In tax-loss selling, waiting till the last moment can be very expensive
BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Tuesday June 15, 2021
Are you enjoying this tremendous stock market ride? We certainly hope so. Like many investors, we have been participating in the climb with many solid wins. But with every triumph comes — you guessed it — capital gains tax.
At this time of year, we start to focus on tax-loss selling to offset some of the profits. We support paying our fair share of taxes, but that can be done more efficiently with a little planning.
Many investors choose to wait until the year-end for their tax-loss sales, often in the few days remaining just before the deadline. We compare this to students who know a month in advance when an assignment is due, but pull an all-nighter to get it together.
While that can be stressful, and may cost them a letter grade or two, there will likely be no immediate monetary consequence. However, when applied to investing, the “wait until the last moment” mentality can be very expensive.
Oftentimes, the tax-loss selling stampede at year-end whacks certain stocks badly and others to a lesser degree. This phenomenon compounds the scale of the tax-loss sale for the average investor. This is exactly why we do a lot of buying in December as valuations dip and before the Santa Claus rally takes off into the seasonal “January effect.”
One loser that Benj had was Permian Basin Royalty Trust, purchased at US$6.46 at the end of 2018. As its name suggests, it is located in the heart of the Permian of West Texas and tallies 125 royalty interests over 51,000 acres.
The trust has been around since 1980 and has a long, rich history. But that was largely forgotten when oil and gas prices cratered, forcing the distribution down to under a penny a month. At points in the past, the monthly payout had been more than a dime. The tax loss was taken this month at $4.49. The trust has climbed 66 cents since then, and currently pays out about two Lincoln pennies a month for a yield of 4.9 percent.
Did Benj want to sell this one? Not really, as he feels it has excellent upside potential. But shaving the tax bill made it worthwhile, and after 30 days he can repurchase the shares, once the loss has been crystalized. The royalty trust does appear to have a lot of potential and a double-digit price is not out of the question. It traded above US$10 as little as three years ago and a decade ago the price was north of US$22.
Where will oil and gas prices go from here? Many believe that their time has passed, and 14 months ago oil bizarrely traded at a negative valuation. It seemed like people were saying, “Take my oil, please, and I will pay you to do it!”
At Contra, prices in the patch are a regular topic of discussion. Ben and Benj think these commodities are essential and will continue to power the world’s economy for a time. Philip, on the other hand, is less certain, and worries the sector is a value trap. He believes the transition to electric vehicles is key, and as a result, has wanted to avoid the sector.
Recently, oil has regained some of its mojo and the price has moved up sharply to a two-year high. Meanwhile, efforts to reduce global warming are picking up speed and even major oil companies have come out in support of Net Zero by 2050 initiatives. Replacing 1.4 billion cars, not to mention tens of thousands of commercial aircraft, will be a Herculean task. Though we are long-term investors, 30 years out is beyond our time horizon.
A major key to fat investment returns is keeping as many after-tax dollars in your pocket as possible. Using tax losses efficiently can help to accomplish this. While we often think that being successful is all about the winners, how the losers are played is also key.