Free Post: Buffett/Bogle Speak Out Against “Short-Termism” and Miss

Berkshire’s (BRK.A) Warren Buffett and John Bogle propose some ideas. One makes sense, two others, I don’t get…

My problem is with the last 2 parts (from the end notes).

1 The Obama Administration has called for an increase in the longer-term capital gains rate to 20 percent. Instead, if a choice is made to implement this idea through capital gains, the Administration may consider a capital gains rate that is positively and dramatically skewed toward longer-term holdings.

2 The tax treatment of a capital loss for non-corporate taxpayers that provides a $3,000 annual limitation on the deduction against ordinary income has been in place since the 1976 Tax Act. In recent years a number of proposals have been put forward to increase the $3,000 yearly limit on a capital loss deduction against ordinary income. While a higher deduction limit makes sense to account for inflation, we suggest that a capital loss tax policy should be implemented that favors very long-term losses, for example when one sells an asset that has been held for 10+ years or longer at a loss, a 100% deduction against ordinary income in the year in which the asset sale occurs is allowed

3 The SEC’s proposed proxy access rules, issued June 10 and open for comment until August 17, 2009, require a holding period of 1 year.

The first makes sense. You always get a better response when you encourage behavior by rewarding it rather than punishing it. The smaller the gap between long term gains and short term ones, the less incentive to hold an investment. The Administration here has it backwards. IF they desire more stability in the financial markets via less frequent trading/turnover, they need to lower the LT Cap Gains tax. Lowering it to 10% (or lower) means a difference of near 20% (or more) of the profits in taxes (28% vs 10%). That is a serious incentive to hold on to an investment. Closing that gap to 28% and 20% virtually eliminates any incentive to hold on to it and in all reality encourages folks to “take the profit” and move on.

The second to me is a bit bizarre..Here is the part : “tax policy should be implemented that favors very long-term losses, for example when one sells an asset that has been held for 10+ years or longer at a loss, a 100% deduction against ordinary income in the year in which the asset sale occurs is allowed”

Holding onto a loser for ten years? Really? There is long term and then there is just foolish and this does qualify as the latter. This suggestion is essentially meaningless as I can’t think of anyone who would hold onto an investment that is a loser for a decade. Yes, I know, there are some examples of folks who have had an investment for years only for the company to go under and they lose big. I get that. But such cases are minute compared to the total investment pool out there.

The point of the paper though, is to incentivize behavior and knowing that an investment I make today, if it is a loser 10 years from now can be 100% written off, really has no bearing whatsoever on my behavior or any purchasing/holding decision throughout the entire investing process.

#2: Ought to be changed to allowing those investments held for 10+ years that are profitable to be sold TAX FREE. Anyone want to bet if you have held something for 8 years are up big in it and you know your tax hit will be 15% (current LT rate) or ZERO you might then decide to hold on?

#3: Why should we make an activist investor who is investing is a company that is not performing well to effect change for the benefit of shareholders (not to many of them invest in companies performing well, it is a waste of money) wait a year to file a proxy fight? If there is a troubled company with a questionable board, they need help sooner rather than later. What activist investor will invest in such a company today if they know they cannot effect any change for a year? In all reality, unless they purchase shares just before one annual meeting, the wait may be longer than a year depending on the purchase time and annual meeting schedule. By that time their investment may be wiped out/severely impaired. This proposal, if it does anything is gives Board Members a “one year lifeline”.

What you will end up with is far fewer activist situations in troubled companies and even further entrenched Boards. If the goal is to make Boards of Director more responsive to shareholders, this proposed rule does the opposite.

Here is their letter:
Overcome Short State0909