ERICOPOLY

Because they are used for swapping risk. Loss averse people use them.

You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention. Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies. You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names. These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning. I think this strategy looks quite appealing, but during market corrections, correlations among the 100 stocks tend to become close to 1, so the downside may not be truly diversified. The point of diversification isn't to prevent the portfolio from declining in market corrections, it's to prevent you from single-company risk. So you don't wind up being 100% concentrated in JPM when the next London Whale comes along on a scale of 20x the size of the last one.

Similar to something else I think about, which is to buy out-of-the-money puts on individual companies that you both understand and want to own in the next crash. Once their stock prices decline to the strike price of the puts, you have enough premium value in those puts to flip them into calls. Then you profit on the recovery as the calls appreciate. The benefit here is that the premiums for individual names might skyrocket -- this ensures you will be able to afford them without stressing out about the premiums. Or in taxable portfolio margin account, just keep the puts and load up on the common (hedged by the puts). This way there is no taxable event from selling the puts.

You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention. Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies. You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names. These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning.

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here. So if the insurance float is used to buy stocks, they need to be MTM, but if the float is used to buyout a company, then it is no longer needed to MTM, because there is no market to mark to, am I right? In this case, I think it is much less risky. His insurance float is not invested in wholly owned businesses. His float is invested in fighter planes parked on his carriers. He can comfortably park more fighter planes on the carriers due to the presence of the destroyers. The destroyers earn good returns on their own, make the whole enterprise safer, as well as boosting the fighting capability of the carriers (more fighter jets). I like this analogy because "insurance carrier" is a common term.

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here.

I don't know for sure if Roth or not -- however I think they were only introduced for the first time in 1998. Then there were income restrictions on doing a Roth IRA conversion. Potentially he did the conversion in 2010 when the income restriction was lifted. The low end of the range is $21 million and the upper end is $103 million. This article claims it to be a SEP-IRA (not a Roth IRA) -- however I would think he would have done a Roth IRA conversion by now (in 2010) so that his kids can inherit it (and so that he doesn't have to make forced withdrawals). Especially since the tax rates were better. http://www.bloomberg.com/news/2012-07-15/the-secret-behind-romney-s-magical-ira.html

I gave his $100mm some thought. This is a Regular IRA (not a Roth IRA). So does he really have $100mm? He is 66 years old. So I figure he's pretty much stuck with a 40% income tax (either in his life or upon his death) on those assets. That knocks the effective balance down to $60mm. Then I figure he is never going to spend all of the assets ouside of his IRA. Therefore, he will effectively have to pay inheritance tax on the IRA assets. At 40% rate, that knocks it down to $36mm. So he doesn't really have anywhere near as much as people think. In fact, the Treasury has about 77% more money in his IRA than he does! He barely has 1/3 of what people believe.

Ericopoly - I hope you don't take this the wrong way - but I'm really surprised you haven't heard of this before. I say I'm surprised because I view you as the thought leadership on this board when it comes to tax avoidance and investment schemes. I say don't take it the wrong way, because I've thoroughly enjoyed and benefited from the schemes you've proposed in the past! Tax avoidance schemes (legal ones) might be a close 2nd favorite topic of mine, behind stock research. If you haven't already read about it, you should read about the methods Mitt Romney and Bain employed that resulted in him having $100mm+ IRA balances. The practice is questionable, because the assets were purchased at (arguably) undervalued prices). He was doing this back in the 90's though; not sure if the IRS was paying as close of attention back then. It's hard to offend me because I'm a retail investor, not a pro. I learn these things piecemeal as I blunder through life. The last couple of days an opportunity came along and I said "I don't know how that works mechanically". So then came the question to the board. Thanks for all the help (to all the posts above).

It is 84 at my house right now (Montecito, CA). This is ridiculous beach weather :D :D :D Investing in farmland and ski resorts must be difficult. http://online.wsj.com/news/articles/SB10001424052702304244904579278321514522650?KEYWORDS=california+drought

I get an immediate gain of 66.6% (assuming estate tax is 40%), yet I can take back the funds at any time. So I just think that's too great to pass up. I suppose it would be less exciting of an idea if estate taxes weren't a concern.

Let's say my wife and I each give $14,000 to my son's 529 plan. That's $28,000 total. It is removed from our taxable estate because it is considered to be a "gift". It's now in his name compounding away tax-deferred. Should he spend it on anything other than education, he is going to pay a penalty. Now compare that to.... My wife and I each give him $14,000 to a trust in his name. That's $28,000 total. It is removed from our taxable estate because it is a gift. It's now in his name compounding away tax-deferred in a variable annuity. Should he spend it on anything other than education, there is no penalty (provided he is retirement age). So you really aren't abusing anything at all by overfunding a 529 plan. The way I see it, I can withdraw the money if I change my mind or reassign it to another beneficiary. Thus, he has to behave himself because I can take it all away from him at my discretion. So, the IRS really has nothing to bitch about. Either way, it's not like they are missing out on any revenue. They're not! The main benefit of the 529 is the kid can't behave like a spoiled brat or it gets taken away.

I found this link: http://newdirectionira.com/private-equity.html So it appears I can invest my Roth IRA assets into shares of a private company (should such an opportunity come along ;)) Any ideas on which major companies offer this kind of IRA, and who you would recommend? To my knowledge Fidelity doesn't offer this type of IRA. But my idea is to open an IRA account (with the right company) and transfer some cash from my Roth IRA to that one, then invest in the private equity placement.

I have an inkling that if that Vice Chairman title has anyone on it, it will probably be somebody whose name ends with "Spiers". It would only make sense. Cheers! Instead of saying "I have nothing to add to that", she can just say: "yeah, yeah, yeah, yeah, yeah" "yeah, yeah, yeah, yeah, yeah"

So once we emerge from this recession, we perhaps have another 57 months to go before the next one (that being the average time between recessions since WWII). So next recession in 2018+?

You could always short RIM to have a 0% net exposure. BeerBaron That would be an interesting psychological experiment. I doubt the critics of the RIM investment have the same amount of conviction in shorting RIM to hedge their FFH, as their vocal grumblings from the peanut gallery.

“Too many cities are in peril because they over-borrowed,” Mr Ravitch said. Yeah, well, making muni bonds tax-exempt probably had something to do with that. The cheaper the interest rate, the more you will borrow. Eventually, you wind up with the same absolute interest payment burden but a much higher absolute amount that you owe.

You're right about that. The 5 year waiting period is only for money that was "converted" to RothIRA.

But that's also one benefit of Roth conversion. If you do want to take it out early (without paying that 10% penalty), then do a full Roth conversion and wait 5 years. Then you can take the "day of conversion" value out of the account without penalties (leaving behind whatever gains are left since conversion). You are allowed to take out the already-taxed contributions and already-taxed conversion money first. That's sort of nice. So you can cherry pick some of it for a completely tax-free withdrawal before 59.5 -- but as long as you've waited 5 years.

It only becomes tax-free when you are 59.5. Any gains withdrawn from the account before 59.5 is a taxable gain (secondary taxation). Until you are 59.5, you can only withdraw tax-free the amount that you contributed or the value at time of Roth conversion. Even if you try to withdraw that already-taxed money, they'll still hit you with an early withdrawal penalty if you attempt this within 5 years of Roth conversion or after-tax contribution (I think the penalty is 10%).

How about you put a "lunch with Sanjeev" on EBay. The winning bidder gets your stock tip.

Then make it illegal to smoke pot then. It's illegal to travel by car without a seatbelt, because it is dangerous to ride in one without a seatbelt. When there is a safety device readily available, you can make it the law that people make use of it. Keep the cars, lose the needless injuries. There are other ways to inhale it than smoking it -- technology has moved on. There are vaporizers now that many chronic potheads utilize -- they do this for health reasons because they are afraid of the health risks associated with smoking. All you have to do is Google for "weed vaporizers": http://weedvaporizers420.com/ The guy selling the vaporizers is probably going to make a lot of money. It's not even illegal to sell them under Federal law.

So if I have a 10m Roth IRA with a cost basis of 300k, she would get 5m in a 50/50 split. But that 5m is probably 150k cost basis, and 4.85m "gains". So the government would tax that gain as a taxable withdrawal.... and at 50% tax rate in California, it's probably something like 2.425m in taxes to be paid... so then the courts would likely take more of my assets to help her settle the tax bill. All this despite the tax bill supposedly already having been settled at time of Roth conversion. It's a double tax.

Let's say you go with the Roth, then later get divorced before you are 59.5. Your spouse could wind up getting 1/2 of it. Then, any taxable gains (in the Roth, assuming it appreciated since the conversion) she takes from you will be taxed! So beware the double taxation.

Hey, I find if I don't discuss my thoughts on an investment I'm missing out on smarter people cautioning me about doing something stupid. It's a good sounding board. Lose/lose situation IMO.