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Walter's Wisdom

INCOME TAXES
By Walter Pearson

Out of every dollar you pay in federal income taxes, 57 cents is needed just to pay interest on the federal debt. So only 43 cents of your income tax dollar is used to pay for day-to-day government. The rest is ALL debt payment. To go a little further along this line, the percentage of our taxes going toward debt payment is increasing each year. What this means is that eventually ALL of your income taxes will be necessary to cover those interest payments. Perhaps the time has come to tell it like it is. Eventually, we tell our children, “there’s no Santa Claus, no tooth fairy.” Let’s awaken the public to the fact that we really have no debt. That is just a figment of the Federal Reserve’s imagination. After all, when our government needs money and goes to the “Fed” bankers, they don’t have it either, and they have to print it up for us to borrow. And they print it up on our machines. Perhaps we should pay them something for the printing, but I think the tooth fairy story makes more sense.

RETIREMENT & PENSION & OPPORTUNITY 12/03/2001

Walter Pearson is the former President of First New England Securities, Co., Inc. and at that time, also managed the Statistical Department. He is the author of the book, "Investing for the Millions" and Publisher Emeritus for the Pearson Investment Letter. At this time, Mr. Pearson is Chairman of the Board of Pearson Capital, Inc. He is a contributing columnist for various publications and is listed in Who's Who in America.

WHEN SHOULD YOU START INVESTING?
At what age should one start thinking of investing? Some people give no thought along these lines until the time comes when they realize that in a few more years earned income will be a thing of the past. Today, most people will not receive Social Security checks large enough to keep them living in the style to which they have become accustomed. The prudent parent will start a nest egg for each of his children if he is financially able. In this manner the child becomes not only an investor, but with proper guidance he will learn what he should know regarding finance and the art of compounding. When I was a youngster, an aunt of mine passed away and left me $100. My father explained to me that by the time I was 21 years of age my inheritance would have grown to $200. If my father had understood the stock market, he could have done much better for me. It is almost unbelievable what compounding will do for an account even though it may start small. A small $2,000 account may grow to more than $1 million while the child is growing up. The mathematics are not that difficult. If the account can grow at a rate of only 12% a year, the account would double in a six-year period. What this would mean to a man of 63 years of age is that on that basis his account would be worth much more than $1 million if such an account had been started for him at birth. Whether a person starts early or late, the important thing is to get started. It is very nice to have an income that belongs to you and is not a product of Social Security. Many people like to have auxiliary income in their later years, and it is easy enough to set up a plan where the shareholder receives a monthly check which fits his needs. The younger person usually requires no income except in special cases. In those circumstances, the investments should be scaled toward growth, forgetting income entirely. As a person ages and gets closer to quitting time, consideration then can be taken to tailor the account toward income and growth. Investors who are retired and who need income should not be looking at income only. Things have changed in this country and investing for income alone is a losing game. With inflation going at a rate of approximately 7% a year, it is important to have issues that will tend to show a growth potential of at least that much while spinning off a bit in the way of dividends. In one respect companies are very much like people. When a company is new, it is almost a sure thing that there will be no dividends paid for some time. And too, this new company will very likely lose money for a few years. Then comes the time when it starts to make money. Just like the youngster who has started working and has money, both the lad and the company have places to put their earnings. He doesn’t save any, and the company doesn’t pay dividends to the stockholders. A new or young company can often find ways of increasing earnings or profit, but it takes money to do some of these things. Consequently, the young company may be increasing earnings each year, but it does not have enough to pay the stockholders. In the long run this should be a boon for the stockholders inasmuch as the value or the price of the stock will usually rise as the company’s earnings increase. Then, sooner or later, comes the time where more growth is limited. The company has either gotten so big that it can’t grow much bigger, or it has corralled most of the business in its field, and there’s not much more that can be done in the growth area. In this case, the company is still making money, and, as there is no better place to put it, the company starts paying dividends to its shareholders. Think about Henry Ford. I don’t know how long it took him, but I know his company paid no dividends when he first started eliminating the horses. Today every family has not just one car, but very likely two or more. How much more growth can Ford look to? That’s why Ford pays its stockholders. McDonald’s has been paying dividends for a few years now, and the reason is the same. Anywhere you go you will find a McDonald’s, even overseas, which means future growth is limited. The younger person should be looking for the stars of tomorrow. He should be looking for tomorrow’s Ford or McDonald’s. It is my opinion that there is a terrific growth potential in the high tech field. About 12 years ago a $1,000 investment in Microsoft would have grown to about $34,000, and Cisco to about $73,000. I still think this field is attractive for growth investing, but Microsoft is now paying dividends, which, to me, means that Cisco would be the better choice for growth. (01/17/04)