ERICOPOLY

Similar to something else I think about, which is to buy out-of-the-money puts on individual companies that you both understand and want to own in the next crash. Once their stock prices decline to the strike price of the puts, you have enough premium value in those puts to flip them into calls. Then you profit on the recovery as the calls appreciate. The benefit here is that the premiums for individual names might skyrocket -- this ensures you will be able to afford them without stressing out about the premiums. Or in taxable portfolio margin account, just keep the puts and load up on the common (hedged by the puts). This way there is no taxable event from selling the puts.

You can be very limited if you only invest in common stock (not using options). 100% investment in a single common stock can lead to the total loss you mention. Instead, using options, you can get at-the-money calls which represent a 100% notional upside position. But then you pay for those calls by writing puts on 99 other companies. You now have a portfolio of 100% concentrated upside in one name, but only 1% downside exposure in each of 100 different names. These Kelly formula discussions never deal with these real world strategies. It's all Ivory Tower stuff that leads to unrealistic fears about concentrated positioning.

That's about a 13% "dividend" yield at that pace (including the actual 2% dividend yield).

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here. So if the insurance float is used to buy stocks, they need to be MTM, but if the float is used to buyout a company, then it is no longer needed to MTM, because there is no market to mark to, am I right? In this case, I think it is much less risky. His insurance float is not invested in wholly owned businesses. His float is invested in fighter planes parked on his carriers. He can comfortably park more fighter planes on the carriers due to the presence of the destroyers. The destroyers earn good returns on their own, make the whole enterprise safer, as well as boosting the fighting capability of the carriers (more fighter jets). I like this analogy because "insurance carrier" is a common term.

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities. Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash.... Two things just happened by adding the very high quality wholly owned cash machines: 1) insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings) 2) You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire. The structure boosts intrinsic value. Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers. Buffett is playing a little game of fleet admiral here.

I don't know for sure if Roth or not -- however I think they were only introduced for the first time in 1998. Then there were income restrictions on doing a Roth IRA conversion. Potentially he did the conversion in 2010 when the income restriction was lifted. The low end of the range is $21 million and the upper end is $103 million. This article claims it to be a SEP-IRA (not a Roth IRA) -- however I would think he would have done a Roth IRA conversion by now (in 2010) so that his kids can inherit it (and so that he doesn't have to make forced withdrawals). Especially since the tax rates were better. http://www.bloomberg.com/news/2012-07-15/the-secret-behind-romney-s-magical-ira.html

I gave his $100mm some thought. This is a Regular IRA (not a Roth IRA). So does he really have $100mm? He is 66 years old. So I figure he's pretty much stuck with a 40% income tax (either in his life or upon his death) on those assets. That knocks the effective balance down to $60mm. Then I figure he is never going to spend all of the assets ouside of his IRA. Therefore, he will effectively have to pay inheritance tax on the IRA assets. At 40% rate, that knocks it down to $36mm. So he doesn't really have anywhere near as much as people think. In fact, the Treasury has about 77% more money in his IRA than he does! He barely has 1/3 of what people believe.

Ericopoly - I hope you don't take this the wrong way - but I'm really surprised you haven't heard of this before. I say I'm surprised because I view you as the thought leadership on this board when it comes to tax avoidance and investment schemes. I say don't take it the wrong way, because I've thoroughly enjoyed and benefited from the schemes you've proposed in the past! Tax avoidance schemes (legal ones) might be a close 2nd favorite topic of mine, behind stock research. If you haven't already read about it, you should read about the methods Mitt Romney and Bain employed that resulted in him having $100mm+ IRA balances. The practice is questionable, because the assets were purchased at (arguably) undervalued prices). He was doing this back in the 90's though; not sure if the IRS was paying as close of attention back then. It's hard to offend me because I'm a retail investor, not a pro. I learn these things piecemeal as I blunder through life. The last couple of days an opportunity came along and I said "I don't know how that works mechanically". So then came the question to the board. Thanks for all the help (to all the posts above).

It is 84 at my house right now (Montecito, CA). This is ridiculous beach weather :D :D :D Investing in farmland and ski resorts must be difficult. http://online.wsj.com/news/articles/SB10001424052702304244904579278321514522650?KEYWORDS=california+drought

I get an immediate gain of 66.6% (assuming estate tax is 40%), yet I can take back the funds at any time. So I just think that's too great to pass up. I suppose it would be less exciting of an idea if estate taxes weren't a concern.

Let's say my wife and I each give $14,000 to my son's 529 plan. That's $28,000 total. It is removed from our taxable estate because it is considered to be a "gift". It's now in his name compounding away tax-deferred. Should he spend it on anything other than education, he is going to pay a penalty. Now compare that to.... My wife and I each give him $14,000 to a trust in his name. That's $28,000 total. It is removed from our taxable estate because it is a gift. It's now in his name compounding away tax-deferred in a variable annuity. Should he spend it on anything other than education, there is no penalty (provided he is retirement age). So you really aren't abusing anything at all by overfunding a 529 plan. The way I see it, I can withdraw the money if I change my mind or reassign it to another beneficiary. Thus, he has to behave himself because I can take it all away from him at my discretion. So, the IRS really has nothing to bitch about. Either way, it's not like they are missing out on any revenue. They're not! The main benefit of the 529 is the kid can't behave like a spoiled brat or it gets taken away.

My question is how much opportunity is there from higher rates. We know about BAC's huge low-cost deposit base -- they benefit from the short-term securities portfolio earning more money from higher short-term rates. Does C have the same opportunity? I recall C having an inferior funding model.

I found this link: http://newdirectionira.com/private-equity.html So it appears I can invest my Roth IRA assets into shares of a private company (should such an opportunity come along ;)) Any ideas on which major companies offer this kind of IRA, and who you would recommend? To my knowledge Fidelity doesn't offer this type of IRA. But my idea is to open an IRA account (with the right company) and transfer some cash from my Roth IRA to that one, then invest in the private equity placement.

Except that (after the few face-sucking comments from Sears employees), you see this down at the bottom of each page of his blog "Comments are closed."

I have an inkling that if that Vice Chairman title has anyone on it, it will probably be somebody whose name ends with "Spiers". It would only make sense. Cheers! Instead of saying "I have nothing to add to that", she can just say: "yeah, yeah, yeah, yeah, yeah" "yeah, yeah, yeah, yeah, yeah"

True, but we expect the capital return to increase in 2014, and 2015 over 2013 levels. So if you want consistency, it will need to have steps in it. Perhaps the even distribution is fitting the following pattern: $1.8b Q1 2014 $1.8b Q2 2014 $1.8b Q3 2014 $2.3b Q1 2015 $2.3b Q2 2015 $2.3b Q3 2015 So far they are not violating this pattern. (yes, dry humor)

The 5% dilution every year makes me sad. Pay your employees more, don't give away cheap stock options that don't incentivize properly. agreed, horrible. I do not understand why companies refuse to use their authorized buybacks. That has been the most disappointing part of this whole thesis/playout. I'm pretty sure there isn't much question about that. The reason: 1) buybacks are to be cancelled in face of mounting losses 2) "You say you executed the entire buyback on day 1? Well I suppose then it can't be cancelled" Furthermore, this is why the Fed prefers buybacks over dividends, and this is why (you people ;)) need to stop hoping that they are going to return all capital as dividends in some effort to pump up the stock

So once we emerge from this recession, we perhaps have another 57 months to go before the next one (that being the average time between recessions since WWII). So next recession in 2018+?

You could always short RIM to have a 0% net exposure. BeerBaron That would be an interesting psychological experiment. I doubt the critics of the RIM investment have the same amount of conviction in shorting RIM to hedge their FFH, as their vocal grumblings from the peanut gallery.

I guess you would have to short in a manner to keep the leverage equal, right? Otherwise you would lose if the common appreciated more than the 4.5% hurdle rate. See, here is what I'm thinking. 1) Buy the common for the dividend 2) Short the warrant to eliminate common stock pricing risk of dropping down to warrant strike 3) Purchase put on GM with $18 strike for 20 cent (asking price) You basically have a risk-free dividend, less the 20 cents for the put. And less the borrowing cost on the warrant. So I'm kind of curious how much the borrowing cost is going to cost for the warrants, and what the premiums will be for the warrant. EDIT: well, I suppose there is risk of rising volatility premium in the puts (come time to roll them) if stock drops down near strike. However, that's not a big risk..

I figure if somebody buys GM common and shorts the warrant, they'll get a nice little low-risk yield. Then perhaps you buy at-the-money calls with that yield. I wonder what the warrant borrowing costs are looking like.

What's the argument for spinning off a REIT? Paying income tax at today's high rates can't be that compelling for Eddie. The corporate tax rate is not only lower, but will probably go lower still. Plus, don't they have a lot of losses at SHLD that can offset real estate rental income? One might think they would use up those losses before spinning off a REIT? At that point you might want a REIT structure to avoid the double taxation (corporate and dividend).

Already switched out of the warrants into a combo of common and LEAPS. Hoping that the stock price moves up rapidly after this announcement, after which I can sell my LEAPS and hold onto my common. I'm glad we had that discussion about cost of leverage a couple of weeks ago. I wonder if the warrants will trade with any premium tomorrow.

The Sears real estate is located in the mall though -- so you would want to leverage that uniquenesss. It would be a shame if the other stores at that very mall could not participate. They all want their online customers to pick up the item in the store, or to return the item to their store, so their salesperson can tackle them, tie them down, and make them buy more things. One of the problems with online shopping is losing that personal customer contact. That might lead to less sales, and therefore less pressure on rents at the mall. Suppose you are a mall REIT executive -- you would want to perhaps help SHLD get this done as it drives up the value of your owned properties. But anyways, just a brainstorm.

“Too many cities are in peril because they over-borrowed,” Mr Ravitch said. Yeah, well, making muni bonds tax-exempt probably had something to do with that. The cheaper the interest rate, the more you will borrow. Eventually, you wind up with the same absolute interest payment burden but a much higher absolute amount that you owe.