BRK Valuation

[rb]

Theoretically yes. Certainly from an accounting perspective. But I don't recall having such a sharp effect when the tax rates went down thus I expect the reaction will be similar should corporate taxes increase.

[wabuffo]

But I don't recall having such a sharp effect when the tax rates went down.

 

rb - you need to sharpen your memory.  Since the market is a discounting mechanism, it begins reworking valuation as soon as a tax cut is deemed highly probable.  So you can't measure from when the tax cut was enacted (Trump signed it on Dec. 22, 2017 and it went into effect Jan. 1, 2018).  The tax cut wasn't a "surprise" when it was enacted to Mr. Market, Mr. Market was expecting it all the way through 2017!  With Republicans controlling the House and the Senate, the tax cut was a go even before inauguration.  The only question was how far was the federal tax rate going to get cut (early reports were talking as far down as 15% instead of 21%).  The market was starting to value it as early as Dec 2016.

 

Here's a typical thread where investors weren't debating whether it was going to happen, but whether it would have any effect on BRK at all (despite the vehement arguments that it would from an intrepid poster!).

https://boards.fool.com/trump39s-cut-32510442.aspx?sort=whole#32510589

 

The B-shares were trading at around $158 when the Trump Tax cut came into focus at the time of these posts and people were trying to figure out the impact to BRK.  After the Trump Tax Cut finally passed, they were at $210-$215.  By February they plateaued into the $220s and have gone sideways since (until the virus affected everything in 2020).  That's a big jump of over 35% in a little over a year.  Some of that may be operating performance, but I would reckon that's maybe 10%-15% of the change.  I think at least 20%+ was the change in the Federal tax rate increasingly becoming a reality as 2017 progressed.

 

So yeah - I think it was a big deal and had a big effect.  Will a change from 21% to 28% be as big.  I don't think so - maybe a 9-10% hit to valuation, if the tax rate changes.

 

wabuffo

[Jurgis]

...

But, Berkshire has historically nevertheless been extremely tax efficient and made the absolute best of a “suboptimal” situation. Berkshire is not an actively traded equity portfolio. They don’t need to sell to make new investments and have deferred like $30B of stock related taxes and $30B+ of taxes as it relates to BNSF and BE, so Berkshire in practice pays a very low cash tax rate and has had more than adequate capital to make new investments without having to sell highly appreciated stock. As noted by others, Berkshire has found ways to convert highly appreciated stock to wholly owned businesses (Duracell, Phillips, Washington Post)

 

For better and worse, Berkshire doesn’t really sell winners, so it’s not that big of a problem, and the DTL (as pointed out by the chairman himself) has very low present value; it’s an interest free loan.

 

....

 

This is true historically for Buffett holdings.

 

It seems that T&T portfolio turnover is quite higher. I wonder if their outperformance vs. SP500 is measured pre-tax or post-tax. And if they have outperformed post-tax.

[thepupil]

fair point, aryadhana's criticism is more relevant to T&T's higher turnover investment approach, thought the buffett positions still dominate the portfolio of course.

[longterminvestor]

Tax conversation is important and did not see anyone mention loss reserve account tax incentives.  This has been my understanding and if anyone has additional info (or sources) for this - I want to learn so would enjoy any back/forth. 

 

The Unpaid losses and loss adjustment expenses (loss reserve account) receives a tax deduction - which leads Berkshire, in my opinion, to overstate loss reserves when possible.  However most large insurers are publicly traded, and do not want to run the loss reserve account up because it affects (effects?) the EPS quarterly. 

 

If actual losses are 100 AND reserves (loss adjustment expense) are 100 going into a quarter, and for that quarter you paid 10 in actual and you "goose" your unpaid loss reserves by 15 - you get a NET 5 in deduction.  (Please excuse the crude example). 

 

Overstating loss reserves is a way to "postpone" taxable income.  WEB always talks about carriers under-reserving which is interesting because that means those carriers pay more in tax than they could have if they sacrificed their quarterly earnings per share amount. 

 

Curious if anyone else knows about this - might be 6 - 1/2 dozen to the other - my opinion is WEB found a little edge there and is exploiting as much as possible. 

[Cigarbutt]

Tax conversation is important and did not see anyone mention loss reserve account tax incentives.  This has been my understanding and if anyone has additional info (or sources) for this - I want to learn so would enjoy any back/forth. 

 

The Unpaid losses and loss adjustment expenses (loss reserve account) receives a tax deduction - which leads Berkshire, in my opinion, to overstate loss reserves when possible.  However most large insurers are publicly traded, and do not want to run the loss reserve account up because it affects (effects?) the EPS quarterly. 

 

If actual losses are 100 AND reserves (loss adjustment expense) are 100 going into a quarter, and for that quarter you paid 10 in actual and you "goose" your unpaid loss reserves by 15 - you get a NET 5 in deduction.  (Please excuse the crude example). 

 

Overstating loss reserves is a way to "postpone" taxable income.  WEB always talks about carriers under-reserving which is interesting because that means those carriers pay more in tax than they could have if they sacrificed their quarterly earnings per share amount. 

 

Curious if anyone else knows about this - might be 6 - 1/2 dozen to the other - my opinion is WEB found a little edge there and is exploiting as much as possible.

That's interesting but intricacies of property-casualty insurers' federal taxation are not exactly the topic of the day. :)

 

Looking at many reserves triangles over the years, it seems like there is a trend. Rarely, insurers use big-bath accounting techniques and sometimes (to varying degrees, from benign to improper) insurers use the reserves account as a "supplemental" cookie jar to mitigate underwriting results (in both directions). However, usually, there seems to be consistency for companies to maintain a relatively constant pattern of either under- or over-reserving. Why is that? IMO, companies (including BRK) that tend to consistently over-reserve do so in the spirit of financial conservatism: to maintain a margin of safety in order to be ready to mitigate potential unexpected future adverse loss development. This posture has the interesting side effect of decreasing taxes paid and increasing cashflow but i don't think that's a loophole Mr. Buffett is trying to "exploit" directly.

 

As far as the federal tax aspect is concerned (whatever the motive), over-reserving has the potential to be particularly significant in growing and long-tail lines (the temporary difference will tend to become permanent) although the IRS requires discounting of future reserves according to prescribed rates (adjusted with the 2017 Act) and established payment patterns. The IRS has slowed down in this area (please educate me if aware of recent cases) but it has been known to go after insurers that tried to escape tax (IRS perspective) when loss estimates of prior years retrospectively became apparently disconnected from reality (owned taxes to be paid with interest and with potential penalty). Despite an industry-wide impressive reserve release record (seems to be coming to an end) in the last few years, it seems like the IRS has stayed quiet (maybe because P+C insurers have not tended to be very profitable in this ultra-super-low rate environment and the IRS budget seems to be under pressure). It seems to me the IRS would hesitate to go after BRK for an over-reserving issue and Mr. Buffett likely would prefer not be tied to a potential tax-evasion issue.

 

At times and in selected cases, it appears that some insurers will significantly increase reserves in some lines in order to secure a premium price increase through state regulators but most regulators are not dumb and this is not BRK's style.

[DooDiligence]

Tax conversation is important and did not see anyone mention loss reserve account tax incentives.  This has been my understanding and if anyone has additional info (or sources) for this - I want to learn so would enjoy any back/forth. 

 

The Unpaid losses and loss adjustment expenses (loss reserve account) receives a tax deduction - which leads Berkshire, in my opinion, to overstate loss reserves when possible.  However most large insurers are publicly traded, and do not want to run the loss reserve account up because it affects (effects?) the EPS quarterly. 

 

If actual losses are 100 AND reserves (loss adjustment expense) are 100 going into a quarter, and for that quarter you paid 10 in actual and you "goose" your unpaid loss reserves by 15 - you get a NET 5 in deduction.  (Please excuse the crude example). 

 

Overstating loss reserves is a way to "postpone" taxable income.  WEB always talks about carriers under-reserving which is interesting because that means those carriers pay more in tax than they could have if they sacrificed their quarterly earnings per share amount. 

 

Curious if anyone else knows about this - might be 6 - 1/2 dozen to the other - my opinion is WEB found a little edge there and is exploiting as much as possible.

That's interesting but intricacies of property-casualty insurers' federal taxation are not exactly the topic of the day. :)

 

Looking at many reserves triangles over the years, it seems like there is a trend. Rarely, insurers use big-bath accounting techniques and sometimes (to varying degrees, from benign to improper) insurers use the reserves account as a "supplemental" cookie jar to mitigate underwriting results (in both directions). However, usually, there seems to be consistency for companies to maintain a relatively constant pattern of either under- or over-reserving. Why is that? IMO, companies (including BRK) that tend to consistently over-reserve do so in the spirit of financial conservatism: to maintain a margin of safety in order to be ready to mitigate potential unexpected future adverse loss development. This posture has the interesting side effect of decreasing taxes paid and increasing cashflow but i don't think that's a loophole Mr. Buffett is trying to "exploit" directly.

 

As far as the federal tax aspect is concerned (whatever the motive), over-reserving has the potential to be particularly significant in growing and long-tail lines (the temporary difference will tend to become permanent) although the IRS requires discounting of future reserves according to prescribed rates (adjusted with the 2017 Act) and established payment patterns. The IRS has slowed down in this area (please educate me if aware of recent cases) but it has been known to go after insurers that tried to escape tax (IRS perspective) when loss estimates of prior years retrospectively became apparently disconnected from reality (owned taxes to be paid with interest and with potential penalty). Despite an industry-wide impressive reserve release record (seems to be coming to an end) in the last few years, it seems like the IRS has stayed quiet (maybe because P+C insurers have not tended to be very profitable in this ultra-super-low rate environment and the IRS budget seems to be under pressure). It seems to me the IRS would hesitate to go after BRK for an over-reserving issue and Mr. Buffett likely would prefer not be tied to a potential tax-evasion issue.

 

At times and in selected cases, it appears that some insurers will significantly increase reserves in some lines in order to secure a premium price increase through state regulators but most regulators are not dumb and this is not BRK's style.

 

To paraphrase; just because a mouse lives in a cookie jar doesn't make it a cookie.

 

www.foley.com/en/insights/publications/2013/09/us-tax-court-upholds-pc-insurers-full-reported-los

[Cigarbutt]

To paraphrase; just because a mouse lives in a cookie jar doesn't make the it a cookie.

www.foley.com/en/insights/publications/2013/09/us-tax-court-upholds-pc-insurers-full-reported-los

Thanks! Interesting and relevant.

Isn't it great when institutions work?

And now, i have a movie to watch or a book to read (The Hiding Place).

[NoCalledStrikes]

But if you give a mouse a cookie, he will ask for a glass of milk...

[Jurgis]

But if you give a mouse a cookie, he will ask for a glass of milk...

 

You cannot give mouse a cookie, but if you give browser a cookie, you can ad target to your heart's content.

[longterminvestor]

Hopefully the ad is for GEICO. 

 

OK, OK Agree "exploit" is a harsh word.  After reading Foley's summary of the case, put more appropriately:  Mr. Buffett understands the rules of the game and his loss reserves are "fair and reasonable" for the benefit of the shareholders of Berkshire...I'm sorry...I mean benefit the ultimate client of Berkshire's insurance subsidiary - the first named insured client. 

 

I have come to understand behind the grandpa glasses and white hair is a shark who bites hard leaving a mark.  Charlie might even bite harder than Mr. Buffett, especially in the early years. 

[Cigarbutt]

Hopefully the ad is for GEICO. 

OK, OK Agree "exploit" is a harsh word.  After reading Foley's summary of the case, put more appropriately:  Mr. Buffett understands the rules of the game and his loss reserves are "fair and reasonable" for the benefit of the shareholders of Berkshire...I'm sorry...I mean benefit the ultimate client of Berkshire's insurance subsidiary - the first named insured client. 

I have come to understand behind the grandpa glasses and white hair is a shark who bites hard leaving a mark.  Charlie might even bite harder than Mr. Buffett, especially in the early years.

Apologies for taking precious space here but 1-taxation is an important consideration, 2-Mr. Buffett is a folksy shark, but still a shark and 3-this is soooo interesting (at least in a discussion involving anonymous participants).

 

Actuarial analysis is a science (specific statistical techniques and fancy math) but is also an art. In addition, for reserves, a "reasonable" (many ways to define reasonable) range is submitted and management decides what value within that range to use for reporting purposes. One also has to consider that reports may be printed after verbal (and non-verbal) arguments behind closed doors and "independent" reports can be obtained. When the range is determined, actuaries do use standard techniques but historical development patterns are important (so new lines of business may require a larger range). On top of that, actuaries have the possibility to "bend the curve" (the loss payment curve which decreasing slope looks like a depleting oil well curve, somewhere between conventional and tight oil). This is interesting with all the talk these days about "flattening the curve" for the coronavirus. Anyways, actuaries can 'adjust' the previously observed payment patterns if changes are applied during the development (ie claims handling, legal strategy etc). So, all in all, the numbers can vary wildly and judgement is required.

 

In terms of how Mr. Buffett deals with this issue (personal, corporate or population level; he may not use the same mental algorithm), here's a little discussed event that occurred in 2005 that sheds some light on the issue.

https://www.govinfo.gov/content/pkg/USCOURTS-ned-8_04-cv-00460/pdf/USCOURTS-ned-8_04-cv-00460-0.pdf

TL;DR version:

According to the IRS, for years 1989, 1990 and 1991, BRK entered into "double dipping", meaning that it claimed deduction for debt incurred while simultaneously claiming a second round of deduction (dividends received deduction, DRD) for dividend income received on stocks held in the float portfolio.

The IRS action came after somebody read a Forbes article and took three years to complete. The IRS team inferred from numerous public memos written by the Master over the years that the fundamental source of value of insurance was its float, which, like Janus, has two faces (a liability and an asset). To maintain that rule 246A had been violated, the IRS used the typical conceptual criteria (purpose or intent, and traceability). Money is fungible so good luck with that. For purpose, the IRS had to prove that it made sense for Mr. Buffett to borrow large amounts in order to buy KO for the long term. Who would consider that from reading Mr. Buffett over the years? But really to prove their point, the IRS needed to enter into a specific cranium.

A key quote:

"The second factor the Court relies on in reaching this conclusion is the uncontradicted testimony of Mr. Buffett, which establishes that Berkshire’s dominant purpose in incurring the indebtedness was to increase and fortify NICO’s capital base. While Mr. Buffett does not dispute that the proceeds were to be invested, his testimony establishes that he did not know how the debt proceeds were to be invested at the time Berkshire engaged in the borrowing transactions." (my bold)

The IRS and the Judge (see conclusion) noted that something was going on and the Judge did make some recommendations for legislative "purposes" but the IRS sent an invoice to Omaha which was probably one page in length confirming a money transfer.

 

 

[aryadhana]

But, Berkshire has historically nevertheless been extremely tax efficient and made the absolute best of a “suboptimal” situation. Berkshire is not an actively traded equity portfolio. They don’t need to sell to make new investments and have deferred like $30B of stock related taxes and $30B+ of taxes as it relates to BNSF and BE, so Berkshire in practice pays a very low cash tax rate and has had more than adequate capital to make new investments without having to sell highly appreciated stock. As noted by others, Berkshire has found ways to convert highly appreciated stock to wholly owned businesses (Duracell, Phillips, Washington Post)

 

For better and worse, Berkshire doesn’t really sell winners, so it’s not that big of a problem, and the DTL (as pointed out by the chairman himself) has very low present value; it’s an interest free loan.

 

Furthermore, by retaining all capital Berkshire is very tax efficient vehicle for holding outside of a tax advantaged retirement account , particularly for those of us who have state taxes to pay on gains/ dividends and partocularly if Biden gets rid of the advantage of long term cap gains for high earners. Also I believe  insurance companies do pay lower rates on dividends; I have read this in the past but can’t find a source now.

 

In sum, I don’t think Berkshire trades at a discount  because of deferred tax related to equities. I don’t think that’s “the problem”.

 

How would we go about studying whether holding equities beyond what's needed for insurance capital in a corporation leads to some or much of the discount?  I agree that it doesn't feel like it does, but I think it follows logically and ultimately informs market prices.  A nice thing about market prices is that they can be set in recognition of some fact about which individual participants themselves are quite unaware.  Many times market prices can be set in recognition of some fact about which individual participants are themselves unaware?

 

I'm not convinced of anything I've written.  I just feel that it is by definition impossible to be adequately compensated appropriately for the risk of owning companies at prices set between non-corporate taxpayers without an amount of "edge" that isn't possible from holding the kind of portfolio he does forever.  That he doesn't sell doesn't matter, I don't think, since the tax liability accrues anyway.  At best what we can say is that the effect will be mitigated by the dividends received deduction, and so only half of the income from his investments is subject to the double tax -- but that really relies on an investment realizing its value primarily through dividends.

 

If Berkshire were actually like a mutual fund, as it is sometimes misrepresented, the C-corp would obviously be a bad choice - as Charlie has pointed out over the years.  But Berkshire is an insurance-focused conglomerate, one of the largest enterprises in the world - not an investment partnership or fund.

 

There are a lot of great sections to that 1986 letter, I enjoyed re-reading it as Buffett was a lot more talkative about important things back then.  (you can skip the section on selling encyclopedias to keep it interesting.  "5 cents per page!")

 

As for the "why does Berkshire hold all these stocks inside a corporation?" question and the currently popular "why does Berkshire hold so much excess capital in cash equivalents?" question - he addresses them in 1986 pretty clearly:

 

Marketable Securities

 

    During 1986, our insurance companies purchased about $700

million of tax-exempt bonds, most having a maturity of 8 to 12

years.  You might think that this commitment indicates a

considerable enthusiasm for such bonds.  Unfortunately, that’s

not so: at best, the bonds are mediocre investments.  They simply

seemed the least objectionable alternative at the time we bought

them, and still seem so. (Currently liking neither stocks nor

bonds, I find myself the polar opposite of Mae West as she

declared: "I like only two kinds of men - foreign and domestic.")

 

    We must, of necessity, hold marketable securities in our

insurance companies and, as money comes in, we have only five

directions to go: (1) long-term common stock investments; (2)

long-term fixed-income securities; (3) medium-term fixed-income

securities; (4) short-term cash equivalents; and (5) short-term

arbitrage commitments.

 

Common stocks, of course, are the most fun.  ...(continues)

 

I think Berkshire is an "investment partnership or fund" to the extent it has investments well beyond what is necessary to satisfy its insurance obligations.  I completely agree that Berkshire is exceptionally-positioned to invest in stocks insofar as managing its float effectively is concerned, especially in concert with cash flow from its consolidated operating companies.  I would say that to the extent it needs its equities for insurance obligations, it may need to sell them at any time and so the deferred tax liability isn't illusory; conversely it is strictly suboptimal to compound within a taxable entity anything it holds it would never need to sell. 

 

As an aside, the "convexity" of taxes makes it such that the suboptimality of holding for investment something like bonds within a corporation is less severe than holding stock.  Ironically tho, I think short-term trading would be pretty tax efficient even inside a corporation if they kept reinvesting their profits (or put them towards buybacks / dividends to long-term owners). 

[thepupil]

That he doesn't sell doesn't matter, I don't think, since the tax liability accrues anyway.  At best what we can say is that the effect will be mitigated by the dividends received deduction, and so only half of the income from his investments is subject to the double tax -- but that really relies on an investment realizing its value primarily through dividends.

 

...

 

I would say that to the extent it needs its equities for insurance obligations, it may need to sell them at any time and so the deferred tax liability isn't illusory; conversely it is strictly suboptimal to compound within a taxable entity anything it holds it would never need to sell. 

 

Berkshire does indeed "rely on an investment realizing its value primarily through dividends". How have the following investments been realized?

 

Can we think of a single material winner that has been sold outright and realized tax?

 

GEICO: bought common stock, then whole company

 

BNSF bought common stock, then whole company, paid $35B of dividends to Berkshire last 10 years

 

AAPL: paid dividends, hasn't sold material shares

 

BE: no sales and no dividends, making BE an outlier, though has realized benefits of BE ownership via tax credits. NI $1.2B 10 years ago, $3B today, could always stop investing and pay divvies, was investing $2-3B / year 10 years ago, on pace for $7-$9B these days

 

Bank of America: bought prefferred stock, got cheap warrants, exercised /converted warrant position to stock, bought more stock, has recieved dividends

 

See's Candy: bought for $25mm, since paid $1.5B dividends to Berkshire

 

Note that WFC is being sold down, but Berkshire has high cost lots that will probably make this a wash in terms of tax. Likewise Berkshire has realized losers like IBM and the airlines.

 

In a world where Berkshire is "forced" to sell equities because of insurance obligations, there will have to be truly massive insurance losses that would offset the capital gains, plus they'd have to burn through a whole lot of excess cash and fixed income.

 

I think we'll probably agree to disagree on this if you think accruing a countercyclical (gets smaller in bad times, bigger in good) 0% interest rate liability that can be deferred is substantially similar to paying that liability today.  Even though the liability accrues, one still gets 100% of the dividends of the asset and also gets to use the assets to increase liability (financial/insurance float) bearing capacity.

 

there's theory and then there's practice. the theory is that double taxation is bad and could be a reason for berkshire discount.

 

the practice is that berkshire pays a significantly lower tax rate than many individuals and is extremely tax efficient. it rarely realizes material capital gains and pays a lower tax rate on dividends; it is a much more tax efficient investor than almost any non-index strategy. As an operating company, BNSF and BE have favorable tax dynamics.

 

2015-2019 =$130B of pre-tax income, $19B of cash taxes = 14.6% cash tax rate.

 

again, I think we'll have to disagree on what matters. I do think that increasing corporate tax rates are likely and that Berkshire and all US companies will pay more taxes in the future, but I don't think that the framework of Berkshire as inefficent investment vehicle froma tax perspectice is correct. Berkshire has always been extremely conscious of tax (I'd argue to a fault).

 

[IceCreamMan]

That he doesn't sell doesn't matter, I don't think, since the tax liability accrues anyway.  At best what we can say is that the effect will be mitigated by the dividends received deduction, and so only half of the income from his investments is subject to the double tax -- but that really relies on an investment realizing its value primarily through dividends.

 

...

 

I would say that to the extent it needs its equities for insurance obligations, it may need to sell them at any time and so the deferred tax liability isn't illusory; conversely it is strictly suboptimal to compound within a taxable entity anything it holds it would never need to sell. 

 

...

 

In a world where Berkshire is "forced" to sell equities because of insurance obligations, there will have to be truly massive insurance losses that would offset the capital gains, plus they'd have to burn through a whole lot of excess cash and fixed income.

 

I think we'll probably agree to disagree on this if you think accruing a countercyclical (gets smaller in bad times, bigger in good) 0% interest rate liability that can be deferred is substantially similar to paying that liability today.  Even though the liability accrues, one still gets 100% of the dividends of the asset and also gets to use the assets to increase liability (financial/insurance float) bearing capacity.

 

there's theory and then there's practice. the theory is that double taxation is bad and could be a reason for berkshire discount.

 

the practice is that berkshire pays a significantly lower tax rate than many individuals and is extremely tax efficient. it rarely realizes material capital gains and pays a lower tax rate on dividends; it is a much more tax efficient investor than almost any non-index strategy. As an operating company, BNSF and BE have favorable tax dynamics.

...

 

If we're interested in calculating the true economic value of Berkshire's accrued capital gains, we'd want to consider the expected timing of future sales and the expected capital gains tax rate at the time of future sales, right?

 

It's too bad that if we push out the capital gains tax liability into the infinite future (representing a scenario in which Berkshire adopts a strict policy of never realizing capital gains), the size of the capital gains tax liability gets infinitely large, which I think negates the time value of pushing it out into the infinite future... right?

[Mephistopheles]

 

It's too bad that if we push out the capital gains tax liability into the infinite future (representing a scenario in which Berkshire adopts a strict policy of never realizing capital gains), the size of the capital gains tax liability gets infinitely large, which I think negates the time value of pushing it out into the infinite future... right?

 

But until the cap gains is realized, the deferred tax liability serves as an interest free loan that continues to be invested in the particular security, which otherwise would not be available to invest if the gain is realized. This of course only makes sense if the particular security itself is worth holding for that period of time.

 

Here's my question. Why not just borrow against a stock, and hedge with puts that are priced appropriately in order to avoid realizing gains? Buffett can pull an Ericopoly.

[IceCreamMan]

 

It's too bad that if we push out the capital gains tax liability into the infinite future (representing a scenario in which Berkshire adopts a strict policy of never realizing capital gains), the size of the capital gains tax liability gets infinitely large, which I think negates the time value of pushing it out into the infinite future... right?

 

But until the cap gains is realized, the deferred tax liability serves as an interest free loan that continues to be invested in the particular security, which otherwise would not be available to invest if the gain is realized. This of course only makes sense if the particular security itself is worth holding for that period of time.

 

Here's my question. Why not just borrow against a stock, and hedge with puts that are priced appropriately in order to avoid realizing gains? Buffett can pull an Ericopoly.

 

True. I guess we need to consider the accrued tax liability separately from future tax liabilities not yet accrued. This reminds me of the question of how to value float. Let's say Berkshire has a liability that we don't expect it will have to pay for 100+ years (hypothetically). Can we approximate the value of this liability as zero?

 

Buy puts and borrow against... that would turn our equity position into a synthetic call option. Maybe we'd want to sell covered calls too, unless we wanted to be long volatility. I'm not sure how taxation would work if we created a synthetic short position by buying puts and selling calls with the same strike against our long positon-- the IRS might have a rule about that.

[TREVNI]

 

It's too bad that if we push out the capital gains tax liability into the infinite future (representing a scenario in which Berkshire adopts a strict policy of never realizing capital gains), the size of the capital gains tax liability gets infinitely large, which I think negates the time value of pushing it out into the infinite future... right?

 

But until the cap gains is realized, the deferred tax liability serves as an interest free loan that continues to be invested in the particular security, which otherwise would not be available to invest if the gain is realized. This of course only makes sense if the particular security itself is worth holding for that period of time.

 

Here's my question. Why not just borrow against a stock, and hedge with puts that are priced appropriately in order to avoid realizing gains? Buffett can pull an Ericopoly.

 

True. I guess we need to consider the accrued tax liability separately from future tax liabilities not yet accrued. This reminds me of the question of how to value float. Let's say Berkshire has a liability that we don't expect it will have to pay for 100+ years (hypothetically). Can we approximate the value of this liability as zero?

 

Buy puts and borrow against... that would turn our equity position into a synthetic call option. Maybe we'd want to sell covered calls too, unless we wanted to be long volatility. I'm not sure how taxation would work if we created a synthetic short position by buying puts and selling calls with the same strike against our long positon-- the IRS might have a rule about that.

 

 

The deferred tax liability grows infinitely large in absolute dollar terms but is asymptotic. Attached is an older analysis (with a higher tax rate) but shows the growth of KO within BRK and the accrued unpaid tax liability over time. What you see is the deferred tax approach the tax rate asymptotically.

 

Float can be considered as equity if it is cost free. (In that scenario it's better than cost free.) The cost of float determines its worth. At one price it's too costly, at another it's on par with borrowing money, at another it's akin to equity.

[ValueMaven]

How does todays move in Apple change how you view Berkshires current valuation?  This is easily one of Buffett's biggest homerun's of all time.  If I think how Apple ($100B) position balances out the Rails, Uts, and Insurance businesses; it is extremely complementary.  Few investors understand the consumer as well as WEB - and this highlights it.  5G roll-out, A.I., new product cycle and the whole Apple ecosystem.   

[Mephistopheles]

How does todays move in Apple change how you view Berkshires current valuation?  This is easily one of Buffett's biggest homerun's of all time.  If I think how Apple ($100B) position balances out the Rails, Uts, and Insurance businesses; it is extremely complementary.  Few investors understand the consumer as well as WEB - and this highlights it.  5G roll-out, A.I., new product cycle and the whole Apple ecosystem.   

 

"Berkshire shares are down today as its (deferred tax) liabilities swelled by more than $1 billion overnight due to the massive increase in the value of its Apple position."

 

:P ;D

[ValueMaven]

Berkshire purchase of Apple (~253M shares @ $130) less than 3 years ago.  In terms of sheer P&L, this is the greatest trade ever. 

[thepupil]

Naspers -700HK $32mm to $180B and the Louisiana Purchase are still kicking warrens ass but as far as $30B stock picks go, I’d agree.

 

I, for one, one would be very okay with some tax inefficient trimming, but knowing WEB, that probably won’t happen.

[Jurgis]

I, for one, one would be very okay with some tax inefficient trimming, but knowing WEB, that probably won’t happen.

 

Holding stocks - even forever stocks like AAPL - in taxable accounts sucks.

 

But then I tax-efficient trimmed AAPL something like 20+% lower. So maybe the right thing is not to trim...  ::)

[ValueMaven]

RationalWalk posted this on twitter - interesting way to look at it

 

Every $BRKA share has an indirect position of ~153 $AAPL

Every $BRKB share has an indirect position of ~0.102 $AAPL

 

It's easy to calculate your indirect ownership interest in Apple.

 

Buffett owns ~248,741 BRKA, so he indirectly owns a bit over 38 million AAPL worth ~$16 bn

 

[John Hjorth]

Holding stocks - even forever stocks like AAPL - in taxable accounts sucks.

 

But then I tax-efficient trimmed AAPL something like 20+% lower. So maybe the right thing is not to trim...  ::)

 

It all depends [ : - ) ] [on the local tax system].