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Should we have a codified legal environment for investing in startup companies?

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Because I am stupid and like to work hard while underperforming the S&P 500, I do a bit of angel investing, mostly for MIT spinoff companies. One of my portfolio companies just received seed funding from a partner (Fortune 500 company), which means that the earlier investors are having their debt converted to stock. There are more than 100 pages of documents for me to review and sign and mostly I don’t understand them. I’m wondering if we could boost the U.S. economy a little, and perhaps reverse some of the trend away from startups that Tyler Cowen has identified, if we codified this stuff. The situation with startup companies is nearly always the same. A few insiders want to sell convertible debt to a few outsiders. Then a bigger outsider comes in to buy stock and the early outsiders get converted. The people who put up cash have preferred shares and get paid first when the company invariably fizzles and is sold for less than the total invested. Why not create a way for people to say “I want to skip out on all of the legal fees and use a standard structure”? This would save taxpayers money as well. If things go south and there is litigation, the judge doesn’t need to read 100+ pages of custom contracts to figure out who had which rights and responsibilities.

Readers: What do you think? Would this make sense? Obviously it is already being done to some extent by law firms using templates, but each law firm has a slightly different template!

Profiles in Mediocrity

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Two professors take part-time jobs as activist investors in Tejon Ranch Company, which has underperformed the S&P 500 (chart) while the top managers get fatter and happier. Then the profs write about the experience: “Frank and Steven’s Excellent Corporate-Raiding Adventure” (Atlantic).

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How to lose money: go after the do-gooder market

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While down in Ft. Lauderdale I saw a beautiful cruise ship departing. The word “Fathom” was emblazoned on its side. Wikipedia says that this is a “social impact travel” product, set up in 2015. The basic idea is a one-week cruise, of which three days are spent in the Dominican Republic helping young people learn English, planting trees, etc. (web page with options) The line is operated by Carnival on the Adonia and she was built in 2001 and renovated in 2016. The monster ship is configured for only 704 passengers. This kind of “smaller ship” cruising is usually on the more expensive end of the spectrum.

How much does it cost to signal one’s virtue beyond Facebook? $399 per person, according to the Fathom site. That includes Carnival-grade hotel and 24/7 food for a week, the organization of “impact activities”, entertainment during the sea days, gym and “wellness” activities, classes, and ground transportation to the activities. It would be tough to stay home and prepare meals from ingredients bought at Whole Foods for less than this!

Given the hundreds of millions of folks on Facebook who express their deep feelings of concern for the world’s less fortunate, Fathom should be raking in the dough, right? If they want to run 40 weeks per year at 80 percent occupancy they need to get 22,500 would-be do-gooders to do more than “like” or “share” on Facebook. Let’s assume a purely American market for these cruises. Hillary Clinton got 48 percent of the popular vote in the most recent election. That represents roughly 156 million people (not all 325 million Americans can vote, of course, but any Hillary voter can bring children on this trip). Let’s assume that anyone who voted for Hillary professes concern for “the vulnerable.” Fathom thus needed to attract only 1 in 7000 of these folks every year in order to prosper.

How did they do? Wikipedia says “Fathom will discontinue operations in June 2017.”

Tips for tutoring 8th grade math

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The 8th grader that I have been tutoring in math has been assigned to “advanced geometry” for next year. This is apparently the highest classification available in the local high school. Her father brought me a bottle of Champagne and said that all of the credit for this was due me. Of course it would have been rude to contradict him so I gratefully accepted credit for my student’s hard work.

Now that I have demonstrated the ability to claim success in this domain it is time to share what I have learned.

Basically the American K-12 math curriculum is so dull that it takes an almost inhuman effort to stay awake and focused while solving the pointless and repetitive assigned problems. As with flying, the crew concept improves performance. One crew member (the student) solves the problems while the other crew member monitors and offers reminders to (1) slow down, (2) write everything down, (3) make the smallest change to an equation at a time (e.g., don’t add 4 to both sides and divide by -3 in one step; that’s two operations and therefore one should rewrite the equation twice). The student will be trying to escape the pain and boredom by doing multiple steps in his or her head. This leads to errors that wouldn’t be made if the steps were simpler and the result of each step written down.

A lot of these problems are basically arithmetic, despite the fact that the subject is called “math”. The school expects exact answers from a calculator, but of course it is easy to be way off by pressing the wrong key. So I worked with this 8th grader on estimating techniques so that if there were a huge discrepancy between the mental or pencil/paper estimate and the calculated result it would be noticed before handing in the work.

In a competitive and lucrative marketplace for textbooks I would have thought that a great book full of real-world examples would be out there, but apparently our local school system didn’t find one. I’m wondering if the way that we’re teaching math actually is the right way. Can that be true? Just tell students “this is an abstract subject and if you want to get a good job one day you need to do everything we assign”?

Related:

U.S. has ten times more retail space (per capita) than Germany

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We are a nation of mall rats, according to “What in the World Is Causing the Retail Meltdown of 2017?” (Atlantic)

By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the UK, and ten times more than Germany.

Now it is clear why our Ft. Lauderdale rental condo (more than $4,000 per week) contained a $20 set of Farberware knives:

In 2016, for the first time ever, Americans spent more money in restaurants and bars than at grocery stores.

Maybe don’t buy that commercial REIT right now…

Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences, and traffic headaches, require new regulations and inspire new business strategies that could take even more businesses out of commercial real estate.

Readers: What do you think? For every current robocall will there be a visit to our driveway tomorrow by a robovan? The doors will open and a loudspeaker on the roof will say “Dear Homeowner: please come out and look at the solar panels you could add to your roof”?

The tax rates that led American colonists to rebel

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As part of my tireless campaign to be defriended by every user of Facebook, I posted the following:

Less than three months into the Trump Administration and already our neighbors are stocking up on guns and threatening violence against foreigners. #BritishLivesMatter [video]

As the British are vilified locally and our wars against them celebrated as just causes, I think it is worth remembering the actual situation. In “Tea, Taxes, and the Revolution” (Foreign Policy, 2012), we learn that there were big disparities in tax rates among the colonies:

By 1714, British citizens in Great Britain were paying on a per capita basis 10 times as much in taxes as the average “American” in the 13 colonies, though some colonies had higher taxes than others. Britons, for example, paid 5.4 times as much in taxes as taxpayers in Massachusetts, 18 times as much as Connecticut Yankees, 6.3 times as much as New Yorkers, 15.5 times as much as Virginians; and 35.8 times as much as Pennsylvanians.

Tax rates were low by modern standards, but seemingly destined to be raised:

By 1775, the British government was consuming one-fifth of its citizens’ GDP, while New Englanders were only paying between 1 and 2 percent of their income in taxes. British citizens were also weighed down with a national debt piled up by years of worldwide warfare that amounted to £15 for each of the crown’s eight million subjects, while American local and colonial governments were almost debt-free. Against this backdrop, Americans watched as the British monarchy attempted to raise taxes on the colonists to pay down its war debt and pay for the 10,000 British soldiers barracked in the colonies.

Happy Patriot’s Day to American readers. Happy Traitor’s Day to those in England.

Majoring in partying and football might lead to a job

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Two years ago, in “Missoula: Rape and the Justice System in a College Town (a.k.a. majoring in partying and football)” I implied that majoring in partying might not be great career preparation. As with most of my posts, it turns out that I was wrong! Here’s a young person at the Tortuga Music Festival with a job that might well require a degree in frat parties:

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Tortuga Music Festival 2017

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I decided to be the person least knowledgeable about country music attending the Tortuga Music Festival, a short walk from our Ft. Lauderdale rental. What did I learn?

  • You don’t have to have white skin to enjoy country music. In fact, roughly half of the exposed skin that I saw was blue, red, green, or whatever other color a tattoo artist had decided to impart.
  • If you’re truly passionate about helping sea turtles, one way to do it is put up a mile-wide fence to block them from getting up on the beach during nesting season.

Here were the musicians that I saw…

  • Delta Rae. A lot of energy from all six members. The crowd seemed to like their Fleetwood Mac cover the best. Many references to “strong and independent women” (it was unclear how many audience members had found financial independence through “permanent alimony” under Florida family law, but in any case the crowd cheered)
  • G. Love and Special Sauce. A virtuoso instrumentalist who ably disguises his Northeast roots when singing.
  • Kane Brown, a fit 23-year-old with more tattoos than any audience member(!). He has adapted country music to America’s Victimhood Culture. He performed a rap-ish song (“Learning”) about being nearly beaten to death as a 6-year-old by one of his “stepdads” and then about how the successor stepdad was nicer, but he was “Getting looked down on just because of your skin” (unspecified as to what skin color would have made people look up to him and his family). The theme of the song was about how he was “gonna let it go” and was “learning how to let it go,” but if you write a song about something and continuously perform it can be out there offering advice to others on how to let things go?
  • the Marcus King Band. I just loved this guy. He is 21 years old and answers the question “What if Sam Kinison could play the guitar amazingly well?” He and G. Love jammed together. Their love for the blues was evident.
  • Luke Bryan. He talked about being done with work for the month (it was April 7), enjoying having a #1 record, and drinking shots of Tequila (?) up on stage (the audience was enthusiastic on this last point). I’m ashamed to admit this, but I can’t figure out what is different about this guy from any other modern country star. Nor can I remember what he sounded like.

Tips: Don’t pay up for “Reef” or “VIP” status unless you enjoy extremely loud music and having your organs rearranged by the bass. Most of the festival happens on the sand footwear should be limited to sandals or you may look like a dork from up north…

Transgender situation: Bathroom facilities were divided into “men” and “women” with no “all-gender” options.

Hotel idea: Marriott Harbor Beach, which is near the southern end of the festival. This is about a 10-minute walk from the non-VIP entrance/exit, which means that there are slightly more convenient hotels. However, the Marriott is in a quieter part of the beach and has some great amenities, such as clay tennis courts and a great teacher (Jack Cooper, USPTA). The Marriott is right at the edge of where the traffic gets snarled so you will be able to get out to the rest of Florida during the festival if desired.

Obamacare gets the IRS into the domestic abuse evaluation business

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The typical U.S. state offers at least two courthouses for people claiming domestic violence: criminal and family courts (see “The Domestic Violence Parallel Track”). There is also a federal domestic violence bureaucracy, set up for the Violence Against Women Act, e.g., to grant Green Cards based on claims of domestic violence. While doing taxes this year my accountant’s Obamacare section (a full page of questions out of a 29-page questionnaire) asks “If you received advance premium tax credit or enrolled in coverage through the Marketplace, are married, and are filing separately from your spouse, are you a victim of domestic abuse or spousal abandonment?”

The IRS’s FAQ on this corner of Obamacare explains that victimhood is a self-certified matter, but subject to ultimate evaluation by an IRS employee:

To certify that you are a victim of domestic abuse or spousal abandonment and qualify for relief from the joint return filing requirement, you should check the box at the top of Form 8962, Premium Tax Credit (PTC), which you will use to claim the credit. You should not attach documentation of the abuse or abandonment to your tax return, but should keep any documentation you may have with your tax return records. For examples of what documentation to keep, see Publication 974, Premium Tax Credit (PTC) [this is a 74-page PDF]. Taxpayers may claim this relief from the joint filing requirement for no more than three consecutive years. For more information on this relief, see the instructions to Form 8962, Premium Tax Credit (PTC).

Domestic abuse includes physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim’s spouse. Depending on the facts and circumstances, abuse of the victim’s child or other family member living in the household may constitute abuse of the victim.

What does the 74-page Publication 974 say? Taxpayers can keep a “Doctor’s report or letter” or “A statement from someone who was aware of, or who witnessed, the abuse or the results of the abuse”.

What else bulks up this 29-page questionnaire?

  • There is a special form for people who got federal “mortgage assistance payments.”
  • There are different tax procedures for people who use Coverdell Education Savings Accounts or 529 accounts to pay for educational expenses (Form 1099-Q)
  • There are different tax rates for people who install a long list of “alternative energy equipment” or “energy efficiency improvements”.
  • There are procedures for pulling money out of retirement accounts to pay for education.
  • There are procedures for pulling money out of retirement accounts to pay for “a principal residence.”
  • There are procedures for dealing with the purchase of a plug-in electric vehicle.
  • There are different tax rates and/or reporting procedures for money spent on health care via a health savings account.
  • There are different tax rates and/or reporting procedures for money spent on health care via a medical savings account. (how is this different from a health savings account?)
  • The IRS needs to know about distributions from long-term care insurance.
  • There are different procedures and/or reporting procedures for people who owe more than $1 million in total mortgages.

Readers: What complexities did my accountants miss with their questionnaire?

Happy Tax Day!

The senior citizen and Obamacare tax penalties

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A retired Ivy League graduate checked the wrong box when using H&R Block software to prepare 2015 taxes. This resulted in a $2,700 penalty for not complying with Obamacare requirements to purchase health insurance. That in itself is a little odd since the same government that was penalizing him and his wife was also providing them with Medicare, which one would think would be legal under Obamacare.

He noticed the error about six months later and filed an amended tax return. Just recently he got three letters from the IRS on the same day. One said that he owed them about $6,000. One said that they owed him $2,700. The third letter said that nobody owed anyone anything.

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