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Financial Myths: “A Bird in the Hand is Worth Two in the Bush” — Part III

With year end only weeks away, charitable deductions take on a special glow.
Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.
Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.

Image via Ginny/Flickr CC

This myth raises worrisome issues for investors: how to hold onto earnings from smart investing and how to figure out where the tax reform debate is headed. A tax cut strikes fear into those fastened to entitlements, who are gathering the wagons in a circle around tax revenue. A tax cut also brings joy to small businesses, investors and tax payers.

In this final piece on this thought-provoking myth, we look at other aspects of the bird in the hand. The first impulse is to keep the bird in the hand. Investors want to hold onto their earnings. They want to enjoy them – maybe now, maybe later. A different perspective on the bird in the hand is to give away some portion of the wealth gained from successful investing. Warren Buffett and Bill Gates are perhaps the best known examples of huge portfolio owners who have turned to charitable giving. They are not alone. Americans give about 2% of Gross Domestic Product (GDP) to charities. Giving is a worldwide trait and is not limited to business moguls. According to The Telegraph, Cristiano Ronaldo, Portuguese soccer superstar, is the world’s most generous athlete, followed by wrestler John Cena.

With year end only weeks away, charitable deductions take on a special glow. While charitable giving offers tax benefit, it also spurs a tremendous amount of generosity and funds many outstanding causes. More than one and a half million charitable organization in the country pursue great missions. Americans give $390 billion annually to charities with religion, education and human services taking the largest shares. For example, according to its annual report for 2015, St. Jude’s Children’s Research Hospital holds 31,000 events annually across the country to raise funds and create awareness of its services. They report that 74% of their budget flows from donations.

The Metropolitan Opera of New York faces slumping ticket sales, but does well with donor contributions. Its roughly $300 million endowment stands out among the great performing arts organizations but pales in comparison with Harvard University’s $36 billion endowment.

Profits Matter at Not For Profits

The first issue for the charitable giver is to pick a charity or not-for profit that serves a significant purpose. Education, medicine, food supply, the arts, religion and many other causes need our help. Investors also want the money they donate to go directly to the causes in need. Recent problems at various organizations shake up the confidence of benefactors. Investors who watch their stock market outlays with great care need to look inside the altruistic organizations that seek their funds. A recent article published by discussed the worst charities in the US. Of the 50, the research indicates that most of the money went to the collectors not to victims or others in need. For example, the Veterans Assistance Foundation ranked 26th on the list. Their Facebook page states that the organization “operates transitional housing programs to help military veterans who are homeless or at risk of becoming homeless re-establish self-sufficiency and independence.” Charity Watch gave the group a C- rating. Part of the problem is the high cost to raise funds: 83%. The group also carries enormous overhead.

By contrast, the Semper Fi Fund is ranked among the top charities by Charity Watch, earning an A+. Its cost to raise funds is 3%. Clearly, all charities are not the same. But, most do a good job. As the Myth Buster has said many times, “Not for profits need profit!”

The most materialistic question is, what is the trade off between charity and tax? Amazingly, in some cases, the exchange is one to one. A taxpayer with a huge tax burden may cut taxes almost one to one by the size of the charitable gift. This is hard to believe, and there are limits. But the Myth Buster has witnessed a few conversations along these lines: give to a charity or to the IRS. And paying taxes does not carry the feeling of accomplishment and the appreciation received from a worthy charitable contribution.

In many instances, a taxpayer can deduct 50% of adjusted gross income (AGI) as a charitable contribution without limitation. There are also carryovers, which allow the gift giver to obtain a tax benefit for the next five years.

The Spurt Continues

As we wind up this thought-provoking myth, a word about spurts is in order. The first two entries dealt with the sharp and sustained rise of the market over the last twelve to fourteen months. The idea of a spurt is that the market turns upward sharply. A strong spurt is generally followed by a slower and steadier rise in value, a bull market. The focal point of the spurt is stock prices rather than macro-economic factors. In addition to what has happened over the last year or so, here are five other such events, which track the spurt pattern: 2011, 2003, 1998, 1994, 1990. Spurts are not regular – coming at set intervals. Nor are they entirely predictable; and they may not even be recognized for a time. Investors may see a long rise in the market with some indefinite starting point. The argument made here is that the sharp rise at the outset should be of interest to investors. Better to be inside the investment tent than outside!

The three pieces on this myth show that the saying stands up well: a bird in the hand is worth more than two in the bush. If only we could figure out how to keep the wealth or use it for an altruistic purpose. Please consider the suggestions in these entries.

In the next piece, we will move to a new and equally thorny myth.


Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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