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  • The 3 'Macro' Questions Investors Must Ask Heading Into 2015  [View article]
    I wonder if Buffett still uses the market cap to GDP ratio? With a growing share of earnings for U. S. domiciled companies coming from outside the U.S. (thus directly impacting market cap) and the GDP being a totally U.S. production number, I can't fathom how they can be compared. But they keep showing up in SA articles. The comparison might have been usable in 1970 but tell us how it works now.
    Dec 19, 2014. 10:17 AM | 1 Like Like |Link to Comment
  • Saudi Arabia: Do The Math  [View article]
    As NC investor points out, we don't know all the reasons that Saudi Arabia is doing what on the surface seems crazy. My take is that they are concerned not only about US onshore shale production but future shale production that might occur in many other parts of the world if the price of oil is high enough and the cost of the technology continues to drop (think Russia, Canada, Norway, offshore U.S.)--then their concern would be much greater than 600,000 barrels and OPEC might lose total control of the price of oil. They might just have calculated that they are better off, long term, with $70 oil rather then making shale production attractive to the world at $100 and dropping.
    Dec 5, 2014. 10:13 AM | Likes Like |Link to Comment
  • Despite Recent Hiccup, Gilead Is Still A Blue Chip Gem  [View article]
    Two weeks ago GILD issued $5 billion in 5-30 year bonds. With nary a peep from SA writers. It came with the usual explanation that the funds would be used for "general corporate purposes"--which of course tells us nothing. Yes, interest rates are low but they have been low for 5 years. With GILD cash flow high and getting higher there must be something else about to happen. Any rumors about acquisitions?
    Nov 25, 2014. 07:20 PM | 1 Like Like |Link to Comment
  • Understanding The Importance Of Income And Total Return  [View article]
    Dave: You tell us that everyone knows what income is, so you don't define it. You do, however, mention that to you selling assets is income, as is realized capital gains. I don't think of selling assets as being income--it is cash but it's not income. I don't even think of realized capital gains as income. It's a part of total return and it might be cash but it's not income by my definition. I think of income as being interest and dividends and other distributions--then in my definition it is added to realized and unrealized capital gains, less taxes and other expenses to get a total return. Many would ignore taxes when getting a total return. The definitions aren't really that important other than the obvious problem of some readers misunderstanding how you are using the terms. So next time, I suggest you just go ahead and give us your definition of income. If you want to ignore taxes you might even want to mention why you don't think taxes reduce total return.
    Nov 19, 2014. 02:13 PM | 6 Likes Like |Link to Comment
  • Shiller CAPE And Contrarian Investing  [View article]
    CAPE makes a lot of sense in theory but when you start thinking about the details I think it falls apart. The problem being all the hundreds (thousands?) of changes to the makeup of the S&P 500 and tax/income/reporting requirements imposed by various regulatory agencies over the last 100 years (I think he uses 133 years as his database comparison). I will give one example. Prior to 2001 there were zero REITs in the S&P 500. Now there are 19 included. We all know that REITs have very high PE ratios (caused by the high level of depreciation that reduces taxable income). In fact the PEs are so useless a valuation measure that the REIT industry has pushed for the use of FFO to value REITs. A typical REIT has a PE of 35-45 (whereas its FFO might be 15). What impact to the average market PE does the addition of 19 REITs have? Unless Shiller takes the time to identify all the major changes that have impacted the PE ratio over the years and then adjusts his database it seems that the data is near worthless.
    Nov 18, 2014. 02:44 PM | Likes Like |Link to Comment
  • Buffett's Brilliant Duracell Deal: A Reprise Of Past Deals, A Comment On The Present Market, A Whisper About The Future  [View article]
    T&M: You make some good points about the Buffett companies and their returns being much higher than inflation. The numbers might even be accurate if they were calculated at the time of Buffett purchase instead of using 1980 as the start date. But since the debate is really one of capital gains let me throw out some wider numbers. Your comparison is inflation to total return--I will compare inflation with appreciation of the S&P 500. Capital Gain taxes, as we all know, are applied to appreciation, not total return. Let's save the debate on the qualified dividend tax for another day.

    From 1950 through 2009, S&P 500 appreciation averaged 7.2% per year. Inflation during that period averaged 3.8%. 53% of the total appreciation was inflation (not the 25% you mentioned). The info is provided in 10 year segments by I assume it is correct but if anyone has an alternative source of info please provide it Two of the 6 segments were similar to your assumption--the 1950s where inflation was only 19% of the appreciation and the 1990s when it was 22%. In two segments (1970s and 2000s) the inflation was higher than the appreciation--negative real appreciation.

    We can only guess what the future holds but the Jeremy Granthams of the world seem to think stock appreciation will be minimal over the next 10 years and we know the Fed is trying to get inflation to the 2% level.

    I recognize that since 2009 we have had low inflation and high S&P 500 appreciation but assuming the 53% inflation ratio is still close to correct for the longer period than using my suggestion of adjusting capital gains for inflation before applying a full marginal tax, the 15% capital gain rate would equate to a 32% marginal rate. That tells me that anyone in the 25/28/30% marginal tax rates is actually paying more in capital gains taxes than their marginal tax rate.

    The comparison would be even more lopsided if we recognize that there is a big difference between marginal tax rate and average tax rate. Because of the standard deduction and personal exemptions (let alone itemized deductions and the numerous refundable and normal tax credits) the average tax rate is less than 15% for most SA readers.

    I think that for most investors, if we want to tax all sources of income equally, than the capital gain tax is still too high--but close enough for government work.

    Nov 17, 2014. 11:55 AM | 1 Like Like |Link to Comment
  • Buffett's Brilliant Duracell Deal: A Reprise Of Past Deals, A Comment On The Present Market, A Whisper About The Future  [View article]
    T&M: Of course there are some major differences between the athlete who gets taxed his $10 million in salary and a tax on a long term gain. The biggest is the impact of inflation. The gains on Berkshire investments discussed, KO, Washington Post, PG, are largely the result of inflation over the long period those investments have been held. Should Berkshire, or you, pay a capital gain tax on inflation? If you bought a stock for $10,000 in 1980 and sold it today for $20,000 you would pay a capital gain tax on the $10,000 gain. In reality you have a loss on the stock in inflation adjusted terms. If capital gains were adjusted for inflation (as is most of the rest of our tax system) there would be less justification for the tax rate differential. Our tax system is far from perfect but generally there is logic for what you see as inconsistency.
    Nov 15, 2014. 08:35 AM | 9 Likes Like |Link to Comment
  • 3 Signs Your Mutual Fund Is A Looming Tax Headache  [View article]
    Mayhawk: Not sure what your point is on CEFs. The rules for distributing tax liabilities for CEFs, to my understanding, is exactly the same as open end funds. Both types of funds must distribute all income and realized capital gains each year. The only difference seems to be that often CEFs throw in a little return of capital and I don't think open end funds ever do that. Personally, I have a mix of open end, CEFs, ETFs and individual stocks but think some of the best managers are in the open end area. Check out the historical track record of DODFX and POAGX and tell me what CEFs or ETFs can match them.
    Nov 12, 2014. 03:33 PM | Likes Like |Link to Comment
  • 3 Signs Your Mutual Fund Is A Looming Tax Headache  [View article]
    Selling a mutual fund before distribution is usually a terrible way to avoid taxes. Not only is the coming capital gain distribution built into the NAV (which means it will be taxed as a capital gain on sale in most cases) but the unrealized capital gain of the mutual fund (also included in the NAV) will also be taxed. Selling might make sense if you have a loss in the fund (who wants that?) or you are planning on selling anyhow in the near future and might convert the income portion of the coming year end distribution into a capital gain instead.

    If you want to avoid capital gain taxes you can look at the turnover rate of the fund (the lower the turnover generally the lower the tax) and that is why index funds are very tax efficient.
    Nov 12, 2014. 06:55 AM | 2 Likes Like |Link to Comment
  • Safe And Sound: The Tale Of Plumb Creek Lumber  [View article]
    Michael: Maybe you mean it as a joke but the company you are writing about is Plum Creek not Plumb Creek.
    Nov 10, 2014. 08:09 AM | 3 Likes Like |Link to Comment
  • SEC Gets One Right Putting Kibosh On Nontransparent ETFs  [View article]
    We'll have to disagree. My guess is that transparency has almost nothing to do with the success of ETFs. It surely isn't a factor in my buying them. I think most people buy the index variety of ETFs for their low cost and ability to trade throughout the day at a price known at the time of purchase. Being able to buy at NAV would seem to be a minimal advantage since open end funds provide that at an absolute level (and many investors buy closed end funds partially because they don't trade at NAV). With actively managed ETFs we can add tax efficiency to the benefits but give up some of the cost advantage. I also don't think most investors really care what initials you use to refer to them. If you want to separate ETFs into actively managed, index style and hybrid, each with their own set of benefits go for it--I wouldn't be surprised if that happens over time as the number of ETFs grow.
    Oct 27, 2014. 10:17 AM | 1 Like Like |Link to Comment
  • SEC Gets One Right Putting Kibosh On Nontransparent ETFs  [View article]
    Ron: You make a lot of bold statements and obviously feel strongly about the issues but maybe you are ignoring the reasons that some ETFs want and need at least delayed transparency. I think you are wrong also in assuming that transparency always helps the small investor.

    Transparency isn't an important issue in the vast majority of ETFs--those that are passive. Their holdings are known because they are based on a published index so publishing the holdings every 15 minutes does no damage. But coming to the ETF world are actively managed ETFs. Actively managed ETFs typically charge higher expenses (sometimes much higher) because their stock selection is not based on an index but is instead based on either management research or a proprietary algorithm used to select stocks. If those stock selections need to be published every 15 minutes anyone can jump in front of the ETF and buy those holdings (without paying anything for the research done by the fund). Who gets hurt by that--the ETF customer.

    That need for delayed transparency is the same for open end mutual funds and the same as that obtained from the SEC by Warren Buffett when he is building a position.

    You might argue that ETFs should not be actively managed but if there are actively managed ETFs and they are forced to publish their holdings every 15 minutes then that will damage their small investors. I don't know what the solution is--as you say keeping prices close to NAV would seem to require transparency but total tranparency will kill actively managed ETFs.
    Oct 26, 2014. 09:57 AM | 1 Like Like |Link to Comment
  • Improving The Performance Of Quant Value Portfolios  [View article]
    You mention Wesley Gray. He has had an actively managed ETF in process for what seems a year or more. From his site it appears the ETF will become available in the next week--although apparently the SEC doesn't allow any discussion by the managers before the IPO date. Any thoughts on how the factors being used compare with your analysis?
    Oct 12, 2014. 05:46 PM | Likes Like |Link to Comment
  • On Sale Now: Tax-Free Income Over 6%  [View article]
    Left Banker: You mention that muni CEFs are "beginning...a year end sale". At first reading I assumed you were saying that year end tax selling might be involved. But since all these funds seem to have had good years, appreciation and income wise, there wouldn't seem to be any tax loss selling in 2014. So, other than the fear of rate increases that might occur next year is there anything specific about year end to the muni discount action. Another way of phrasing the question--is there any reason to think discounts will be reduced starting on January 1?
    Oct 7, 2014. 08:13 AM | Likes Like |Link to Comment
  • Forget Active Vs. Passive: It's All About Factors  [View article]
    GestaltU: Took a quick look at the Morningstar data for the two funds. They don't have comparable numbers for 1998-2014 but looking at the 5 and 10 year numbers the Dodge and Cox Stock fund (DODGX) had better results than the I shares Russell 1000 Value ETF (IWD). For 10 years it was 7.96% to 7.52% and for 5 years it was 16.83% vs. 15.79%. Both funds handily beat the S&P 500 Index. Of course, I will choose the 5 year numbers to make my case--1.04% per year advantage for the Dodge&Cox. DODGX has a much greater share of their holdings in the "Giant" and "Large" categories (91%) versus 78% for the ETF. If your 16 year number shows an advantage for IWD that might tell us that mid and small cap value is losing some of its advantage as a factor. I will also mention that DODGX has some European exposure and I don't think the Russell 1000 does so they are not totally comparable, especially in a period where Europe has struggled. I will avoid your issue of risk--as a long term measure I don't think there is any valid measure of risk.
    Oct 5, 2014. 11:58 AM | Likes Like |Link to Comment