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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214655  
Subject: Re: Thank you, Fool Gods. Date: 12/4/2012 5:01 PM
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jim: If he could lighten up without tax consequences when some long term
holding is getting overvalued I'm sure he'd do so in a flash.


rational: I'm not so sure. I think part of it is his personality as well. He prefers to own businesses for long periods of time.


It's hard to say, since there always have been tax consequences.


rational: If we look back to the late 1990s, it is hard to make the case that he shouldn't have sold a number of stocks in the portfolio because even after the tax hit he would have clearly been getting more than intrinsic value.

Buffett has said as much. He has said that he should have sold his Coca-Cola shares when they were trading at 80 times earnings, and wishes he had. As you say, he found a way of doing this without actually offending the other members of the board of directors.


But to get back to your observation, that Berkshire's current weakness might logically be attributed to longstanding owners reducing their tax bills, I think this is plausible, and I'm not so sure it would be bad advice if a broker contacted one of these guys sitting on millions of gains, with the option of paying 15% in a few months versus 35% in a few years.

Since I am not in that fortunate position, I can not help but wonder how I might take some advantage of this natural wish to avoid taxes. If your hypothesis is true, that Berkshire owners want to minimize their tax bill (despite loving the idea, of course, like Buffett, that the federal government receive more income, but just not from them), then one might expect a bit of a repurchase buying spree in early January. Would a January call option be a way of getting in front of that spree?

Maybe not, since our hypothetical rich, charitable but stingy shareholders are thinking the same thing, and buying January call options so they don't miss out on the fun. Looking at the interest on December calls, between $80 and $100, there are about 40,000 call contracts open, whereas for January in the same range ther are about 90,000 contracts open; for March, there are less than 20,000. Fifty thousand extra contracts means options on 5 million shares, or about 0.2% of shares, so it's still a fairly uncommon strategy, if that is what it is.

On the other hand, I vaguely recall that tax law could disallow such a scheme, at least in the USA. In Canada it would not be allowed. Any thoughts?

DTM
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