Capital account vs income account and business structure

[cloud]

Hi all,

This is my first post.  happy to find like minded people.  I've been to many forums and many think I am a crazy person.

To introduce myself, I  graduated in 2008 with B. Electrical Engineering. You knew what happened. Nobody wanted to hire me. Not a single interview! No worry. I was preparing for that since high school thanks to the book "Rich dad, Poor dad".  I am just like many people. I don't really care about money itself but I need the independence very badly. So I started investing in the stock market  in 2007 with $1000, bought RBC equity fund. A year later, I was experimenting with picking stocks and made some mistakes. After trial and error, my performance has becoming very good and stable. With a bit of leverage(~30%), I obtained 40% return in 2013 and 28% in 2014, 5% YTD 2015.  The problem I have right now is not enough capital. 

 

 

I have two questions.

 

#1 Capital account vs income account  (Canadian)

In the past 3 years, I started combining concentrate investing and value investing and the result is very good. It involves lots of trades. As a result, I start to  worry about tax issues.

 

2013:

Number of Trades that generate gain/loss: ~5 trades/ month(Buying/sell shares, selling covered calls)

Net gain from transactions: ~$7,000

 

2014:

Number of Trades that generate gain/loss: ~ 20 trades/month  (Buying/sell shares, selling covered calls and cash secured puts)

Net gain from transactions: ~$10,000

 

I used margain. Average holding period of each trade ranges from one month to several months or 1 year.

I am not full time investor, just doing it part time. I can't even live on this capital gain income. After 10 years, it can replace my job income.(30k/year pretax)

 

As my portfolio grows, I see the number of trades increases because I have more capital to deploy.

Right now, I am reporting in capital account. When should I worry about reporting on income account?

$10k capital gain/loss is not worth CRA's resource to reaccess ?  What about when it reachs $50k ? 100k?  Is there an income threshold that I should start worrying?

I don't want to go back 10 years and redo all tax returns 10 years from now.

 

#2 Business structure for stock market investor

The biggest incentive for me to create a business structure for stock investing is to obtain more capital.

When should I consider incorporate as a single person corporation in terms of investable asset and investment income?

What about sole proprietor ? Its tax rate is same as individual?  Does it help me to get a bigger unsecured line of credit if I set up a sole proprietor business structure?

 

Thanks

 

 

 

 

 

[rb]

Welcome to the board.

 

Let me say that I like your enthusiasm. Reminds me of younger days :) Now let's get to the business at hand.

 

Let me start by saying that CRA does not mess around. If you think that CRA will not bother to ask about $10,000 gains you are greatly mistaken. Take the taxes seriously. From what I read in your post, your taxes would already be quite complicated.

 

Issue #1. I can help you here, but you'll have to be more specific and give more detail. What exactly do you mean by capital and income accounts? I think I know what you mean but I want to be sure. More detail and specifics are preferable to less.

 

Issue #2. The simple answer is that the most tax efficient way to invest in Canada is as an individual. There a few other ways of structuring things, but you are very very far away from that and are particular to certain situations. Most of the things you've read that are done in US and UK are not allowed in Canada. And our legislation is very tight.

 

So let me know more about #1 and we'll go from there. If you're really interested in #2 I can give you more colour, but keep in mind that there's not much you can do there.

 

rb

[scorpioncapital]

Based on what you wrote, forget income treatment, it's capital gain. Canada has this silly system where you have to classify this but you win either way so it matters little. However, the default position is capital gains and one should consistently stick to that. The reason I say you win either way is because if it's income you deduct against income gains or losses, if it's cap gains or losses you deduct against other year capital gain or losses.

 

About incorporating for this, forget it too. Do you know how complicated it is to prepare balance sheets in multiple currencies and translate them to CDN and you have to do this every year. Also there is little to no tax benefit except the compounding of non-dividended income in the corporation but it's really not worth that much.

 

The best business structure is called RRSP and TFSA, tax free trading in there and you can do whatever you want in there, even trade every 5 seconds :)

 

also check out financialwebring.com taxing situations - all your questions are answered there and much more.

[cloud]

@RB

I thought people who  can answer my first question should understand capital gain vs income gain.  One is 50% taxable and the other one is 100% taxable.

I know day traders are definitely need to report as income but I am not a day trader. But I do 20 trades per month with a bit a borrowing. Right now I am not claiming any interest expenses.

 

@  scorpioncapital

It makes a big difference whether I report as capital gain or income because my winning positions far outweigh the losing positions. Most of my trades are net positive. I won't trigger loss just because some positions went down below my cost.  If I report capital gain as income, I'll pay $2000 tax this year vs $1000 in terms of realized gain.

My main question is when do I consider changing to reporting capital gain as income?  I want to know if anyone had experience being challenged by CRA or know other people.

 

 

This is very vague:

(From taxtips.ca)

 

The combination of a number of the following factors may cause the gains or losses to be treated as income (100% taxable), not capital (50% taxable):

-frequent transactions, extensive buying and selling of securities

-short periods of ownership

-some knowledge of or experience in the securities markets ( Comment: Ouch! Punishing knowledgeable people)

-security transactions form a part of the taxpayer's ordinary business

-a substantial portion of the taxpayer's time is spent studying markets and investigating potential securities purchases  (  Comment:  Ouch! Punishing hard working people)

-security purchases are financed primarily with margin or debt

-the taxpayer has advertised or otherwise made it known that he is willing to purchase securities

-securities purchased are speculative in nature or do not pay dividends

 

 

 

Re: Incorporating:

I don't mind if it gives me no tax benefits and involve more work as long as it allows me to borrow more money easily from the bank or other people.

 

That's the question of borrowing money from bank as one person corporation vs an individual with income from job and investment. If bank looks at earning power of both to determine that amount of lending, it makes sense that an individual with two incomes can borrow more than an one person corporation structure because corporation only earns from investment. Tax rate for investment is almost the same for corporation and a person at maximum tax bracket.. Before a person reaches maximum tax bracket, a corporation pays more tax on investment.

There is no tax inventive to hold investment inside corporation. In fact I pay less tax as individual. But if I can borrow more as corporation, I am willing to pay 50% tax on gain from 500k than 30% tax on gain from 100k. Its like increasing revenue with lower net profit margin.

 

 

 

 

 

[rb]

Cloud,

 

May I suggest, that when you are looking for help, maybe you should not go ahead and insult ppl who are trying to help. If I ask for more information is to make sure I give an accurate answer. I don't think writing a bit of follow-up like u did was that hard.

 

Now let's get started with this.

 

Firstly, yes CRA challenges returns. I have this happen quite often with clients, not because of anything wrong being done, but because their dealings are more complicated and CRA goes and investigates. It's not necessarily a full blown audit. They send a request for information. Basically asking you to back claims you made on the tax return. If you were wrong or cannot back claims things get dicey. Keep in mind that CRA also gets a copy of you tax slips from your broker. But from my many dealings with CRA I found them to be very reasonable. Basically follow the rules and everything will be ok.

 

From what I read about your situation you are ok to claim your capital gains and losses as capital gains and losses. Also you should go ahead and claim the interest paid on margin loans - nothing wrong with that. It goes on the "Carrying Charges" line. A few things to keep in mind that may apply to you though:

-gains and losses from short sales are always income

-gains and losses from naked options are always income

-gains and losses from covered options normally get the same treatment as the underlying shares do

-if you hold a security for less than (I think it's 30 days - double check) then the gain or loss is income

-if you hold a security, sell it, and the buy back into it after less then 30 days (again check), then you must claim the capital gain if it was a gain, but you cannot claim the loss if it was a capital loss. In that case you go back and adjust your basis.

 

CRA covers capital gains in T4037 you should read it. Link below:

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-14e.pdf

 

Now, whether you can claim capital gains or everything should be income:

 

What you copied from taxtips is a straight quote from CRA IT479, but it's a small part of it. You should read that one as well: http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

 

The gist of it is that is that the determination of whether it is capital gains or income is determined by how you behave: if you behave like a broker-dealer or speculator (benefitting from the short term movements in prices of securities) then it's income. If you behave like an investor (deploying capital to earn a rate of return) then it's capital gains.

 

Re Incorporation:

A corporation is one of the worse vehicles to use for investing. Canada has special legislation pertaining to investment holding corporations. One of the things covered is that you cannot claim capital gains - it's all income. Furthermore, I don't think you're going to find an FI in Canada who will extend credit with no collateral to further leverage leveraged investments. But if you're hell-bent on levering up so much then why bother with lines of credit? You can just trade CFDs.

 

rb

[cloud]

I apologize for the unintended insult. That's the side effect of being too straight forward.  And thank you for taking the time to answer my two questions.

 

As for leveraging, not all forms of leveraging are good.  For example, I don't buy plain call or put.  I also don't buy 200%, 300% ETF..

I like to use super low cost margin loan as operating leverage for short to medium term value stocks. And  it  helps to have back up funding I can access any time such as cash and LOC.

I also have non leveraged accounts so not all eggs are in one basket. 

 

Maybe I should really forget about INC.  It's less hassle and more peace of mind. If it comes up in the future, I'll deal with it then.

Even with current setup, as an individual earning 30k, I will still do really well after another 10 to 15 years.  Last year, scotiabank almost doubled my unsecured LOC limit without me asking from $7000 to $12000 because I've been a good customer.  i would think they will give more if I ask. :)

 

I will avoid short term trading as much as possible. Rarely, when stock moved substantially in short period of time, I take action. For example, I bought COS and sold at 30% gain within 2 weeks last month .  This is rare. Most of my stock positions are longer than 30 days.

 

 

 

 

Cloud,

 

May I suggest, that when you are looking for help, maybe you should not go ahead and insult ppl who are trying to help. If I ask for more information is to make sure I give an accurate answer. I don't think writing a bit of follow-up like u did was that hard.

 

Now let's get started with this.

 

Firstly, yes CRA challenges returns. I have this happen quite often with clients, not because of anything wrong being done, but because their dealings are more complicated and CRA goes and investigates. It's not necessarily a full blown audit. They send a request for information. Basically asking you to back claims you made on the tax return. If you were wrong or cannot back claims things get dicey. Keep in mind that CRA also gets a copy of you tax slips from your broker. But from my many dealings with CRA I found them to be very reasonable. Basically follow the rules and everything will be ok.

 

From what I read about your situation you are ok to claim your capital gains and losses as capital gains and losses. Also you should go ahead and claim the interest paid on margin loans - nothing wrong with that. It goes on the "Carrying Charges" line. A few things to keep in mind that may apply to you though:

-gains and losses from short sales are always income

-gains and losses from naked options are always income

-gains and losses from covered options normally get the same treatment as the underlying shares do

-if you hold a security for less than (I think it's 30 days - double check) then the gain or loss is income

-if you hold a security, sell it, and the buy back into it after less then 30 days (again check), then you must claim the capital gain if it was a gain, but you cannot claim the loss if it was a capital loss. In that case you go back and adjust your basis.

 

CRA covers capital gains in T4037 you should read it. Link below:

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-14e.pdf

 

Now, whether you can claim capital gains or everything should be income:

 

What you copied from taxtips is a straight quote from CRA IT479, but it's a small part of it. You should read that one as well: http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

 

The gist of it is that is that the determination of whether it is capital gains or income is determined by how you behave: if you behave like a broker-dealer or speculator (benefitting from the short term movements in prices of securities) then it's income. If you behave like an investor (deploying capital to earn a rate of return) then it's capital gains.

 

Re Incorporation:

A corporation is one of the worse vehicles to use for investing. Canada has special legislation pertaining to investment holding corporations. One of the things covered is that you cannot claim capital gains - it's all income. Furthermore, I don't think you're going to find an FI in Canada who will extend credit with no collateral to further leverage leveraged investments. But if you're hell-bent on levering up so much then why bother with lines of credit? You can just trade CFDs.

 

rb

[ScottHall]

This thread is frightening on so many levels...

[rb]

No worries cloud, if you would have been upset I wouldn't have replied.

 

If most of your positions are over 30 days don't worry about being classed as a business dealing in securities. But you still need to follow the other rules. So for example you COS profit is income not capital gain. Also keep in mind that while it is totally ok to claim your margin interest, you cannot claim interest paid for personal loans so no claim for your LOC since you cannot prove that it was directly linked to investing. Furthermore, you're supposed to file your taxes according to rules I mentioned which are from the Income Tax Act. When filing double check the tax slips from your broker with your personal records. You're supposed to file according to the Act not according to broker slips.

 

You should also probably go back and check your filings for previous years and make sure everything is ok. If it is not, you should file T1-adj with CRA to correct mistakes. It's better to do it sooner rather than later.

 

Cheers,

rb

[rb]

This thread is frightening on so many levels...

 

Why is that?

[ScottHall]

This thread is frightening on so many levels...

 

Why is that?

 

1. Rich Dad, Poor Dad

 

2. "Not concerned about money," but wants freedom

 

3. Is willing to use 30% leverage to get it

 

4. While the markets are at all time highs

 

5. Is concerned he can't live off these capital gains

 

6. Does 20 trades a month

 

7. A lot of which apparently have a holding period of less than a year, some just "a month"

 

8. Wants this to replace his job income

 

Conclusion, ~80% certainty: Gambler.

 

I wish him the best. We've had some successful gamblers here in the past. I just hope he really knows what he's doing and I'm way off the mark here...

[rb]

1. Rich Dad, Poor Dad

2. "Not concerned about money," but wants freedom

3. Is willing to use 30% leverage to get it

4. While the markets are at all time highs

5. Is concerned he can't live off these capital gains

6. Does 20 trades a month

7. A lot of which apparently have a holding period of less than a year, some just "a month"

8. Wants this to replace his job income

Conclusion, ~80% certainty: Gambler.

 

I wish him the best. We've had some successful gamblers here in the past. I just hope he really knows what he's doing and I'm way off the mark here...

 

That maybe so. But the op is an adult. He asked for some tax-related help and I tried to provide what I can. While I wouldn't do what he is doing, I don't think it's my place to provide adult supervision. We all make choices and we live with them.

[clayroad]

Is a high portfolio turnover as bad today as it used to be? Today's transaction costs are pretty low, at least for most stocks. With a small amount to invest, taking advantage of very short term mispricings might make sense. Taxes are a disadvantage, but I suppose most of us have ways to work around that problem for the most part.

 

[kevin4u2]

Hi Cloud,

 

Let me make a few comments.  I can be blunt too so please don't take this personally, but I'm confident you will remember this discussion is a few years. 

 

1)  If you are dealing with small sums of money why not trade within a TFSA or RRSP if you have contribution room?  If you are using a LOC in a margin account to increase your leverage, you must like paying with fire.  I mean a 3x ETF would be less leveraged.

2)  If you are paying interest to invest, write it off.  Then again if you want to pay more tax on my behalf go right ahead. 

3)  Being an engineer doesn't make you a god.  You are young and have a lot to learn.  A BS in any type of engineering does not make you an engineer nor can you claim you are an engineer by law in Canada.  I didn't say you are making this claim but it could have been implied.

4)  I agree with Scott that this thread is quite scary.  The markets have been going in one direction since you have been investing.  Wait till the market turns and you'll learn what your really made of. 

5)  Leverage is great when the market is going the right direction.  See point 4.

6)  Reading rich dad poor dad is not an investment education. 

7)  Why not post all your trades for everyone to see?  Start a blog.  The transparency will be good for your ego. 

and

8)  (I'm serious here)  What was your investment rationale for buying COS? 

 

[oddballstocks]

Not a trader..240 trades a year..!!  Fidelity considers anyone with over 120 trades a year an "Active Trader"

 

I don't really know what to say except "It works until it doesn't."  Trading often and leverage aren't hallmarks of success, but who knows maybe you'll buck the trend.

 

 

[clayroad]

Buffett used leverage in his partnership days, and at least anecdotal evidence suggests he had a bigger turnover than one might expect. Difficult to say what Buffett would have done with today's spreads and trading costs.

 

 

 

[rb]

Buffett used leverage in his partnership days, and at least anecdotal evidence suggests he had a bigger turnover than one might expect. Difficult to say what Buffett would have done with today's spreads and trading costs.

 

Incorrect. During partnership days, Buffett only used leverage in dealing in special situations. What our OP is doing is down right reckless. I don't exactly know WB's turnover back then... but if he used higher turnover when younger and then used less. Maybe you should assume that as he learned more about things he improved his method.

 

Furthermore, taxes are a higher problem when you trade often. Not just the income vs. capital issue, but also compounding effects. If I trade often and I harvest my gains, then I need to pay taxes on my gains today as opposed to the future. Therefore I have less capital available to compound today which results in significantly less assets in the future. If you model it you'll be surprised by the long term effects.

 

Also since you brought WB into this, he tries like crazy to push recognizing gains as far into the future as possible. See recent P&G and Graham Holdings transactions.

 

rb

 

[clayroad]

Buffett used leverage in his partnership days, and at least anecdotal evidence suggests he had a bigger turnover than one might expect. Difficult to say what Buffett would have done with today's spreads and trading costs.

 

Incorrect. During partnership days, Buffett only used leverage in dealing in special situations. What our OP is doing is down right reckless. I don't exactly know WB's turnover back then... but if he used higher turnover when younger and then used less. Maybe you should assume that as he learned more about things he improved his method.

 

Yes, as I said he used leverage. I prefer not to assume reasons for his lowered turnover. There is no fundamental reason why any amount of leverage is automatically bad. Appropriate level depends on various things, including personal risk tolerance.

 

[biaggio]

Cloud,

...

Re Incorporation:

A corporation is one of the worse vehicles to use for investing. Canada has special legislation pertaining to investment holding corporations. One of the things covered is that you cannot claim capital gains - it's all income. Furthermore, I don't think you're going to find an FI in Canada who will extend credit with no collateral to further leverage leveraged investments. But if you're hell-bent on levering up so much then why bother with lines of credit? You can just trade CFDs.

 

rb

 

rb, Never considered that investing within a corporation is  one of the worst vehicles to use for investing.

 

what do you think of investing within a professional corporation (income generated from professional services) or an active business that is incorporated- example investing the rental income from property held inside of a corporation. Income is taxed at at the low small business rate. Generally investments would be buy and hold until capital is needed 10-20 years down the road i.e. no trading, strict buy and hold.

 

[rb]

Biaggio, in Canada investing inside a corporation is one of the worst ways to do it tax wise. In the 90s there was wide spread tax avoidance using corporation and the gov't introduced legislation and squashed that with an iron fist.

 

Now there are ways to do it but I didn't want to bring it up because I didn't feel like looking up exact numbers today, but if you're interested you can take what I say and confirm the details yourself.

 

Based on what I know, to avoid being classed as a Canadian Holding Corporation your marketable securities need to be less than 20% of your assets. A professional corporation is not good cause it doesn't have a lot of assets. The best way to do it would be through a leveraged property company. That way your marketable securities are a small % of your assets but a higher % of your equity. That way you get all the goodies: no tax on dividends, capital gains at 50%, everything taxed at small business rate, and you can even trade.

 

rb

 

Edit. Sorry I butchered your name. Fixed now

[cloud]

;D

I am a bit surprise to find this kind of reply on Corner of berkshire and fairfax.

The most important quality to have in life is: open mindedness.Close mindedness only limit personal growth.

I believe anything is possible until proven otherwise.

It would be tiring to answer each points.

 

 

 

This thread is frightening on so many levels...

 

Why is that?

 

1. Rich Dad, Poor Dad

 

2. "Not concerned about money," but wants freedom

 

3. Is willing to use 30% leverage to get it

 

4. While the markets are at all time highs

 

5. Is concerned he can't live off these capital gains

 

6. Does 20 trades a month

 

7. A lot of which apparently have a holding period of less than a year, some just "a month"

 

8. Wants this to replace his job income

 

Conclusion, ~80% certainty: Gambler.

 

I wish him the best. We've had some successful gamblers here in the past. I just hope he really knows what he's doing and I'm way off the mark here...

[rb]

I am a bit surprise to find this kind of reply on Corner of berkshire and fairfax.

The most important quality to have in life is: open mindedness.Close mindedness only limit personal growth.

I believe anything is possible until proven otherwise.

It would be tiring to answer each points.

 

Really? Surprised? It is a discussion board frequented by people that admire two conservative insurance companies, named as the intersection of said insurance companies.

 

To very loosely paraphrase Warren Buffet you went to a ballet looking for a rock concert and then you complain that you're surprised by the content of the show. See I can be blunt too  ;).

[cloud]

Hi Cloud,

 

Let me make a few comments.  I can be blunt too so please don't take this personally, but I'm confident you will remember this discussion is a few years. 

 

 

 

1)  If you are dealing with small sums of money why not trade within a TFSA or RRSP if you have contribution room?  If you are using a LOC in a margin account to increase your leverage, you must like paying with fire.  I mean a 3x ETF would be less leveraged.

-Right now I am concentrate on growing my networth as fast as posible. I have 10% of my asset in TFSA. The main reason is that I can't borrow against my stocks in TFSA and RRSP.  Leveraged ETF is a losing game in the long term for buy and hold investor.  They depreciates.

 

2)  If you are paying interest to invest, write it off.  Then again if you want to pay more tax on my behalf go right ahead. 

-If I claim the interst cost, it'll give impression I am running a business which I am not at that level yet.  Writing off the interest will save me maybe $100 to $200 / year which I am  willing to give up.

 

3)  Being an engineer doesn't make you a god.  You are young and have a lot to learn.  A BS in any type of engineering does not make you an engineer nor can you claim you are an engineer by law in Canada.  I didn't say you are making this claim but it could have been implied.

-I did not say I am a Professional Engineer. I said I got a degree in Engineering and not one give a single interview.

My point was if people don't approciate my skills, I don't feel bad. I make my own luck.

 

4)  I agree with Scott that this thread is quite scary.  The markets have been going in one direction since you have been investing.  Wait till the market turns and you'll learn what your really made of. 

- It's normal for most people to feel scary for something we don't understand.

In my curent setup, the whole market can drop 90% and I am still fine meaning no margin call because of  backing funding.(Application of redundancy).  and my portfolio will drop less than the whole market because of the quality of stocks I own.  As long as it dosn't drop 90% in one day I am fine. It's imposisble because of circuit breakers.  The market is at all time high but I found many quality stocks at 52 weeks low.  If I am ahead of the market by 5 to 10% per year, I don't worry about how high the market is. I am in for the long run.

 

5)  Leverage is great when the market is going the right direction.  See point 4.

-See my reply about point 4.

 

6)  Reading rich dad poor dad is not an investment education. 

-yes it is. I learned about balancesheet, cashflow and his idea of true asset and true liabiliyty.  e.g. a car is a liabiliy not an asset.

But I don't agree everythign Robert says and does. I don't agree with network marketing/MLM.

 

7)  Why not post all your trades for everyone to see?  Start a blog.  The transparency will be good for your ego. 

and

-Why attract competitions?  If I am in for the ego, I would use my real name on the forum .

It's a good thing most people don't agree with what I am doing. The road less travelled is most rewarding.

 

 

8)  (I'm serious here)  What was your investment rationale for buying COS?

-Buy low sell high.

 

 

[cloud]

OK. Fair enough. Then I am way less conservative than Buffett and many on this forum.  It's quite lonely.  ;D

 

This quote from Soros explains why I am doing the leveraged value trades:

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

 

I am a bit surprise to find this kind of reply on Corner of berkshire and fairfax.

The most important quality to have in life is: open mindedness.Close mindedness only limit personal growth.

I believe anything is possible until proven otherwise.

It would be tiring to answer each points.

 

Really? Surprised? It is a discussion board frequented by people that admire two conservative insurance companies, named as the intersection of said insurance companies.

 

To very loosely paraphrase Warren Buffet you went to a ballet looking for a rock concert and then you're surprised by then you're surprised by the content of the show. See I can be blunt too  ;).

 

WB is using leverage from insurance company premium, AKA OPM.

 

WB said he can obtain 50% return if he has millions vs billions to manage. I think it's quite possible for his current skills. I think the way to do it is find deep value stocks. This will result in high turnover rate for sure. I think he will also concentrate the fund in a small number of positions.

 

I think my turn over rate is close to 100% because of margin  trading.  The rest of my margin account are long term buy and hold. They were carefully picked so the quality is exceptional. 

What can we talk about them?  Nothing. They are so simple and stable. There's nothing to talk about.  What can we talk about CNR?  or SJ? or RCH?  ::)

 

There's another way to look at high turnover and tax consequence: It's better to earn more money and pay more tax then earn less money and pay less tax!

My target return for value trades is 5x to 10x my interest cost.  So even I pay tax on those trades. I am still ahead than without them.

 

Example trade:

TSE:STN,  100 shares,  bought Dec, 2014, sold  Feb, 2015 for 6.6% gain.  Annualized : 40%/y. Interest cost: 4%/y.  I am still holding 50 shares in my non leveraged account. In just two months, I created a 13% margin of safety for my 50 shares positions. 

 

 

 

 

Buffett used leverage in his partnership days, and at least anecdotal evidence suggests he had a bigger turnover than one might expect. Difficult to say what Buffett would have done with today's spreads and trading costs.

 

Incorrect. During partnership days, Buffett only used leverage in dealing in special situations. What our OP is doing is down right reckless. I don't exactly know WB's turnover back then... but if he used higher turnover when younger and then used less. Maybe you should assume that as he learned more about things he improved his method.

 

Furthermore, taxes are a higher problem when you trade often. Not just the income vs. capital issue, but also compounding effects. If I trade often and I harvest my gains, then I need to pay taxes on my gains today as opposed to the future. Therefore I have less capital available to compound today which results in significantly less assets in the future. If you model it you'll be surprised by the long term effects.

 

Also since you brought WB into this, he tries like crazy to push recognizing gains as far into the future as possible. See recent P&G and Graham Holdings transactions.

 

rb

[oddballstocks]

Cloud,

 

You should talk to the guy who was posting around here recently about putting 100% of their portfolio into one stock.

 

Here's my advice.  Stop worrying about the investment returns and get a job and save.

 

The biggest predictor to investment success is consistency of investing process.  I'd do a deep look inside and ask yourself if you have it.  You said you tried to get a job and gave up.  If you give up that easily over a job what will happen to your investing process when it hits a bump in the road?

 

[rb]

Example trade:

TSE:STN,  100 shares,  bought Dec, 2014, sold  Feb, 2015 for 6.6% gain.  Annualized : 40%/y. Interest cost: 4%/y.  I am still holding 50 shares in my non leveraged account. In just two months, I created a 13% margin of safety for my 50 shares positions. 

 

You know, the private equity industry is all obsessed about annualized returns - they call it IRR. However in the industry there's a saying - "You can't eat IRR!". That means that your annualized returns on a small short term investment doesn't mean much. You're richer when you make a lower "annualized rate" consistently over a long period. BRK shareholders aren't so rich because WB made 40% in one year or 6.6% on one trade. They are so rich because he made 20% compound over 50 years.

 

Also I think you got the concept of margin of safety wrong. I recommend "The Intelligent Investor" (see chapter 20) instead of "Rich Dad Poor Dad".