Folks:
What do you think of Berkshire Hathaway stock? BRK-A and BRK-B?
The company has a great track record, but a friend who retired from money management about 10 years ago said “there are a LOT of embedded capital gains since Warren never sells anything. If he croaks and the portfolio makes some changes or liquidates, you will generate a boatload of phantom capital gains and get taxed on them even though you never actually got them.”
Are there risks to BRK-A associated with Warren Buffett’s potential retirement or death? If they sell stuff themselves it gets taxed at 35 percent federal plus any state corporate tax (C corporations don’t get a special rate for long-term capital gains) and then if they pay that out to shareholders it gets taxed at about 24 percent (dividend tax rate plus Obamacare tax, right?). Could they do a tax-free spin-off, though, of one of their portfolio companies? Then you have a crazy low basis if you ever sell it?
Since Berkshire Hathaway functions more or less like a mutual fund, would it be smarter to buy a Vanguard fund where any capital gains have been distributed to shareholders and taxes paid on them gradually?
What about political risk? Warren Buffett had friends in the White House for the last eight years. Presumably he won’t have any influence with the Trumpenfuhrer. Are there tax law changes that Congress and Trump are proposing that would have an adverse effect on Berkshire Hathway?
Berkshire Hathaway has done some stuff in the past that perhaps the incoming administration might shut down. See this Washington Post story:
In transactions in 2014 and last year, Berkshire did three “cash-rich split-off” transactions that allowed it to end up with lots of cash and assets while avoiding what I estimate to be a total of about $2.5 billion in capital gains taxes.
Berkshire did what amounted to complicated trades with three companies whose shares it had owned for years, swapping those holdings for a combination of cash and operating assets. The transactions are treated by the IRS as tax-free trades, rather than sales.
…
By my count, the three transactions that yielded cash and assets were worth $6.2 billion more than Berkshire’s $1 billion total cost for its stock in the companies, which in the case of Graham Holdings dated back more than 40 years.
At a combined state and federal tax rate of about 40 percent—there is no special capital gains rate for corporations—selling its holdings in those three companies for cash would have triggered a $2.5 billion tax bill.
Related:
I hear that about half of Berkshire Hathaway’s worth would have evaporated in 2008-2009 but was saved by government bailouts. The question is whether they’re still exposed to similar risks; if they are, I doubt that Trump is going to handle bailouts the way they did in 2008 and I’d expect Berkshire to lose quite a lot.
First off, you really need to consider the fact that BRK has increasingly become a holding company of wholly-owned operating business, and is not really a ‘mutual fund’. It used to be this way, and is not any long. The best source for the data is their annual letter to shareholders. The 2016 version is not out yet, but in 2015:
http://berkshirehathaway.com/letters/2015ltr.pdf
Page 19 shows the value of all investments; common stocks with a market value of 112B acquired at 59B. The current market cap of BRK is about 400B. So, you have roughly 25% of the value of the firm coming from common stocks; the rest is operating businesses.
If for some reason Warren’s successors decided to dump core holdings like KO and WFC upon his death, a 40% tax on the difference (50B) is 20B, which is 5% of the market cap. This does not seem significant.
Your bigger point — how is the company run when Warren is gone — is a great question. He has refused to name his successor. Ted Combs and Ajit Jain are both front runners, as is the guy who runs their energy sub. Warren is in a position to somewhat ensure that his successor has the same approach and values he has used to good effect investing. I very much doubt the successor will, without good reason, sell some of those core holdings and generate a huge tax bill.
One final point: I think the Trumpenfuhrer might greatly advantage BRK. Unlike AAPL, BRK pays full freight corporate taxes on profits, at a high rate. AAPL is able to recognize revenue outside of the US and pay no US corporate tax. If you think that these loopholes will be somewhat closed, the relative value of BRK to other stocks should improve. Evidence of this was the massive outperformance of small- and mid-cap stocks post election — the view in the investor community is that smaller guys who can’t play tax games like the big companies should come out ahead, relatively speaking.
Phil, you know I don’t like when you call Trump the trumenfuherer! But alas I used to own a solitary share of brk.a which I purchased in around 2008 and sold last year. As we all know I am a stupid Donald Trump supporter. I have no advanced degrees in finance but I do have quite a bit of money I manage myself and typically do better than the so called professionals. I sold my share because it is my belief that brk.a has a huge cult of personality with Buffet and he will be dead soon. It is hard to say what premium we are paying for Buffet but my guess is around 30%. It is a certainty he will be dead soon and it is a certainty that it will affect the share price so why risk it? I put the earnings from my brk.a sale into a vanguard fund called VTSMX. I have not really compared the two stocks performance over the last year but having a dividend pay out is actually kind of nice! One benefit to owning a share is you are invited to his annual share holders meeting / carnival event. Not sure if you get invited for owning the cheap one and I never bothered to go myself.
All bonds and equities are on the cusp of permanently crashing because we are now rapidly running out of viable oil.
https://drive.google.com/file/d/0B9wSgViWVAfzUEgzMlBfR3UxNDg/view
Bobby: I assume that you’re loaded up on out-of-the-money put options then! What will you do once the crash does occur and you’re the richest person on the planet? Gulfstream G450 like Hillary Clinton or G550 like Al Gore?
As “The Big Short” illustrated, having stupendously valuable put options is a risky business because there may be no one left to buy them or to pay out if the crisis is bad enough. Who cares if you’re a paper billionaire if the liability holders are all bankrupt and/or we have Zimbabwe-level inflation? Who cares if you have a Gulfstream if jet fuel isn’t available at any price?
phil, playing with options makes somewhat less sense than acquiring gold and silver, I’m afraid. Which I have done and continue to do. I also strategically short individual stocks and have done OK with that and anticipate a big payday sooner or later.
You should familiarize yourself with The Hill’s Group thermodynamic model and similar studies of the developing energy situation. There is no way we make it through the next ten years without a lot of rude awakenings. The idea of an appreciating stock market is totally dependent on expanding energy supply.
Bobby: Check out http://www.ecowatch.com/solar-job-growth-2197574131.html “Solar Employs More Workers Than Coal, Oil and Natural Gas Combined”
My Facebook friends are excited about this. They think the more workers you have to devote to a task the more advanced the economy. So if 100% of American workers toiled away in the solar mines to keep the lights on, that would be a sign of how great solar is.
(But even if we do run out of easily pumped oil, doesn’t that just slow down growth? We have plenty of natural gas and shale oil.)
Space based solar may pencil out, but nobody is seriously investing in it.
Conventional solar has an EROI too low to support anything like current economic activity. It is pretty much the same thing as fracking. In order to turn a profit frackers and solar panel installers need energy prices so high that that none of the customers’ business models work. So as energy gets more dear, there will be *less* solar and fracking, not more. Oil prices will decline as the customer base goes broke.
> We have plenty of natural gas and shale oil
… that will mostly remain in the ground forever. Look over the financials for Chesapeake, for example. They have done nothing but lose money hand over fist.
The high energy prices necessary to get this stuff out of the ground bankrupt the customer base. Therefore, they are not viable large scale energy sources.
The accounting really has to be done on an EROI basis, i.e. properly tallied net energy yielded to consumers. We need loads and loads of energy at an EROI of 25+ for business as usual to continue. Shale and tar sands simply don’t work on that basis.
Nuclear power still seems like a good option, except there’s so little scope for preening and prancing in the flood lights of the world stage.
However, it seems clear that the revolution will be swift and merciless if cars are made uneconomical. The elites can only hope to before then have programmed the self-driving cars of the mobs to instead take them to Happy Fun Continued Education Camp.
Harvard moderators, thus do consider that future funding of self-driving cars may be of critical interest to your class.
I’ve owned shares, and have read the annual reports, the last 15 years. There’s nothing new about their long-term stock holdings. They’ve been doing buy-hold for 40+ years. Have there been changes in capital gains taxes? Do people expect Trump to enact changes in capital gains taxes? I haven’t heard of any except around carried interest, which affects hedge fund guys.
Like all American companies, they could be affected by changes to the tax code.
Someone else pointed out they’re not as much a mutual fund as they are a holding company. Operating businesses (as opposed to equities) make up the lion’s share of assets.
I don’t think Berkshire can find another manager that can do what Buffet has done. They’ve tried testing out some successors and they just don’t have his touch. It’s a very different situation from Bridgewater where Ray Diallo is all about creating a culture which can outlast him.
I would not be worried about politics, for most businesses you find getting what they want does not reliably get them ahead. John D Rockefeller fought the breakup of standard oil bitterly but his wealth doubled overnight when it happens. With a few exceptions such as SBIR mills, rent seeking and serving customers are not compatible in the long term.
As for oil I am not worried. I was back in 2000 without knowledge of the shale revolution and I did some modelling of how bad it would get but I could not convince myself that oil supplies would drop faster than substitutes would come online.
One thing about energy is that it is volatile in the short term and stable in the long term. If the price of gas goes up you don’t change much right away but over a few years you get a more efficient car, move closer to work, etc. Oil companies see dollar signs and they start investing but it takes a few years. By then a lot of oil winds up on the market and there are a lot of plugin hybrids on the road and gas is cheap so you buy a huge SUV and the cycle goes around.
The information that Buffet will die some day, that his replacement will probably not be as talented as him, and that the company has embedded gains is well known and therefore likely priced in. The supposed “great track record” and investment company structure are also things of the distant past and reflected in the share price, which the last time I looked is not all that much over the company’s book value.