ERICOPOLY

Cummings and Steinberg each own 10% of the company. Were there more partners in the beginning? Or did they reduce their ownership over time?

There is also a "personal holding company tax" of 15% that your C corp has to pay on retained earnings from passive investments if you do not pay them out. You can avoid it if the 5 largest shareholders put together comprise less than 50% of the shares, or if the majority of the corporate income is not from such passive investments. Anyways, the suggestion that I just start my own corporation has this headwind to contend with. And when in my example the man buys 60% of a company he should do so perhaps with an insurance company (more on that later) or an offshore company. http://wraltechwire.com/business/tech_wire/opinion/story/2458989/ You can avoid the personal holding company tax if the corporation is offshore -- it only applies to domestic companies. Also, if you acquire an insurance company or similar financial based business where the business model is designed around income from interest/dividends, then you do not have to worry about such a tax.

Curious why so many start partnerships instead of closed end funds? It looks like partnerships lock out so many interested investors due to the SEC restrictions on net worth. What is unattractive (from a money manager's perspective) about running closed end funds? Why do you all do partnerships? Is it something simple like, for example, trying to sell into an illiquid market that scares the investors away? Are the expenses too high (sending material out to every fund holder)? Do regulations make them bureaucratic nightmares?

I like the idea of buying my own portfolio below NAV... but I'm wondering how we go about taking over a closed end fund. You'd need to have knowledge of who the shareholders are so that you don't have someone else playing the same game (or just sitting on a big chunk and unwilling to sell at a reasonable price). Why not start a new closed end fund instead of taking over an existing one? I don't know anything about how hard it is to start one, so if that sounds naive I'll apologize in advance.

Did you bring your swim diapers this time?

Here is a product that pays you a fixed sum. Not great if interest rates rise though (unless you are the insurer). So this has me wondering, given the current low interest environment... Does anyone on this board follow any companies where a substantial amount of their business is derived from providing fixed annuities? This seems like the kind of business to get into when: 1) interest rates are relatively low 2) interest rates will go substantially higher. 3) portfolio is positioned to expect a rise in rates The idea of investing in such company has never occurred to me before -- I know nothing about this sector. Just looking for means of profiting from potential rise in rates -- thinking of out of the money calls on such a company as a form of insurance.

Glad to see someone gets it. People are funny. If you insult the Republicans only, they'll get mad. If you insult the Democrats only, they'll get mad. If you insult both, everyone remains happy.

This makes the assumption that the criminals are unsuccessful in their endeavours. It appears that they were attempting to kill FFH , put it out of business . It smacks slightly of hubris not to understand that the good guys do not always win. Come June of 2006 that game was already won by the good guys. Runoff was breaking even as posted months beforehand in the annual report, big gains were being booked on Indian equities, the only catalyst left for the hedgies was a major hurricane season. But the people who do this professionally were still writing business in Florida, albeit at higher rates (insurance companies). The expectation as we discussed at the time was to NOT have a repeat of 2005, which of course is exactly what happened. The hedgies overstepped when they became dependent on natural disaster as their sole recourse -- I remember we were discussing the company otherwise trading at a P/E of 3 for the year due to the big gains coming in. I think they got too emotionally caught up in their lie -- too hard to give up and admit that the good guys has already won. I remember one of those hedge funds was still trying to short the company even when they had all the CDS hedges during the financial crisis -- was killed in the short ban.

Of course, as of the date of publication, the price of the S&P was roughly 28% lower than the current level. The markets have risen 12.5% annualized from the closing price of the day that article was published. It's been 2.5 years to the day.

1) In your scenario the tax deferral benefits on the rest of the retained earnings are now zero -- this is meant to be a tax-deferred investment holding company. The annual tax-laundered-dividend payout in my example is only about 1%... but one can assume this holding company earns far more than that (it only pays out enough to fund his consumption and retains the rest of the earnings to reinvest). The retained earnings over time push the stock price up -- but you keep turning it over every quarter at 100% so you are paying capital gains tax every quarter on those retained earnings and therefore on a quarterly basis paying far more in taxes than you'd pay if you just took a dividend in cash. 2) The person has a 60% stake in the company. He can't sell and then immediately buy back a 60% stake. For one thing (liquidity aside) he loses control of the company -- what if somebody doesn't sell it back? You're right, the wash sale scenario doesn't work. Without the wash sale rules, the only offsetting tax benefit is the dollar value of (t)(dividend) when you realize the capital gains in the future, so you've effectively paid all the interest on that money to the government. How shitty is this deal?! I added an "ASIDE" to my last post. I am disheartened at our prospects of turning the US economy around as a jobs creation engine unless they cut the taxes on capital way back. And that lunch conversation came up when he had just finished saying that BHP is buying back shares -- so I had to ask why in the hell BHP would buy back shares when Australian get the dividends tax-free??? I mean, Australian shareholders (in order to get their cash) will need to take a capital gain, where they will be owing tax... versus the tax-free alternative of just getting cash dividend! Amazing -- what stupidity. Must be that they are either trying to push up stock options or else they love their non-Australian shareholders a whole lot more.

1) You are completely eliminating the tax deferral benefit on the retained earnings -- this is meant to be a tax-deferred investment holding company. The annual tax-laundered-dividend payout in my example is only about 1%... but one can assume this holding company earns far more than that (it only buys back enough shares to fund his consumption and retains the rest of the earnings to reinvest). The retained earnings over time push the stock price up -- but you keep turning it over every quarter at 100% so you are paying capital gains tax every quarter on those retained earnings and therefore on a quarterly basis paying far more in taxes than you'd pay if you just took a dividend in cash. example: Company compounds shareholder value at 10% annually. With 100% turnover of the shares, you're paying 10x as much tax with your proposal versus just taking the 1% dividend. And it's more than 10x the tax when compared to my dividend-laundered-buyback alternative with non-zero cost basis -- he is going to take the tax-deferral on retained earnings to the limit and leave his shares to his heirs with the step-up in cost basis. 2) The person has a 60% stake in the company. He can't sell and then immediately buy back a 60% stake. For one thing (liquidity aside) he loses control of the company -- what if somebody doesn't sell it back? ASIDE: I was at a lunch yesterday with a local businessman (local to Sydney). He says it's actually a zero personal income tax for Australian taxpayers for fully franked dividends on Australian shares (before I thought it was 9%). Translation -- his maximum tax rate is 30% (paid by the corporation). He can then pay out any post-tax corporate earnings to himself personally without getting taxed a second time. This validates what my Australian grandmother says "The rich do not pay any tax". In America they do at least pay some tax... not in Australia. I believe the day the US Government gets serious about wanting more jobs in America, they will stop treating capital like it's something to be punished.

This is what I was thinking. They are stupid criminals in that they are risking prison time when all they really did was give us outstanding prices at which to go long (with really cheap non-recourse leverage). It's a better crime to just wait for them to serve things up -- they take all the risk, we take most of the upside.

I'm watching this on the 10pm news in Sydney. They are giving the list of destinations where the Tsunami will hit next... it's not ending with Japan it looks like. Evacuations ordered in Hawaii for example.

This is right -- it's a wash before taxes. He doesn't need to buy back shares as a means of getting a tax deferral benefit. For tax deferral he can use his retained cash flow to purchase 80+% positions in more companies. He prefers to diversify the corporation's income anyhow: so rather than trying to boost his % ownership of the existing, he feels more secure to have the added diversification that new bolt-on 80+% acquisitions bring. This is a passive investment vehicle. He only looks for companies that run themselves (nothing to fix and management already in place) -- making new investments with the cash flow (without getting taxed on dividends before reinvestment) is one reason why he wanted a corporate investment vehicle in the first place. He wants to acquire new companies without getting involved in running their operations -- just like you don't have to run companies that you own on a fractional basis. Otherwise, he would get bogged down in the management. So the focus is on passive investment here. His only purpose in doing the buyback in the first place was as an alternative to taking the cash as a dividend. 100% of the alternative (a dividend) will be taxed, but not 100% of the value of the shares sold after the buyback (his cost basis in the shares is not zero -- he does not pay tax on the cost basis of shares he sells). That's my point: It all comes down to the cost basis on the shares sold -- because his cost basis is above zero on the shares, the tax will be less if he launders the dividend via buybacks instead of just paying out the dividend as cash. In my prior post I mentioned that the taxes would only be the same if the share price approached infinity -- this is a reference to what you were taught in Calculus: "take the limit as N goes to infinity". Think about how the Riemann sum was used to approximate the area under a curve using rectangles crammed together -- and to prove the integration (used to precisely compute the area under a curve), it was shown that cramming 'N' number (where N approaches infinity) of rectangles under a curve (where the width of each rectangle approaches zero) and then summing their respective areas will provide you with the area under a curve. Somewhat similar type of thinking here -- as the share price heads towards infinity, the cost basis becomes insignificant (sorry, it's because I was a math major that I used this comparison. I spent much of the time sneaking glances at Danica, so perhaps I didn't learn the subject matter very well; correct me if I'm wrong). Once he has satisfied his need for personal cash flow via dividend laundering (to fund his personal spending), he is free of course to use more of the company cash for more buybacks if he wishes to boost his stake in the company. That's a separate topic though -- that's just about boosting his ownership in the company without taking a dividend in order to do it. "Best strategy for increasing one's ownership" is a separate topic from "extracting cash in a tax-friendly manner via dividend laundering".

When criminals unload something on the black market inexpensively, the buyer runs the risk of losing everything for accepting stolen property. The novel thing about these financial crimes is that there is no such risk to the buyer. They drive the price down for whatever reason and then let others participate in the bounty! They even provide inexpensive non-recourse financing (LEAPS).

Buffett originally paid about 14x when he made his famous $1b investment: http://www.fwallstreet.com/article/24-buffett-coca-cola-1988-now-i-get-it If KO gets to 5x it will either be because they'll be facing a class action lawsuit for knowingly poisoning people (and I wouldn't want to take Coke's side in that one), or it will be a general market panic and other companies will be perhaps selling for 1x or less.

More details: So let's say the controlling shareholder begins with 60% ownership in a $4b company. Here is the loop that repeats every quarter: step 1) The corporation buys back 0.25% of shares every quarter (on an annual basis 1% of shares are repurchased) step 2) At the end of the quarter, the controlling shareholder owns a higher percentage of the company than before. He then calculates exactly how many shares, 'Y', to sell to bring it back down to 60% ownership. step 3) He tells his broker to sell 'Y' number of shares over the following quarter step 4) go back to step 1 That would be a $24m annual income at a $4b market cap. More income when the stock trades higher, less income when it trades lower. He maintains intrinsic value -- his percentage ownership in the company never drops below 60%. The intrinsic value of the company at the start of the prior quarter is X. He owns .60*X. The buybacks at the company make it such that his ownership goes up, but his selling brings it back down to 60% ownership. So, after getting his laundered dividend, he still owns .60*X. Thus, no impact to intrinsic value of his holdings -- but he has his laundered dividend in hand. Oh, I suppose intrinsic value may have gone up over the course of the quarter due to retained earnings and such, but you get the point anyhow -- his ownership of the company is steady-eddy 60%. Sometimes he will sell at higher or lower prices than the prior quarter's shares were repurchased at. It doesn't really matter if in any given quarter the prices are not the same as in the prior quarter. It won't always be higher, and won't always be lower -- over decades of consistent practice this washes out. I suppose a really nit-picky person would say that he loses the time value of money for 3 months -- oh well, I can live with that criticism. In the early years after his 60% takeover he may very well be selling some shares below his cost basis, taking a capital loss with his laundered dividend. That would certainly be the case if I took over 60% of a company -- everyone would be rushing to dump the stock. Over time perhaps he would succeed at growing the company and/or market confidence and the share price would rise, then perhaps his sales would be at 1x, 2x or 3x or 4x or whatever... relative to the cost basis of the shares. Hard to say how long it would take before the dividend laundering advantage gets too watered down. Even when the stock is a ten bagger there will still be a 10% discount on tax bill paid. Once the share price gets exceedingly high (as it tends towards infinity), only then will txlaw be correct in his suggestion that equal tax rates on dividends and capital gains would eliminate the tax laundering scheme. Gather ye rosebuds while ye may, I suppose... Anyhow, my example above explains why I don't get upset when management uses cash to buy back shares at any price. It's cheaper for me (in my taxable account) than when they pay a dividend. Besides, I like to believe that I only own shares at good prices to begin with (and sell when they get expensive).

My mother in law moved her assets over to Wells Fargo after Columbia Bank took over American Marine Bank (local bank that failed). Wells Fargo then proceeded so send her financial documents to our house by mistake -- I opened it without checking the name on the mail, we also do business with Wells Fargo so I just figured it was something pertaining to us. Now we know how much she's got and how it's invested -- unless there are more accounts we don't yet know about. She wasn't very happy with the bank! Bad first experience for her?

Impressive, that's 19.56% annualized.

Jim Rogers believes the commodities bull market will last another couple of years. It looks like he wants to be given a decade in order to predict that gold will hit $2,000. http://www.bloomberg.com/video/67100110/ Of course, I don't put too much weight in what he says. After all, go back to what he said in 1988: "Most stock markets around the world," echoed TV commentator and motorcycle buff Jim Rogers, "are going to go up dramatically ... but no longer than six months, at which point we are going to have a real bear market. I am talking about a bear market that is just going to wipe out most people in the financial community, most investors around the world. And in fact there are many markets I would short but which I will not be short, because I think they will probably close them down."

I saw it argued implicitly, but I don't think you are lying so I must have misunderstood. Anyway, in that post #33 you also said that you are getting warm to the idea that corporate taxes should be lowered. I totally agree with that, it would be good for the country. Of course, you'll have to grit your teeth because it will make the rich far richer as it will speed up their compounding machines. Anyhow, I don't think the growing divide is as much of a problem as the media portrays -- much of it is likely due to demographics.... there are simply more older people around today (baby boomers) and they've had longer to compound, or more years of savings and higher pay in their seniority and experience... that's all. But the generation won't live forever.... it's sort of like the pig in a python analogy -- once the pig gets digested the gap between rich and poor ought to go into decline. The statistic that the average age of millionaires is in the 50s says it all -- the more people you have age 50 or higher, the more millionaires. I don't believe demographics explains the entire story, but I think it is a very significant factor. For individuals, I think we should just have a consumption tax only. Some people would disagree with me on that, but as pointed out I can just put the money in a corporation and effectively have my own consumption tax. So, the idea of it being regressive may be true... but don't we effectively already have it? Okay, yes we already have it (sort of) for the idle rich, but not for the working rich. The idle rich can keep assets in corps, the working rich get hammered. By "working rich" I am talking about people who have high incomes but may not have much in the way of assets (so their tax is proportionally high relative to their means). So even though Buffett is not idle (he works), I would classify him under "idle rich" because his taxable income is a fraction of the true nature of his wealth. So... in summary the theme here is that the working rich can't tweak their taxable income to match their consumption but the idle rich can... and in the spirit of fairness I think the people at the top shouldn't get a lighter tax load here, so the consumption tax would settle this as it would give the frugal "working rich" more take home pay for reinvestment (and we both agree that money intended for reinvestment doesn't need to be taxed for corporations, so why is it different for individuals? Frugality should be cultivated). I think a means of making it up to the people at the very bottom could be dreamed up -- some sort of extra check in the mail or something if monthly income below a certain amount -- to be repaid at year end with filed tax return if a bonus or a raise bumps them up, or with penalties if they lied. For people who don't apply for the monthly grant, then no need to file a tax return. Perhaps just a far simpler method would be to not tax things like toothpaste, diapers, toilet paper, food... in other words what we generally think of as essentials. Going back to something you mentioned prior: You expressed your view that people should be taxed on their personal balance sheet. Effectively it could be implemented similarly to an estate tax yet without the death. That might actually be interesting to think about in a sort of thought experiment... I wonder what taxation percentage rate would be necessary, and do you advocate a progressive balance sheet structure? I mean, would the government ask for a tax equivalent to something like 1% of Buffett's assets annually? Higher rate? Berkshire would have been ordered to pay out an annual cash dividend to fund the taxes. That would have left less cash to reinvest in new fat pitches, so the growth rate would have been somewhat lower in the early years -- later years it doesn't matter because he can't reinvest it fast enough. On that topic, he says he won't pay a dividend because people would be competing with him in reinvesting the dividend, but I suppose he could have paid a special dividend in early 2009 when everything was inexpensive (to buy more WFC or AXP for example where Berkshire's potential ownership is capped by that bank holding company law). Very curious on what the rate would be. But if Berkshire is a $214B corporation today, and if Buffett were taxed at 1% of his net worth, then Berkshire would need to pay out $2.14B a year in dividends. And that would work fine for Berkshire, because they have healthy cash flow. But what about a company in a cash pinch? Their controlling owners would perhaps be faced with selling down their stake in order to pay their bill I suppose... No I certainly don't believe that. However I did joke about it -- you can probably search for the word "jokingly" and you'll find the specific sentence. But I'll save you the time: Cynically, I would jokingly suggest that they've lobbied to have that personal dividend tax put in there just to convince double-dividend-tax-conscious people like you to give them a lower corporate dividend rate within the holding company so they can grow dynastic wealth faster.

Don't forget who you are talking to... just a few posts back I explained that one really needs to acquire a controlling stake in an existing company in order to make buybacks work for tax laundering. To jog your memory, I was referring to why starting my own C corp doesn't work. Pick 60% ownership if that suits you... just don't jump all the way to "wholly owned" -- I didn't. Yes, I said "acquire a holding company", but I figured you'd understand what I meant... I would have not said the word "acquire" otherwise, for it would be far simpler to just start a new C corp (were it not for the dividend laundering thing). Perhaps you are just screwing with me... maybe I should stop taking the bait?

That's half the truth and I'll show you why. I will use the same tax rate in both scenarios. Scenario A: 1) You acquire a holding company for $100 per share 2) It buys back shares at $200 3) You pay just $35 in tax Scenario B: 1) $200 dividend is paid out 2) You pay $70 in tax Twice as much tax!!!!

You have been naively arguing that the taxes will be collected on the personal income tax return as distributions are paid out. That's true for people who don't have a ton of money already and who therefore need liquid funds, but it's not true of the very rich. They use them differently from how you envision -- they are effectively just an investment account that has a much lower tax rate -- and the tax rate can be driven to zero as they achieve scale. And that's pretty much what we disagree about. I am having a conversation about how the very rich use it as a tax shelter, and you are justifying the tax shelter by saying that the much smaller people take distributions and pay the tax.

No, the Roth 401k isn't dead. I had a Roth 401k at Microsoft up until I left in early 2008. The way for a high income person to get money into a Roth account is to arrange to quit and then get rehired. When you are unemployed, you roll your company plan into a Rollover IRA, then convert that Rollover IRA into a Roth IRA (and pay the tax due). Currently, there is no income limit for conversion into a Roth IRA. So once your rollover is complete, then go get your old job back again! Now, you can either do that every year (quit and get rehired), or do it in batches (like every 10 years or so). Microsoft wouldn't let me roll the company plan while I remained employed -- so quitting and being rehired was the only option. Maybe your company is more flexible, or maybe they are not allowed to by law... I'm not sure why Microsoft was inflexible on that one. This country has some really dumb laws -- I can't believe we can roll into the RothIRA but can't directly contribute to them! The other action I recommend is to max out your after-tax contributions to your 401k -- those will flow into the Roth as well! I always maxed out my after-tax contributions to the 401k -- the tax has already been paid on that money so there will be no tax when converted to Roth IRA, although you'll pay tax on any gains converted. A few months after I quit, they adopted the self-managed 401k plan. So now they have a relatively optimal 401k in place. Of course, they made me suffer from their lack of options for 10.5 years only to give the sweet deal to the new person getting my job.