This is probably more up to the date and better than the Triumph book https://publications.credit-suisse.com/tasks/render/file/?fileID=B8FDD84D-A4CD-D983-12840F52F61BA0B4 keywords: Credit Suisse yearbook, historical returns, long-term returns
From the BRK letter "Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever. Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 - 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems." Buffett is getting ready to dump marketable securities if tax rates are slashed by Trump (that's what he is saying even though he is being all polite about it). He also explains (right after this) that there are plenty of dividend tax breaks (for BRK and others), so dividends are fine (which is why he favors controlled business over common stocks). The issue is capital gains (a major source of the gains in common stocks are of this form). If rates are slashed, the cost of closing a lot of positions will come down (as the deferred tax liability comes down) so it becomes CHEAP to sell (taking advantage of low tax rates) and buy something else. Much better than holding and then seeing tax rates go up in the future when a different president comes in The dude is giving a seminar on how to manuver inteligently during tax changes. Get ready for the Buffett dump
"But here’s the corporate math. Every $1 of capital gains that a corporation realizes carries with it 35 cents of federal income tax (and often state income tax as well). The tax on dividends received from domestic corporations, however, is consistently lower, though rates vary depending on the status of the recipient. 20 For a non-insurance company – which describes Berkshire Hathaway, the parent – the federal tax rate is effectively 10 1⁄2 cents per $1 of dividends received. Furthermore, a non-insurance company that owns more than 20% of an investee owes taxes of only 7 cents per $1 of dividends. That rate applies, for example, to the substantial dividends we receive from our 27% ownership of Kraft Heinz, all of it held by the parent company. (The rationale for the low corporate taxes on dividends is that the dividend-paying investee has already paid its own corporate tax on the earnings being distributed.) Berkshire’s insurance subsidiaries pay a tax rate on dividends that is somewhat higher than that applying to non-insurance companies, though the rate is still well below the 35% hitting capital gains. Property/casualty companies owe about 14% in taxes on most dividends they receive. Their tax rate falls, though, to about 11% if they own more than 20% of a U.S.-based investee. And that’s our tax lesson for today" So taxes on dividends (to a corporation) are anywhere between 7%-10.5% (non-insurance) to 11%-14% (insurance). So they are already pretty low. On common stocks, BRK got to pay 35% everytime they dump a stock. If they have been holding a stock forever (like Coke) the size of the tax is huge. In that case its better (math wise) to hold and receive dividends WHILE WAITING for tax rates to come down, even if the stock is a little overvalued, you don't like it as much, etc. The reason is that because the tax is so huge (35%) to have almost 1/3 of your capital to dissapear like that is a huge burden. Its better to hold something a little overvalued (but not massively so) and GAMBLE that rates will come down. Because if they do, you produce an extra 10-20% of capital in savings. That's a form of 'return'. When tax rates change, you go ahead and dump everything that is marginal like that and use the proceeds to either reinvest into something else or keep in cash while waiting for a huge purchase. And that's what he will do
Truth is that Buffett is really a great tax accountant and mathematician, his actual strategy is not advanced. In fact, his strategy seems more of a natural consequence of his mastery of tax laws and compounding math rather than anything else
When Buffett does that (keeps a marginal stock because he doesn't want to pay a huge tax bill) he is risking that tax rates will increase but that's not a true risk because he doesn't have to sell. He can always hold and GAMBLE again that tax rates will come down in the next election (and the opportunity cost is not high because the stock still should beat bonds/inflation rates as it is not massively overvalued). Because BRK has a huge deferred tax liability (because of Coke and other stocks), they also own a 'short' position on tax rates. His statement of " This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems" Makes me think he will cover part of that short. Trump might be the last chance BRK gets before the US fiscal situation gets worse and tax rates RISE The guy is a true tax master In a few days the media might pick up on this but you heard here first
There is no trade that can be derived from this (that I know of) but its a huge lesson on how to maximize long-term wealth. The avg Buffett fan who read 3 books and thinks he's got Buffett figured out will miss out things like that (in fact, how many Buffett books even go in depth on the compounding math associated with his different decisions? almost none but its huge). Mastering the tax code should be a huge part of a wealth creation plan
There is one known 'Buffett rule', that rich people shouldn't pay a lower tax rate than their secretary. Through his behavior I'm creating a 2nd Buffett rule. The first draft: When you have a lot of unrealized investment gains in stable investments (like safe/predictable businesses, real estate, etc), realize those gains when you believe you are at a multi decade low in tax rates and the investment is not as attractive as before. Avoid realizing gains in other situations unless absolutely necessary (investment is massively overvalued, capital is needed for other investments, etc)' The multi decade level of tax rates can be estimated by looking at fiscal trends, demographics, unfunded liabilities, and things like that
If someone invests in a stock at $1 a share, and it rises to $50 after 20 years, there will be a $1 cost basis $49 in capital gains at 35% tax there is a $17.15 tax liability But if taxes are slashed to 0% (temporarly), the person can then sell at $50, immediatly rebuy it and 'reset' their cost basis to something that will save a big amount of taxes in the future when tax rates rise again. So when tax rates fall, there is a big incentive to convert 'accumulated capital gains' into a 'new cost basis' (be it in the same stock or in another one). But a cut to 15% makes things more complicated because there will be that 'loss' involved (a loss of 15% of all the accumulated capital gains which in some investments will account for 10-15% of the total funds obtained by the sell) That loss is only worth taking IF: -You think there will be an even greater loss in the future. If tax rates will rise in the future than its better to take this loss now than to defer it(So, its the multi decade low in tax rates or perhaps if rates are resonably low but its a situation where one is having a difficulty estimating future rates).Or the stock is priced too highly compared to alternatives (So there is a loss in terms of opportunity cost) Or -You need the capital for other investment opportunities. I suppose Buffett is signaling that despite the fact that he has $100B in cash, he is STILL short of the total capital that he needs to have around to make big purchases. Just the fact that he is considering selling marketable securities tells you that he wants even more money in case there is a recession or a series of big buys appear. He could always just hold these marketable securities forever (and never pay any tax, or only sell when the stock went into a mini-bubble in which the undeserved gains would offset the tax). The fact that he is considering selling them (and updated a rule list from 1983!) tells you that he does not think $100B is enough. And he is right. Good companies tend to grow strongly overtime, so the universe of potential acquisitions will become more and more expensive (Like Unilever, which required a $143B bid) There is no chance of a Buffett dividend for a really long-time and Buffett will dump all the marginal securities from his portfolio as the next presidential election approaches (due to the chance that Trump loses) to raise his buyout gun even more
Longed some deep OTM Jan 2018 calls on HLF. I think I will do the last part of my PSH HLF hedge this way (the first part was through shares at $54, that got the PSH 10% short size down to 3-4%).