"I have shares. The more I hold them the more tax savings I get compared to any shares I buy now. And yet, I think they are overvalued at, say, $300.
Now: I don’t want to sell them at $300 now. I don’t want them to be called away at $300 in six months. But a year from now, if they are down to $200, THEN I want to get $300 from them."
Yeah, makes perfect sense.
Not sure if the remark is meant to be sarcastic, but yes, it does make perfect sense.
If BRK is overvalued at $300 (it’s not, but let’s play along), but one has no need to sell, and knows that BRK value rises steadily over time, then one can look forward to it not being overvalued at $300 at some point in the not-too-distant future. So one would not be compelled to sell in that situation. Waiting is fine if you don’t need the money.
But one can also believe that the market is being generous today and might not be as generous in a month or two, in which case BRK could quickly become undervalued (i.e., priced less than $300). This wouldn’t be a disaster, since the loss would be unrealized and there’s no need to sell, so again, it just becomes a waiting game for the stock to recover.
On the other hand, there’s the thought: Why let an opportunity go to waste? Who wouldn’t want to capitalize on the scenario where BRK temporarily falls by a large amount, if it transpired? Having a long put position in this case would be very nice indeed. One could sell the puts for a nice profit, and use the proceeds to buy more BRK at now-undervalued prices, or use the cash for beer and pizza, as it were.
The only real problem with setting up a position like this in advance, not knowing if it will actually be needed, is the pricing question. Puts aren’t cheap. One could easily spend 5% or more of the total position just to buy a meaningful insurance position in puts. So therein lies the difficulty. It’s a poker decision of sorts. At a low enough price, relative to the size of the position and probability of profit everyone would buy puts. At a high enough price, nobody would buy them.
My personal opinion is that the covered call approach is a good one for Berkshire when prices are approaching something like fair value, since the market never seems to get all that excited about the stock. It will mostly likely either pull back, in which case the calls can be covered or rolled for partial profit or expire for full profit, or they can be rolled for partial profit or at least a net credit with an eye to profit at some point in the future. With a big position it’s also possible to roll some calls and let others be exercised to reduce the stake and make sure the covered call action is never a negative in itself.
The “do nothing” approach is a perfectly fine one, too.