^^agree mhannebert Wrote: ------------------------------------------------------- > I’m sure you got the message. Well, first off I’m sorry for being a smartass. My wife tells me I am a little on edge lately for some reason. Anyway, whether it is a big word, or used by managers to sugarcoat performance… I don’t know. Fact is, every strategy is going to periodically have gains and losses. Strategically harvesting losses to offset taxable gains generates a tax alpha. You don’t have to like it. It just is.
Darn, I forgot about this part of the readings.
amit_cfa2 Wrote: ------------------------------------------------------- > This is how I think about it > > Scenario 1) > Sold the 5500 , hold the 4500 ----> So I have 5500 > - 75 ( tax on the 500 gain) + 4500 ( I did not > sell) ----> Total value of my portfolio 9925 > > Scenario 2) > I sold both —> Total value 5500 + 4500 = > 10,000 > > > Now I have a $ 75 tax alpha Thanks for the example but I think that is not enough. You should think economically and not the figures you find at the bottom line of your security valuation listing… I mean, the “5500” is economically (i.e. after taxes you will pay one day or the other) “5425”. And the “4500” is economically “4575”. Imagine these gains / losses are made within an company, then from an accounting point of view if taxes are not paid you would book a tax liability / tax asset to account for the deferred tax positions… The value of loss harvesting is that there are some tax laws that allow you to use the tax reductions from your losses only during some time… MH
If an AM question requires you to: i.) Formulate the trades tax alpha, and ii.) Explain the concept of tax alpha, you are welcome to respond: i.) From an accounting point of view the tax alpha = 0 since GAMHAP (generally accepted m. hannebert accounting principles) requires you to “imagine” that investment holding gains/losses are the same as a companies operating income. Therefore you should track the deferred tax amounts on all individual portfolio positions using existing tax rates and book a tax liability/tax asset in the calculation of ending portfolio value. ii.) Tax alpha is a “big joke” developed by portfolio managers who attempt to convince their clients that they strategically select positions to generate losses.
Thanks slouiscar - I laughted, you made my day and it’s 23:25 local time for me. GAMHAP - is rather difficult to put in a conversation but I will try in the next days. More seriously, if such question occur, I know what I have to answer, and I will, no question. I think my post was to confirm my understand (both kind of “personal” and “official”. One day we may meet and laugh together. MH
deal. you can buy me a beer.
What SS was this? Anybody know which cfai book it was in?