Q4 2010 results out

[Munger_Disciple]

He loves the business, I get it, but I think the tax reasons are why he won't sell.

 

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed.

 

Regarding the Fairfax conference call, I thought Watsa punted a very good question from Jaideep. It is very disappointing. Can you imagine Buffett ever not answering such a question when the whole purpose of the call is to answer shareholder questions?

[Munger_Disciple]

In my previous post, I meant Berkshire sold a portion of Coke holding thru' the Genre transaction.

[Myth465]

In my previous post, I meant Berkshire sold a portion of Coke holding thru' the Genre transaction.

 

I think thats  over complicating things.

[txlaw]

I believe the folks at HWIC are huge admirers of Jeremy Grantham.  So it's worth taking a look at GMO's 7-year asset class return forecast, which was posted on gurufocus earlier today:

 

http://www.scribd.com/doc/49350845/GMO-7-Year-Forecasts-January-2011

 

GMO believes that at January 31, 2011 prices, large cap US equities and small cap US equities will return between 0.2% and -2.1%.  Forget about the specificity of those numbers -- the basic thesis is that the US market's valuation is fair to overvalued at current prices.

 

FFH has hedged its equity portfolio against the market.  But I believe that even with a 100% hedged portfolio, the "messy equity" positions that FFH has (e.g., LVLT, DELL, FBK) will generate a nice spread in their hedged equity portfolio because these companies are deeply undervalued.  And if the market does correct, they get to redeploy the unwound hedges into either "messy equity" positions or high quality positions.

 

Even though they may have been a little early with their hedges, I like FFH's positioning at this time.  Although I do not own any FFH at the moment, if the next quarter gets hit by the earthquake and further bond declines, I will likely get back in.

[savant]

He loves the business, I get it, but I think the tax reasons are why he won't sell.

 

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed.

 

 

I believe that is 100% correct. Plus it is pretty obvious that WEB believes in Sloan's philosophy on acquiringa business that provide a reasonable rate of return for the longest period of time as opposed to a higher rate of return for a shorter period.

[Rabbitisrich]

He loves the business, I get it, but I think the tax reasons are why he won't sell.

 

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed.

 

Regarding the Fairfax conference call, I thought Watsa punted a very good question from Jaideep. It is very disappointing. Can you imagine Buffett ever not answering such a question when the whole purpose of the call is to answer shareholder questions?

 

The conference call is intended to be a review of the reported quarter and to fill in any blanks on topics that weren't covered in the report. Questions of strategy and such distract from that purpose.

[ERICOPOLY]

Coke should have been sold about 10 years ago. Holding that great asset has been a waste of time. At the very least puts could have been bought against it. I like those preferreds though.

 

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

 

[Myth465]

Coke should have been sold about 10 years ago. Holding that great asset has been a waste of time. At the very least puts could have been bought against it. I like those preferreds though.

 

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

 

 

Aw good point. I remember talking to you about the tax rules with puts. Humm, ya given that he should have found an overvalued basic to short / buy puts against.

[Guest Bronco]

Are we suggesting buying an out of the money put creates a sale on the underlying stock for tax purposes?

 

I believe Buffett doesn't hedge as mentioned because he doesn't feel the capital spent buying puts is worth the money - if he holds a stock, he holds a stock.

 

Not saying that is right wrong or whatever but that is his position (I believe).

[Rabbitisrich]

Are we suggesting buying an out of the money put creates a sale on the underlying stock for tax purposes?

 

I believe Buffett doesn't hedge as mentioned because he doesn't feel the capital spent buying puts is worth the money - if he holds a stock, he holds a stock.

 

Not saying that is right wrong or whatever but that is his position (I believe).

 

The size of the WFC stake would require a bespoke put contract that would be difficult to unload before maturity.

[ERICOPOLY]

Are we suggesting buying an out of the money put creates a sale on the underlying stock for tax purposes?

 

It depends -- the rules of whether or not it is treated as a sale depend on a few factors, such as when the put is closed out, when you purchase additional puts or hedges on that stock after closing out the prior hedges, the strike price of the put (whether it protects any gain), etc...

 

For individuals the date at which you close out your puts will at the very least become your new date of acquisition for long/short term capital gains considerations.  For example, if you hold the stock for 20 years and then buy puts on it today, but close the puts out next week and then sell the stock the next day -- that makes the holding period short-term and you owe tax as a short-term capital gain. 

 

The tax people aren't stupid -- they understand that by purchasing a KO put to protect your KO gains you are avoiding just selling the stock.  So they treat you as if you are doing just that.

 

Indirect hedging will avoid the constructive sale rules. 

 

Prior to 1997 (when these rules went into place) you could just short the stock in perpetuity to lock in the gain on the offsetting long position without EVER paying tax!  Combine that with naked short selling (no borrowing costs) and you are in tax nirvana.

 

 

[bargainman]

Are we suggesting buying an out of the money put creates a sale on the underlying stock for tax purposes?

 

It depends -- the rules of whether or not it is treated as a sale depend on a few factors, such as when the put is closed out, when you purchase additional puts or hedges on that stock after closing out the prior hedges, the strike price of the put (whether it protects any gain), etc...

 

For individuals the date at which you close out your puts will at the very least become your new date of acquisition for long/short term capital gains considerations.  For example, if you hold the stock for 20 years and then buy puts on it today, but close the puts out next week and then sell the stock the next day -- that makes the holding period short-term and you owe tax as a short-term capital gain. 

 

The tax people aren't stupid -- they understand that by purchasing a KO put to protect your KO gains you are avoiding just selling the stock.  So they treat you as if you are doing just that.

 

Indirect hedging will avoid the constructive sale rules. 

 

Prior to 1997 (when these rules went into place) you could just short the stock in perpetuity to lock in the gain on the offsetting long position without EVER paying tax!  Combine that with naked short selling (no borrowing costs) and you are in tax nirvana.

 

 

 

Hmmm.. are you sure about that?  The rules I read on constructive sales have to do with a real 1 to 1 offsetting position.. see:

 

http://www.irs.gov/pub/irs-pdf/p550.pdf

 

On page 39 titled "Constructive Sales of Appreciated Financial Positions".  It sounds like you have to do a short position or futures contract where both the loss potential *and* the gain potential is eliminated..  See here also:

 

http://www.fool.com/school/taxes/1999/taxes990730.htm

 

it's a bit old so not sure if it's out of date, but here is what they say:

 

"Remember that the constructive sale rules were implemented to impact transactions that had the effect of eliminating substantially all of your risk of loss and opportunity for income and gain with respect to the appreciated financial position. That's the standard and it's very clear. Applying this reasoning, Congress intended that transactions only reducing risk of loss or only reducing opportunity for gain would not be covered under the constructive sale rules.

 

Example: You hold an appreciated financial position in a stock. You then enter into a "put" with an exercise price equal to the current market price (an "at-the-money" option). Because such an option reduces only your risk of loss, and not your opportunity for gain, the above standard would not be met, and this would not be considered a constructive sale. Again, remember that the transactions the constructive sale rules affect are those that reduce both risk of loss and opportunity for gain. So, if you hedge only one end of the transaction, the constructive sale rules wouldn't apply."

 

[bargainman]

Here's another more recent one from Schwab's site:

 

http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/portfolio_planning/hedging_tax_traps_for_the_unwary.html

 

Constructive sale rules

The constructive sale rules arrived as part of the Taxpayer Relief Act of 1997. In a nutshell, certain offsetting transactions can require you to recognize the capital gain on your original position even though you haven't actually sold it. These rules severely limit the usefulness of an old standby, the "short-against-the-box" strategy.

 

Importantly, a put option used by itself to hedge the risk on an existing position should not trigger a constructive sale as long as the exercise price is at or below the price of the existing position. And there are a number of other viable hedging and diversification strategies which, when properly structured, can help avoid constructive sale treatment.

[oec2000]

He loves the business, I get it, but I think the tax reasons are why he won't sell.

 

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed.

 

Regarding the Fairfax conference call, I thought Watsa punted a very good question from Jaideep. It is very disappointing. Can you imagine Buffett ever not answering such a question when the whole purpose of the call is to answer shareholder questions?

 

The conference call is intended to be a review of the reported quarter and to fill in any blanks on topics that weren't covered in the report. Questions of strategy and such distract from that purpose.

 

Doesn't FFH also have a policy of not discussing of individual investments they make?

 

 

[ERICOPOLY]

Here's another more recent one from Schwab's site:

 

http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/portfolio_planning/hedging_tax_traps_for_the_unwary.html

 

Constructive sale rules

The constructive sale rules arrived as part of the Taxpayer Relief Act of 1997. In a nutshell, certain offsetting transactions can require you to recognize the capital gain on your original position even though you haven't actually sold it. These rules severely limit the usefulness of an old standby, the "short-against-the-box" strategy.

 

Importantly, a put option used by itself to hedge the risk on an existing position should not trigger a constructive sale as long as the exercise price is at or below the price of the existing position. And there are a number of other viable hedging and diversification strategies which, when properly structured, can help avoid constructive sale treatment.

 

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

[Rabbitisrich]

He loves the business, I get it, but I think the tax reasons are why he won't sell.

 

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed.

 

Regarding the Fairfax conference call, I thought Watsa punted a very good question from Jaideep. It is very disappointing. Can you imagine Buffett ever not answering such a question when the whole purpose of the call is to answer shareholder questions?

 

The conference call is intended to be a review of the reported quarter and to fill in any blanks on topics that weren't covered in the report. Questions of strategy and such distract from that purpose.

 

Doesn't FFH also have a policy of not discussing of individual investments they make?

 

 

 

I've read reports from boardmembers that management goes into specific companies at the message board dinner prior to the AGM, as well as at the AGM.