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Raul Shah explains how value investing can help investors navigate volatile markets, highlighting opportunities in Hims & Hers (HIMS), ServiceNow (NOW), and UnitedHealth (UNH).
Two tax-efficient charitable giving strategies: donor-advised funds and qualified charitable distributions. Raul also discusses eligibility, tax benefits, limitations, and common pitfalls.
Transcript
Rena Sherbill: Welcome back, everybody. We are back once again, very gratefully with Mr. Raul Shah. And we are back with another round of Tax Alpha. Today we are going to be discussing something related to the charitable world.
And for a refresher, Raul Shah is the founder of DocShah Financial, which is a value investing firm that is focused on helping everyday investors and retirees maximize their portfolio growth while protecting their wealth from heavy taxation through advanced tax planning. It has been around since 2023 and since then has generated a 36% annualized equity return for its clients. In addition to the work in the markets, Raul is also an educator at Johns Hopkins University, where he teaches a tax planning course for that community.
I think that we should start, if you wouldn’t mind, where we’ve started the past couple of times. Just anchor us in this current market before we get into this today’s topic.
Raul Shah: Sure. Well, I always say at the start of these podcasts that I’m excited to talk about the tax planning stuff. I’m excited to back be back with you. So no exceptions there. This is gonna be a great segment.
And yeah, crazy market, but when is it not really a crazy market? And you you mentioned our the firm’s annualized stock return has been thirty six percent since inception. I’m incredibly proud of that.
I don’t do anything crazy. I mean, I just do value investing for our clients and I pair that with a lot of tax planning strategies, the same ones that we use in all these podcasts, that we talk about. And, it’s just a tremendous value add.
And as I try to navigate the market for clients, all I’m trying to do is look at what a company is worth and buy it at some discount relative to that. And the bigger the discount that you can buy, the safer the investment.
You really learn the importance of that in super volatile markets because when you go out and you buy really speculative stocks or stocks, selling for like 80 times price to sales, or there’s no earnings and there’s never been any earnings, and people are paying ridiculous prices for these stocks, that’s when you get burned, is when you buy those types of things and the market’s really volatile because you experience these brutal shakeouts and repricings of stocks that are grossly overpriced.
And when you’re buying value stocks, you don’t have to worry about that because any turbulence that happens if you own value stocks are just opportunities because you get to buy something either more at a cheaper price, which makes your portfolio safer because you’ve lowered the cost basis and increased the margin of safety.
Or if it’s to the upside, you get to actually capture that volatility and and sell it and and go buy a car or something, do something that you want to do with the money.
The antidote to volatile markets is is always been the same. It’s buying value stocks, really good companies at cheap prices. And we talked about a few stocks last time.
I’m happy to give a recap on some of the developments in the past month if that’s something that would interest you and and and the audience. I always tell people that it’s of course not financial advice. I manage a lot of money for for various clients and our three biggest positions are Hims & Hers Health (HIMS), ServiceNow (NOW) and UnitedHealth Group (UNH).
And we’ve talked about these stocks a lot. HIMS is reporting on November 9th. HIMS is a healthcare platform and they are growing rapidly. I mean, they’ve been growing at like 50, 60% since inception, or actually since they were founded in in 2018. And they’re expected to continue to grow, 30% plus for the foreseeable future.
What they’re really doing is building a really, really sticky healthcare platform. The average monthly revenue per subscriber has gone up so much. It’s gone up it was in the 40s a few years ago, and now it’s $92. So people are flocking to the platform.
They’ve got millions of subscribers, and they’re paying double now for the services and the products that they’re buying than just a few years ago. And you can imagine flywheels like that, like really sticky subscription revenues like that, are beautiful businesses because the revenue is very predictable.
And it’s very easy to forecast. And Hims is doing the same thing that Amazon (AMZN) did. If you go back and you look at Amazon from like the early 2000s, where Bezos had a very large vision. He could have made the company profitable in the early 2000s.
All he had to do was just cut out his R&D expense. But he didn’t want to do that. He wanted to keep pouring capital back into the business and scale it higher and higher and higher. So that ultimately, 15 years later, when the profits did start to show up, they were gigantic.
HIMS is doing the same thing. If you look at their income statement, it’s it’s almost the same exact in fact, it is the same exact situation as Amazon. They’re investing all their capital in R&D and marketing, and they’re trying to grow the business as fast as they can.
If you took out marketing expense and part of the R&D that’s just related to growing the business, they would be profitable today. They’d make a ton of money. They’d probably have like a dollar of earnings per share already today, if not even more.
But they’re choosing to reinvest. And so with that comes uncertainty. And the market hates uncertainty.
You see it with all these AI stocks. Anytime Google (GOOG) or Meta (META) or Microsoft (MSFT) comes out and they say, we’re going to spend, you $100 billion or whatever on building out our AI infrastructure, the market just punishes them.
Because again, the market hates uncertainty. From the market’s perspective, anytime a company says we’re reinvesting in our business, that equates to that company is lighting that money on fire and we’re never going to get a return on it.
That’s where the market’s mind goes. And so they punish stocks like that. but if you really know the value of the companies that you’re buying, you’re not going to be worried or get shaken out, when the market has has those kind of shakedowns that it always has.
We talked a lot about ServiceNow. ServiceNow actually reported a great quarter, except their stock got absolutely decimated. In fact, it was the largest drop in ServiceNow’s history.
That was a really interesting case for anyone following along. But ServiceNow basically they provide enterprise software to Fortune 500 companies. you can think if you have 5,000 employees, imagine if you’re onboarding one employee, all of the different things that have to happen, right?
HR has to issue a contract, IT has to issue security credentials, the cafeteria has to know your dietary restrictions. I mean, there’s a million different things going on. You can’t manually do that when you’ve got 10,000 employees, right? You need a software that does that and ServiceNow layers AI into their entire software.
In fact, they partnered just recently with ChatGPT to help expand the service offering. So they’re an AI company that that also uses software. But the market, it’s it it it just sees AI and SaaS, right? SaaSpocalypse, and the market thinks that AI is gonna kill all SaaS companies.
And it’s not what AI is gonna do is it’s gonna for sure kill off those SaaS companies that are like one-trick ponies like if you’re a SaaS company and all you do is provide CRM. I mean, your days are numbered, AI is gonna take that job pretty easily.
In fact, it’s already doing that. But when you’re an actual platform, like what I what I call a pass, AI enhances platform as a service. AI enhances your offering, and that’s what ServiceNow does.
But the market doesn’t see that. I’m reading common stocks and uncommon profits by Phil Fisher, which is a fantastic book. Anyone who’s listening to this should should absolutely go out and and and read this book. But you’ll learn very quickly when you study stock market history that it just repeats itself, and that’s the most powerful tool you can have as an investor.
Because if you just go in blind and you don’t know anything about stock market history, every news article is gonna result in you panicking. But when you go back and you study, this is the exact same thing that would get reported 100 years ago, 75 years ago, 50 years ago, and it’s still today, you’re gonna have a totally different perspective on investing and you’re gonna actually see things a lot more clearly.
One of the things that Fisher talks about in his book is that the market, and this is not a surprise to anybody, but it’s good to repeat this. The market has this collective pair of glasses that they put on, right? Everybody puts on the same glasses. And they look through certain stocks or industries with rose-tinted glasses or not at any given particular time. And that really influences the prices that are available in that moment.
And it makes prices really wonky relative to what the stock is worth. So you wind up in situations where perfectly healthy companies who are producing massive amounts of free cash flow, growing at 20% a year like ServiceNow, get re-rated downward because everybody’s got these glasses on that thinks that the AI is gonna kill ServiceNow or or some of these other platform companies.
But if you have a long-term horizon and you and you study stock market history, you’ll very quickly realize that, there are opportunities in volatile markets to make tremendous long-term investments, whether that’s, something like ServiceNow or s or some other company that or industry that that you might find.
That’s I think a good history lesson for investors.
And then, United Health Group is their third largest company. I’ve mentioned this a million times at this point, but that’s just a, they just have to reprice their plans and then their margins will come back over a couple of years.
Rena Sherbill: I’m wondering, would you say, would your answer be see above – I saw today that Hims & Hers is one of the top five most shorted healthcare stocks? Our quant system has a hold on it and you could see various grades of near failing grades.
But would you say for the reasons that you just stated previously, that’s why you’re still holding it? And how would you encourage investors that fear the volatility, that fear the dip, that don’t have that full conviction, how would you encourage them to think about that and stay true to to their strategy?
Raul Shah: The short interest on HIMS is bizarre.
I’ve actually never seen that before. It makes no sense.
You’ve got a company growing, thirty, forty, fifty percent a year potentially, that’s gonna be profitable very quickly and extremely profitable, super sticky subscription platform. Insiders own fifteen percent of the shares. balance sheet looks great.
It doesn’t make any sense. They’re in a bunch of countries now that they were never in before. I think that it’s funny. I think that you have a lot of people who do short term trading.
HIMS is an extremely volatile stock. In fact, I saw a report, I think it was last year, that it was like one of the most volatile stocks in like the the mid caps. Or or it might have been the most volatile stocks, volatile stock.
When you have traders and speculators on both sides of the coin, I mean you’re gonna see certain situations like this that could arise where you’ve got a large large short interest in a company that is growing. But it’s bizarre. I’ve been looking for two years to try and find a solution. I’ve got an investor group that I talk to pretty well connected. no one has an answer.
I don’t have an answer as to why it’s so heavily shorted. They’re dead wrong and they’re gonna get murdered. But it just makes for basically pent up demand at this point that’s gonna result in a lot of buying of shares. as far as conviction goes, nobody can give you conviction.
And somebody could listen to this podcast or another podcast and they could hear somebody talk about a stock and and they might think, they might be, they might say, this guy really sounds like he knows what he’s talking about. That this he likes this stock, maybe I should go buy that.
That’s a horrible idea. Because no matter how much you trust somebody else, you can never gain conviction unless you do the research yourself.
Unless you see with your own two eyes, you read the balance sheet, you read the income statement, you look at the cash flow statement, you look at the market, you look at their growth, you look at the downside risk, the margin of safety, the valuations, you actually run the discounted cash flow analysis, you project their future cash flows, and you do all of these different things. Only then will you actually gain conviction.
And it’s incredibly hard to do that because it’s time consuming and you need to have a very good disposition. You need to know what to look for so you aren’t wasting your time reading an entire annual report for a bunch of 99% of fluff that doesn’t even matter. it’s a skill and it only gets sharpened the more that you use it.
I remember reading something recently that I thought was quite interesting, which is that nobody would be their own lawyer, you would lose every lawsuit if you did that. But people want to be their own investor.
In my personal opinion, I think it’s as crazy as trying to be your own lawyer. It’s a full-time job that requires a lot of skill and expertise and part of gaining that conviction is just having the skills and expertise and the experience to know what to look for.
Rena Sherbill: Not to mention time, which is a precious commodity that most people don’t have. yeah. Especially to to get enough value from the time that they’re allocating. So just want to remind everybody to catch everybody up to date.
This is our sixth episode. First one was thoughtful asset location, then Roth conversions, then mega backdoor Roth, then tack then tax loss harvesting, and then tax gain harvesting.
And I know that we’ve had some questions and due to compliance issues, unfortunately, Raul Shah cannot answer those questions directly. So hit them up on DocShah Financial if you have personal questions.
But if you have suggestions of topics to cover under the rubric of tax alpha, we would love to hear from you. So, Raul Shah, what are we talking about today?
Raul Shah: We are talking about charitable giving today. And I’m going to clear up a bunch of misconceptions people have about how the wealthy give to charity and how you can give the charity and actually claim a tax deduction because people really think that there’s loopholes and crazy things like that.
And it’s not. It’s really simple.
I’m gonna talk about two strategies that I use with clients. In fact, I just opened, I just did one of these with a client yesterday.
We’re gonna talk about donor advice funds. And then we’re going to talk about qualified charitable distributions.
What both of these are are different are two tax strategies that will allow you to give to charities that you want to support, but actually claim a tax benefit from doing so. We as people care about our fellow men and women out there in the world and we want to help everybody. And, we aren’t giving to charity just for our own gain, our own benefit of maybe saving in taxes.
We obviously care about the charity and all the cause they support, but we want to gain some kind of a tax benefit too, right? And there’s nothing wrong with that. And the way that people go about it is is a little bit wrong.
So what most people think is if they just give the charity that they get to take whatever they gave and deduct that from their taxes.
Let’s say you give a thousand dollars to the Salvation Army, that now your income is a thousand dollars lower because you can just deduct that. And it doesn’t work that way. And the reason why is because in America, we have a standard deduction.
The standard deduction if you’re married filing jointly is thirty-two thousand two hundred dollars. If you’re single, it’s just half that. So sixteen thousand one hundred dollars. I’m gonna focus on married couples just for this example.
So if you give to charity, you could deduct that, but you have to itemize your deductions. That means that you’re gonna take whatever you gave to charity combined with medical payments that you maybe made that year or mortgage interest that you made that year.
There’s a certain group of individual things that if you collectively add them up and it’s exceeds your standard deduction of $32,200, then you can itemize because you’d be able to claim a greater tax benefit.
So for example, let’s say that like your mortgage interest, some of your medical costs this year and what you gave the charity was forty thousand dollars. Well, then you don’t want to take the standard deduction of thirty-two thousand two hundred dollars. You’d rather take the itemized deduction of $40,000 because you’ll pay less tax if you do that.
Most people don’t give enough to charity to exceed the standard deduction. So there’s two ways that we can go about solving this problem.
Now, the first is a donor advice fund. And what I tell people to think about the DAF is what we call it, DAF, think about the DAF as like a bucket, like a like a charitable savings account. And you can put money or assets into the account and you get to take an immediate tax deduction that year.
But then you can grant money to charity at any cadence that you want. So for example, like let’s say that you give $5,000 to a specific charity every single year. Well, $5,000 doesn’t exceed the standard deduction, so you wouldn’t get any tax benefit if you just gave $5,000 a year. But what if you bunch like 10 years of donation into one year? So you put $50,000 in a donor advice fund.
Now, you could itemize your deduction because fifty thousand dollars now you can deduct. That’s more than the standard deduction.
So you get a huge tax benefit in the year that you contribute. And you can still give five thousand to whatever charity you want over time, over ten years, right? In this example.
So you’re just bunching that deduction in one year. So you’re just excuse, you’re just bunching the contributions in one year so that you can claim a big deduction.
Now, a qualified charitable distribution, and by the way, we’re going to expand on this a lot more, but a qualified charitable distribution or QCD, I want you to think of that as like a bridge.
And what that is, it’s a direct bridge from your IRA to a charity. And so it’s just a tax-free transfer from your IRA straight to a nonprofit, and it’s only for retirees who are seventy and a half or older.
I’ll talk about some of the key differences and features right now to kind of help you understand the differences.
Here’s, just in in a nutshell, some of the differences.
Donor advice funds are great for anyone, especially high earners, because you can bunch a lot of money into one big deduction in a year. donor advice funds, you you can put money in from anywhere.
It could be cash, it could be stock, crypto, real estate, anything that you sell, for cash proceeds or even stock itself, you can put stock into that account. And that’s actually a really nice way, to to give to a charity. And I’ll talk about that a little bit later on.
The only thing though is that the the donor advised fund does not count towards your RMD. So there’s a lot of retirees out there who have to take required minimum distributions. It doesn’t count towards that. Now if you look at a QCD on the other hand, okay, who is it for?
Well it’s not for anyone, it’s only for IRA owners who are seventy and a half or older.
The source of the funds can’t be from anywhere. It’s not like you can you can can put stock into your IRA and then send it out to a charity, right? It’s just whatever’s in that traditional IRA to begin with. That’s the source of the funds.
And there’s an annual limit of $111,000 per person. There’s no annual limit for a donor advise fund, although the deductions are subject to AGI limits, the adjusted gross income limits. Basically they cap how much you can deduct from your actual taxes.
But the QCD counts towards your RMD or your required minimum distribution. So if you’re writing a check straight from your IRA to a charity, you actually can satisfy your required minimum distribution with that check.
And so it’s a really wonderful way to help retirees save a lot of money in taxes when they’re being forced to take money out of their IRA, but they don’t even need it for whatever reason. It’s a really good strategy for that.
I was thinking too, at this point, it might help to go through a couple of examples if that sounds good.
So we’ll start with donor advice funds. Again, the concept here is very simple. It’s give now, pass it out later. That’s how you think about the donor advice fund.
And the reason people use it is because it solves the bunching problem, right? Because standard deductions are so high, donating small amounts every year gets zero tax benefit. So the donor advice fund lets you pile multiple years of giving into one single tax year to get a huge deduction.
And then hand the money out to charities at whatever your usual schedule is. So let’s say we’ve got someone named Sarah, and Sarah’s 45 years old, and she either has a high income or she sold stock with a huge capital gain. If she gets $5,000 a year normally to local shelters, instead of her giving $5,000 each year and getting no tax benefit from it, she could put potentially $25,000 of stock into the donor advice fund today.
She would get an immediate tax deduction of $25,000. And if she combines that with, let’s say, her mortgage interest and it exceeds the standard deduction, then she’s gonna wind up getting a huge tax benefit from putting money in the donor advice fund.
Now, if we look at QCDs, right, the concept here is a little bit different. Basically, you’re bypassing the tax return entirely. And so why do people use it? Well, once you turn 73 or 75, depending on your birth year the IRS forces you to take required minimum distributions from your IRA account.
The IRA account, when you’re taking money out of it, it’s just counted as income. So the more you take out of that account because of your RMDs, the higher your income goes, the higher your tax bracket goes, the higher the taxes you pay.
What the QCD does is remember, it’s a bridge. So it just lets you send money directly from your IRA to the charity instead of you taking it for yourself. And it still counts towards your RMD.
But it never shows up as taxable income for you because you sent it to the charity and not your own bank account. So if we use an example here, let’s say we’ve got somebody named Tom who’s 75, and let’s say that he’s got a $20,000 RMD that he has to satisfy this year. If he doesn’t need the money to live on, but sorry, if it let’s assume that he doesn’t need the money to live on, if he takes it in cash, that 20,000 RMD, he’s gonna get taxed on it as income.
So instead, what he does is he tells his IRA custodian, to be Fidelity or Schwab or Vanguard, just write the check for $20,000 directly to his alma mater or some other charity. He gets to satisfy his mandatory RMD, but his taxable income never goes up because the RMD didn’t go to him, the QCD just went to the charity.
Those are the two examples that kind of explain the different strategies.
And you can’t mix the two, right? Like a lot of mistake that listeners will make is they’ll try to move money from an IRA via a QCD straight to a donor advice fund.
You can’t do that.
The IRS bans it. and at the end of the day, the the the main difference here is that QCDs technically are are better than donor advised funds because QCD, what they’re doing is they’re offsetting income tax, whereas a donor advice fund is just offsetting capital gains tax if you’re contributing stock, which is generally a lot lower than your income tax.
But they’re both really, really good strategies. And there’s a couple of nuances that we’ll get into,
Really one of the big nuances here, and that comes with donor advice funds, and it’s the tax deduction limit. So if you put a million dollars into a donor advice fund, you can’t actually deduct a million dollars from your income.
There’s actually a limit on what you can deduct. And that limit is dependent on if you contributed cash to the donor advice fund or stock or property to the donor advice fund.
If you put cash in the donor advised funds too, like you just put $50,000 in cash, it’s you’re limited in how much you can deduct in that year. It’s 60% of your adjusted gross income. If you put stock in the account in the donor advised fund, you’re actually limited to 30% of your adjusted gross income in terms of what you can deduct for tax purposes.
Now everything else above that carries forward for five years. But let’s just use an example here. So let’s say that if your your adjusted gross income for the year is $100,000.
That means that you could deduct up to $60,000 from your taxes if you give a cash gift to a donor advice fund. Or you can deduct up to $30,000 in appreciated stock if that’s what you gave to a donor advice fund.
And again, it’s very nuanced because there’s another layer to this too, which is that you might think, okay, if I give appreciated stock, I don’t get to claim as much of a tax benefit. And that is true.
But you have to keep in mind that if you’re donating a stock that’s appreciated significantly in value, like let’s say you bought Apple (AAPL) stock for 10,000 10 years ago and now it’s at $100,000.
Well, if you’re donating money that’s if you’re donating appreciated stock, you actually get a tax break because that stock, the capital gain gets wiped out when you give it to the donor advice fund.
So not only do you get the tax deduction of what you put in that donor advice fund, but you also get to wipe out the capital gains tax. So there’s actually a double tax benefit if you donate stock versus if you donate cash. and most of the time, there’s no expiration date.
Some custodians might have like a limit, like they might be like, hey, come on, you gotta give some get give some money out. But for the most time there’s no expiration date.
And I guess the only other nuance that I can think of off the top of my head is that QCDs, so when you’re taking money from your IRA straight to the charity, they have what’s called a first dollars out rule.
So if you take your RMD out in cash earlier in the year, you can’t retrofit it into a QCD later. So the IRS treats first money withdrawn from your IRA each year as the RMD.
So you always want to make sure that you execute the QCD before taking any cash distributions.
In terms of risk involved, at the end of the day, there’s not necessarily a ton of risk in you utilizing these strategies to give to charity.
It’s more a question of reporting things right, making sure that you run the numbers so it’s advantageous for your situation. That can be quite complicated. It’s very good to work with somebody who who specializes in that. I do this for clients all the time. So I always tell people, whether it’s me or somebody else, make sure you have professional to help you map out the numbers because you don’t want to screw this up and get into problems.
Tax planning is very nuanced so the risk involved with it, especially in this case, is not so much,giving the charity. It’s just reporting it right and making sure that it’s actually advantageous and you got to run the numbers to do that.
I would say there’s a common mistake that people make in general, and that’s letting the tax tail wag the dog. So I have a joke, there are people out there that would turn down a bonus at their job because they’re say that their taxes are gonna go up. And it’s like, well, that doesn’t make sense because your income is going up too. So you’re left with more money at the end of the day, even if your taxes go up.
And so, don’t let the tax tail wag the dog.
Don’t make decisions in life solely based off of taxes. make sure that when you’re doing tax strategies, you’re doing it for the right reasons.
So in this case, you don’t want to just give to charities maybe for causes that you don’t necessarily believe in or have conviction in because you’re trying to save money in taxes. You want to do it in reverse. Find those charities and those causes that you really care about, that you really want to support.
And then if you can find a way to make it advantageous for you from a tax planning perspective using one of these two strategies, then you go forward and do it. So make sure you put the cart before the horse is all I would say.
Rena Sherbill: Raul, by the way, has a slew of recent articles on Seeking Alpha. So follow Raul Shah on Seeking Alpha.
If you have tax questions or wealth management questions, reach out to him on DocShah Financial. Anything you want to tease about next month’s episode?
Raul Shah: I’m gonna keep that one a secret, but people are going to love next month’s tax planning episode.
Rena Sherbill: Stay tuned. Same bat time. Same bat channel. Thank you, Raul. Talk to you next month.
Raul Shah: Thank you.
