Squibb.)
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