7 ms·

Naïve question. The richest people in the world, who are billionaires from pretty much just stock. How do they convert that to real money to buy things? Do the

Naïve question. The richest people in the world, who are billionaires from pretty much just stock. How do they convert that to real money to buy things? Do they just simply wait until the stock is at a high point, and sell a lot? Maybe move that money to other investments?

elliotec 10y ago
I think yes probably both.
dfischer 10y ago
These individuals can easily call up banks and get a loan on their worth. "Hey, Morgan Stanley I need 2 mil deposited in my account" - "ok" This is also how they avoid income tax. ;) They can take in millions and it's just a loan. Then they pay it back off with stock or other asset deals.
- harryh 10y ago
  You might be able to move around when you incur income tax a little bit that way, but you can't avoid it.
  - ChuckMcM 10y ago
    This is exactly right, you can shift it into another tax year but you can't legally avoid it. But everyone's tax situation is different.
    - charlesdm 10y ago
      There are ways, e.g. by donating to your own accredited charitable foundation.
      - icebraining 10y ago
        But then you can only use the money for certain purposes.
        charlesdm 10y ago
        Of course, you can't get rid of your entire tax bill (well, maybe you can, in one tax year). But you can probably do more with charities than you'd assume. For example: let's say you buy a mansion. This mansion has a forest or large amounts of land surrounding it. A charity focusing on land or nature preservation could acquire that land.
        deleted 10y ago
        [deleted]
  - Retric 10y ago
    Deferring tax means you get interest on money that would have been taxed which acts as a tax break. Ex: Supose you have 100$ your tax rate is 15% and you get 5% in interest. Pay 10% now you have (100$ - 15$) * 1.05 = 89.25 next year. Swap that order 100$ * 1.05 - 15$ = 90$ Next year or a ~7% tax break. Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate.
    - harryh 10y ago
      Yes, borrowing can increase the leverage on an investment. It can magnify gains, but it can also magnify losses. No, you cannot use leverage to reduce taxes to zero. You are confused if you think that. Go play with the numbers some more. Don't forget that you have to pay taxes on the investment gains you make with borrowed money (as you did in your example).
      - Retric 10y ago
        You only need to pay capital gains when you sell an asset. As to deferring if you defer and save 10% then next year defer and save 10% of that it's a net reduction of 0.9 * 0.9 and every year you defer is another * 0.9. If nothing else inflation makes deferring tax loads very attractive.
        harryh 10y ago
        It's true that you can somewhat increase your overall return by deferring capital gains taxes because you get to hold on to the assets you would have paid in taxes longer and those assets can earn a return for you (this is why certain types of tax advantaged retirement accounts are nice). But I think you are significantly overstating the potential gains when you say that you can save 10% a year. For example let's say you have $1000. Tax rates are 15% and annual investment returns are 8%. Under strategy A you sell and pay taxes at the end of every year. Under strategy B you only sell at the end of 30 years and pay taxes all at once. Under strategy A you will end up with $6,738.55. Under strategy B you will end up with $8,069.6 which is about 20% more. 20% more is a lot so that's a strategy worth thinking about! But it's not reducing your tax bill anywhere close to 0. In fact you actually pay more in total taxes under strategy B in nominal terms (and about the same in real terms assuming 2% inflation) because you have more overall gains. Overall, I agree that deferring tax payments can be a very useful thing to do. I just dispute your statement that "Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate." That's simply not true.
- joewee 10y ago
  This. There is a large section of private banking that have creative ways to provide loans/financing to major shareholders. As long as your stock remains stable, you can finance anything up to your net worth.
  - prostoalex 10y ago
    As long as. http://www.wsj.com/articles/SB10001424052702303505504577402421170625302 http://www.wsj.com/articles/SB100014240527023035055045774024...
- melling 10y ago
  I have $100 and i need $2 so i go through the trouble borrowing it? That's if you have a measly billion dollars. Now if you've got $10B, that's like financing 20 cents.
  - jedberg 10y ago
    You're forgetting about taxes. If you sell something worth $100, you probably aren't going to pay $30 in tax on it (or probably anything at all). If you sell something worth 100 million you're going to pay 30 or 40 million in taxes. With the loan you won't pay any tax now, you might pay it later, or you might not ever pay it because you'll have that loan until you die and the bank will be the beneficiary of 100 million of your estate.
    - melling 10y ago
      you only need $2. There's no need to cash in $100.
      - jedberg 10y ago
        You're right I missread but the point is the same. Taxes. The whole thing changes when you're trying to be tax efficient.
    - harryh 10y ago
      Then you just die with more assets which will incur higher estate taxes. The estate tax rate is higher than the long term capital gains rate. Estate taxes are paid before creditors.
      - jedberg 10y ago
        Yeah but you're dead so you don't care. :)
        harryh 10y ago
        Well if your goal was to optimize your taxes to pass on as much as you could to your heirs you failed at your goal.
- deleted 10y ago
  [deleted]
jhulla 10y ago
They diversify into other investments. For very large holders of stock, they use a preset and scheduled sales plans to negate any color of insider trading or impropriety. The very largest insiders have to disclose their sales publicly. See for yourself: Zuckerberg's sales of FB. https://biz.yahoo.com/t/15/8822.html https://biz.yahoo.com/t/15/8822.html
tomeehan 10y ago
> Do they just simply wait until the stock is at a high point, and sell a lot? Maybe move that money to other investments? Pretty much. If they own shares in a public company, they can just sell them on the open market. You can see director's dealings on the company's 'Insider Transactions': (i.e. Apple: http://finance.yahoo.com/quote/AAPL/holders?p=AAPL http://finance.yahoo.com/quote/AAPL/holders?p=AAPL) If the company's not public — they can receive cash through salary/bonus/dividends. If they're privately financed (i.e. VC's) they can liquidate some of their shares during a funding round (they sell some of their shares to the VC). (This is a total ELI5 — sorry to any financiers/accounts reading this)
rezashirazian 10y ago
At that level money takes on a whole new meaning. It's no longer a form of currency used to purchase things but more of an abstract perception of power.
- eevilspock 10y ago
  Perception? It IS power. The power to influence politicians and elections. The power to influence how we educate our youth (e.g. Bill Gates and Common Core). The power to dominate everything. It thoroughly undermines democracy, unless we want to redefine democracy as 1$ = 1 vote.
  - rezashirazian 10y ago
    I've been finding myself quoting Game Of Thrones more than usual lately but: “Power resides where men believe it resides. No more and no less.” These billionaire are powerful only because we have collectively decided to put such high value on the product of their companies and investments. It all stems from perception.
    - oldmanjay 10y ago
      If you claim that the benefits of our technological society are merely perception, I suggest that you are not perceiving all that clearly.
    - Ntrails 10y ago
      > “Power resides where men believe it resides. No more and no less.” Follow it through. People believe what they are told, to a certain extent, so Power resides where people are told it does. Who tells them where it resides? Those who can afford to shout about it a lot. Thusly a billionaire is powerful because they have the ability to make people believe it by projecting that position through "propaganda", and this doesn't go away. Money buys people listening to you. By the quote, that is essentially power, and so money is power.
ChuckMcM 10y ago
There are a couple of ways (disclosure, I am not a billionaire :-)) First, nobody really needs a billion dollars in "cash" it just doesn't make sense as "cash" deposits pay a below inflation rate return in most places (meaning it loses its "value" over time) and even a negative interest rate in some places. Second, it isn't like there is a "fixed amount of money" in the world and if someone has all of it, everyone else has none. So if you are a billionaire, and most of your billions are in stock of a particular company, and you are a US citizen. You file a form with the Securities and Exchange commission (SEC) to sell some shares every month or quarter or year. Or you file a form that says you will sell X shares 3+ months from now. The SEC posts this information publicly so that other investors will know about it ahead of time and decide what to do. The point being that you are a "big investor" or an "insider" and selling might be seen as a signal, and this makes the signal loud and with a time delay so that the other investors can respond. Then the appointed time comes and your shares get dumped on the market and you collect however much money they happen to bring in (less taxes). You will see lists like this one (http://www.nasdaq.com/symbol/goog/insider-trades http://www.nasdaq.com/symbol/goog/insider-trades) for Google. Which itemize those sales. So lets say you need 15 million a month to operate your private jet, you set up a system that will sell enough stock to net at least 15 million a month to cover that. You don't want to sell it all since you might want to vote your shares but you have to get around so you let some go. A lot of tech billionaires set up trusts for their children which they fund such that their children will never have to work and can live a comfortable lifestyle. A number of tech billionaires have been setting up foundations (like the Bill and Melinda Gates foundation) which can convert stock to cash in a tax advantaged way and do good things with it. Sometimes the foundations are created to give the billionaire a vehicle for influencing others while nominally keeping their hands clean. (not working so well for Trump and Clinton but I read about a number of foundations being used in this way.) So generally if you look at the insider trading you will see billionaires selling stock in 10 to 100 million dollar chunks and using it for different things.
- TheAceOfHearts 10y ago
  Somewhat related, if you or someone else knows: is there any special process for transferring or handling large amounts of money? For example, if you're buying a $5m private jet, how would you pay for it? A regular check or bank transfer? Also, do the banks keep any security checks in place? e.g. If I had $10m and there was a request to transfer out $5m, I'd definitely like the bank to run it by me.
prostoalex 10y ago
Three possible strategies: 1) Sell immediately and diversify. 2) Sell a smallish portion of holdings at a market price periodically. 3) Never sell anything, borrow against the portfolio to finance personal needs. Strategy (1) is suitable for heirs and retired executives. Markets really-really like it when active executives stick to (3), though. Because it's not the most rational financial decision and due to AMT tax bill incurred on new stock grants to such active executive, most people at that level stick to (2), which can be traced via tools such as Yahoo! Finance. (2) also has a benefit of reasonable diversification and obfuscation in regards to internal signals, i.e. traders reading the insider filings for any signs of unusually high buy or sell orders.
charlesdm 10y ago
There are also less obvious ways to unlock cash, instead of just selling (you might not want to do that, because you believe your stock is undervalued or you want to retain control of your company, etc). For example: let's say you own $500m worth of Google stock. Google stock compounds pretty well at the moment. Interest rates are low, around 1-2% per year. You can borrow $200m quite easily by using your existing stock as collateral. That money could then be reinvested again in a low fee S&P fund and in some individual stocks, generating you a 10% yield per annum. 10% - 2% = 8% of annual gains, or $16m per year.

elliotec 10y ago

I think yes probably both.

dfischer 10y ago

These individuals can easily call up banks and get a loan on their worth. "Hey, Morgan Stanley I need 2 mil deposited in my account" - "ok" This is also how they avoid income tax. ;) They can take in millions and it's just a loan. Then they pay it back off with stock or other asset deals.

harryh 10y ago
You might be able to move around when you incur income tax a little bit that way, but you can't avoid it.
- ChuckMcM 10y ago
  This is exactly right, you can shift it into another tax year but you can't legally avoid it. But everyone's tax situation is different.
  - charlesdm 10y ago
    There are ways, e.g. by donating to your own accredited charitable foundation.
    - icebraining 10y ago
      But then you can only use the money for certain purposes.
      - charlesdm 10y ago
        Of course, you can't get rid of your entire tax bill (well, maybe you can, in one tax year). But you can probably do more with charities than you'd assume. For example: let's say you buy a mansion. This mansion has a forest or large amounts of land surrounding it. A charity focusing on land or nature preservation could acquire that land.
      - deleted 10y ago
        [deleted]
- Retric 10y ago
  Deferring tax means you get interest on money that would have been taxed which acts as a tax break. Ex: Supose you have 100$ your tax rate is 15% and you get 5% in interest. Pay 10% now you have (100$ - 15$) * 1.05 = 89.25 next year. Swap that order 100$ * 1.05 - 15$ = 90$ Next year or a ~7% tax break. Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate.
  - harryh 10y ago
    Yes, borrowing can increase the leverage on an investment. It can magnify gains, but it can also magnify losses. No, you cannot use leverage to reduce taxes to zero. You are confused if you think that. Go play with the numbers some more. Don't forget that you have to pay taxes on the investment gains you make with borrowed money (as you did in your example).
    - Retric 10y ago
      You only need to pay capital gains when you sell an asset. As to deferring if you defer and save 10% then next year defer and save 10% of that it's a net reduction of 0.9 * 0.9 and every year you defer is another * 0.9. If nothing else inflation makes deferring tax loads very attractive.
      - harryh 10y ago
        It's true that you can somewhat increase your overall return by deferring capital gains taxes because you get to hold on to the assets you would have paid in taxes longer and those assets can earn a return for you (this is why certain types of tax advantaged retirement accounts are nice). But I think you are significantly overstating the potential gains when you say that you can save 10% a year. For example let's say you have $1000. Tax rates are 15% and annual investment returns are 8%. Under strategy A you sell and pay taxes at the end of every year. Under strategy B you only sell at the end of 30 years and pay taxes all at once. Under strategy A you will end up with $6,738.55. Under strategy B you will end up with $8,069.6 which is about 20% more. 20% more is a lot so that's a strategy worth thinking about! But it's not reducing your tax bill anywhere close to 0. In fact you actually pay more in total taxes under strategy B in nominal terms (and about the same in real terms assuming 2% inflation) because you have more overall gains. Overall, I agree that deferring tax payments can be a very useful thing to do. I just dispute your statement that "Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate." That's simply not true.
joewee 10y ago
This. There is a large section of private banking that have creative ways to provide loans/financing to major shareholders. As long as your stock remains stable, you can finance anything up to your net worth.
- prostoalex 10y ago
  As long as. http://www.wsj.com/articles/SB10001424052702303505504577402421170625302 http://www.wsj.com/articles/SB100014240527023035055045774024...
melling 10y ago
I have $100 and i need $2 so i go through the trouble borrowing it? That's if you have a measly billion dollars. Now if you've got $10B, that's like financing 20 cents.
- jedberg 10y ago
  You're forgetting about taxes. If you sell something worth $100, you probably aren't going to pay $30 in tax on it (or probably anything at all). If you sell something worth 100 million you're going to pay 30 or 40 million in taxes. With the loan you won't pay any tax now, you might pay it later, or you might not ever pay it because you'll have that loan until you die and the bank will be the beneficiary of 100 million of your estate.
  - melling 10y ago
    you only need $2. There's no need to cash in $100.
    - jedberg 10y ago
      You're right I missread but the point is the same. Taxes. The whole thing changes when you're trying to be tax efficient.
  - harryh 10y ago
    Then you just die with more assets which will incur higher estate taxes. The estate tax rate is higher than the long term capital gains rate. Estate taxes are paid before creditors.
    - jedberg 10y ago
      Yeah but you're dead so you don't care. :)
      - harryh 10y ago
        Well if your goal was to optimize your taxes to pass on as much as you could to your heirs you failed at your goal.
deleted 10y ago
[deleted]

jhulla 10y ago

They diversify into other investments. For very large holders of stock, they use a preset and scheduled sales plans to negate any color of insider trading or impropriety. The very largest insiders have to disclose their sales publicly. See for yourself: Zuckerberg's sales of FB. https://biz.yahoo.com/t/15/8822.html https://biz.yahoo.com/t/15/8822.html

tomeehan 10y ago

> Do they just simply wait until the stock is at a high point, and sell a lot? Maybe move that money to other investments? Pretty much. If they own shares in a public company, they can just sell them on the open market. You can see director's dealings on the company's 'Insider Transactions': (i.e. Apple: http://finance.yahoo.com/quote/AAPL/holders?p=AAPL http://finance.yahoo.com/quote/AAPL/holders?p=AAPL) If the company's not public — they can receive cash through salary/bonus/dividends. If they're privately financed (i.e. VC's) they can liquidate some of their shares during a funding round (they sell some of their shares to the VC). (This is a total ELI5 — sorry to any financiers/accounts reading this)

rezashirazian 10y ago

At that level money takes on a whole new meaning. It's no longer a form of currency used to purchase things but more of an abstract perception of power.

eevilspock 10y ago
Perception? It IS power. The power to influence politicians and elections. The power to influence how we educate our youth (e.g. Bill Gates and Common Core). The power to dominate everything. It thoroughly undermines democracy, unless we want to redefine democracy as 1$ = 1 vote.
- rezashirazian 10y ago
  I've been finding myself quoting Game Of Thrones more than usual lately but: “Power resides where men believe it resides. No more and no less.” These billionaire are powerful only because we have collectively decided to put such high value on the product of their companies and investments. It all stems from perception.
  - oldmanjay 10y ago
    If you claim that the benefits of our technological society are merely perception, I suggest that you are not perceiving all that clearly.
  - Ntrails 10y ago
    > “Power resides where men believe it resides. No more and no less.” Follow it through. People believe what they are told, to a certain extent, so Power resides where people are told it does. Who tells them where it resides? Those who can afford to shout about it a lot. Thusly a billionaire is powerful because they have the ability to make people believe it by projecting that position through "propaganda", and this doesn't go away. Money buys people listening to you. By the quote, that is essentially power, and so money is power.

ChuckMcM 10y ago

There are a couple of ways (disclosure, I am not a billionaire :-)) First, nobody really needs a billion dollars in "cash" it just doesn't make sense as "cash" deposits pay a below inflation rate return in most places (meaning it loses its "value" over time) and even a negative interest rate in some places. Second, it isn't like there is a "fixed amount of money" in the world and if someone has all of it, everyone else has none. So if you are a billionaire, and most of your billions are in stock of a particular company, and you are a US citizen. You file a form with the Securities and Exchange commission (SEC) to sell some shares every month or quarter or year. Or you file a form that says you will sell X shares 3+ months from now. The SEC posts this information publicly so that other investors will know about it ahead of time and decide what to do. The point being that you are a "big investor" or an "insider" and selling might be seen as a signal, and this makes the signal loud and with a time delay so that the other investors can respond. Then the appointed time comes and your shares get dumped on the market and you collect however much money they happen to bring in (less taxes). You will see lists like this one (http://www.nasdaq.com/symbol/goog/insider-trades http://www.nasdaq.com/symbol/goog/insider-trades) for Google. Which itemize those sales. So lets say you need 15 million a month to operate your private jet, you set up a system that will sell enough stock to net at least 15 million a month to cover that. You don't want to sell it all since you might want to vote your shares but you have to get around so you let some go. A lot of tech billionaires set up trusts for their children which they fund such that their children will never have to work and can live a comfortable lifestyle. A number of tech billionaires have been setting up foundations (like the Bill and Melinda Gates foundation) which can convert stock to cash in a tax advantaged way and do good things with it. Sometimes the foundations are created to give the billionaire a vehicle for influencing others while nominally keeping their hands clean. (not working so well for Trump and Clinton but I read about a number of foundations being used in this way.) So generally if you look at the insider trading you will see billionaires selling stock in 10 to 100 million dollar chunks and using it for different things.

TheAceOfHearts 10y ago
Somewhat related, if you or someone else knows: is there any special process for transferring or handling large amounts of money? For example, if you're buying a $5m private jet, how would you pay for it? A regular check or bank transfer? Also, do the banks keep any security checks in place? e.g. If I had $10m and there was a request to transfer out $5m, I'd definitely like the bank to run it by me.

prostoalex 10y ago

Three possible strategies: 1) Sell immediately and diversify. 2) Sell a smallish portion of holdings at a market price periodically. 3) Never sell anything, borrow against the portfolio to finance personal needs. Strategy (1) is suitable for heirs and retired executives. Markets really-really like it when active executives stick to (3), though. Because it's not the most rational financial decision and due to AMT tax bill incurred on new stock grants to such active executive, most people at that level stick to (2), which can be traced via tools such as Yahoo! Finance. (2) also has a benefit of reasonable diversification and obfuscation in regards to internal signals, i.e. traders reading the insider filings for any signs of unusually high buy or sell orders.

charlesdm 10y ago

There are also less obvious ways to unlock cash, instead of just selling (you might not want to do that, because you believe your stock is undervalued or you want to retain control of your company, etc). For example: let's say you own $500m worth of Google stock. Google stock compounds pretty well at the moment. Interest rates are low, around 1-2% per year. You can borrow $200m quite easily by using your existing stock as collateral. That money could then be reinvested again in a low fee S&P fund and in some individual stocks, generating you a 10% yield per annum. 10% - 2% = 8% of annual gains, or $16m per year.