There has been the odd post from 'value' investors occasionally
lamenting the fact that if it were not for CGT that they would have sold
some of their best performing stocks in the current bull market climate.
Is this the general feeling of those of you who have held stocks for a
number of years, and if CGT did not exist would you be a seller in this
market.
The question is then asked, does CGT help perpetuate bull runs longer
than normal by suppressing selling pressure?.
Then, when does a 'value' investor sell and have to pay CGT, assuming
they do sell some day?.
How big a factor is CGT to you?.

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	18 Jan 2005 06:09:39 -0800

Goldberg wrote:
> There has been the odd post from 'value' investors occasionally
> lamenting the fact that if it were not for CGT that they would have
sold
> some of their best performing stocks in the current bull market
climate.
> Is this the general feeling of those of you who have held stocks for
a
> number of years, and if CGT did not exist would you be a seller in
this
> market.

I don't really care about "this market", if I can find shares worth
buying I'll buy them. If I can't find any I'll sell them.

CGT doesn't affect my purchase decisions but when it comes to sell I
need to subtract off the tax liability from my shareholding to see if
on an after tax basis it is still overvalued.

A stock which is overvalued even after taking off the CGT liability is
a sell.

If there was no CGT I would probably have a slightly higher portfolio
turnover.

> The question is then asked, does CGT help perpetuate bull runs longer

> than normal by suppressing selling pressure?.

Probably not very much if at all. The number of investors who are CGT
sensitive is actually quite low. If you've ever looked up portfolio
turnover numbers for managed funds you'll find that many have very high
turnover well in excess of 100%pa (many, not all, some have very low
turnover). You'll also note the popularity, at least on the Internet
and presumably also among the wider population, of short term trading
approaches rather than longer term investment approaches.

Add to this the effect of tax exempt institutional investors (there are
many and they control substantial sums of money) and allocated pension
investors, I think there are more than enough people who don't have CGT
liabilities or simply don't care to minimise CGT as an influence on the
formation of bubbles.

> Then, when does a 'value' investor sell and have to pay CGT, assuming

> they do sell some day?.

Lets assume that I calculate that the value of a share is $2.00.

I probably wouldn't be buying it unless the price was $1.50 or less.
However, once I buy it I probably wouldn't sell it until it got over
$2.00, perhaps 25% over that, purely because I think there is
uncertainty in valuations and as long as I have a CGT liability and
other transactional costs I don't want to sell unnecessarily unless I
happen to need the cash for something which is really undervalued.

Lets just say my buy price was $1, the market price now is $2.75.
Assuming a 48.5% tax rate and 50% CGT discount, I lose 43c to CGT.
*MY* sell price, what I'll actually get, is about $2.30, which I
consider slightly overvalued but not above my margin of error on the
valuation.

I may be tempted to sell if I had a more attractive investment
opportunity (I try to maximise the intrinsic value of my portfolio by
investing dollars into companies with a lot more than what I pay for
them), but if I don't have anything really attractive and the
alternative is to have the money sit in cash I'll probably stay put.

> How big a factor is CGT to you?.
About as big as a piece of string is long.

Travis
www.travismorien.com

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	20 Jan 2005 02:43:21 -0800

> I dont have first hand experience, but a friend of a friend told
> me that you can realise capital losses for tax purposes

You can do that and buy the stock back.

The general principle I'm trying to convey is that the price tends to
drop after bad news is announced, rather than saying "the news is bad,
time to sell", a better reply would be "the news is bad, lets take a
closer look at this stock to see if it has overcorrected,
undercorrected or the stock is fairly priced, in which case I should
buy, sell or hold."

Travis
www.travismorien.com

From:	Greg Martin
Subject:	Re: Does CGT influence your investment decisions
Date:	Thu, 20 Jan 2005 23:51:01 +1100

"Travis Morien" wrote in message
news:1106217801.320068.266770@f14g2000cwb.googlegroups.com...
>> I dont have first hand experience, but a friend of a friend told
>> me that you can realise capital losses for tax purposes
>
> You can do that and buy the stock back.
>

You have to be a little careful doing this that Part IVA doesn't get you.

Apparently the ATO doesn't like this sort of thing.

From:	Fitzroy
Subject:	Re: Does CGT influence your investment decisions
Date:	Sat, 22 Jan 2005 03:23:16 GMT

"Greg Martin" wrote in message
news:41efa933$1_1@news.iprimus.com.au...
>
> "Travis Morien" wrote in message
> news:1106217801.320068.266770@f14g2000cwb.googlegroups.com...
> >> I dont have first hand experience, but a friend of a friend told
> >> me that you can realise capital losses for tax purposes
> >
> > You can do that and buy the stock back.
> >
>
> You have to be a little careful doing this that Part IVA doesn't get you.
>
> Apparently the ATO doesn't like this sort of thing.
>
>

Greg, are you able to dig up the ATO link which deals
with these 'Wash Sales'.

I wasnt able to find it.

Particularly interested in how a distinction is made
between long-term and short-term holdings.

From:	Greg Martin
Subject:	Re: Does CGT influence your investment decisions
Date:	Mon, 24 Jan 2005 00:01:32 +1100

"Fitzroy" wrote in message
news:EGjId.128636$K7.87026@news-server.bigpond.net.au...
> "Greg Martin" wrote in message
> news:41efa933$1_1@news.iprimus.com.au...
>>
>> "Travis Morien" wrote in message
>> news:1106217801.320068.266770@f14g2000cwb.googlegroups.com...
>> >> I dont have first hand experience, but a friend of a friend told
>> >> me that you can realise capital losses for tax purposes
>> >
>> > You can do that and buy the stock back.
>> >
>>
>> You have to be a little careful doing this that Part IVA doesn't get you.
>>
>> Apparently the ATO doesn't like this sort of thing.
>>
>>
>
>
> Greg, are you able to dig up the ATO link which deals
> with these 'Wash Sales'.
>
> I wasnt able to find it.
>
> Particularly interested in how a distinction is made
> between long-term and short-term holdings.
>

Fitzy, the best I can do is IT 2643 which is at
http://law.ato.gov.au/atolaw/view.htm?find=%22it%202643%22&docid=ITR/IT2643/NAT/ATO/00001

Even then, this isn't definitive.

Apart from that, I'm relying to a large extent on my accountant, who reacted
with horror when I asked him about doing this with my Telstra shares a few
years ago then explained the anti-avoidance provisions to me.

Look, if it looks like tax avoidance and smells like tax avoidance, then it
probably is, but given that my accountant, two tax solicitors and an
accounting professor at Melbourne Uni can't explain the difference between
tax minimisation and tax avoidance without contradicting themselves, I just
don't know anymore.

Probably best armed with that knowledge not to tempt fate.

Cheers,

Greg.

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	19 Jan 2005 09:27:14 -0800

sarge wrote:

> > Any change in fundamentals will be reflected in a change in
intrinsic
> > value. A share should not be sold unless the price substantially
> > exceeds this value.
> >
> I would disagree. A share should be sold when they no longer appear
to
> be able to produce the expected long term income stream that you
seek.

How are you going to make this judgement?

If you were expecting your $1 to buy you a $0.10 pa income stream,
indexed for inflation, and then they announce something really bad that
will reduce that to a $0.05 pa income stream, and the price falls to
$0.50 per share, what advantage will you secure out of selling your
$0.50 share and buying half as many $1.00 shares which will pay $0.10?

Or more to the point, since I believe markets frequently overreact,
would you sell your shares for $0.20 because they only produce a $0.05
income stream, switching this for one fifth as many $1.00 shares
producing a $0.10 income stream?

> > I have made very good money buying companies nobody wanted any more
> > which have fallen substantially in price and dropped well below
their
> > intrinsic value (even though the intrinsic value itself may have
fallen
> > following an adverse development, it doesn't matter where IV is
> > compared to where it used to be, it matters where it is compared to
> > today's price).
> >
> > So when, for example, Brazin Ltd came out and said their growth was
> > stalling because of competition in the CD market from big retailers
and
> > the stock fell from $2 to a low of about 50c, even though the
intrinsic
> > value may well have halved from its high, the stock was still
cheaper.
> >
> So would you have held them all the way down from $2 to 50c ? Or put

I was a long term watcher of Brazin, the price never impressed me and I
had a few issues with the way the company was being run, it never
became attractive to my inner vulture until the price started getting
near $0.50. In fact on the day I emailed my clients the closing price
was $0.69.

At any rate, if I had bought at $2.00 what relevance would that have?
After the loss all I can do is reappraise the stock and decide whether
holding it is still justified because the remaining intrinsic value of
the stock exceeds or at least equals the price of the stock.

The $2.00 is a sunk cost.

> another way, you calculate the IV of a company and determine $20 a
share
> is an acceptable price to pay. New information comes out 3 months
later
> and the shares drop to $5 per share over the next month, which is
what
> you now determine to be a fair price after calculating the IV of the
> company based on the new information. Do you hold all the way down or
do
> you sell and re-invest either elsewhere or back in to the company
once
> the price gets to $5 ?

If I believed the stock was worth $20 I would be buying aggressively,
subject to limits on diversification which protect me from
overconfidence in a single manager preventing me losing everything on
one company.

Some quotes from John Neff On Investing, one of the best books on value
investing I've ever read:

"Nevertheless, Citi dashed our hopes again. As 1991 progressed, only
Citi, among Windsor's banks, failed us on the earnings side. So we did
what seemed logical. With an average cost of $33 a share and a going
price of $14 a share, we bought more shares."

"At that point, Windsor owned 23 million shares; a half-billion dollars
of shareholders' assets were at risk. Meanwhile, Congressman John
Dingle, Chairman of the House Banking Committee, hinted that Citi might
become technically insolvent, and stories circulated about a run on one
of Citi's Asian branches. The price kept on sliding to nearly $8 a
share in late 1991."

By 1992 the stock position was profitable again, by the time it was
sold it was one of Windsor's more successful investments.

John Neff, in case you don't know about him, had one of the longest and
most successful careers in fund management that Wall Street has seen.
He isn't as well known as Buffett nor were his returns quite so good,
but over 31 years he beat the S&P500 by 4%pa on average. His
reputation was so good in fact that he was the manager of choice among
Wall Street investors. Where did other fund managers invest their
money? In Neff's fund, Windsor.

The secret to Neff's success?

"To us, ugly stocks were often beautiful. If Windsor's portfolio looked
good, we weren't doing our job."

Articles on Neff from my FAQ can be read at:
http://www.travismorien.com/FAQ/shares/johnneff.htm
http://www.travismorien.com/FAQ/shares/neffmethod.htm
>
> > Brazin shareholders who sold near the bottom because they no longer
> > expected it would produce the growing income stream they had
> > anticipated had their shares snapped up by deep value/contrarian
guys
> > like myself who ran the numbers on the company even with
pessimistic
> > assumptions and concluded it was just way too cheap.
> >
> Bottom picking is fine, but reverse the situation and assume you had
> bought at $2/share. What would you have done ?

Perhaps realised the loss for tax purposes and then bought back if I
thought the share was worth a lot more than the market price.

See also http://www.travismorien.com/FAQ/psychology/sunkcostfallacy.htm

> > The idea behind value investing is to exchange a dollar for a
parcel of
> > stock worth more than a dollar but not recognised as such by the
> > market, yet. You are buying $1.20 for only a dollar. The
expectation
> > is that the market will eventually see the qualities of the stock
and
> > the price will rise to somewhere around your estimate of intrinsic
> > value.
> >
> Or it could be purchasing an asset at a reasonable price which
produces
> a growing income stream with no intention of selling that asset. Thus

> whether it is worth $1 or $1.20 makes little difference.

The value of a share is the net present value of the growing income
stream.

In the case of Brazin I tried to be as pessimistic as I could (without
going for the full Doomsday Deluxe outlook) and determined that BRZ was
worth *at least* $1.10 per share and potentially considerably more.
With a few changes and some decent management I thought the stock had
potential to at least double.

The purchase price is absolutely crucial, it determines your initial
yield and the total value of all income that I'm buying in the future.

What happens soon after I buy it isn't necessarily all that important
but can lead to opportunities to either trade in my shares at
considerably more than they are worth or buy more at considerably less
than they are worth.

Here's my favourite quote from The Intelligent Investor again:

"Imagine that in some private business you own a small share that cost
you $1,000. One of your partners, named Mr Market, is very obliging
indeed. Every day he tells you what he thinks your interest is worth
and furthermore offers to either buy you out or to sell you an
additional interest on that basis. Sometimes his idea of value appears
plausible and justified by business developments and prospects as you
know them. Often, on the other hand, Mr Market lets his enthusiasm or
his fears run away with him, and the value he proposes seems to you a
little short of silly.

If you are a prudent investor or a sensible businessman, will you let
Mr Market's daily communication determine your view of the value of a
$1,000 interest in the enterprise? Only in case you agree with him, or
in case you want to trade with him. You may be happy to sell out to him
when he quotes you a ridiculously high price, and equally happy to buy
from him when his price is low. But the rest of the time you will be
wiser to form your own ideas of the value of your holdings, based on
full reports from the company about its operations and financial
position.

The true investor is in that very position when he owns a listed common
stock. He can take advantage of the daily market price or leave it
alone, as dictated by his own judgement and inclination. He must take
cognizance of important price movements, for otherwise his judgement
will have nothing to work on. Conceivably they may give him a warning
signal which he will do well to heed - this in plain English means that
he is to sell his shares because the price has gone down, foreboding
worse things to come. In our view, such signals are misleading at least
as often as they are helpful. Basically, price fluctuations have only
one significant meaning for the true investor. They provide him with an
opportunity to buy wisely when prices fall sharply and to sell wisely
when they advance a great deal. At other times he will do better if he
forgets about the stock market and pays attention to his dividend
returns and to the operating results of his companies.

The most realistic distinction between the investor and the speculator
is found in their attitude toward stock-market movements. The
speculator's primary interest lies in anticipating and profiting from
market fluctuations. The investor's primary interest lies in acquiring
and holding suitable securities at suitable prices. Market movements
are important to him in a practical sense, because they alternately
create low price levels at which he would be wise to buy and high price
levels at which he certainly should refrain from buying and probably
would be wise to sell."

> > When selling the process is the same, you exchange less than a
dollar's
> > worth of a stock for money. If you own $1 worth of stock but lose
20c
> > in capital gains tax you are exchanging $1 of value for 80c.
> >
> > After each trade your net worth in terms of the total intrinsic
value
> > of your portfolio should have increased, whether that be money ->
> > undervalued stock or overvalued stock -> money.
> >
> Why trade at all ? The whole aim of assets is to produce an income,
so
> if you get the asset right the first time you shouldn't need to trade

> your stocks. In fact if you purchase an asset that has a growing
income
> stream it wouldn't matter if the value of that asset remains static
> forever as all you are after is the lifetime income.

If I identify an opportunity to pay $0.50 for $1.00 I have three
options available to me if I don't happen to have large amounts of
cash:

1) Draw down a loan and buy the share on credit.
2) Sell another share from my portfolio which is trading at a
considerably lesser discount (or even a premium) to my best and most
recent estimate of intrinsic value based on the facts of the
fundamental shape of the company as I see it.
3) Pass up the opportunity.

They are all reasonable alternatives but assuming I've decided not to
draw down any more on my loans and assuming that I was really confident
that this share was a genuine bargain it would be reasonable for me to
look seriously at 2 and perhaps think of swapping one income stream for
a more valuable one.
>
> > If the amount of money you get after transaction costs, including
CGT,
> > is less than the intrinsic value of the parcel of shares you are
> > selling, you shouldn't sell.
> >
> > Travis
> > www.travismorien.com
>
> Don't sell, don't have to worry about transaction costs or CGT. Look
for
> income and avoid trading whenever possible. Pay a fair price for a
good
> asset and you wont go wrong.

That's great for a passive investor and I encourage all who feel this
way to look closely at index and other passive funds as well as the
better value LICs, particularly when the latter trade at below
intrinsic value.

Those who aren't passive investors however tend to fall into two major
categories. I am of course in this discussion of direct investment in
equities speaking as an active investor, I'll put on my passive hat for
a different thread. The categories of active investors are:

Investors who try to maximise the value of their portfolio by
purchasing undervalued assets and selling overvalued ones, focusing
only on the value of their holdings; and

Speculators who try to anticipate market fluctuations and do their
buying and selling primarily on their belief of which way the market
will go.

Of course some people believe they can combine these but I'm yet to
hear of someone doing that effectively, for reasons that I've already
explained in aus.invest's many odious debates on technical analysis and
related subjects in the past.

Travis
www.travismorien.com

PS: sorry if this has been posted twice, I got an error message on my
first attempt.

From:	Fitzroy
Subject:	Re: Does CGT influence your investment decisions
Date:	Thu, 20 Jan 2005 10:31:07 GMT

"Travis Morien" wrote in message
news:1106155634.662208.72640@c13g2000cwb.googlegroups.com...
>
> If you were expecting your $1 to buy you a $0.10 pa income stream,
> indexed for inflation, and then they announce something really bad that
> will reduce that to a $0.05 pa income stream, and the price falls to
> $0.50 per share, what advantage will you secure out of selling your
> $0.50 share and buying half as many $1.00 shares which will pay $0.10?
>

What advantage ?
I dont have first hand experience, but a friend of a friend told
me that you can realise capital losses for tax purposes :)

From:	John Wright
Subject:	Re: Does CGT influence your investment decisions
Date:	Thu, 20 Jan 2005 22:23:38 +1100

"Fitzroy" wrote
>> If you were expecting your $1 to buy you a $0.10 pa income stream,
>> indexed for inflation, and then they announce something really bad that
>> will reduce that to a $0.05 pa income stream, and the price falls to
>> $0.50 per share, what advantage will you secure out of selling your
>> $0.50 share and buying half as many $1.00 shares which will pay $0.10?
>>
>
> What advantage ?
> I dont have first hand experience, but a friend of a friend told
> me that you can realise capital losses for tax purposes :)
>

That's a fallacy. Eventually these cancel each other out.

Suppose you bought stock A for $1 and sold it at a loss for $0.50; you can
claim a capital loss; but presumably you sold so as to use that cash to buy
something that would make a gain for you in future. Suppose you succeeded -
say you bought stock B for 0.50 and sold it subsequently for $1; you will
have to pay capital gains tax and that will cancel out the previous tax loss
you claimed. The net result is exactly the same if you had simply hung on to
stock A and its price came back from $0.50 to $1 and you sold it then.

Regards - JW

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	18 Jan 2005 21:23:12 -0800

sarge wrote:

> No - if I am selling it is due the a change in the fundamentals
behind
> why I purchased in the first place, ie. the company is no longer
> expected to produce the growing income stream I anticipated. With
that
> being the case I will sell and invest my available funds elsewhere.

Any change in fundamentals will be reflected in a change in intrinsic
value. A share should not be sold unless the price substantially
exceeds this value.

I have made very good money buying companies nobody wanted any more
which have fallen substantially in price and dropped well below their
intrinsic value (even though the intrinsic value itself may have fallen
following an adverse development, it doesn't matter where IV is
compared to where it used to be, it matters where it is compared to
today's price).

So when, for example, Brazin Ltd came out and said their growth was
stalling because of competition in the CD market from big retailers and
the stock fell from $2 to a low of about 50c, even though the intrinsic
value may well have halved from its high, the stock was still cheaper.

Brazin shareholders who sold near the bottom because they no longer
expected it would produce the growing income stream they had
anticipated had their shares snapped up by deep value/contrarian guys
like myself who ran the numbers on the company even with pessimistic
assumptions and concluded it was just way too cheap.

> CGT is just a cost of doing so, it will not influence the decision to
do
> so. Besides the opportunity exists to minimise my tax in a range of
> different ways that the CGT will mostly be able to be offset anyway.

The idea behind value investing is to exchange a dollar for a parcel of
stock worth more than a dollar but not recognised as such by the
market, yet. You are buying $1.20 for only a dollar. The expectation
is that the market will eventually see the qualities of the stock and
the price will rise to somewhere around your estimate of intrinsic
value.

When selling the process is the same, you exchange less than a dollar's
worth of a stock for money. If you own $1 worth of stock but lose 20c
in capital gains tax you are exchanging $1 of value for 80c.

After each trade your net worth in terms of the total intrinsic value
of your portfolio should have increased, whether that be money ->
undervalued stock or overvalued stock -> money.

If the amount of money you get after transaction costs, including CGT,
is less than the intrinsic value of the parcel of shares you are
selling, you shouldn't sell.

Travis
www.travismorien.com

From:	sarge
Subject:	Re: Does CGT influence your investment decisions
Date:	Wed, 19 Jan 2005 08:48:39 GMT

Travis Morien wrote:
> sarge wrote:
>
>
>
>>No - if I am selling it is due the a change in the fundamentals
>
> behind
>
>>why I purchased in the first place, ie. the company is no longer
>>expected to produce the growing income stream I anticipated. With
>
> that
>
>>being the case I will sell and invest my available funds elsewhere.
>
>
> Any change in fundamentals will be reflected in a change in intrinsic
> value. A share should not be sold unless the price substantially
> exceeds this value.
>
I would disagree. A share should be sold when they no longer appear to
be able to produce the expected long term income stream that you seek.

> I have made very good money buying companies nobody wanted any more
> which have fallen substantially in price and dropped well below their
> intrinsic value (even though the intrinsic value itself may have fallen
> following an adverse development, it doesn't matter where IV is
> compared to where it used to be, it matters where it is compared to
> today's price).
>
> So when, for example, Brazin Ltd came out and said their growth was
> stalling because of competition in the CD market from big retailers and
> the stock fell from $2 to a low of about 50c, even though the intrinsic
> value may well have halved from its high, the stock was still cheaper.
>
So would you have held them all the way down from $2 to 50c ? Or put
another way, you calculate the IV of a company and determine $20 a share
is an acceptable price to pay. New information comes out 3 months later
and the shares drop to $5 per share over the next month, which is what
you now determine to be a fair price after calculating the IV of the
company based on the new information. Do you hold all the way down or do
you sell and re-invest either elsewhere or back in to the company once
the price gets to $5 ?

> Brazin shareholders who sold near the bottom because they no longer
> expected it would produce the growing income stream they had
> anticipated had their shares snapped up by deep value/contrarian guys
> like myself who ran the numbers on the company even with pessimistic
> assumptions and concluded it was just way too cheap.
>
Bottom picking is fine, but reverse the situation and assume you had
bought at $2/share. What would you have done ?

>
>>CGT is just a cost of doing so, it will not influence the decision to
>
> do
>
>>so. Besides the opportunity exists to minimise my tax in a range of
>>different ways that the CGT will mostly be able to be offset anyway.
>
>
> The idea behind value investing is to exchange a dollar for a parcel of
> stock worth more than a dollar but not recognised as such by the
> market, yet. You are buying $1.20 for only a dollar. The expectation
> is that the market will eventually see the qualities of the stock and
> the price will rise to somewhere around your estimate of intrinsic
> value.
>
Or it could be purchasing an asset at a reasonable price which produces
a growing income stream with no intention of selling that asset. Thus
whether it is worth $1 or $1.20 makes little difference.

> When selling the process is the same, you exchange less than a dollar's
> worth of a stock for money. If you own $1 worth of stock but lose 20c
> in capital gains tax you are exchanging $1 of value for 80c.
>
> After each trade your net worth in terms of the total intrinsic value
> of your portfolio should have increased, whether that be money ->
> undervalued stock or overvalued stock -> money.
>
Why trade at all ? The whole aim of assets is to produce an income, so
if you get the asset right the first time you shouldn't need to trade
your stocks. In fact if you purchase an asset that has a growing income
stream it wouldn't matter if the value of that asset remains static
forever as all you are after is the lifetime income.

> If the amount of money you get after transaction costs, including CGT,
> is less than the intrinsic value of the parcel of shares you are
> selling, you shouldn't sell.
>
> Travis
> www.travismorien.com

Don't sell, don't have to worry about transaction costs or CGT. Look for
income and avoid trading whenever possible. Pay a fair price for a good
asset and you wont go wrong.

sarge

From:	Fitzroy
Subject:	Re: Does CGT influence your investment decisions
Date:	Thu, 20 Jan 2005 10:32:44 GMT

"sarge" wrote in message
news:H9pHd.124406$K7.6239@news-server.bigpond.net.au...
> Travis Morien wrote:
> > sarge wrote:
> >
> >
> >
> >>No - if I am selling it is due the a change in the fundamentals
> >
> > behind
> >
> >>why I purchased in the first place, ie. the company is no longer
> >>expected to produce the growing income stream I anticipated. With
> >
> > that
> >
> >>being the case I will sell and invest my available funds elsewhere.
> >
> >
> > Any change in fundamentals will be reflected in a change in intrinsic
> > value. A share should not be sold unless the price substantially
> > exceeds this value.
> >
> I would disagree. A share should be sold when they no longer appear to
> be able to produce the expected long term income stream that you seek.
>
> > I have made very good money buying companies nobody wanted any more
> > which have fallen substantially in price and dropped well below their
> > intrinsic value (even though the intrinsic value itself may have fallen
> > following an adverse development, it doesn't matter where IV is
> > compared to where it used to be, it matters where it is compared to
> > today's price).
> >
> > So when, for example, Brazin Ltd came out and said their growth was
> > stalling because of competition in the CD market from big retailers and
> > the stock fell from $2 to a low of about 50c, even though the intrinsic
> > value may well have halved from its high, the stock was still cheaper.
> >
> So would you have held them all the way down from $2 to 50c ? Or put
> another way, you calculate the IV of a company and determine $20 a share
> is an acceptable price to pay. New information comes out 3 months later
> and the shares drop to $5 per share over the next month, which is what
> you now determine to be a fair price after calculating the IV of the
> company based on the new information. Do you hold all the way down or do
> you sell and re-invest either elsewhere or back in to the company once
> the price gets to $5 ?
>
> > Brazin shareholders who sold near the bottom because they no longer
> > expected it would produce the growing income stream they had
> > anticipated had their shares snapped up by deep value/contrarian guys
> > like myself who ran the numbers on the company even with pessimistic
> > assumptions and concluded it was just way too cheap.
> >
> Bottom picking is fine, but reverse the situation and assume you had
> bought at $2/share. What would you have done ?
>
> >
> >>CGT is just a cost of doing so, it will not influence the decision to
> >
> > do
> >
> >>so. Besides the opportunity exists to minimise my tax in a range of
> >>different ways that the CGT will mostly be able to be offset anyway.
> >
> >
> > The idea behind value investing is to exchange a dollar for a parcel of
> > stock worth more than a dollar but not recognised as such by the
> > market, yet. You are buying $1.20 for only a dollar. The expectation
> > is that the market will eventually see the qualities of the stock and
> > the price will rise to somewhere around your estimate of intrinsic
> > value.
> >
> Or it could be purchasing an asset at a reasonable price which produces
> a growing income stream with no intention of selling that asset. Thus
> whether it is worth $1 or $1.20 makes little difference.
>
> > When selling the process is the same, you exchange less than a dollar's
> > worth of a stock for money. If you own $1 worth of stock but lose 20c
> > in capital gains tax you are exchanging $1 of value for 80c.
> >
> > After each trade your net worth in terms of the total intrinsic value
> > of your portfolio should have increased, whether that be money ->
> > undervalued stock or overvalued stock -> money.
> >
> Why trade at all ? The whole aim of assets is to produce an income, so
> if you get the asset right the first time you shouldn't need to trade
> your stocks. In fact if you purchase an asset that has a growing income
> stream it wouldn't matter if the value of that asset remains static
> forever as all you are after is the lifetime income.
>
> > If the amount of money you get after transaction costs, including CGT,
> > is less than the intrinsic value of the parcel of shares you are
> > selling, you shouldn't sell.
> >
> > Travis
> > www.travismorien.com
>
> Don't sell, don't have to worry about transaction costs or CGT. Look for
> income and avoid trading whenever possible. Pay a fair price for a good
> asset and you wont go wrong.
>
> sarge
>
>

Good post.

From:	sarge
Subject:	Re: Does CGT influence your investment decisions
Date:	Fri, 21 Jan 2005 19:42:41 GMT

Fitzroy wrote:
> "sarge" wrote in message
> news:H9pHd.124406$K7.6239@news-server.bigpond.net.au...
>
>>Travis Morien wrote:
>>
>>>sarge wrote:
>>>
>>>
>>>
>>>
>>>>No - if I am selling it is due the a change in the fundamentals
>>>
>>>behind
>>>
>>>
>>>>why I purchased in the first place, ie. the company is no longer
>>>>expected to produce the growing income stream I anticipated. With
>>>
>>>that
>>>
>>>
>>>>being the case I will sell and invest my available funds elsewhere.
>>>
>>>
>>>Any change in fundamentals will be reflected in a change in intrinsic
>>>value. A share should not be sold unless the price substantially
>>>exceeds this value.
>>>
>>
>>I would disagree. A share should be sold when they no longer appear to
>>be able to produce the expected long term income stream that you seek.
>>
>>
>>>I have made very good money buying companies nobody wanted any more
>>>which have fallen substantially in price and dropped well below their
>>>intrinsic value (even though the intrinsic value itself may have fallen
>>>following an adverse development, it doesn't matter where IV is
>>>compared to where it used to be, it matters where it is compared to
>>>today's price).
>>>
>>>So when, for example, Brazin Ltd came out and said their growth was
>>>stalling because of competition in the CD market from big retailers and
>>>the stock fell from $2 to a low of about 50c, even though the intrinsic
>>>value may well have halved from its high, the stock was still cheaper.
>>>
>>
>>So would you have held them all the way down from $2 to 50c ? Or put
>>another way, you calculate the IV of a company and determine $20 a share
>>is an acceptable price to pay. New information comes out 3 months later
>>and the shares drop to $5 per share over the next month, which is what
>>you now determine to be a fair price after calculating the IV of the
>>company based on the new information. Do you hold all the way down or do
>>you sell and re-invest either elsewhere or back in to the company once
>>the price gets to $5 ?
>>
>>
>>>Brazin shareholders who sold near the bottom because they no longer
>>>expected it would produce the growing income stream they had
>>>anticipated had their shares snapped up by deep value/contrarian guys
>>>like myself who ran the numbers on the company even with pessimistic
>>>assumptions and concluded it was just way too cheap.
>>>
>>
>>Bottom picking is fine, but reverse the situation and assume you had
>>bought at $2/share. What would you have done ?
>>
>>
>>>>CGT is just a cost of doing so, it will not influence the decision to
>>>
>>>do
>>>
>>>
>>>>so. Besides the opportunity exists to minimise my tax in a range of
>>>>different ways that the CGT will mostly be able to be offset anyway.
>>>
>>>
>>>The idea behind value investing is to exchange a dollar for a parcel of
>>>stock worth more than a dollar but not recognised as such by the
>>>market, yet. You are buying $1.20 for only a dollar. The expectation
>>>is that the market will eventually see the qualities of the stock and
>>>the price will rise to somewhere around your estimate of intrinsic
>>>value.
>>>
>>
>>Or it could be purchasing an asset at a reasonable price which produces
>>a growing income stream with no intention of selling that asset. Thus
>>whether it is worth $1 or $1.20 makes little difference.
>>
>>
>>>When selling the process is the same, you exchange less than a dollar's
>>>worth of a stock for money. If you own $1 worth of stock but lose 20c
>>>in capital gains tax you are exchanging $1 of value for 80c.
>>>
>>>After each trade your net worth in terms of the total intrinsic value
>>>of your portfolio should have increased, whether that be money ->
>>>undervalued stock or overvalued stock -> money.
>>>
>>
>>Why trade at all ? The whole aim of assets is to produce an income, so
>>if you get the asset right the first time you shouldn't need to trade
>>your stocks. In fact if you purchase an asset that has a growing income
>>stream it wouldn't matter if the value of that asset remains static
>>forever as all you are after is the lifetime income.
>>
>>
>>>If the amount of money you get after transaction costs, including CGT,
>>>is less than the intrinsic value of the parcel of shares you are
>>>selling, you shouldn't sell.
>>>
>>>Travis
>>>www.travismorien.com
>>
>>Don't sell, don't have to worry about transaction costs or CGT. Look for
>>income and avoid trading whenever possible. Pay a fair price for a good
>>asset and you wont go wrong.
>>
>>sarge
>>
>>
>
>
>
>
> Good post.
>
>
Thanks Fitzroy.

sarge

From:	sarge
Subject:	Re: Does CGT influence your investment decisions
Date:	Tue, 18 Jan 2005 08:44:46 GMT

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	18 Jan 2005 08:11:50 -0800

sarge wrote:

> I do not consider CGT as a factor in my investments at all. The
reason
> for this is that I invest and do not speculate.
>
> My aim is to purchase an asset (in my case shares) that will give me
a
> growing income stream for the rest of my life. As such when I
purchase
> shares in a company it is under the belief that I will not sell them
-
> although I will if the company was to experience a company changing
problem.
>
> Given my intention at the outset is to never sell then CGT is never
an
> issue. Even if I was to sell the CGT is only going to be at half my
> marginal tax rate, ie. 24.25%, which is neither here nor there, so
again
> why worry about it.

Intention at the outset is never to sell, which is fair enough, but
even the most determined buy and hold investor will at times be put in
a position where they may have to consider selling something, either
because they made a mistake or because of a change in circumstances.

Presumably you would consider CGT when you have to sell something?
Travis
www.travismorien.com

From:	sarge
Subject:	Re: Does CGT influence your investment decisions
Date:	Tue, 18 Jan 2005 20:08:55 GMT

Travis Morien wrote:
> sarge wrote:
>
>
>>I do not consider CGT as a factor in my investments at all. The
>
> reason
>
>>for this is that I invest and do not speculate.
>>
>>My aim is to purchase an asset (in my case shares) that will give me
>
> a
>
>>growing income stream for the rest of my life. As such when I
>
> purchase
>
>>shares in a company it is under the belief that I will not sell them
>
> -
>
>>although I will if the company was to experience a company changing
>
> problem.
>
>>Given my intention at the outset is to never sell then CGT is never
>
> an
>
>>issue. Even if I was to sell the CGT is only going to be at half my
>>marginal tax rate, ie. 24.25%, which is neither here nor there, so
>
> again
>
>>why worry about it.
>
>
> Intention at the outset is never to sell, which is fair enough, but
> even the most determined buy and hold investor will at times be put in
> a position where they may have to consider selling something, either
> because they made a mistake or because of a change in circumstances.
>
> Presumably you would consider CGT when you have to sell something?
> Travis
> www.travismorien.com
>
No - if I am selling it is due the a change in the fundamentals behind
why I purchased in the first place, ie. the company is no longer
expected to produce the growing income stream I anticipated. With that
being the case I will sell and invest my available funds elsewhere.

CGT is just a cost of doing so, it will not influence the decision to do
so. Besides the opportunity exists to minimise my tax in a range of
different ways that the CGT will mostly be able to be offset anyway.

sarge

From:	John Wright
Subject:	Re: Does CGT influence your investment decisions
Date:	Wed, 19 Jan 2005 12:43:53 +1100

"sarge" wrote
> No - if I am selling it is due the a change in the fundamentals behind why
> I purchased in the first place, ie. the company is no longer expected to
> produce the growing income stream I anticipated. With that being the case
> I will sell and invest my available funds elsewhere.
>
> CGT is just a cost of doing so, it will not influence the decision to do
> so. Besides the opportunity exists to minimise my tax in a range of
> different ways that the CGT will mostly be able to be offset anyway.
>
> sarge

Can't argue with anything you say above, but still I am sure even you will
give SOME thought to CGT - even if it is timing related. Take these cases
for example. Today is 30/6/2005, you decide to sell a share today for
whatever your "sound" reason is. Someone sitting next to you points out that
if you sold it tomorrow instead, there is a good tax deferral advantage to
you. Take another case - you are deciding to sell a share that you bought 11
months and 29 days ago. This guy points out that by selling two days later
you come out $1000 ahead (of course, assuming market price is the same in 2
day's time).

Regards - JW

From:	sarge
Subject:	Re: Does CGT influence your investment decisions
Date:	Wed, 19 Jan 2005 08:37:04 GMT

John Wright wrote:
> "sarge" wrote
>
>>No - if I am selling it is due the a change in the fundamentals behind why
>>I purchased in the first place, ie. the company is no longer expected to
>>produce the growing income stream I anticipated. With that being the case
>>I will sell and invest my available funds elsewhere.
>>
>>CGT is just a cost of doing so, it will not influence the decision to do
>>so. Besides the opportunity exists to minimise my tax in a range of
>>different ways that the CGT will mostly be able to be offset anyway.
>>
>>sarge
>
>
> Can't argue with anything you say above, but still I am sure even you will
> give SOME thought to CGT - even if it is timing related. Take these cases
> for example. Today is 30/6/2005, you decide to sell a share today for
> whatever your "sound" reason is. Someone sitting next to you points out that
> if you sold it tomorrow instead, there is a good tax deferral advantage to
> you. Take another case - you are deciding to sell a share that you bought 11
> months and 29 days ago. This guy points out that by selling two days later
> you come out $1000 ahead (of course, assuming market price is the same in 2
> day's time).
>
> Regards - JW
>
>
>
You probably have me there - "timing" in very minor way may make me
thing about CGT. Probably more so the issue of getting the 50% discount
on an asset if I am extremely close to the 12 month period being up.

Not so much the 30th June issue as this is more of a tax deferral
strategy and may actually work out worse for you. What happens if your
income the following year dramatically increases and you are pushed in
to the highest tax bracket, whereas due to tax minimisation strategies
that were implemented at the start of the financial year you were only
going to be in the 2nd higher bracket this year ??

sarge

From:	Travis Morien
Subject:	Re: Does CGT influence your investment decisions
Date:	20 Jan 2005 05:56:29 -0800

John Wright wrote:

> > I dont have first hand experience, but a friend of a friend told
> > me that you can realise capital losses for tax purposes :)
> >
>
> That's a fallacy. Eventually these cancel each other out.
>
> Suppose you bought stock A for $1 and sold it at a loss for $0.50;
you can
> claim a capital loss; but presumably you sold so as to use that cash
to buy
> something that would make a gain for you in future. Suppose you
succeeded -
> say you bought stock B for 0.50 and sold it subsequently for $1; you
will
> have to pay capital gains tax and that will cancel out the previous
tax loss
> you claimed. The net result is exactly the same if you had simply
hung on to
> stock A and its price came back from $0.50 to $1 and you sold it
then.

Realising losses early and gains late does produce a timing advantage
even if eventually they cancel each other out.

What you say is quite true, realise the loss and buy it back and then
sell it later, the net CGT is the same.

But in practice realising the loss now gives you a handy exemption on a
capital gain for some other asset you've sold at a capital loss. The
share you sold and rebought might end up becoming a quasi permanent
part of your portfolio held for decades.

But the loss you realised on it comes in handy to offset the gain you
made on a takeover or wanted to sell for other reasons.
Travis
www.travismorien.com

From:	Dave
Subject:	Re: Does CGT influence your investment decisions
Date:	Fri, 21 Jan 2005 20:16:35 +1100

"Travis Morien" wrote in message
news:1106229389.547123.232210@c13g2000cwb.googlegroups.com...
>
> John Wright wrote:
>
>> > I dont have first hand experience, but a friend of a friend told
>> > me that you can realise capital losses for tax purposes :)
>> >
>>
>> That's a fallacy. Eventually these cancel each other out.
>>
>> Suppose you bought stock A for $1 and sold it at a loss for $0.50;
> you can
>> claim a capital loss; but presumably you sold so as to use that cash
> to buy
>> something that would make a gain for you in future. Suppose you
> succeeded -
>> say you bought stock B for 0.50 and sold it subsequently for $1; you
> will
>> have to pay capital gains tax and that will cancel out the previous
> tax loss
>> you claimed. The net result is exactly the same if you had simply
> hung on to
>> stock A and its price came back from $0.50 to $1 and you sold it
> then.
>
> Realising losses early and gains late does produce a timing advantage
> even if eventually they cancel each other out.
>
> What you say is quite true, realise the loss and buy it back and then
> sell it later, the net CGT is the same.
>
> But in practice realising the loss now gives you a handy exemption on a
> capital gain for some other asset you've sold at a capital loss. The
> share you sold and rebought might end up becoming a quasi permanent
> part of your portfolio held for decades.
>
> But the loss you realised on it comes in handy to offset the gain you
> made on a takeover or wanted to sell for other reasons.
> Travis
> www.travismorien.com
>

It also depends on your marginal tax rate, your tax position may change over
time.

From:	Public Image Ltd
Subject:	Re: Does CGT influence your investment decisions
Date:	19 Jan 2005 00:56:37 -0800

Goldberg wrote:

> How big a factor is CGT to you?.

Not so much a CGT issue, but tax more generally certainly limits my
participation in share buy-backs. The lot of them nowadays seem to be
structured to suit low-tax brackets. Obviously, they're pandering to
the big funds, but the SMSF crowd are also benefitting, and it is
almost enough to get me considering pitching my lot in.