ERICOPOLY

That's very helpful. And thanks to Bronco too. The IRS of course can't just write their rule in a clearer fashion.

It's funny how many people wonder without certainty why Buffett prefers to wholly own the businesses. I think it's fairly obvious why.

What's more likely... finding a quality money manager to just run your money (reinvest your dividends) for you if you are a poor allocator, or finding a CEO that not only has undervalued shares (reason why you own in the first place), but also runs his business in addition to knowing more about allocation than your genius money managers? And then you find out that this CEO wants to change the name of the business to his own, and swipe your cash flows as his "performance fee" or whatever crap he thinks up. Sometimes best to just hire the able capital allocator (money manager). Or if you are already a money manager, I suppose you could tell your clients that the CEOs know more about capital allocation than you do, so they'd better just find a more competent money manager in the first place. I find it frustrating when companies just sit on hoards of cash waiting for their shares to be undervalued so that they can return it to us common shareholder folk at long last. Their superior intellect of course informs them that we are better off to be treated this way. By the very implication of their saving dry powder for a buyback at such a moment, this must indicate that a wad of cash is just sitting there earning next to nothing in the meantime. They can start out looking like great value, which is why you buy them, but then later you find out they just want to stockpile the cash that you'd sort of figured was FREE CASH FLOW, but really isn't because it needs to rest for years to fund their ego. Meanwhile, there's all these other opportunities to purchase shares in other companies while we sit and patiently wait for the CEO god to find the right moment -- not all stocks are undervalued at the same time as we all well know. But the CEO god knows all, and can't possibly be missing the opportunities that we turn up. There's probably not a person on this board that can't allocate a dividend into a reasonable prospect when a given CEO can't find anything -- yet I find the people on this board more supportive of the idea of the all-knowing CEO. It's kind of ironic. Can you think of any companies you owned at the bottom of the market in 2009 where you would have liked these geniuses who know so much more than you to just give you a dividend so that you could take advantage? They were probably still buying back shares 9 months later furiously trying to deploy all that cash, even though the market price of the shares had already doubled. Point being, the bottom doesn't last that long -- not long enough for a company who can only buy 25% of the daily volume and where the company wants to purchase like 25% of the float or something. Generally if we're excited about a buyback opportunity we're talking about a MEANINGFUL and SIZABLE one right? The company with it's hands tied on volume is the absolute worst method of deploying cash this way at such a time -- except for taxes. Name any company you like -- I could have deployed any "special dividend" in seconds. It takes these guys months if not years to deploy the same amount of cash (on a per share basis) via buybacks -- just too many restrictions. Academically, it sounds enticing, but in practice these rules make it not quite so good. Then there is the factor of price -- all that buying by the company, does that support the price at all? In the absence of an official buyback program, could you get it cheaper with your dividend? After all, not everyone getting the dividend will reinvest in the same stock --- unless the company is doing it on your behalf.

1) Management can opportunistically time buybacks when stock is cheap (which could be at anytime throughout the year) but the dividend receiver has no such luxury What if the market crash happens during a blackout period and the company buyback plan misses the boat entirely or at least substantially? The management can pay the cash out faster than it can buy shares in the market. Shareholder can sit on the cash and wait for the right time. Management is restricted to purchasing something like 25% of the daily volume average -- the individual shareholder is not best served by such restrictions. I don't agree with management that feel they have to maintain a dividend when they can't afford one. They seem to desire a consistent payout, and this keeps them from bumping it up and down. They get too many questions otherwise and likely do it to make their professional lives more convenient. Microsoft however once managed a "special" dividend as did Leucadia -- don't see why such dividends are not more common, especially during market crashes when prices are cheap and there is too much cash to deploy in buybacks (I'm referring to that slow 25% accumulation rate). Eddie could have done a special dividend in late 2008 and early 2009 for example and shareholders could have grabbed more shares in a shorter period of time while the getting was still incredibly good. I'll bet the corporate pace of buybacks lags such an approach, but of course this is just my intuition again -- a "thought experiment". For an investment vehicle, I like the way Berkshire has been managed. He'll buy other non-Berkshire businesses -- the advantage here is that he has a zillion lifeboats he can sell if he ever needs cash. Somebody else trying to run an investment vehicle might take the attitude that his own stock being just as cheap as another stock, might buy more of his own stock. That person undervalues the importance of the lifeboats. If SHLD is an investment vehicle then I think he should be gobbling up more lifeboats. But if SHLD is merely an operating company, then Eddie is doing the right thing by just returning cash. Just another reason why I think he isn't running it as an investment vehicle.

Correct. Return to shareholders -- nothing more or less. No more so than to just buy more shares with the dividend. Is two quarters worth less than a 50 cent piece? It's more tax efficient in the buyback route -- but taxation is the only source of added value. Correct. To quote Malboussin: "You are making an active decision if you do not sell any shares while a company is buying back stock. Doing nothing is doing something— increasing your proportionate stake in the company by effectively reinvesting." The key fact is that he is "building value" for you via buybacks no faster than if you are getting more shares through a DRIP. So why does he do it? Probably he wants ESL to buy more shares, but he doesn't want to pay tax on a dividend in order to boost their stake. Whatever his motives for the buyback, my point is that it's just a tax-efficient dividend of your free cash flow. You can choose to hold your increased stake or sell -- no different from getting a dividend and choosing to buy more or not buy more. Sorry, but I like that so much I am going to repeat the question: Is two quarters worth less than a 50 cent piece? Forgive me if we're saying the same thing in different words but there are two questions as I see it. One concerns whether a reinvested dividend is theoretically and practically equivalent to a stock buyback. The second is whether stock buybacks can grow per share business value. Yes, well I don't disagree that per share business value goes up. But that's overrated -- I mean, compared to just having more shares. I don't see as I put it any advantage to your having 1 quarter that grows to 50 cents in value (via buyback), or instead just acquiring a second quarter (via dividend). When I comment that no special value is created, I'm referring to the alternative action which is to just return the cash as cash. Value investors are a funny lot -- you don't see them bragging about master capital allocators that pay dividends. Like "Oh my god man, that person is a genius because he paid a dividend so now I have purchased an additional share and therefore I now own more cash flow!". Either way you own more of the business cash flow... it's just a matter of tax, and somewhat a little bit trading costs. Value investors don't cut through the crap and just say "wow, Eddie saves us tax and trading costs"... no, they speak of the buybacks as if there is some value conjuring force at work. As if there is something special to SHLD other than the businesses it holds. And yes, it's true that SHLD is a portfolio of operating companies. So is Proctor & Gamble -- but we don't speak of PG as an investment vehicle. I don't know whether a study has been done, but I intuit that over the long haul you'll come off ahead (if you have sufficiently large positions) if they always just buy back shares and you sell an offsetting portion after getting the news on the amount and price. Right now the dividend tax rate is low, but when they restore it to prior levels it provides a large margin of safety between the price paid in the buyback and the price you sell it at a few months later. Over time it will wash out (sometimes you sell higher than they bought) and the tax benefit will largely put you ahead I suspect. Why in the hell would we ever own shares that were overvalued? So why ever worry about "paying too much" in a buyback? Sounds like an argument for academics, but not value oriented people like us who don't own overvalued stock right? Isn't that just simple investing sense?

Correct. Return to shareholders -- nothing more or less. No more so than to just buy more shares with the dividend. Is two quarters worth less than a 50 cent piece? It's more tax efficient in the buyback route -- but taxation is the only source of added value. Correct. To quote Malboussin: "You are making an active decision if you do not sell any shares while a company is buying back stock. Doing nothing is doing something— increasing your proportionate stake in the company by effectively reinvesting." The key fact is that he is "building value" for you via buybacks no faster than if you are getting more shares through a DRIP. So why does he do it? Probably he wants ESL to buy more shares, but he doesn't want to pay tax on a dividend in order to boost their stake. Whatever his motives for the buyback, my point is that it's just a tax-efficient dividend of your free cash flow. You can choose to hold your increased stake or sell -- no different from getting a dividend and choosing to buy more or not buy more. Sorry, but I like that so much I am going to repeat the question: Is two quarters worth less than a 50 cent piece?

I take it you don't think he's right about the following: But there is an important difference from the investor’s standpoint. With a dividend, all investors are treated equally. When a company buys back its shares when they are overvalued, on the other hand, there is a wealth transfer from the continuing shareholders to the selling shareholders. Symmetrically, when a company buys back undervalued shares there’s a wealth transfer from the selling shareholders to the ongoing shareholders. While the company may return the same amount of cash to shareholders through a buyback or a dividend, how value is distributed can be very different. He isn't saying anything wrong here. It could be restated as "automatic dividend reinvestment plans are a wealth transfer to selling shareholders from buying shareholders". I'd completely agree with that, if the shares are overvalued. If undervalued the wealth transfer would flow in reverse. So he is correct once more. The trick is to become one of the sellers. That's obvious, we already knew that.

The buybacks have been mentioned several times throughout this thread... I can't give him any credit for being a master capital allocator related to his buying back shares. No more so than a company that pays dividends is a master capital allocator. The buybacks are merely the return of cash flow. Stop thinking of the buybacks as any special recipe of value creation here. The only thing that matters is the price to cash flow. This other matter is a distraction. The only thing "masterful" about the buybacks is that he is returning the cash flow to you in recognition that he has NO MEANINGFUL USE FOR IT -- if that isn't an endorsement of SHLD as not being an investment vehicle, then I don't know what is. At least he is returning the cash flow instead of devaluing it via bad investments... that I'll give him credit for.

Yes, but what is the price of S&P500 telling you? Not to pick on you -- a lot of people say the bond market tells us this or that. What does it mean? What did the bond market tell us in 2006?

Only 16% of their assets in Spain/Portugal and most Latin American operations in the top 3 by country with ROEs in the 25% range. Currently priced at 1x BV. Precisely. I hope you get your next European scare (I will buy more).

It depends -- the rules of whether or not it is treated as a sale depend on a few factors, such as when the put is closed out, when you purchase additional puts or hedges on that stock after closing out the prior hedges, the strike price of the put (whether it protects any gain), etc... For individuals the date at which you close out your puts will at the very least become your new date of acquisition for long/short term capital gains considerations. For example, if you hold the stock for 20 years and then buy puts on it today, but close the puts out next week and then sell the stock the next day -- that makes the holding period short-term and you owe tax as a short-term capital gain. The tax people aren't stupid -- they understand that by purchasing a KO put to protect your KO gains you are avoiding just selling the stock. So they treat you as if you are doing just that. Indirect hedging will avoid the constructive sale rules. Prior to 1997 (when these rules went into place) you could just short the stock in perpetuity to lock in the gain on the offsetting long position without EVER paying tax! Combine that with naked short selling (no borrowing costs) and you are in tax nirvana.

Having $50k in the 401k and contributing another $10k I suppose is 20% growth in the balance. Doesn't say much.

Buying puts on Coke would have triggered a "constructive sale". That's why I suggested hedging against the index as Fairfax does.

He is right: You are making an active decision if you do not sell any shares while a company is buying back stock. Doing nothing is doing something— increasing your proportionate stake in the company by effectively reinvesting.

Whatever happened to dengyu the nugget? I seem to recall enjoying reading his posts before I joined the board as a member. He is one of the two people I pointed towards this board (the other being Santayana) -- but neither has posted in quite some time. Nothing is wrong with his health.

I know, an unfortunate ticker. Whether they continue to return cash to shareholders via dividends or buybacks, I will be happier with the more efficient of the two. I will leave the emotional/religious preferences to other people like you.

I own a bit more than 1% of the outstanding shares of CRVP -- learned about it when Harry posted it. He then deleted the post, somebody asked why, but no response. Given how hard it has become to accumulate, I think I know why. It's a pity that I can't get a lot more without significantly increasing the bid.

Glad to see he likes Banco Santander -- I bought some recently.

Hey Eric, I'm definitely not arguing with you about the bubble. I think we are on the same page. Right now, I'm focused on what instrument I should use for this idea. The banks might be better capitalized than I originally thought, so they might not be best thing to short. CDS are interesting, but I think buying them would be a pain. From what I understand buying one requires a lot of capital and if I do decide to this is the best option, then I'll have to pool my capital with a few partners. Also, even though I believe the CDS will widen during a crisis - I'd rather have better fundamental analysis so I know when to sell the CDS. Also, CDS depend on a "credit event" - which, I'm not even sure what that means. So, there is lots of me to figure out and analyze before I even come close to making a decision. I'd think Munger would suggest me to put this in the too complicated pile and move forward, but I find this idea extremely interesting. You've been chatting with Yu about this -- I know, I've been talking with him as well about the CDS. I don't believe the SEC allows us to purchase options on foreign exchanges, so the CDS is pretty much my only option. And like you said, what a pain trying to get CDS.

I'll agree that it is "more" likely, however, when a rental home is down 50% in value the only thing stopping people from walking away is debtor's prison. 12% of households in Australia report rental income on their tax filings, and 70% of them are negative cash flow. Those are the people with the incentive to walk away. People don't walk away after a 5% drop... but I don't think Australia is headed for a 5% drop. Annual rents in Australia (before expenses like repairs and mortgage interest) average 3.5% of the home price. In 1989 it was 8%. The other argument you'll hear in Australia is that the fundamentals (demand and scarcity) are driving housing prices... well, it's interesting that it has not the same impact on rent, eh???

Furthermore, this article states that Florida is among the three states with the highest defaulters: http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-federal-national-mortgage-association-fannie-mae-freddie-mac-terence-edwards-bank-foreclosures-strategic-mortgage-defaults-delinquent-home-loans-2800.php Here is the list of non-recourse states: http://wiki.answers.com/Q/Which_states_are_non-recourse_states_for_mortgage_debt

It will look like Florida then perhaps. First mortgages in Florida are full recourse. I'm in Australia right now so I get a front row view of the spectacle of denial. And yes, that's one of the arguments here. Additionally, HELOC loans in the US in all states are full recourse. This of course means that people are prudent with them right?

I tore a tendon 3 years ago running on a treadmill, less than a couple of months after I'd quit my job. The problem is that my first metatarsal on my left foot protrudes dowward at too sharp an angle, so the ball of my big toe is on a plane lower than the balls of my other toes. This forces me to rock outward on my foot when I walk (supination) and that puts stress on the tendon (it's the tendon that always gets swollen when you twist an ankle). In short, it's a partial club foot. That was the first time I realized there was something wrong with my foot. So the doctor is going to clip and lengthen my achilles tendon to give it slack so that he can straighted (via cutting) my ankle bone. Then he is going to cut and redirect the angle of my first metarsal and also cut and feed slack to that tendon. Then he is going to stitch up the torn tendon and tighten some other tendon in that area. Six procedures. I should have had this done right away nearly three years ago but I didn't ??? Finally I won't be limping around anymore as I've been doing. Oddly enough I'm looking forward to getting this done and behind me. Eric, Consider prolotherapy before surgery. Check out caringmedical.com :) I enjoyed reading about prolotherapy tonight, thank you. Ironically I view this surgery as preventive medicine -- if the bones don't get corrected the prospects for re-injury aren't favorable.

I have my pen and paper ready now. Go ahead...

I guess it's been six years now since I found the board. Thanks Sanjeev!