ERICOPOLY

I also employ a methodology of buying puts instead of selling appreciated shares. Then as the puts expire worthless I can take the tax deduction to begin to reduce holdings. So while I can't dump the entire holding all at once without tax consequences, I can certainly lock in the value all at once without tax consequences. Unless the shares don't have options traded, but currently I don't have that problem.

In truth, this is not fair: not much of what Mr. Buffett does is very relevant to any of us… Ok, I admit that! Yet, an entrepreneur is content to be “vaguely right”… When he finds a good business, he sticks with it, unless its future prospects go irremediably south, or he is offered an obscene price. And the reasons are very clear to me: 1) the knowledge and the experience of everyone are definitely limited, 2) valuation is not an exact science. And in the long-run I think it is far better to hold a slightly overvalued share, which you know in the end will take you where you want to go!, than to constantly run the risk of making very costly mistakes. But the fact that I might be willing to hold a slightly overvalued share doesn’t mean I would be buying more at those prices, or that I would like management to do that in my stead. Gio And assuming that ERICOPOLY bought at a good price originally, and taking into account the fact that he says he is paying about 50% combined state and federal taxes in taxable accounts. It would seem like in making capital allocation decisions he would have to take that into account. 1) By selling at full value he reduces his profit by that rate? 2) He says that by holding the stock you are implicitly saying you are buying that stock today. So would that mean you would be immediately taking a loss when you factor in taxes? You are right, I do have to take taxes into account, which changes the calculus of dumping the entire holding. But it does not change the calculus of dividends versus buybacks, because dividends will always be the worse option that destroys more value (unless the cost basis of my shares is $0).

My long term capital gains rate is 33% (same as my dividend rate) and it is only on gains portion. So take BAC... which I bought at "good prices". My shares might have a cost basis of $6, and today the stock is at $14.50. So I have a gain of $8.50 per share. Dividends: Now let's say they pay $1 of dividends. Okay, my tax on that is 33 cents. Buybacks: Instead, they buy back shares and I sell an offsetting amount. My tax on that is 19.33 cents. So less value is destroyed by repurchasing shares. Unless you pretend to claim that 19.33 is greater than 33.

;D ;D ;D So, Eric, you don’t see a situation in which you hold a stock, without adding to that position as soon as you have cash available? Maybe, you are right... The problem though is the difference between theory and practice: in practice almost no one behaves like you are suggesting. So trying to be practical, and engineers are always practical! ;D, I will be content enough and even very pleased, if management buys back shares when they are undervalued, and refrains from buying back shares when they are overvalued… ;) Mr. Buffett buys back under 1.2 x BVPS, and yet doesn’t sell one share of his, even when the stock trades above that price. Does he? And he is not an engineer! ;D ;D ;D Gio Humans are capable of writing down pure logic, and formulating purely logic thoughts, but they are not capable of executing investments in a purely logical manner.

I have only common shares+puts in taxable holdings, and have a mix of common and calls in my non-taxable account. I won't tell any more because I'm still trying to accumulate and don't want to move the market and further. Damn this thing is illiquid! If you're still 100% BAC and you are still trying to accumulate, I take that to mean you hold a certain amount of cash in your portfolio. What % is in cash? And how low do you anticipate letting your cash percentage get once you are all-in? EDIT: On 2nd thought, you could be holding no cash and be continuing to buy on margin. Onyx1 got the joke. No, I don't have any cash. I'm over 100% BAC on a notional basis, but I do have some tucked away in the FOCIX fund and in 529 plans.

I have only common shares+puts in taxable holdings, and have a mix of common and calls in my non-taxable account. I won't tell any more because I'm still trying to accumulate and don't want to move the market and further. Damn this thing is illiquid!

This is a really strange way to look at it… It is as if, instead of thinking how to use the new free cash my businesses generate, I would be constantly looking for someone who might be willing to buy those businesses from me… Yes, I might consider to sell a business… but only if it becomes extremely overvalued! This certainly doesn’t mean that I am going to put all the free cash generated by that business back into it! This is clear, isn’t it? I have never done so, and I will never do it… yet, I don’t sell my businesses! Exactly like it is for my businesses, also for a stock that I bought at BV and that can compound at high rates for many years into the future, I am willing to stick with that business through all the ups and downs. (Unless, of course, it becomes extremely overvalued!) This doesn’t mean I will add to my holdings on the ups… right? Gio A company repurchasing it's shares has absolutely nothing to do with plowing money back into the business. It is merely returning capital to shareholders. Shareholders who do not sell an offsetting amount are responsible for their increase in ownership at those prices. Like it or not, it's your personal responsibility as a shareholder to sell the offsetting number of shares if you think it is overvalued. But you might as well dump the entire holding if it's overvalued, no? And yes, you can be fully in cash on any given day provided you hold relatively liquid stocks. The fact that today you aren't fully in cash is an indication that you are a buyer of those shares at these prices today. It's just "tough cookies" if your mental psychology blocks you from seeing it that way, but it's the reality nonetheless. Nobody ever accused an engineer of being logical ;)

Cynically, I believe Mayo's report was motivated by a trader who wanted to see how resilient the stock is to a change in sentiment. No meaningful reaction would be his "buy" signal. The stock being down two pennies this morning would seem to be a reasonable signal that comments from analysts aren't going to talk the price down. So ironically even a bullish investor could find a report like that very valuable.

Gio, I think this is a matter of personal responsibility. If the stock is overvalued and you do not sell out your shares, then you are the one behaving stupidly. Are you not making an implicit "buy" decision every single day that you hold your shares? I mean, you can go back to cash at any time... so by continuing to "hold", you are in fact making the same capital allocation decision as if you were buying new shares. So it's you, you, you! You can't ever duck and blame management.

Forgive me for pointing this out, but your tax rate on the share-repurchase "dividend" is less than what you are stating, because the tax is not paid on the cost basis. So of course the tax might very well be zero on the pass-through sneaky dividend-laundering buyback. Lastly, the very guy that first promoted this thing through value investing circles is Mr. Warren Buffett himself. He has a scheme where 99% of his net worth is in Berkshire, 100% of his Berkshire common stock holdings are held within insurance companies, and the tax rate on those dividends is only 14.5%. Oh, and did I forget to mention that his tax rate on capital gains is 35%??? Geez, no wonder he's got everyone singing the dividends over buybacks song. He's got everyone painting his white fence for him.

It's real alright. And people who theorize about whether dividends should be paid or buybacks should be paid... blah blah blah They shouldn't care! They don't even own overvalued stocks in the first place (being "value" investors), and if they did, then it's their own frigging fault for not having sold out! Talk about a case of living in an ivory tower... sheesh!

That same year, in March 2013 2011, Mayo said BAC had $2 per share of core earnings power. Hold the Mayo.

Actually, to clarify a point. I've never seen anyone mention that it is trading for a $140 billion discount. You are overstating my estimate of a $100b discount by 40%, and I think you are confused by when I said the legal issues won't be $140b. That was a pre-tax number, because so far the legal issues have all been pre-tax expenses. Take the estimate for next year of 20 analysts -- they think it will be $1.33 per share. But that's after-tax. Pre-tax, it's $1.90. And at 12x earnings, it's $22.80 per share. Due to the DTA, they get to keep the would-be tax payments (until all used up). The idea being that by the time the DTA is used up, they're through all the expenses and are earning $2 per share after tax. So, in the meantime, while they are working towards this $2 per share after-tax number in a couple of years, they make roughly $2 pre-tax that they get to keep, minus the temporarily high pre-tax expenses. But the pre-tax expenses won't amount to $140 billion. Last year's expense levels don't matter anymore, and that's where you are getting your P/E of 19 from. It isn't relevant because your returns are based on what happens going forward. EDIT: And so once you hit $2, in two or three years, you have $24 share price at 12x earnings... in addition to the accumulated earnings between now and then. So that's possibly $28-$30 in three years, which is a double of course.

Last year when the bank said they were meeting B3 requirements, I believed it was a signal that they could return all future capital generated. This year, in Q3, once again they crossed the 9% B3 threshold, calculated by a different method (using 3rd party ratings instead of in-house ratings). I think the 3rd party ratings are going to be more politically saleable, and that will be the method they live by and it will be important to show this number to the world. So... false start last year. But this year the same statement just needs a reboot. They are now apparently meeting all of the requirements laid out for them, and seemingly can now return everything they generate... once they get approval to do so. I think that's why there was such a lame request for capital return last year. EDIT: In other words, they still had to build capital but just wouldn't admit it openly.

I went through the 10-Q and I couldn't find the outstanding long term debt maturities and interest rates. But BAC has stated that $40b is expiring next year, and they intend to roll less than 1/2 of it. So that means more than $20b won't be replaced. I looked at bond being traded, and saw some expiring next year that have coupons all north of 5%, but not by much (although one issue expiring is 7%). And I saw other financials issuing 7 year bonds at around 3% (new issues), or 5% for 20 year maturities. So assuming they roll $20b at 3% for 7 years, then they pick up at least 200bps on the 20b being rolled, and they pick up at least 500 bps on the 20b (at minimum) maturing. pre-tax. So roughly $1.4 billion annual benefit from maturing LT debt next year (before tax).

Investing however is not about buying the stock today in order to earn yesteryear's income. And I know that you know that.

BAC appears to be buying back stock at pretty much the rate allowed in the CCAR authorization, at about 2 bn of 5 bn spent halfway through the period. Especially when you consider that near-term economic forecasts and macro environment uncertainty (rates) have probably increased since the last CCAR process - Fed would probably want to see additional caution. It would not pay to put the pedal to the metal in 2013 if that means reduced capital distributions in 2014, 15, 16... because the regulator sees you as reckless. They also only just barely clear 9% B3 (standardized method) and 5% minimum on that new leverage ratio. They are years ahead of schedule, but demonstrates good behavior and the clients/counterparties likely want to hear it. It probably isn't a coincidence that they hit those metrics before buying back more shares. It gets them to those levels going into the next CCAR process. So have the ratios met by end of Q3 (check!), then complete the $3b of buybacks out of new capital generated during next 6 moths. So one theory is that by hitting those two metrics (which they couldn't have done if they'd spend $3b extra on buybacks) they are trying to make a stronger case for their next capital return request.

I read his full report. I am shocked by this guy. He states that his $12 price target is arrived at by taking the average of dividend discount method, P/E, price-to-book, PEG ratio analysis, and sum of the parts for both PE and PB. That's some pretty deep analysis!

Here is Mayo's Report. GO! The report is stating a falsehood. Mayo claims the 14% ROTE metric only came up today in response to a question. He is wrong!

He is still consistent with what he said two years ago (late 2011) -- New BAC will be done by mid-2015. And he's given a similar timeline for all the costs to come out of LAS. Which is roughly two years (from today)... a bit less. So this cleanup is happening roughly on the timeline he promised.

Yes I'm still fully invested in it. It's getting easier to hold for me, even though the price has risen. They are better able to withstand whatever storm comes... compared to two years ago. I keep thinking this was just super easy money, but partly it's because an asteroid the size of Texas didn't hit the Earth... I mean, hindsight bias is a tricky thing.

There has not yet been a fire that was not caused by collision and physical damage to the battery pack. It has not yet, for example, demonstrated the ability to set itself on fire when just driving along -- primarily because it does not have this extremely hot thing called an internal combustion engine: http://www.mibz.com/13968-shocking-a-porsche-911-turbo-caught-on-fire-suddenly-in-usa.html The driver of a Porsche 911 Turbo has encountered problems while commuting to the office. His car caught fire and the flames were quickly extended to the model cloth roof after they have expanded rapidly in tight engine compartment of athletes from Stuttgart. It appears the fire started to the engine, but its exact causes are not known yet.

Tax situations differ for every person, buy you put yourself at a big disadvantage if you buy something that has a high tax rate for you, but a low rax rate for most investors. Sometimes not buying a certain asset class might be the best move: if you indeed need to pay a 45% dividend tax as an Australian on a foreign stock you are basically screwed by the government, and owning a dividend paying foreign stock is just not an option. But you might be able to work around the issue. Buying derivatives (such as options, or CFDs) could be a solution: their pricing does include the expected dividend, but since you don't receive the dividend you don't need to pay the tax and the party writing the option is most likely not paying any dividend taxes. Or maybe you could setup an offshore holding company. If you face high taxes you either have to find a way around it, or just not buy it in the first place. You aren't going to get anywhere with that unless you go with something like an insurance company which holds the passive investments. You can't simply set up a foreign corporation for yourself where you do your passive investing. http://www.borelassociates.com/topics/Using-Offshore-Holding-Companies.pdf Basic Anti-Deferral Regimes For a taxpayer to benefit from deferral, the foreign entity that holds the income producing property or activity must be a foreign corporation. If a U.S. taxpayer invests through a foreign entity that is treated as a partnership, branch or disregarded entity for Federal income tax purposes, it will remain subject to tax on its allocable share of the entity’s income, regardless of whether the partnership is formed under domestic or foreign law. Accordingly, the general rules applicable to the taxation of foreign corporations owned by U.S. persons must first be considered. There are two main anti-deferral regimes under which the U.S. imposes tax on the income of a foreign corporation with U.S. shareholders. These regimes operate by applying special tax rules to shareholders of foreign entities that qualify as either CFC’s or passive foreign investment companies (PFIC’s). Both sets of rules are aimed predominantly at taxing a U.S. shareholder on the foreign corporation’s passive and “mobile” income (i.e., income that may easily be shifted to low-tax jurisdictions). If the rules apply, the U.S. shareholder may either: (1) be taxed currently on the foreign corporation’s income, despite the fact that no income was repatriated to the shareholder through a distribution; or (2) face a somewhat punitive interest charge (in addition to the shareholder’s ordinary income tax liability) on an ultimate distribution to the U.S. shareholder or disposition of the entity’s stock.

Today, Moynihan said that they can get to 1% ROA and 14% return on tangible equity within a couple of years. It's at the 37 minute mark of today's webcast: http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-audioarchives#fbid=22yFtlrqv3Y

Ironically I believe high tax rates help support high asset prices. I see it here in local luxury real estate. The top income tax rate is over 46% in California. So, you see a property rented at gross rental yield of 4% and you would think it's overpriced, but keep in mind from the renter's perspective it eats up 7.5% pre-tax income . So the homeowner earns 7.5% gross imputed rental yield if he buys the home he was renting previously. Even though he'd only earn 4% pre-tax if he turned around and rented it out! Normally, 7.5% pre-tax gross rental yield from a landlord's perspective would be an appropriate rent. That's the same rent the homeowner earns for himself. Therefore, it makes sense to buy the home that you are renting even if your rents represent only a 4% cap rate for the landlord/investor.