Tim Eriksen

You are exactly right on point #2. Buffett was pointing out that some who lost their homes took out more in a refinancing than the amount of equity they had from their original down payment and monthly payments. His point was not to rip on the homeowners but to point out that they technically didn't lose money and that banks were left holding the bag. Granted most frittered away the money they took out on equity loans. As for Buffett's recent track record - it is unimpressive when viewing the opportunity that the 2008/early 2009 meltdown provided. If not for the favorable deals he got due to his reputation, it would be even less impressive. A younger Buffett would not have got into the utility or railroad business at the price Buffett paid. The returns are just not that great. The businesses are too capital intensive. considering Buffett prefers a capital intensive business than one with no opportunities for reinvestment, I would say he bagged the Elephant he wanted. Interesting. I see (or used to see) the opposite. He used to speak of royalties as being the best business. If he prefers a railroad or a utility over a See's Candies type of investment then he has changed tremendously and that might explain his decisions and performance over the last decade. Purchases of NetJets, Burlington Northern, etc. are lower risk, low return, and poor FCF investments.

You are exactly right on point #2. Buffett was pointing out that some who lost their homes took out more in a refinancing than the amount of equity they had from their original down payment and monthly payments. His point was not to rip on the homeowners but to point out that they technically didn't lose money and that banks were left holding the bag. Granted most frittered away the money they took out on equity loans. As for Buffett's recent track record - it is unimpressive when viewing the opportunity that the 2008/early 2009 meltdown provided. If not for the favorable deals he got due to his reputation, it would be even less impressive. A younger Buffett would not have got into the utility or railroad business at the price Buffett paid. The returns are just not that great. The businesses are too capital intensive.

Fairfax accused of borrowing shares of Odyssey Re in order to meet 80% ownership level instead of buying them, thus claiming false $400 million benefit. Accuser is one of the hedge funds who are being sued for market manipulation by Fairfax. http://www.finalternatives.com/node/19910

Every investor is different so there is no right answer. For me it is usually a matter of a few hours. A good stock (opportunity) will jump out at me. Part of that is due to staying within my circle of competence and focusing on smaller stocks that are simpler to understand. As much as Buffett talks about having read a company's annual reports for thirty years or more before buying, he also notes that he has made many purchases within a few hours. He can do that because he knows what he is looking for. There is nothing wrong with being thorough, but many investors have a much more pessimistic (cautious) mindset than Buffett. They are constantly looking for flaws and fear the future. In addition, they probably have not spent enough time thinking through what they are looking for. What makes for the ideal investment in terms of margins, capital intensity, sales growth, ability to reinvest in the business? If it took me many weeks to decide, I would be concerned about how clear of a margin of safety there truly is.

Interesting site. I always enjoy anything related to unlisted stocks. I have owned three and written about 3 of the 5 you posted back in 2004 in Walker's Manual Unlisted Newsletter, and also attended an annual meeting of another (APTL). Steel is on my list of things to research. I'll bookmark it and definitely check in periodically.

People can believe what they want to. You are free to believe in talking snakes, people rising from the dead, golden tablets ascending to heaven... whatever floats your boat. You can even believe that marriage is strictly between a man and a woman. Just don't force others into your belief system! That's when you are taking away freedom. Does this mean you would vote in favor of allowing polygamy? If not, why? I don't need an answer I am just noting that your philosophy, if consistent, would have to say yes to polygamy, prostitution, drug legalization, etc. They are all consenting adults.

I will never be the first to defend Tilson, but in this situation he is right - pre tax earnings do NOT include insurance earnings. Look at any of Buffett's letters - he tracks non-insurance EBT and investments both on a per share basis. Tilson adds zero originality to the analysis, he just copies Buffett. Actually if you look at Tilson's slides he does use a portion of the insurance earnings (see note on slide 15). He includes "half of the $2 billion of annual profit over the past nine years."

You want to me explain what Politicians were thinking? Thanks for an easy question. Based on history I would have to say they acted largely in self-interest. They presumably thought lowering the rate to 15% would help their reelection chances by either improving the economy or improving their fund raising, or some combination of both. I would agree that a dividend franking system makes sense, but they must have believed that the other side would attack them on it, or no one proposed it. Washington DC suffers from serious groupthink. I read the other day that on average US corporations have paid 25%. It did not detail how the calculated the figure, which would have been very helpful. In the last two years the article said the rate has plummeted to I believe less than 10% due to tax credits and the like. At the historical 25% effective rate it works out to 36.25% so that would be slightly higher, but pretty close.

Unfortunately you are reading into what I wrote. AZ: Inherent to the corporation form and its existence as a separate legal entity is the fact that it can raise vast amounts of cash through the capital markets. Do you see a world where the big capital providers, the pension funds, mutual funds etc. buy shares in companies where they will be held accountable for the manager's mistakes and their own assets will be on the line every time, due to bad management, a company goes bankrupt? I personally don't think it's plausible and I would be interested in finding someone who can prove me wrong. Response: I answered this already. For nearly every, if not all, the cost of insurance would be a fraction of the cost of what they pay in taxes. I never said that nearly every corporation would make the change. If they are smart, they would see that the cost of liquidity is not worth giving up 40% of the profits. AZ: But even if we put all this aside, one thing that is constantly missing from the arguments those on the right make is that they have nothing to prove what they are claiming the taxes will cause is based on any sort of facts. Please remember, it was only in 2003 that the Bush tax cuts were introduced to us. Can you show us any empirical proof that prior to 2003 companies were converting to partnerships en masse because dividends were taxed higher? It should be fairly easy to prove if it was true, we're only talking about 2003 after all. And yet, this is what you're claiming will happen. Response: The discussion is about taxes not politics. I just gave you one example of a large company. I know of a number of small otc companies that went that route too. Feel free to call up every corporation and ask them. I don't have the time. Often it takes one company to lead the way then others will follow. There is plenty of proof that small business changed structure in the 80's in response to tax changes. I'm not saying all or most large corporations will change. I recognize that for most large corporations it is extremely difficult. Why has BRK switched to buying companies versus equity investments? Tax savings and control of capital allocation. AZ: The bottom line is this, the tax cuts only contributed to exacerbate the deficit and the nation's debt because they happened at a time when the Bush administration was increasing spending significantly and we all agree on spending cuts to solve our problems but tax reform also needs to be part of the solution and I for one don't buy made up arguments like corporations will turn into partnerships if we change anything, why weren't they partnerships before 2003 then? Response: My comments have nothing to do with a discussion on the deficit. If you cannot separate the two then there is nothing to discuss.

It's very simplistic view. You are ignoring the enormous benefits the government is granting by allowing a corporation to exist as a free standing legal entity. If a corporation produces a dangerous product or goes bankrupt then the investors receiving dividends are not on the hook. Investors share the risk of their invested capital but it stops there. Government is allowing transfer of all other risks from investors to society as a whole. This transfer of risk should not be free. Some price has to be paid and that price is corporate tax. I don't have any opinion on rate but it can not be free. Investors can form partnership and avoid paying tax at corporation level. Corporate status is voluntary and investors consider the benefit of corporate status to be worth the price. It's not double taxation. Tax is paid by two separate legal entity. If Investors are not getting enough benefit by having two separate legal entity then they are free to keep only one and assume all the risk. It is understandable that investors would want to get benefits from the government at no cost but it is not practical. Pass through entity having legal status is recent development but this double taxation argument is very old one. I think you are vastly overstating the benefits of incorporation. For most companies the cost of liability insurance would be a fraction of what they pay in taxes. As an investor it is not something I see as worth the price at all. Rather it is just the way it is. Fort eh super wealthy they are paying a high price for liquidity. I would argue it is unfair to tax the person/entity twice for the same benefits. I used to work for Peter Kiewit Sons, a private employee owned company. This is the same Kiewit where Buffett has his office. It is also compounded book value faster than BRK. Anyways, in 2002 they were going to convert to an LP due to the cost of double taxation. They even stated that if they were starting today (2002) they would not incorporate. At the time they had $4 billion in annual revenue from heavy construction (bridges, highways, treatment plants) and also coal mining. All industries with significant risk yet they were willing to do it. While never publicly said, they reason was due to the likelihood of the tax rate on dividends being raised if Gore beat Bush in the 2002 election. Since Gore lost (sorry to bring up a sensitive subject for Democrats) they cancelled the plan. Businesses aren't stupid. If the US raises dividends to the same level as earned income there will be consequences. Companies will convert to S-Corps or partnerships to minimize taxes. LBO's will be more attractive. Why pay 35% corporate tax and then have dividends taxed at 45% when you can borrow and the interest is deductible? The irony is that changes based on "fairness" will probably cost the Treasury tax revenues.

I'm not sure what you are implying and what most of this quote meant, but apart from not being an American and from not having any partisan tendencies (I don't think I've voted for the same party twice in a row in the past), I posted this because it had to do with Buffett and might interest people here, because, y'know, they are interested in Buffett. As for the rest: Demagogy (/ˈdɛməɡɒdʒi/[1]) or demagoguery (/ˈdɛməɡɒɡəri/[2]) (Ancient Greek: δημαγωγία, from δῆμος dēmos "people" and ἄγειν agein "to lead") is a strategy for gaining political power by appealing to the prejudices, emotions, fears, vanities and expectations of the public—typically via impassioned rhetoric and propaganda, and often using nationalist, populist or religious themes. In my book telling a public intellectual like Warren Buffett to "write a check and shut up" qualifies. If I had known this would turn into a political thread, I wouldn't have posted it for sure. Political threads kill brain cells. I wouldn't call Christie's comment demagoguery. Rude, or stupid possibly, but not demagoguery. Buffett's position is either intentional demagoguery or unintentional mistake. The issue really isn't about politics. It isn't about whether government should be bigger or smaller. Whether we should have deficits or not. Nor is it about trying to reverse the rich getting richer while the middle class struggle. Rather it is an honest look at Buffett's argument. Buffett implies something that is totally false. He says he pays a lower overall rate than his Secretary, when the facts are otherwise. If the diagnosis is wrong, the prescription is likely wrong as well. Political threads can be helpful for those who will honestly look at an issue. I know it is rare, but it can and does happen.

Do you think it is fair that someone who makes 80k/year in income pays 30% in taxes while someone making 80 million/year in income from capital gains pays 15%? Buffett doesn't think it's fair. That's his point. I understand exactly what Buffett is trying to argue. He is wrong. He is selecting facts. For someone who used to calculate BRK's earnings on a look-through basis he should know better. He pays much more in taxes. He pays corporate taxes and as an owner, or part-owner, he pays half of the payroll taxes. He grossly understates his true tax burden. Meanwhile he grossly overstates his Secretary's tax burden. Unless her pay has suddenly spiked, she pays lower income taxes than Buffett's 15%. Her overall rate appears higher due to payroll taxes. That is because she has not hit retirement age. When she does her taxes will go to negative infinity. She will collect nearly 30k in benefits and pay zero. Buffett ignores that fact. Over her lifetime, Buffett's Secretary, assuming a normal life expectancy, will pay an overall rate of 2.5% and that includes income taxes and her half of payroll taxes less SS and Medicare benefits received in current dollars. Over Buffett's lifetime he will pay 5 to 6 times that rate and that is IGNORING all the corporate taxes and employee half of payroll taxes that he indirectly pays. For every dollar in dividends Buffett receives 25 to 35% in corporate taxes was already paid. His true lifetime tax rate including corporate taxes is 10 to 15 times the rate of his Secretary. Buffett is wrong.

I guess that the fact that nobody who says they oppose Buffett here is actually addressing his points, but rather they try to turn it into something else completely, is kind of equivalent to conceding the issue... What do you think is Buffett's point? I have addressed his NY Times editorial here and it is available at other forums (Value Investing Letter). Buffett says he is being coddled and implies it is at the expense of the middle class. Yet statistics show the middle class has seen their overall tax percentages fall for thirty years, and at a greater rate than the 1%.

Sorry I have never read Norquist's talking points. I know facts are stubborn things but they only muddy things up for those who can't think it through. For the rest of us they are no problem to resolve. Answer me this. Who paid a higher income tax rate in 2010, Buffett or his Secretary? Unless Warren gave her a large raise in the last few years, the answer is not his Secretary. If corporate taxes don't matter business owners must be idiots. They could incorporate and have the corporation pay all the corporate taxes, and just pay out dividends to themselves and magically lower their tax rate to 15%. Why don't they do this?

This line of thinking does not make sense to me. Right now the situation is where a Bilionair pays less tax than a middle class person. You want this situation to continue till spending gets cut? Buffett argument is not about increasing tax for everyone. Buffett argument is not about increasing tax for some one making even millions in salary. His argument was not about having higher capital gain tax for middle income family. His argument was to make sure that people who earn millions by pushing money should not pay less tax than a person working in mines under harsh conditions. Nothing more , nothing less. Now if you says that precondition for rectifying this stupid situation is reducing the spending then I have nothing more to say. I don't have any opinion about tax rate but I strongly feel Billionairs can afford to pay at least same tax rate as a peson working in mines. By the way, Buffett did advocate reduction in spending. I don't see media highlighting that. But reduction in spending is a seperate issue. I will undertand if reduction in spending is tied to a tax issue which impacts everyone but reduction in spending should not be linked with Buffett's argument. Buffett's argument is that he pays less tax than his secretary, which is absurdly false. Buffett pays a higher income tax rate than his secretary. Buffett uses an incomplete set of facts to arrive at a faulty conclusion. As other forums on here have detailed, he ignores medical benefits being untaxed, attributes both halves of payroll taxes to the employee (conveniently transferring the hit from him to his Secretary), uses taxable income instead of salary in order to make the payroll tax % seem significantly higher, ignores that his Secretary will get back all those payroll taxes and more if she lives to normal life expectancy, ignores the corporate taxes he indirectly pays, ignores the payroll taxes that he as a business owner pays, etc. Even using Buffett's selected facts, Buffett's lifetime tax rate is multiples of his Secretary's. And that is comparing a Secretary to a man who structured his life to minimize taxes throughout his lifetime.

I doubt it since Munger spent $11.1m buying them. ;D wabuffo You are right. My bad. The foreign positions have performed poorly so far. They spent nearly $11 million in cost in early 2011 and ended with a value at calendar year end of approximately $7.4 million.

The operating business of DJCO is in decline. Other than the temporary revenue spike in 2008-2010 due to the real estate crash increasing public notices, revenue is the same as ten years ago. What is impressive is management's ability to reduce costs. Operating income has gone from $1 to $2 million to $10 million in 2011. EPS is above $5 per share. From what I have read. Holding #1 is WFC at about $44 million. Holding #2 is USB at $3.6 million. Holdings 3&4 are foreign companies that combined are valued at just under $1 million. Holding #6 is the unknown addition in Q4 of 2011 at $13.6 million. I hope it is BAC based on how it has performed recently, but who knows. J P "Rick" Guerin is profiled in Buffett's article "The Superinvestors of Graham-and-Doddsville" in Table 6. He is mentioned quite frequently in Janet Lowe's book on Munger titled, "Damn Right."

Did anyone attend the Daily Journal annual meeting today? If so, I for one, would love to hear what Munger had to say.

You seem to be arguing that corporations are getting more benefits than cost. For the owners to pay 35% corporate rate plus another 15% on any dividends and half of all payroll taxes, I believe they are already paying plenty. Transportation is properly funded from excise taxes so that those who use the roads pay for the roads. including corporations. You are right that national defense is a big help to all taxpayers, including corporations. As for entitlements, while sure it reduces the potential for unrest, the main beneficiary is the recipient of the funds not corporations. You closed with "Bringing income and payroll taxes off of the individual and onto the corporation makes the domestic labor more cost competitive (more domestic production of the goods that we consume." Wow. Totally disagree with you there too.

Then it still benefits the corporation. Society as a whole is a human resources mine from the corporation's perspective. A mine operator bears the cost of extracting the valuable nuggets all the same as the cost of extracting the worthless rock. You can't pay only for the costs of extracting the nuggets. I disagree with your analogy. I think it misrepresents the corporations view and neglects the employee's view. Employment is where one entity (a company) agrees to pay another entity (the employee) for services rendered. They agree on a price for those services. Either is open to ending the deal based on the agreement. I also think your analogy (logic) is dangerous in that it opens the door to the corporation being liable to the employee for an indefinite amount of time. That may not have been your intent but that is how some would interpret the analogy. The point is that Microsoft hires the people who have graduated with an education. These are the gold nuggets. There is an expensive system in place the bubbles this gold up to the surface where Microsoft can just bend over and pick it up. I view the corporation as bearing responsibility for funding the expensive system. Do you not? Don't want to shock you but corporations are not responsible for funding education in practice. Education is largely local/state funded via property, sales and personal/business income taxes. Thus if the costs of education are your rationale for the existence of federal corporate taxes it fails logically.

Then it still benefits the corporation. Society as a whole is a human resources mine from the corporation's perspective. A mine operator bears the cost of extracting the valuable nuggets all the same as the cost of extracting the worthless rock. You can't pay only for the costs of extracting the nuggets. I disagree with your analogy. I think it misrepresents the corporations view and neglects the employee's view. Employment is where one entity (a company) agrees to pay another entity (the employee) for services rendered. They agree on a price for those services. Either is open to ending the deal based on the agreement. I also think your analogy (logic) is dangerous in that it opens the door to the corporation being liable to the employee for an indefinite amount of time. That may not have been your intent but that is how some would interpret the analogy.

Here is the biggest one: The entitlement programs take the burden of pension costs away from the corporations. Also: Unemployment benefits relieve the corporation of the burden of employing workers while demand is slack. If that is the biggest one then I think the argument is in need of improvement. Corporations pay 7.65% of payroll cost for the first $106,000 of income. Most corporations also have 401k matching or profit sharing, which I am guessing is probably an average of 3% of payroll. They have passed the risk off but not the costs. Besides, the cost is in payroll tax not income tax. I have never seen a study that details who ends up using unemployment, but I doubt it is dominated by periodic slack demand. It is not like most go on unemployment and then are hired back to the same job. That happens but it is rare. I would be curious to see if most users were working at a corporation or for a small business (LLC or proprietorship). I don't see unemployment benefits as relieving the burden on the employer of employing workers when demand is slack, rather it helps relieve the burden on the employee while he/she transitions to something else.

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones. Just in case, corporations are organizations of people. For some reason many in our society actually struggle with this concept. Personhood is basically a legal concept that allows corporations to enter into and enforce contracts, sue and be sued, etc. It seems obvious to me, that taxes on a corporation are essentially taxes on its owners. Why else do some small businesses switch structures due to changes in the differential in tax rates between individuals and corporations? This is, again, a dramatic oversimplification. The biggest argument is that corporations make use of and require different (and larger) parts of government overhead than other individuals. In addition, the *limitation of liability* is key here. It's not *just* a collection of people. A collection of people have no additional rights than the sum of their own rights, whereas corporations certainly do. If that is the biggest argument I must be missing something. I do not see much in the federal government's expenditures that relates directly to corporations. Sure there is the FDA for drug companies (although tits expenditures may primarily related to consumers) and the SEC for publicly traded companies, etc. The Department of Commerce is not that big. Does Microsoft really cost the federal government what it pays in taxes? If given the choice to be taxed and have limitation of liability or untaxed and have liability, I think many, if not most, would gladly take the untaxed option.

Okay, you may think that WEB is wrong about the prescription, but to jump to the conclusion that he has is in denial because of his need to be loved is a bit much. But let's talk about the Buffett rule. The Buffett rule isn't really just about levying taxes on the super-rich. It's about how we treat labor income versus investment income and about progressivity in the tax code. Let's talk about two hypothetical individuals: Taxpayer 1 and Taxpayer 2. Taxpayer 1 makes just over $1 million in income from his labor on an annual basis. He almost certainly pays an effective tax rate well above the tax rate of WEB's secretary, and most likely pays an effective tax rate of over 30% on his realized income. Income tax and payroll tax. It might even be the case that his employer's half of payroll tax (if he has an employer) is passed onto Taxpayer 1 in the form of lower wages. Taxpayer 2 makes just over $1 million in income from collecting dividends on his large muni bond portfolio and selling a bit of his LUK, which he has held for a long time. His effective tax rate is likely well below the effective tax rate of WEB's secretary and Taxpayer 1. He pays no tax on his muni interest income, and he pays long term capital gains rates every time he sells his LUK. He pays no payroll tax. The Buffett rule, as I understand it, has no effect on Taxpayer 1 but makes it so that Taxpayer 2 has his effective tax rate go up to 30%. Taxpayer 2 still isn't in as bad a tax situation as Taxpayer 1, but his tax burden is now a bit closer to Taxpayer 1, making the system a bit closer to fair. Now, you might say that Taxpayer 2 is suffering because he actually pays a 45% tax rate on a look through basis on his LUK income. Well, in this particular case, he pays no look through tax because LUK never pays tax. ;D Okay, so maybe using LUK is a bad example. But what about BAC? My "look through income" yield from BAC is pretty darn good and will be tax free for a good amount of time, certainly more than a year, which will allow me to get the long term capital gains rate. Or let's take corporate America as a whole. In aggregate, I suspect the corporate tax rate is actually substantially lower than the statutory rate. It could even be around 25%, in actuality. That's not including the use of debt to shelter income, the use of NOLs, and the various credits and subsidies that corporations, as opposed to individuals, can get more easily. Imagine how the most savviest investors can avoid situations where they are paying more "look through income tax" than they have to. Or perhaps the corporation Taxpayer 2 owns is an S corporation, where the income is passed through to him. He pays income tax, but no payroll tax. No double taxation, no payroll tax. Not bad at all. Or Taxpayer 2 may simply choose never to sell any of his stake in the corporation, instead watching his look through income (which under your definition could make his actual income well over $1 million) being taxed at 35% or less and never realizing any capital gains income. The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings. More importantly, why are we even considering the corporate income as Taxpayer 2's income? He cannot use corporate cash for personal consumption. Until cash gets distributed to him or until he realizes income through the sale of part of his ownership stake, there is no income. I don't even know where you want me to start. You are throwing a lot out there. Not everyone will agree with me that is fine. If either of two basic arguments are true then Buffett's position is wrong: 1) corporate taxes should be included because ultimately they are borne by the investor; 2) if current payroll taxes are going to be included then the future benefits should be as well (which effectively zeros out their impact). I believe both are true, particularly #2. The end result if just one is true is that Buffett pays more tax than his secretary. Thus the question is really do you believe either of the two arguments? I am not going to try an answer hypotheticals. I think you know the weakness of the muni bond argument. If you tax it yields will adjust so it will be a wash to government as a whole. I guess if having to pay an investor a higher yield that essentially covers their taxes makes some people feel that fairness is achieved so be it. Seems dumb to me. Yes there are companies that pay little income tax. I realize that. But we are talking about Buffett not a hypothetical person.

I assume you are being facetious since this is the Corner of Berkshire & Fairfax Message Board and not Mother Jones. Just in case, corporations are organizations of people. For some reason many in our society actually struggle with this concept. Personhood is basically a legal concept that allows corporations to enter into and enforce contracts, sue and be sued, etc. It seems obvious to me, that taxes on a corporation are essentially taxes on its owners. Why else do some small businesses switch structures due to changes in the differential in tax rates between individuals and corporations?