Corporate Insiders Have Forgotten The Warren Buffett Feud With Seabury Stanton

Many of you reading this are familiar with the backstory of how Berkshire Hathaway came to be the chosen investment vehicle that built Warren Buffett’s vast fortune. Buffett noticed that the price of Berkshire tended to bump in price every time there was an announcement of a mill closing, and he thought there was a gap in value between the $7-$8 prevailing price and the $20-$21 stated book value of the stock.

The decision to cheat Warren Buffett out of roughly a dime per share in a tender offer led to Seabury Stanton’s ouster as head of the Berkshire Hathaway textile mills. This potential consequence of personally insulting an activist investor was on my mind as I saw Sally Smith’s resignation from CEO of Buffalo Wild Wings after taking gratuitous shots at activist investor Marcato Capital. My view is that it is far better for the job-holder and the corporation itself to focus on the merits of the insurgent activist’s arguments rather than engage in ad hominem battles of identity.

Because Berkshire’s stock price was so low compared to the book value, patrician CEO and Chairman Seabury Stanton would use the liquidated proceeds from the mill closings to buy back its stock. Although this may be obvious, it is useful to keep in mind the premise—anytime a smallish company wants to repurchase a meaningful percentage of its stock, it needs to locate shareholders willing to part with the stock lest the business end up bidding against itself or—even worse!—run afoul of SEC rules and congressional laws on stock price manipulation.

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The Secret to Investing in Bonds

If you read an intermediate level finance textbook, you will encounter advice that discusses the relative safety of bonds. Usually, you will encounter information that says something to the effect of—national governments have the safest debt obligations, then state and/or local governments, then large businesses, and then small businesses. Those notions may be useful as vague generalities, but provide little insight when you are actually trying to determine how to invest your money: What are the exceptions? How can you tell when, say, a high-quality large business is giving you a “safer” bond offering than a government entity?

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American Credit Scores Hit Top Of Range

Between now and 2020, you will likely encounter statistics and headlines pointing out that the top range of the average American credit score has recently risen. There is a reason for this. It is because the poor credit events of the Great Depression are starting to roll off the credit reports of American consumers.

For the first time since 2005, the average credit score of an individual in the United States has hit the 700 mark. As a general FICO reference point, credit scores are viewed as follows: 580 or below and you’re considered high risk, 580-670 and you’re in that range where you’ll get a mix of approvals and rejections and likely carry a moderately higher than average interest rate, 670-740 and you have good credit such that you’ll only get rejected if you attempt to borrow a very high number relative to your income, 740-800 and you’re going to get a significant amount of unsolicited bids asking you to borrow money and you will be able to borrow on great terms, and anything above 800 is a best-in-class borrower.

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Illinois Launches 20% Privilege Tax at Financial Professionals

Perhaps a little more often lately, you come across pending legislation in which you can actually feel a politician stick his hand into your pocket and help himself to your wallet. Such a reaction is understandable after you read Illinois House Bill 3393, popularly called the “Illinois Privilege Tax” because it plans to charge investment professionals an extra 20% on their services rendered.

The specifics of the Illinois privilege tax contain the following provisions:

  • Partnerships and s-corporations that provide investment services would be subject to the tax.
  • The original bill stated that the privilege tax would be subject to repeal once the United States federal government removed the lower tax rate on carried interest, though the amended version contains no such expiration.
  • The test for whether a partnership or s-corporation is subject to the tax is whether it derives more than 40% of its income from “advising as to assets”, “managing or disposing of client assets”, “arranging financing or planning over public securities”, or “any any activity that supports the service of asset management.”
  • “Assets” are defined to mean real estate rental or ownership, publicly traded stocks, bonds issued from governments or any business, commodities, options, derivatives, or “any other financing that shares these characteristics.”
  • Partnerships and s-corporations are excluded from this bill if at least 80% of their income comes from the management of real estate.
  • This tax is in addition to all taxes that partnerships and s-corporations are already obligated to pay.
  • The original version stated that the law would not take effect until New York, New Jersey, and Connecticut all passed “substantially similar” legislation on financial professionals, but the amended version merely states that it will take effect on July 1, 2017 and there is no clause limiting when it takes effect or sets it for expiration.

The Illinois Privilege Tax aims to tax financial professionals at a rate of 20%. The definitions of the target audience is too overbroad and the tax hike is so extreme that it will need to a substantial counter-response from the business community if this legislation is enacted.

My takeaways:

#1. Specially targeted taxation generates a special kind of resentment. There is a reason why, when you visit a restaurant, the costs of your cheeseburger are not itemized. You don’t get charged $0.25 for ketchup, $.50 for a pickle, $0.25 for lettuce, $0.25 for tomato, and so on. That is the same reason why it is rare to see restaurants that charge $0.50 for a refill. Such targeting and nickeling and diming feels like extortion, even if the cumulative cost for the burger is the same as a place that just charges $10 regardless of your toppings.

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Wiping Out A Trust Fund Through Litigation

When you deal with trust fund administration, there is a lot that can go wrong. The typical pitfalls are usually related to the fact that the beneficiary of the trust is not the one who made the money that got submitted into the trust as principal, meaning there is no indication that the person receiving the money has the sophistication to adequately manage financial affairs.

The other pitfalls typically relate to traditional agency issues—the person who makes investment selection and distribution decisions for the trust fund (the trustee) is not the same person that is actually receiving the money (the beneficiary) so problems can arise from this disunity of self-interest. The self-interest for the trustee is to keep as much money in the trust fund as is permissible, as most banks and trust fund administrators charge a certain percentage of the assets each year.

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