Opportunity Zones • Market Valuations
Monthly AIRE Perspectives – December 2021
Dear Friends and Valued Clients,
Please take a moment to read this email each month, as we always try to provide brief but important information for you here!
Summary of Opportunity Zones
With Opportunity Zone funds, investors who take gains on assets can invest those gains (within 180 days) into managed Opportunity Zone funds and receive a number of tax benefits. First, the gains taken are not taxed until the end of 2026 or when the purchased asset (the Opportunity Zone investment) is sold. Second, for gains placed in such funds for at least 5 years (and invested no later than December 31, 2021), the cost basis of the original investment is increased by 10%. In other words, the investor not only defers the capital gains taken on the prior investment, but also gets a reduction in the tax if held for 5 years. Third, if the Opportunity Zone fund is held for at least 10 years, the gains realized on the Opportunity Zone fund itself are fully tax-free. Please contact us if you have taken significant capital gains in any assets within the last 180 days to discuss if this may be a potential solution for you.
Scary Valuations?
As you know from our regular historical messaging and communication, we are big believers in the efficiency of the public markets, which means that we believe that all relevant, available, known information, as well as the market’s consensus expectations concerning unknown information are reflected in stock and bond prices. We believe in the efficient markets hypothesis to such a degree that we do not allow ourselves to advise clients based on our “gut” feelings or market predictions, but rather, based upon the principles of asset allocation, portfolio construction, risk and timeframe, customized to each client. However, this does not mean that we are not paying attention on a regular basis. Please take a moment to read this recent Yahoo article on valuations in the auto industry: It’s bizarro world in the auto industry, again.
This article notes that current valuations in the electric vehicle industry at extremely high in relation to the traditional automakers. In fact, the value of Tesla, Rivian and 5 other startups at the time of the article (November 11) was nearly $1.3 trillion, compare to a valuation of $845 billion for 9 of the word’s largest automakers combined, while the established automakers are outselling the startup EV companies by 100 times. This is a massive bet on the future of batteries, electric vehicles and other new technologies, which clearly are here to stay and will likely continue with explosive growth.
While the efficient markets hypothesis tells us that the market already knows that the EV industry will have extreme growth, which is why the valuations are so high, it is also important to note that there is a very high amount of risk in these types of valuations. This is not a prediction on the future of these stocks, but a commentary of the increased risk that now resides in them, given these valuations. Just like the technology bubble of the late 90s, it is likely that some of these companies will be far higher 10 to 15 years from now, but also that some will see valuations sink substantially. Please keep in mind that we are not calling this a “bubble” as that would be a prediction, but just pointing out that the risk is extremely high, so proceed accordingly.
Our “solution” remains the same – rather than taking such a huge risk with any one company, we prefer to build each client’s core portfolio via a customized asset allocation policy, and for those clients who truly have an appetite to speculate on such companies, to thoughtfully and purposefully set aside a small amount for speculation, with a preference to diversify such speculation, rather than buy individual stocks in the industry. Our general preference – even at the cost of “missing out” – would be to stay away from such speculative bets altogether, but we understand that this is not every client’s preference!
Happy Holidays and Happy New Year!
AIRE Advisors celebrated our 1-year anniversary on November 20th. We are feeling nostalgic, reflective and full of gratitude for all of your support and loyalty throughout this journey. We wish all of you a very happy holiday season and a happy and healthy 2022. Thank you, and we look forward to many more years ahead!
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