Best Practices to Help Prevent Cyber Fraud

Posted by Gay Truscott on December 18, 2017

At our November, 2017 Investment Forum, we discussed cyber security and the measures you can use to protect your identity, personal data, and assets from online theft.    We developed a 1-pager that outlines the best practices to help prevent cyber fraud as well as the resources available if you do find yourself the victim of cyber fraud.    We hope you find it useful.

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Be Tax Efficient This Giving Season

Posted by Timothy Coughlin on October 31, 2017

As we approach the end of the year, charitable giving is once again expected to ramp up between Thanksgiving and December 31st, and we at Edgemoor would like to share some advice with any clients that wish to make donations. Although there is no wrong way to donate to charity, there are steps you can take to minimize taxes and maximize impact.

Donating IRA Distributions

Clients over the age of 70 ½ who have an IRA can donate up to $100,000 of distributions to charity instead of receiving it as taxable income. We recommend using funds from non-IRA accounts for donations above the Required Minimum Distribution amount. This strategy allows IRA assets to grow tax-free for as long as possible, ultimately increasing the funds available for future donations, expenses, and beneficiaries of Inherited IRAs.

Gifting Appreciated Stock

You can avoid taxable capital gains if you donate appreciated securities that have been held in taxable accounts for at least a year. This is preferable to selling the securities and donating the cash proceeds, because you avoid realizing long-term capital gains while still getting the full deduction for up to the fair market value of the donated securities. We recommend donating the securities with the largest capital gains to maximize the tax benefits of charitable giving.

Making Direct Donations vs. Funding Donor-Advised Funds

Appreciated securities may be donated either directly to charities or to a Donor-Advised Fund (DAF). DAFs are investment vehicles for giving to charitable organizations. Edgemoor offers DAFs through its custodians, Fidelity Investments and Charles Schwab & Co.

Appreciated stock donations to DAFs have several advantages:

  • You can choose the charities that will receive grants from DAFs
  • You can take the full tax deduction upfront for donating to DAFs and then distribute the donated assets to the designated charities over time
  • You can invest and grow your assets donated to DAFs if you wait to distribute them over time
  • You can get help from DAFs to research charities, track your donations, and set up automatic recurring donations

Fidelity and Schwab both require a minimum initial balance of $5,000 for DAFs and provide lists of select funds for investment of donations pending their distribution to charities. For accounts exceeding $250,000 you can have your DAF funds managed by the investment advisor of your choice and invest in stocks, bonds, and a wider range of funds. Administrative fees for DAFs range from 0.10%-0.60% based on account size.

We at Edgemoor would be happy to provide allocation recommendations free of charge for DAFs invested in the lists of DAF select funds, or to manage DAFs exceeding $250,000. Setting up a charitable giving account through a DAF is easy, and Edgemoor is ready to prepare all forms and guide you through the process.

Timing Your Donations

You receive the tax benefits from giving to charity, either directly or to a DAF, in the year you make the donation. There is a maximum deduction you can take for charitable giving which is a function of your taxable income. Spreading out your donations over multiple years may maximize your tax savings. However, if you have a higher than usual income in a single year (e.g. from selling a family business), it may be best to make one large donation to a DAF to reduce your large tax bill that year, then distribute the funds to designated charitable organizations over multiple years.

If you wish to receive tax benefits in a certain year, the charitable organizations or DAFs must receive your donations by December 31st of that year. We recommend beginning to transfer assets at least several weeks before the end of the year to ensure the charitable organization or DAF can process your donations in time.

Contacting Edgemoor

If you have any questions, please feel free to call 301-543-8881 or e-mail us at rroane@edgemoorinv.com.

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Cybersecurity and Your Credit

Posted by The Edgemoor Investment Advisors Team on September 12, 2017

Cybersecurity is a major concern, and recent data breaches heighten the importance of protecting one’s privacy and data security.  Following is a summary of the latest data breach at Equifax and our recommendations to reduce the risk that someone can obtain and use your personal identity and data.

Equifax Incident

On Thursday, September 7th, the credit reporting agency Equifax announced it had been the target of a cybersecurity breach that could potentially impact 143 million Americans. Criminals accessed files that included the names, Social Security numbers, birth dates, addresses, and even some driver’s license numbers of Equifax customers.  A more detailed summary can be found here: https://www.equifaxsecurity2017.com

Equifax is giving all consumers the ability to check whether they have been impacted by this breach and the option to enroll in its credit monitoring service, TrustedID Premier, for free for one year regardless of whether you were impacted by the breach. TrustedID Premier includes:

  • Copies of your Equifax Credit Report
  • Credit file monitoring at all three major credit bureaus
  • The ability to lock your Equifax Credit Report
  • Social Security number monitoring
  • Identity theft insurance

To check whether you have been impacted and enroll in TrustedID Premier, simply follow these steps:

  1. Visit https://www.equifaxsecurity2017.com/enroll/ and click the red button “Begin Enrollment” on the left side.
  2. Type in your last name and the last 6 digits of your Social Security number.
  3. The next screen indicates whether Equifax believes your information may have been impacted; click “Enroll” if you wish to sign up for TrustedID Premier for free.
  4. The next screen may show you your enrollment date for TrustedID Premier. If so, return to https://www.equifaxsecurity2017.com/enroll/ on or after this enrollment date and click the red button “Continue Enrollment” on the right side of the page; otherwise, go directly to the next step.
  5. Follow the instructions as prompted, providing any additional information requested and a valid email address to finish enrollment.
  6. You will receive an email within a few days with a link to activate TrustedID Premier.

Freezing Your Credit and Other Tips for Protecting Your Identity

In the wake of this breach, The New York Times has also provided tips for protecting one’s information online in a variety of articles.  Helpful tips include:

  • Lock your credit reports at the three major credit reporting agencies (Equifax, Experian, and TransUnion), either through a security freeze or another option provided by the agencies. This service locks your credit files and prevents the opening of new credit card accounts or loans unless you temporarily open your files to apply for new credit. Please be aware that you may be charged a fee for this service depending on the credit agency and the specific service requested. Fees tend to be one-time charges in the range of $5-$20.
  • Review your credit report at least annually by obtaining it for free from this site: www.annualcreditreport.com. Be sure to use this official site and not others with similar names that companies use to try to sell you services.
  • Change all passwords for websites that store any of your personal information, especially those related to your finances or health.  Do not use the same password for multiple websites.

We at Edgemoor recommend all our clients take the above steps and begin monitoring any online accounts with personal identifying information for suspicious activity. We also urge everyone to be cautious regarding any suspicious requests received online, whether through a website or e-mail.

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The Value of Berkshire Hathaway

Posted by Timothy Coughlin on May 10, 2017

I attended my twelfth Berkshire Hathaway Annual Meeting this past weekend and found it to be as worthwhile as ever.  Chairman/CEO Warren Buffett, age 86, and Vice Chairman Charlie Munger, age 93, are still at the top of their game.  Their appreciative audience seemed to me larger than ever with approximately 40,000 stockholders in Omaha, NE for the meeting and related Berkshire Hathaway events.

Once again for five hours they responded to questions from financial journalists, research analysts and stockholders, many of which dealt with how the intrinsic value of Berkshire Hathaway is not reflected in its balance sheet and income statement.  Here are some of the stunning highlights:

  • Berkshire Hathaway’s security holdings of public companies now have unrealized gains of $90 billion not recorded in net earnings.
  • Berkshire Hathaway’s float, accumulated insurance premiums reserved for future claims, now exceeds $100 billion for the first time.  Carried as a liability on the balance sheet, Buffett regards these reserves as a revolving fund since premiums received for new insurance policies likely replenish insurance claims going forward.  Moreover, Berkshire Hathaway’s insurance operations, which have operated at an underwriting profit for the past fourteen years, are currently expected to continue that performance with the result that the investment earnings on its $100 billion float would fall to the bottom line.
  • Berkshire Hathaway has $15 billion of intangible assets, representing the cost of acquired businesses exceeding their book value, which must be amortized as expenses over many years.  In 2016, the amortization of intangible expense for Berkshire Hathaway was $1.5 billion.  Buffett believes this expense is unwarranted because the acquired companies would not have incurred such an enormous intangible expense had they remained independent.  It is only because of Berkshire Hathaway’s ownership that the intangible expense must be deducted from profit.

Buffet believes that the intrinsic value of Berkshire Hathaway’s stock far exceeds its book value.

Positive News for the Future

  • New Business in 2017
    • GEICO led by Tony Nicely has signed up 700,000 new policy holders.
    • Berkshire Reinsurance led by Ajit Jain received a $10 billion premium for a new reinsurance contract with AIG.
  • Stock Investments
    • Warrants from the purchase of Bank of America Preferred Stock are now worth $10 billion in addition to the $5 billion originally invested.
  • Tod Combs and Ted Weschler
    • Each of these investment managers brought into Berkshire Hathaway by Buffett are now managing $10 billion dollar portfolios and additionally have subsidiaries reporting to them.
  • Stock Repurchases and Dividends
    • Buffett explained that if the size of Berkshire Hathaway’s cash available for investment makes it increasingly difficult to employ, dividends and stock repurchases would be considered.
  • Taxes
    • Buffet said that reduction of corporate income taxes would increase profits of Berkshire Hathaway’s subsidiaries (with the exception of public utilities that have electric rate setting commissions which control profit levels).
  • Management Succession
    • Buffett explained that when he retires or otherwise can no longer be CEO, his successor will come from within Berkshire Hathaway.  While he is not prepared to disclose the name of his successor as long as he plans to continue as CEO, he said that there is ample talent within the company from which to choose.
  • Berkshire Hathaway Without Buffett
    • Buffett said of Berkshire Hathaway’s stock, “If I died tonight, I think the stock would go up tomorrow.”  He attributed the reason why to the market perception that the sum of Berkshire’s parts is worth more than their whole as a single company.  However, he has a loyal board and loyal managers who want his principles for Berkshire Hathaway to continue for the long term benefit of its shareholders.

Past performance is not indicative of future results. The information provided in this commentary should not be considered financial advice or a recommendation to buy or sell a particular security. You should not assume that any of the investment strategies or securities discussed herein are or will be profitable. The opinions expressed herein are those of Edgemoor Investment Advisers, Inc. (Edgemoor) and are subject to change without notice. You should always obtain current information and perform due diligence before investing.  All recommendations for the last 12 months are available upon request.

Edgemoor Investment Advisors, Inc. is a registered investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Edgemoor including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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Buffett and Munger: The Beat Goes On

Posted by Timothy Coughlin on May 5, 2016

At the Berkshire Hathaway Annual Meeting on April 30 with 40,000 in attendance and webcast available for the first time, Warren Buffett age 85 and Charlie Munger age 92 were at the top of their game.

Buy good companies, let their managers run them and invest the capital they generate has been their mantra from the outset, and we believe it is still working.  Berkshire’s annual percentage change in book value (its preferred measurement of performance) was up 6.4% for 2015 compared to the S&P 500 Index which was up 1.4% including the reinvestment of dividends.  Berkshire’s net earnings attributable to shareholders for the year were up 21.0% compared to 2014.  But that’s not to say that Berkshire only had smooth sailing during the year.  Berkshire’s stock was down 12.5% in 2015 but is up 11.3% so far this year, as of today, May 2, 2016.

In 2015, Berkshire’s reinsurance companies encountered increasing competition from others and continuing low interest rates which adversely impacted earnings on the fixed income investment portion of their reserves for claims.  GEICO suffered a significant decrease in profits as increased accidents caused by greater automobile mileage and higher accident rates resulted in rising claims.  BNSF encountered diminishing coal and oil railroad car shipments.  Even so, BNSF’s net earnings rose due to improved service and cost control, and we believe the overall performance of Berkshire for the year was laudatory.

To comprehend the intrinsic (true) value of Berkshire Hathaway, it is necessary to understand its three components.  First is the ownership of 78 non-insurance operating companies led by railroad BNSF and public utility Berkshire Hathaway Energy.  These operating companies account for 36% of Berkshire’s pre-tax net earnings.

Second is Berkshire’s insurance business consisting of 11 insurance companies with their $88 billion of reserve “float” funds available for investment pending future insurance claims.  $59 million of these funds are invested in stocks, the largest 4 of which are Wells Fargo, Coca-Cola, IBM and American Express.  Profits from Berkshire’s stock portfolio are understated since only dividends received by Berkshire are reported as income, not the share in earnings these stock holdings represent.  Moreover, the market value of Berkshire’s stock portfolio was $112 billion at year-end 2015 versus its cost of $59 billion, a 90% unrealized gain of $53 billion which under GAAP is reflected on Berkshire’s balance sheet but has not been recorded on Berkshire’s income statement.

The third value component is the future earnings potential of Berkshire’s retained earnings.  This has been the hallmark of Berkshire’s success and the reason it does not pay a dividend.  Warren and Charlie believe they can invest their stockholders share of Berkshire’s earnings better than their shareholders could invest their dividends if Berkshire paid them.

In Warren and Charlie’s view, Berkshire’s book value significantly understates the intrinsic value of the company.  Warren is so confident of this that Berkshire is committed to aggressively repurchase its shares if they ever fall to 120% of book value.  He also believes that Berkshire’s current market price of 144% of book value is well below its intrinsic value.

Here are some interesting take-aways from the meeting:

  • Warren said Berkshire Hathaway will do just fine no matter who becomes our next president.  He is a supporter of Hilary Clinton, but is not worried if Donald Trump should win.
  • According to Warren, an important reason why the managers of Berkshire Hathaway’s operating companies perform so well is that they can fully concentrate on their businesses and don’t have to be concerned about investor relations since Berkshire is their stockholder.
  • A succession plan for Warren and Charlie is in place but not disclosed, because to announce it would be premature and cause undue attention.  Warren firmly believes that the culture and investment philosophy of Berkshire Hathaway will not change after he and Charlie are gone.  He thinks Berkshire’s board, management and stockholders are too committed to Berkshire’s way of doing things to allow that to happen.
  • Warren views Amazon as a competitive force for change in the marketplace, and it is a company Berkshire follows closely.  On the subject of competition, Charlie said it is Berkshire’s culture to “Win fairly and use (spend) wisely.”  Warren stressed that treating all constituents fairly is important including both customers and vendors.  Pressing to win every aspect of a negotiation can be counter-productive.

All in all, it was another worthwhile Berkshire Hathaway annual meeting to attend in person or to view by webcast.

Past performance is not indicative of future results. The information provided in this commentary should not be considered financial advice or a recommendation to buy or sell a particular security. You should not assume that any of the investment strategies or securities discussed herein are or will be profitable. The opinions expressed herein are those of Edgemoor Investment Advisers, Inc. (Edgemoor) and are subject to change without notice. You should always obtain current information and perform due diligence before investing.

Edgemoor Investment Advisors, Inc. is a registered investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Edgemoor including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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