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Author: mathetes Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120811  
Subject: Re: capital gains when you short Date: 7/19/1999 1:06 PM
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Oh, I didn't sell cuz of the AMT, but because the stock went up even more, pushing it up to 40% of my portfolio. I think even Warren Buffet never had much more than 30% in Coke. :)

I use Warren Buffet as a reference point too, when it comes to developing a sound philosophy for long term investing. There's a difference here, however, that should be recognized: Warren Buffet didn't start with a significant portion of his wealth in the form of Incentive Stock Options.

While I think it's hard to argue with his approach in terms of the stocks that I actually buy, not putting too many of those eggs in one basket, I tend to view the stock that is "given to me," -- even though, yes, we need to lay out a little cash to exercise those ISOs -- in a different category. In connection with it, my goal is to maximize its value by minimizing the share that goes to taxes. The goal is to diversify, to accomplish that by selling off at an appropriate pace, and to avoid shooting myself in the foot at the same time.

In your case, again assuming I've read your notes accurately, you sold before holding for a year and a day, meaning you are paying regular income taxes on that set of ISOs, rather than the long term capital gains rate. While your objective of diversification is a valid one, your method of getting there sounds (if I've read you accurately) unBuffetlike (i.e., rash). This is particularly so if you are quite confident that the company is going to continue to improve its price.

Obviously that's just my opinion, and there is risk associated with keeping more than 40% in any one company. You seem to me to have assured yourself of a known higher tax rate while avoiding the possibility (which you seem to think is low probability to begin with) that that portion of your nest egg could fall in value over the next several months. Or is there something I'm missing in this? Am I wrong about the short term holding period?

(One reason I'm pursuing this is that I'm in the same situation (just in case that's not clear), but I've opted to do my divesting and diversifying more slowly.)

mathetes
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