today, page-50

Hi champ - you sure sound in good spirits, I suspect you sold EXT at a good price recently to lock in your profits - well done. Now, I just would like to explore one thing you said:

"...Very easy to have sold close to $10, gain the 50% tax discount and buy back into this company at a later stage only to do it all again only this time you would have much more money to begin with for gigantic gains..."

OK, to have the 50% tax discount you (not you personally, you understand - a hypothetical person) would have to hold for at least 12 months. So in this case the shares were bought at roughly $1 in Oct last year. Let's say 10,000 shares were bought.

Further, let's say two people bought 10,000 shares on the same day in Oct last year. One of them is pretty prideful and a bit cocky - let's call him "The Rooster". The other is a bit less strident, more feline - let's call her "The Pussy Cat". I'm trying not be modded here, let's keep it rated PG ... :)

So now, 12 months later, as in your example, "The Rooster" sold his 10,0000 shares for $10 each, ending up with $100,000 and locking in $90,000 of profit. Because they were held for more than 12 months only half of this is taxed as capital gains tax, at let us say the marginal tax rate of 45%. So the rooster pays about $20,000 in tax and ends up with $80,000. He then waits until the share price drops to $8.20 and buys up some more, ending up with 9,750 shares. Lucky old him, eh, having the share price drop so far! If it had only dropped a small amount, as EXT often does, he would have had much fewer than 10,000 shares. Still, thanks to the large drop, he has almost as many as when he started with.

Meanwhile "The Pussy Cat" keeps her 10,000 shares.

At tax time, "The Rooster" pays his tax, while "The Pussy Cat" pays none.

A takeover is announced in Jul 2010 (note that most posters reckon a takeover would be sooner than this, but this is an example) for $20 per share. "The Rooster" gets $195,000 for his 9,750 shares, of which $115,050 is capital gain. Since he has held for less than 12 months, all of this taxed, there is no 50% discount. The tax is about $52,000. So "The Rooster" ends up with a grand total of $143,000. Not bad for an investment of $10,000. He struts over to Pussy's house to show off his new wealth.

Meanwhile, "The Pussy Cat" is working out what she gets. Her total is $200,000, of which $190,000 is a capital gain. Since she has held for more than 12 months, only half of that is taxed. She has to pay about $43,000 in tax. So "The Pussy Cat" ends up with $157,000, $14,000 more than "The Rooster". She listens politely to "The Rooster" as he crows, but then when she points out that he has lost $14,000 he becomes a little ... deflated, shall we say.

The moral of this story: locking in short term gains in a stock that will probably be taken over within the next 12 months exposes you to higher taxation and will probably leave you with fewer shares than when you started.

Of course, "champ", this is just a parable. I know that YOU, for example, have not held on to EXT for 12 months. So you wouldn't even be able to take advantage of the 50% CGT rebate as you mentioned in your first post - you would be taxed on the full gain. That's fine if you're a trader, making small profits where you can.

But those who hold and continue to hold aren't loyal, nor are they stupid (thank you so much for your rude words).

They are rich - and will become even richer.

Enjoy the chicken feed.