November 2, 2006 –
I was thinking today that if only people were rational, then investing would be much easier. Maybe there truly is something to chaos theory, because everywhere you look people seem to act irrationally much more often than they act rationally. Case in point. Yesterday, the Canadian Finance Minister Jim Flaherty announced that the Canadian government was most likely going to start taxing CanRoy income and raise dividend tax rates for pension funds and foreign investors four years from now, with immediate taxation applying only to newly formed CanRoys. However, yesterday investors sold off CanRoys like the plague, with many CanRoys suffering double digit losses even though these stocks will not be affected by this legislation until 2011! That’s like people rushing to liquidate their IRAs today because of an announcement that a new supplemental 10% tax will affect all IRA distributions 4 years from now. That’s irrational!
The Canadian government stated that they lose $800 million in taxes every year because of the current immunity of income trusts from taxation. Yesterday, $19 billion in trust capitalization was wiped out because of the Finance Minister’s announcement. However, some Canadian analysts believe that this is just the beginning and that when all is said and done, that $40 to $60 billion of market cap will be destroyed in the Canadian markets.
So to gain $800 million of lost revenue the Canadian Finance Minister is willing to possibly destroy $40 billion to $60 billion of market cap, a distinct possibility given that his announcement destroyed about $20 billion of market cap in one day. Sure, irrational public behavior caused this destruction of wealth, but surely the finance minister must have realized the implications of his announcement and decision. Eventually, when the law takes affect four years from now, much ofl the glowing positives of CanRoys will disappear. I can understand a mass exodus if the law was going to go into affect next year. But four years from now? That’s irrational!
Finally, irrationality is not just confined to the financial world. It seems to rule on all levels of life. Recently, on the social networking website myspace.com, 14-year old Julia Wilson wrote a comment “Kill Bush”. In response, not one, but two, Secret Service and Homeland Security agents, appeared at her grade school, pulled her out of class, and interrogated her. Did they really sincerely believe that a 14-year old girl presented a serious threat to the life of the President? Yes, I understand that threatening the President’s life is a federal crime, but little kids, when they get in arguments, say “I’m going to kill you!” all the time. It doesn’t mean they are actually going to head down to their neighborhood gun store, buy a .9mm, and plug 10-year old Billy next time they see them. What’s next? Sending FBI agents to the kindergarten school to question 6-year old Lisa who scrawls “I hate Bush!” in pink chalk on the hopscotch pavement?
Adults are supposed to have the ability to discriminate between perceived threats and real threats. That’s what makes adults adults and children children. In fact that’s exactly why we have the three strikes law was such a poorly constructed law. It took away the powers of discretion from judges to apply leniency in the case of someone that received three strikes from the petty theft of stealing two candy bars and a loaf of bread from someone that commited grand theft auto once and assault & battery twice. Doesn’t responding to a scrawling in a cartoon posted by a 14-year-old girl make the agents look foolish, not to mention being an absolute waste of energy and time? That’s irrational!
Why are people so irrational? That’s one question I just haven’t been able to figure out.
