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Stocks B / Berkshire Hathaway


Subject:  Re: Iron Condor (revisited) Date:  8/10/2018  11:32 AM
Author:  mungofitch Number:  238110 of 259456

* To create a bit of current yield from a portfolio which does not pay dividends?
* To smooth returns...make bad and so-so times better while turning occasional great times into merely very good time?
* To increase the long run average return on your portfolio?
* Improve a tax situation / avoid hurting a tax situation?

"* To create a bit of current yield from a portfolio which does not pay dividends?"
That pretty much nails it.

Well, here are some strategies that might be worth considering. Or not.

By far the most prudent and obvious is this: sell 1% of your current remaining Berkshire share count each quarter.
Bang, you have an income stream. The tax treatment is fine. Almost by definition you will average realizing the long run average market multiple on the sales.
What's not to like?
No, it's not an *additional* income, but you can't get that without additional risk,'s OK.
It's prudent and intelligent and reliable.

But it contains no promises of magic or excitement or free money, so I imagine you'll read on.

If for some reason you have an irrational attachment to income that comes from dividends for some reason,
sell 1/3 of your Berkshire position and buy some BIP. And/or BPY. And/or WFC/PL.
The problem is that we live in a very low yield world.
There aren't that many things with good coupons that are safe enough.
Those are three I might consider personally, but they are VERY much exceptions.

Very slightly better might be a combo. Switch 1/3 of your BRK to BAM.
You get a small dividend on the BAM, and you can sell a small amount of either one each quarter to top that up.
Whichever one seems to be most fully valued at the time.
BAM doesn't have quite the bulletproofness of Berkshire, but the central expected return in the next few years might be higher.
It's at least conceivable that BAM will have a higher return, and therefore the higher return on
the BAM portion of the portfolio means that the income you're pulling out doesn't make the overall
portfolio return much/any lower than it would have been as a simple block of BRK stock, meaning the yield is "gravy".
Depends on how much you pull out, and how well BAM does relative to BRK.

As others mentioned, I have in the past suggested that greedy people like me can sell moderate fraction
of your BRK stock and buy some long dated deep-in-the-money BRK calls with the proceeds.
This works amazingly long as BRK's valuation is good, and interest rates aren't bad, and you're patient.
It can be combined with suggestion #1, just selling 1% of your remaining current count of BRK shares each quarter.
Use the calls for the rest, as a way of aiming for boosting the long run portfolio returns.
The long run average extra return from the leverage in the calls has a very substantial chance of increasing
the long run return enough that you are getting the return you would have had on just the BRK stock,
PLUS enough extra income that the slight liquidations leave your account as big as it would otherwise have been.
But of course, it's just leverage. It isn't a zero risk proposition.
The attractiveness depends somewhat on the tax treatment of your account, but less than you might think.

Then there are strategies involving gathering option premiums.
There are quite a few of those, to say the least. Few live up to their promise.
Iron condors? and paying somebody to manage that for you? I remain dubious.
Another I have done in the past is writing repeated Berkshire puts.
(sell some stock, leave cash sitting there, write repeated first-in-the-money puts backed by the cash.
Each time a put expires or gets to a uselessly low maximum rate of return to expiry, close and write a new one.
Each time the stock gets assigned, immediately sell the stock and write a new put.
This works. During the time I did it, I got all the stock's return plus a bit of "yield".
The problem with it? The premiums on Berkshire are generally pretty darned low).
As a rule of thumb, use analogies from the insurance business for all premium gathering strategies.
There is a premium level at which a strategy is worthwhile, and another at which it's dumb.
Option premiums are awfully low lately.
Consider all premium harvest strategies seriously only when, say, VIX is over 20.
It has been a long time since that was true, but over the very long run it has been true half the time.

One of the safest and most reliable strategies I know is laid out in great deal in Jeffry Cohen's book "Put Options".
This is not a general manual on options like so many others, but rather a VERY explicit description and defence of a single very specific low risk strategy.
In general the strategy is nearly risk free. You make maybe 15% a year in normal years, and
when things occasionally go south you occasionally break even.
The catch is that some years the strategy described is just not worth the bother...the prospective return is too low.
The silver lining is that when premiums are too low to make the return interesting, you know in
advance you're not going to make much, so just don't do it. Do something else that year.

If you don't use the hedge side of his strategy it's an all long strategy based on repeated cash-backed put writing, something I've done a lot of.
As a rule of thumb, I find you'll get a return equal to roughly the midpoint between the return on the underlying stock portfolio and about 10%/year.
A -20% market drop turns into a loss of -5%, a flat year for the stocks turns into a 5% profit, and a 20% year for stocks turns into a 15% profit.
(maybe that 10% in the formula becomes 8% in low VIX times and 12 in better VIX times, but you get the idea)

There are lots of ways to get fancy.
There is a smaller population of things that promise a free lunch.
And a vastly smaller number that actually deliver on the promise.

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