Archive for February, 2011

Notes from the 2010 Berkshire Hathaway Annual Report

February 27, 2011


Warren Buffett’s annual Letter to Shareholders is always worth reading even if you didn’t own any shares in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Here are some of the highlights from 2010 letter to shareholders released over the weekend and available on the Berkshire Hathaway website:

  • Conventional wisdom has it that America’s best days are behind it and economic might is going to inevitably shift eastward. Buffett, however, is optimistic about America’s prospects. He says that the country’s best days lie ahead because America’s system for unleashing the human potential is the same it has been in the past. (Pages 3-4).
  • If you invest is stocks, you have to have confidence that management will invest retained earnings sensibly. Buffett points out that a dollar of earnings in the hands of Sears Roebuck’s CEO had a far different story than a dollar entrusted with Sam Walton. (Pages 7-8).
  • Next, Buffett explains the business results in Insurance (Pages 8-11), Berkshire’s vast empire selling everything from candies to underwear (Pages 12-14), Railroads and utilities (Pages 14-15) and stock holdings. (Pages 17-18).
  • Buffett warns investors against putting too much stock in net earnings, which can be gamed by management. Instead, he counsels investors to pay close attention to changes in book value and a company’s operating earnings. (Pages 20-21).
  • Buffett counsels investors to eschew leverage, which can magnify gains but can turn lethal to a portfolio. Instead, he explains why despite very low interest rates investors Berkshire keeps plenty of cash around just in case things go horribly wrong as they did in September 2008. If there is only one thing you can read in this year’s letter, it should be Pages 22 to 25.


On Leverage: “And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”

On reaching for yield: “We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.””

On availability of credit: “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.”

On market volatility: “As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.””

On homeownership: “But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

This and That: Parking RRSP contributions, Market Risk and more…

February 24, 2011

  1. If you planning on making a RRSP contribution, you probably know that you only have 5 more days to do so. With time running out, the best tip I have is to first come up with a plan before investing your hard-earned money. You can simply park your contribution until you complete your investment plan.
  2. Dave from GP has some wise counsel regarding RRSPs: build your safety net first before even thinking about RRSPs, TFSAs and whatnot.
  3. It was only last week that we noted that many stock market indices have doubled from the market bottom. This week, in the wake of turmoil in Libya, stock markets started falling sharply. Larry Swedroe points out that this is once again a reminder that markets are highly risky and risk is present all the time.
  4. You can’t make up a story like this if you tried. The Ottawa Citizen’s Randall Denley explains a recent Ontario Energy Board ruling: “some customers paid exorbitant late fees [on electricity bills], the power companies have to pay a penalty, charity gets the money and the current customers get the bill”.
  5. Million Dollar Journey warns that chasing high yields is a risky investment strategy.
  6. You probably have seen the blue ads that say “Risk-Free Investing. Yes, it does exist.” In his Globe & Mail column, Tom Bradley explains why investors should go on full alert whenever they hear the words risk-free and safe in the same sentence.
  7. Michael James offers a very good explanation of how income tax installments work.
  8. Looking to learn more about Exchange-Traded Funds? How To Invest Online wrote up a comprehensive list of ETF resources.
  9. Larry Mac is considering diversifying his portfolio into the US by buying the beaten-up home builder sector. All my US exposure is captured with a single ETF: The Vanguard Total Market ETF.
  10. The Blunt Bean Counter explains how the Canada Revenue Agency selects its audit victims (the taxpayers subject to the audit)
  11. My Own Advisor recounts his recent frustration with getting Aeroplan to credit points for flights.
  12. Thicken My Wallet offered a crash course on severance pay.
  13. Jim Yih has some practical tips for investing your RRSPs on his Retire Happy Blog.
  14. Canadian Couch Potato says that rebalancing is an important risk management strategy. I agree. I rebalance often when adding new money to our portfolios.
  15. Money Smarts Blog explains how there are many different retirement outcomes many of which are perfectly reasonable.
  16. With tax season just around the corner, Canadian Financial Stuff reminds us not to forget claiming medical expenses.
  17. Financial Highway featured a guest post on why it doesn’t make sense to endlessly deferring RRSP or RRIF income.

Phew! That’s it for this week. Just a quick reminder that you can read my posts in your favourite reader or delivered by e-mail. Have a great weekend everyone!

New withholding taxes on stock option benefits

February 23, 2011


If you receive employee stock options (ESOP) or restricted stock units (RSU) at work or participate in the Employee Stock Purchase Plan (ESPP) offered by your employer, you should be aware of new CRA rules on withholding taxes. In the past, employers typically did not withhold taxes at the time an employee received or exercised their stock option benefits. Instead, stock option benefits were included in the T4 slips and employees paid any taxes owing at the time they filed their taxes.

In Budget 2010, the Federal Government provided relief for Canadians who elected to defer taxes on their stock options only to find that they owed taxes on phantom profits. At the same time, the Government also repealed the rule that allowed stock option benefits to be deferred to the year of the sale. A little noticed provision in the budget (see Page 356 of the budget document) also required employers to withhold taxes on stock option benefits:

Budget 2010 proposes to repeal the tax deferral election and to clarify existing withholding requirements to ensure that an amount in respect of tax on the value of the employment benefit associated with the issuance of a security is required to be remitted to the government by the employer. This amount will be added to the employer’s remittances of tax withheld at source in respect of all employee salary and benefits, including other in-kind benefits, for the period that includes the date on which the security was issued or sold. These measures will prevent situations in which an employee is unable to meet his or her tax obligation as a result of a decrease in the value of these securities.

The Government provided some time for businesses to adjust their payroll systems to handle withholding taxes on employee stock benefits. My understanding is that starting this year, employers will withhold taxes on stock option benefits. Here’s an example of how it would work. Let’s say you are in the top 46% tax bracket. If you exercise and sell options on 100 shares of your employer, you will be subject to a withholding tax on the value of 23 of those options (assuming 50% of the stock option benefit is taxable).