ERICOPOLY

Gio, I think this is a matter of personal responsibility. If the stock is overvalued and you do not sell out your shares, then you are the one behaving stupidly. Are you not making an implicit "buy" decision every single day that you hold your shares? I mean, you can go back to cash at any time... so by continuing to "hold", you are in fact making the same capital allocation decision as if you were buying new shares. So it's you, you, you! You can't ever duck and blame management.

Forgive me for pointing this out, but your tax rate on the share-repurchase "dividend" is less than what you are stating, because the tax is not paid on the cost basis. So of course the tax might very well be zero on the pass-through sneaky dividend-laundering buyback. Lastly, the very guy that first promoted this thing through value investing circles is Mr. Warren Buffett himself. He has a scheme where 99% of his net worth is in Berkshire, 100% of his Berkshire common stock holdings are held within insurance companies, and the tax rate on those dividends is only 14.5%. Oh, and did I forget to mention that his tax rate on capital gains is 35%??? Geez, no wonder he's got everyone singing the dividends over buybacks song. He's got everyone painting his white fence for him.

It's real alright. And people who theorize about whether dividends should be paid or buybacks should be paid... blah blah blah They shouldn't care! They don't even own overvalued stocks in the first place (being "value" investors), and if they did, then it's their own frigging fault for not having sold out! Talk about a case of living in an ivory tower... sheesh!

Tax situations differ for every person, buy you put yourself at a big disadvantage if you buy something that has a high tax rate for you, but a low rax rate for most investors. Sometimes not buying a certain asset class might be the best move: if you indeed need to pay a 45% dividend tax as an Australian on a foreign stock you are basically screwed by the government, and owning a dividend paying foreign stock is just not an option. But you might be able to work around the issue. Buying derivatives (such as options, or CFDs) could be a solution: their pricing does include the expected dividend, but since you don't receive the dividend you don't need to pay the tax and the party writing the option is most likely not paying any dividend taxes. Or maybe you could setup an offshore holding company. If you face high taxes you either have to find a way around it, or just not buy it in the first place. You aren't going to get anywhere with that unless you go with something like an insurance company which holds the passive investments. You can't simply set up a foreign corporation for yourself where you do your passive investing. http://www.borelassociates.com/topics/Using-Offshore-Holding-Companies.pdf Basic Anti-Deferral Regimes For a taxpayer to benefit from deferral, the foreign entity that holds the income producing property or activity must be a foreign corporation. If a U.S. taxpayer invests through a foreign entity that is treated as a partnership, branch or disregarded entity for Federal income tax purposes, it will remain subject to tax on its allocable share of the entity’s income, regardless of whether the partnership is formed under domestic or foreign law. Accordingly, the general rules applicable to the taxation of foreign corporations owned by U.S. persons must first be considered. There are two main anti-deferral regimes under which the U.S. imposes tax on the income of a foreign corporation with U.S. shareholders. These regimes operate by applying special tax rules to shareholders of foreign entities that qualify as either CFC’s or passive foreign investment companies (PFIC’s). Both sets of rules are aimed predominantly at taxing a U.S. shareholder on the foreign corporation’s passive and “mobile” income (i.e., income that may easily be shifted to low-tax jurisdictions). If the rules apply, the U.S. shareholder may either: (1) be taxed currently on the foreign corporation’s income, despite the fact that no income was repatriated to the shareholder through a distribution; or (2) face a somewhat punitive interest charge (in addition to the shareholder’s ordinary income tax liability) on an ultimate distribution to the U.S. shareholder or disposition of the entity’s stock.

Ironically I believe high tax rates help support high asset prices. I see it here in local luxury real estate. The top income tax rate is over 46% in California. So, you see a property rented at gross rental yield of 4% and you would think it's overpriced, but keep in mind from the renter's perspective it eats up 7.5% pre-tax income . So the homeowner earns 7.5% gross imputed rental yield if he buys the home he was renting previously. Even though he'd only earn 4% pre-tax if he turned around and rented it out! Normally, 7.5% pre-tax gross rental yield from a landlord's perspective would be an appropriate rent. That's the same rent the homeowner earns for himself. Therefore, it makes sense to buy the home that you are renting even if your rents represent only a 4% cap rate for the landlord/investor.

Well Eric, I think you are right. But only if you don’t look at cash as a strategic asset… There are not many people out there I trust to invest my free cash flow in my stead… And those whom I trust do not buy back shares at these prices… So, if someone instead is buying back shares at these prices, I don’t trust his judgment and I would much rather have the money to invest myself… Even if this means starting with 67% of the original money (assuming a tax rate of 33%). Do stupid things with $1, or do smart things with $0.67… which would you prefer? :) Gio I would prefer starting with the $1 rather than with the systematic destruction of 33% of value. Especially since it's the democratic way. People like you who don't want the stock buyback can just sell an offsetting amount of shares -- quite possibly tax-free if your cost basis is at or above where you are selling the stock. So everybody wins.

Rising US consumer spending: http://www.bloomberg.com/news/2013-11-12/bank-of-america-ceo-says-u-s-consumers-are-spending-more.html?cmpid=yhoo

You only get a dollar back through dividends if you don't pay taxes. Supposing the dividend rate is 33% (like mine), the stock has to be 50% overvalued before the dividend is the better option on a relative basis. Some people pay 45% on their dividends (an Australian holding a foreign stock). That would be a situation where the buyback is always better unless the stock is overvalued by more than 81%. Just run the math.

What is her interest rate on the student loan? Even if it is 5%, that's only $12,500 per year. All that matters really is the cash flow. Her problem isn't the $12,500 she pays on the debt... it's the $25,000 she is bringing in. Get one of these school teacher gigs that start at $50k over on that other thread. A teaching job is a great gig for a working mother, as you've got summers off when your kids are at home with nothing to do.

Here is a macro musing for you... I see parallels of today with the 1970s.

For a more exact hedge, you should just buy the product that prem shorts. Otherwise, if the equity price stays the same, you would lose on your calls (the time component) and break even on the index. Way too dangerous. FFH could go down with the market at the same pace. Then you are doubly screwed.

This hindsight hedger says that he should have just bought an at-the-money index put and rolled it. That would have cost a lot less. Similarly, any private owner of FFH shares that didn't like the hedges could have done the same (purchasing at-the-money calls to offset the onslaught of losses from the look-through index shorts). Next time he hedges, and you disagree, just buy index calls to put a max cap on your share of the potential hedging losses.

There are a lot of intangibles that go into a "good school". My daughter is in second grade public school and she has a violin assigned to her that she takes home and practices with -- brings it back in to music class once a week. Right, whereas at a lot of schools they don't do that. This is for all of the kids in second grade. Also, optionally you can sign them up for enrichment classes that meet for an hour after school each day. Take a look at the variety here, it's totally awesome: http://www.montecitou.org/cms/lib/CA01001556/Centricity/Domain/67/Fall%202013%20After%20School%20Program.pdf So I went to a private school that wasn't anywhere near as good as this public school. I remember class sizes being 20 or so, whereas here at this public school it's about 15 kids per class (and to top it off, there is a teacher's assistant in each class).

We do it though eventually. We concentrate the bright students and send them to place like "Stanford". Right.... so do we just eliminate private pre-schools? Only private elementary schools? Only private middle schools? Only private high schools? Or do we also eliminate private Universities? I mean, it's such a good idea to get rid of private schools, so why not go all the way?

New public offerings are sexy, but beware when they split -- that really keeps you up at all hours of the night/morning. You get a better night's sleep going with a mature stock, but not as sexy.

It's also just plain common sense that there will be more wealth disparity as the boomers get older. Demographically, who are millionaires? People over 55. Where is the age group of the boomers? Oh yeah, people over 55. So should we or should we not have more wealth disparity with the boomers being over 55 versus 20 years ago when it was merely 35 year olds? Damn right we should!

There are no expenses to pay if everyone is retired. No police, no firemen, no teachers. No property tax collectors. No prison guards. Nobody on temporary unemployment. The have roads, fireman, cops, etc... etc... in Australia too. They have high sales taxes, high income taxes, etc... etc... But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income. So when you can best afford the tax, you pay it then. They don't prey on the weak broke homeowner like a sick society.

The have roads, fireman, cops, etc... etc... in Australia too. They have high sales taxes, high income taxes, etc... etc... But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income. So when you can best afford the tax, you pay it then. They don't prey on the weak broke homeowner like a sick society.

One thing that is positive about property taxes is that people who can't afford to pay the tax can sell the property and move to an affordable place. This keeps the properties cycling through the system. A low ( or non-existent ) property tax causes old world problems ( ala the lords and counts of England who keep passing their titles and land to their heirs) which I think is not desirable. Australia has a land tax, but it only applies to the land value. Plus, everyone is exempt for their primary home, and you get a $400,000 land value exemption which allows you to have a small holiday home without taxation. But that land tax is only for land, it doesn't apply to improvements. So that fixes the argument about people hoarding parcels of land all over the place -- if you try that in Australia, you are hit with the land tax.

Property tax though really just funds schools - Texas has no state income tax. Strangely enough I dont see property tax as a housing expense. Its more of a general tax, similar to a medicare levy, gas tax, or anything else. Property tax is embedded in rents so pretty much everyone pays it. Remove property tax, and add back a higher sales tax or Regarding real estate, I think RE can make a good investment if you can find something that cash flows. You can get a great cash flow return on properties in Houston State income taxes at least make more sense because they tax you in the year you make the money. They take it right out of your paycheck before you blow it on a bad investment, a new car, gambling, drinking, whatever... you settle the bill when you can afford to, in proportion to your means of income. Where did the money come from to buy the house in the first place? Income... after-tax income. A lot of people work and retire with their only asset being their house (paid off). So that is the sum total of all of their after-tax savings. And then they just keep taxing that same pot of money over, and over, and over again. I'll tell you why it's messed up -- once you retire, where does the cash flow come from to service the ongoing tax bill? That's just the thing... replacing the property tax with an income tax would give people a secure retirement by allowing you to plan what your expenses will be. You can plant a little garden, walk to the stores (get rid of the car), cancel cable TV.... but the property tax is the thing that just keeps coming after you every year, and keeps rising with property inflation.

So let's say you buy a $500,000 home in Texas, and pay 2.2% tax on it every year. You've got a first year tax bill of $11,000 which will grow every year at the rate of increase in the market price of your property. So... How much money do you need to put in an extremely conservative fund that generates 2.2% income every year to service the tax? And that 2.2% yield is going to predictably rise at the pace of the market value of your home? This has got to be one hell of a blue chip investment! You probably need to set aside at least another $500,000 more in this investment fund just to be sure that it will service the tax in perpetuity. But again, where is this investment to be found? Well, probably have to buy your neighbor's house too and rent it out.

Florida got into a lot of trouble -- it too is full recourse. But it's been one of the worst markets we have. So I feel like the recourse/non-recourse argument is full of holes.

Sickeningly true. It seems to compound capital, you need to do your best to avoid purchasing real estate. I live in Texas, in an area with crazy demand for housing at the moment (Austin). I calculated all in costs for the house we have a mortgage on versus renting and then investing the principal amount. I realized that the low interest rates + leverage from the mortgage was hard to beat from an investment standpoint, especially when taking into account the cost to rent. Here is what I calculated: cost to own = interest portion of mortgage + insurance + taxes + other costs versus cost to rent = monthly payments For a comparable place, we would be paying much more in rent, so we would not get the increase in equity every month (excluded from the cost to own above). then comparing possible appreciation of the home leveraged 4:1 (I own 25%) versus my own investment returns using the 25$ of the house, which are unlevered, I was concerned that I couldn't match the levered returns. Additionally, the house diversifies the investments and the low interest rate is somewhat a hedge against inflation. Prices are currently very high in Austin for real estate (and rent), so if someone has a better way to think about the above, I'd be glad to hear it; I kind of wanted to sell the house this summer and move downtown. I think it is just too cheap to live in my house right now, versus renting. Nutty! 2.2% of the current market value. So if you bought the following home in 1972 and raised your kids in it, you are now paying $22,000 a year in property tax: http://www.realtor.com/realestateandhomes-detail/3505-Country-White-Ln_Austin_TX_78749_M79473-84242?row=6 How much social security do you have left after you pay that $22,000 of tax? There is something missing from the state flag of Texas: A hammer and sickle! You might be 90 years old today and bought that home when you were 49, thinking you would retire there on your pension. Now the state says it's theirs because you can't pay your taxes and they come with the sheriff to kick you out of the home you already bought and paid for!

Suppose you buy a house in Texas when you are 30 and you live in it until you are 85. You wind up paying 1.8% every year in property tax. So you buy the house twice. They don't assess property tax on your primary home in Australia. So like, when you Texans say Australia has this bubble and that bubble, look at the bubble world you live in. Every 10 years you have to pay another 18% for your house.

You can still purchase many of them through their US wrappers. For example, FFH is an international stock, but you can still purchase it in a Fidelity IRA -- you just buy the wrapper... FRFHF: http://finance.yahoo.com/q?s=FRFHF&ql=0 Is it a US listed stock? No! Can you buy it in your Fidelity IRA? Hell yes you can.