twacowfca

Watch your backside Eric! April 1 was opening day of hunting season for liberals. Dick Cheney is rumored to be on the way to Montana, and this time he's not using birdshot! :) Seriously, I like the idea of having well regulated militias the way Singapore and the Swiss do it, but I generally despise the idea of unregulated vigilanties or militias. I imagine that because of who I am, I would be the one who would wind up being at the wrong end of the rope! The only thing worse IMO is when all power is in the hands of a central government's executive. Then, everyone else lives or dies at the pleasure of the king or the "beloved leader" or whoever. Bozeman has an interesting history. It sprang up after the civil war as a gold rush town, full of hard drinking miners and other misfits. Among the misfits were many outlaws and gangs that murdered miners for their gold. The outlaws so intimidated the town that no jury would bring a unanimous verdict against a killer for fear of their own lives. The better citizens of Bozeman then followed the democratic tradition and formed a Committee of Vigilance. The secret committee picked off the outlaw gangs one by one and did what vigilantes generally did back then. HANG EM HIGH! If you want to learn more about their history, pick up a copy of The Bozeman Trail while you're there. Or rent a copy of the classic Jimmy Stewart western, The Man Who Shot Liberty Valance, based on the book by the same author. Interestingly, Charlie Munger's great grandfather was a judge who attempted to help bring law and order to that wild territory.

IMHO You should go ahead and make the conversion to a Roth IRA right away without worrying about how you are going to beg, borrow or steal to pay the taxes. Shhhh. Don't tell anyone, but there's a free put on the conversion. At the end of this year, you can undo the conversion if things don't work out so that you have the money to pay the taxes on the conversion. You can back out of the conversion even during 2011 before your first payment on the conversion to a Roth is due and still have your money in a regular IRA, according to what I've read! ERIC, YOU'LL LIKE THIS NEXT IDEA WITH ALL THE OPTIONS YOU BUY :) But wait! It gets even better than an offer on a late night TV commercial! If you convert and the value of your new Roth IRA goes down toward the end of this year, you can also rescind the conversion ( the free put ) and then turn around and convert again to a Roth at a lower basis and lower amount of taxes due that you'll have to pay! This free put also extends throught 2011, but if I'm not mistaken, you can't jump back in with another reconversion if you exercise your put beyond the end of this year. If anyone wants to get cute, instead of being a value investor, he can even convert multiple iRA's into Roth's, put them into volatile, non correlating assets, then undo the Roth IRA's that go down and reconstitute them at a lower tax basis before the end of the year from what I've read from secondary sources, {I say he rather than he/she because only a guy would even think about doing such a thing! } ( Better check this one out before you take my word for it and try it ). :)

If you pay $100k from outside the account, then in case #1 the amount you can draw down without any tax penalty is $980k (200k at 8% for 20 years), not $440k. If one doesn't have $100k lying around, the economics are compelling enough that you should take out a short term loan to pay the tax obligation to maintain the $200k balance in the ROTH. I forgot to mention that taking out any loan to pay off the tax obligation would skew the results I've outline below much more in favor of an IRA. Basically you're taking on leverage, which everyone should know, can be financial suicide. In the case of an IRA, you could also do something similar and take out a HELOC for 100k at 5% interest and hopefully compound that at 8% for the next 20 years. Free money without the tax costs. I should also mention after looking at my earlier analysis that I did not normalize the tax hits in the IRA in today's dollars. That makes the IRA case more compelling. I did not also show what your account balance would be in either case. In case 2, even though you paid 50% more in taxes (this is not normalized), you still end up with way more money in the IRA: 699k vs. 466k. I rushed through that analysis before posting it. Sorry. Also, I meant to say Washington, not Oregon, for states with no state income tax. Regardless, if anyone can show me a compelling economic argument for the Roth, I'll bite. Otherwise, staying in my IRA. One reason I converted is that we don't have state income tax (yet) in Washington state, where I live. Considering that most states have income taxes (and we might move some day) and that Washington state may eventually have a state income tax, it was a good time to lock in the zero-tax forever.. Now for the compelling economic argument: Let's say the tax rate is the same today as it would be 30 years from now, and let's say you pay the same percentage today during Roth conversion as you would in 30 years making IRA withdrawals. Okay, now let's say a conversion today would cost you $200k in tax. Well, if you choose not to convert and you manage to compound the $200k at the same after-tax rate as the funds in your IRA, then you may find that conversion didn't accomplish anything. So the question is, how are you going to compound that $200k after-tax at the same rate as the money in your IRA? And if you think you can actually achieve that, then why aren't you employing that strategy in your IRA with your tax-deferred investments? So it's obvious that it's harder to compound the $200k in your taxable account at the same rate as the money in your IRA. That's one of the reason why I converted. The other reasons are: 1) no forced withdrawals after 70.5 yrs age 2) my children can inherit my Roth and leave the money in there compounding tax free. I have a ridiculous sum in there now, and I'm 33 years away from being 70. I do not want to be "surprised" by a 70% tax rate (same as when I was born) if my account grows to $500m or so by then -- in the IRA, the forced withdrawals would be so large they could easily trip such a tax rate. 35% (today's rate) is cheap by comparison. Eric's argument is more compelling: A): The younger you are. B): The higher the rate you think you can compound your money. When estimating a compounding rate, don't sell yourself short if you really know what you're doing and if you know what your sweet spot(s) is/are. If you're a good investor and have a track record to show it through both the recent bull and bear markets, use that as a basis for estimating a reasonable compounding rate going forward. If that rate happens to be 15% or 20%, plug that compounding rate into the two scenarios for the two kinds of IRA's, and you'll be amazed at the difference over a long period of time. Don' delude yourself into thinking that your tax rate on the hypothetical funds that would be taxed on future investment gains if you didn't use them to pay the taxes for a Roth conversion will be minimal. That tax rate will probably be about halfway between the rate on short term gains and the rate on long term gains unless you are able to find a BRK or a FFH early in its history and sit on it for many years. In summary, the taxation and the inability to be nimble in changing positions when appropriate may cut the per annum after tax compounding rate of the funds that are not tax sheltered by the IRA in half compared to the IRA. Realize that it's more difficult to compound efficiently in a taxable account than in an an IRA of whatever sort because you're always constrained by tax considerations. Imagine putting 20% of your family's investable funds into a compelling situation and then seeing it pop up three times as high within two months. How disagreable this would be when it should be a happy occasion. Should one sell and take a short term gain or wait for a possible long term gain even though it's now way above the estimate of IV? In an IRA, this type of decision is a no brainer-- take the profit!

The value of the IRA upon conversion to a Roth IRA is treated as adjusted gross income. Therefore, your NOL's should not be able to be used, I think, except as they may be able to be used in the course of your business to reduce your business related income. I hope my understanding of this is correct. Valuecfa or others, am I correct?

If you or a relative happen to be 59 1/2 years old, that person can gain control of an employer maintained IRA or a 401K and convert it to an IRA, or this year to a Roth IRA. I believe this is at the discretion of the employee. Check with the relevant HR dept or with your accountant or tax attorney to confirm this. Does anyone on the board know if my understanding about this is correct?

This year all holders of US IRA's can convert a regular IRA into a Roth IRA. Formerly, only relatively low income IRA holders could do this. The big advantage of this conversion is that this enables the IRA holder ,defacto, to almost double the assets that will compound tax free in future years. Why is this? Because the state and federal governments in effect "own" about 45% of each regular IRA by the fact that you'll have to pay taxes on the mandatory distributions when you reach age 70 1/2. (I assume that all members of this board are going to be taxed at the highest current marginal rate when they retire). Conversion now to a Roth IRA in this unique year of opportunity will in effect nearly double the tax free compounding stream that the IRA account holder actually "owns"! :) Of course, you'll have to pay taxes on the regular IRA assets when you convert to a Roth, so in a sense you'll not have the opportunity to compound what you'll give up in this tax payment. Never the less, biting the bullet and paying the taxes now is still a great advantage. If you hold on to this money that you'll have to pay for taxes, and then use it to invest outside of an IRA, you would then be taxed on your gains! In effect, assets that would be taxed on future compounding are being transferred to an account where they won't be taxed! What's this? You say you don't have enough money to pay taxes on conversion of your regular IRA to a Roth IRA this year? Not to worry. :) You are allowed to string out your tax payments on the conversion, making them in 2011 & 2012. Don't delay. This offer probably will not be extended.

Yup! Maybe even some people on this board listen! :)

I found an article that's even more informative than the one I saw a few months ago. It's in USA Today, Dec 12, 2009: For Feds, More Get 6-Figure Salaries. Apparently, all that's necessary to give everyone a raise is to give a raise to the boss because under US law, no department staffer can make more than that department head. Therefore, giving a raise to the boss raises the cap on the salaries at the next level and unleashes the floodgates. Under Bush only the head of the FAA made more than $170K. Now more than 1700 people in that department are above that level. Sounds like a great idea for the private sector. Now let's see . . . If no one at BRK made more than Warren . . . Now what effect would that have? ? :)

Hear! Hear! Very well said, Sharper D.

I lived in DC several years ago when I went to school there, but I didn't have wheels and rarely got out into the suburbs. We now live in an apparently similar exurb county of another major metro area. In the late 1980's, a bank in our area With solid backing started up at the bottom of another real estate cycle. It prospered as the economy picked up. A few years later, it was bought out by a growing regional bank. By 1999 it was a 12 bagger when we sold our shares. As they say, past performance is no guarantee of future performance. But this happy experience suggests that Sokol has sniffed out an investment with good potential entirely on his own. :)

17 to 1500???? Can you give us a reference? Sorry, can't cite chapter and verse. It was a newspaper article in a major paper, I think. To clarify : the department didn't necessarily hire 1500 new people at that level. Apparently, Bush had a cap on Inflation of GS pay grades or the number of slots allowed above $150K of pay. This meant that a lot of CS employees were bumping against the ceiling. The new administration apparently took these caps off or perhaps gave raises that bumped pay up substantially. The article was vague about exactly how this was done, and I didn't dig deeper. Sorry I'm not more helpful.

What drove Sokol's decision to invest so much in this medium size bank that's relatively solid all things considered? That's obvious. Location! Location! Location! The bank's located in an upscale county in the Washington DC exurbs. His first purchase was made two weeks after the Democrat Party victory in November, 2008. Since then, there has been great inflation of staffing and wages and hiring at the highest levels of government, not to mention the army of lobbyists that has descended on Washington to fight or support the massive spending bills that have been passed or are in the works. For example, one department, transportation, I think, had 17 staffers making $150K or more during the Bush administration; now there are reportedly 1500 staffers in that department making that much or more! I have a friend who is a consultant to nonprofits funded by the US goverment. His organization had been getting a 4% rakeoff of the take. Now they are being told by the government that they should charge an 8% rakeoff! Bottom line: this may soon be the strongest residential growth area in the US! My opinion of David Sokol's investing skill has now gone up a big notch!

Rabbit, my conviction is increasingly strong that the strategy you outline in your second paragraph is optimal if you have one or more very high conviction ideas. Use long term nonrecourse leaps or warrants if these can be purchased economically to be 100% or more invested in your best idea(s) if these are compelling. Then, use the cash freed up to be invested without additional leverage in Buffett style companies with huge moats purchased at bargain prices. If your best idea(s) doesn't work, you'll still have most of your assets intact -- a bad year, but a minor setback in the long run. :). Most value investors fail to load up when they have a really good idea. This strategy reduces the risk in such a load up. :)

Good article. Thanks Ballin. Interestingly, WEB's personal portfolio reportedly amounted to @1% of his total wealth 8 to 10 years ago. Now it's up to about 5% including only US stock holdings, not including foreign stocks like Posco. This implies that he has generated @ 20%+ after tax returns in recent years while the S&P 500 has gone nowhere. Good job Warren. How many other long only fund managers managing large portfolios have done as well?

Eric, I like the way you managed your capital. It's normally not wise to overbet your capital because this eventually leads to "gambler's ruin". The funds you used may have been initially almost all you had, but this was likely only a small part of your potential lifetime earnings, considering your age. Therefore, a big loser or two would not have truly been ruin -- you could have recovered, given normal earnings expectations. :) The trades you took had an asymetric reward/risk payoff if they worked. You stayed mostly in your sweet spot, mainly FFH which you evidently came to understand very well. Congratulations. :)

Maybe. But bonds with reinvested interest may not compound at the same rate as JNJ with reinvested dividends ( especially considering the different tax rates on interest payments and dividends). JNJ has a much higher return on capital over many years than the return on capital that would occur with reinvestment in the bond. Therefore, if JNJ's ROC continues to be high and there are substantial opportunities for reinvestment, JNJ's intrinsic value will grow at a much higher rate than the bond's. :) Also realize that JNJ's main reinvestment isn't capex, but R&D that is generally expensed rather than capitalized. If this incremental expense works like a good investment, JNJ's earnings will grow magically in the years ahead, with allowance for the ups and downs of their patent development and expiration cycle. If their earnings don't grow after making allowance for their cycle, they may be experiencing regression to the mean in their returns along with the entire pharmaceutical industry, although their non pharmaceutical products may insulate them from this trend,

Yes, Eric. Forget the Fidelity button that will give us OUR rate of return. Where's the button that will give us YOUR rate of return!? :)

Dear Sanj, may I take a moment to say how blessed we are to have you as the administrator of our board. Thank you from the bottom of my heart for your evenhandedness that has given us the best investing forum on the Internet.

I read the Delaware Court's memo related to the decision to dismiss TAF's suit. They key issue which should be tried appropriately in NY is whether the NY Insurance Superintendent's decision to allow the split of MBIA 's business and transfer of assets to a new company trumps the strong protections in the debt instrument that prohibit such a transfer without the approval of the debt holders. The Delaware judge noted that the NY Insurance Superintendent's decision to allow the transfer was based entirely on the representations of MBIA and not as a result of an adversarial process involving the debtholders, and that decision did not address the contractual rights of the debtholders. Strange things can happen in court, and I haven't read the recent February NY court decisions, but it would be surprising if the debt holders are not ultimately successful in negotiating the restoration of most of the assets backing the debt or compelling the return of all the assets in the unlikely event that the issue has to be decided by trial (and upheld after appeal). In these events, MBIA may or may not be a zero, but it's value should be drastically reduced. :) The Delaware suit was dismissed without prejudice, meaning that TAF could file another suit in Delaware if they don't like the terms of the potential eventual settlement of the NY class action suit against MBIA by the banks et al. ( after the NY court decides if the contractual rights of the debtholders trump the Insurance Superintendent's decision to allow the transfer of assets). Or TAF might be able to sue in NY if they decide to opt out of the class represented by the banks. :)

It's on the web in Feb 2010. Didn't read the full articles because this is routine stuff: The defendants try to get the case dismissed -- then if the case has merit and no technical disqualifiers they lose the motion for summary judgement or whatever, apparently the current stage. Then discovery begins. Then there are motions which result in delays. Then a trial date is set. Then, in a big case like this with meritorious claims there is usually a negotiated settlement fairly late in the process, perhaps on the trial date or soon after trial begins. All this can take several months. Stay tuned for further developments.

TAF's suit was dismissed Oct28, 2009 for lack of jurisdiction, the court stating that the class action suit by the banks et al supercedes the Delaware suit. When did Marty make that statement about the consequences of a favorable victory for TAV? The claim against MBIA seems meritorious. The other NY suit by the banks is progressing with a recent favorable ruling that the banks lawsuit should not be dismissed. Aurelius also has a similar lawsuit in Federal court that is open.

Is this thread about a tempest in a teapot, brewed by an Australian writer with an not unreasonable concern for his country's dependence on China's buying their ore? Objectively, if the codependence in trade and exchange between the US and China survived the 08, 09 financial crisis, why should it become critical now?

Thank you valuecfa. That's the clearest explanation I've seen about the limits on how large amounts of NOL's in relatively small companies could be valued in a takeover by a company in a related business.

Am I correct in my understanding that a takeover by a company in a related business such as a telecom would not be an event that would necessarily trigger a loss of their NOLS?

Bao, the latest posts about how poor their customer service is in NA seems to shed light on their model for growing their business. Apparently, they go into a new country away from their core distribution European market as a drop ship business using wholesalers to supply and ship the tires, rather than buying their tires directly from the manufacturers. This can be a minefield. A wholesaler may substitute brands or, from the BBB complaints, ship returned or defective tires if the wholesaler isn't first class. Is this how they open up new markets? Their business will never gain traction here if they don't get their act together. Is this uncharacteristic of how they do business in Europe? Do they have significant unresolved complaints in Germany?