1. Rule #1: Reduction of Basis
Andrew Bargerstock

2. Ways to Reduce Cost Basis
Tranching
Selling ROPs
Stock Buybacks
Dividends
Selling ROCs
Selling some shares after doubling

3. #1: Tranching
Dividing total long investing for each company into 4 slices
Tranches
# shares
Cost/sh
Amount 1
250
$40
$10,000 2
260
$39
$10,140 3
270
$38
$10,260 4
$36
$9,000
Total
1030
Avg. cost $38.25
$39,400

4. #2: Selling ROPs
Assume over a 10-year period you sold ROPs only 8 times with premium collected as shown
# ROPs
Avg Prem
Sh/cont.
Avg #
Contracts
Totals 8
$1.50
100 3
$3,600

5. #3: Stock Buybacks
Assume company announces 10% buyback over three year period.
Theoretically, the effect should be to boost stock price 10% because there will be 10% fewer shares outstanding. Benefit > 10%.
This benefit will be realized when we sell shares.

6. #4: Selling ROCs
Assume that after the stock price rose above sticker price, you twice sold 5 ROC contracts earning a premium of $1.50 per share
(5 contracts x 100 shares x $1.50) x 2 times = $1,500
… and that contracts were not assigned

7. #5: Selling Shares Cost (200 sh. X $38.25) = (7,650)
Assume at end of year 3, you sold 200 shares to take risk off the table
Proceeds (200 sh. X $85) = $17,000
Cost (200 sh. X $38.25) = (7,650)
Gain on Sale of shares $ 9,350

8. #6: Dividends Collected
Assume starting dividend yield (3%) and dividend growth of 8%
Year
Div/sh 1
$1.20 2
$1.30
Return of 3
$1.40
# shares
capital
Cum. Div.
$3.90 x
1030 =
$4,013 4
$1.51 5
$1.63 6
$1.76 7
$1.90 8
$2.06 9
$2.22 10
$2.40
$13.49
830
$11,195
Return of capital
>>>>>>>
$15,208

9. SUMMARY of Reduction of Basis
Avg cost
# shares
Basis effect
Cost of remaining sh
$38.25
830
$31,750
ROPs effect
($3,600)
Stock buybacks effect
ROCs effect
($1,500)
Dividends received effect
($15,208)
Gain on selling shares returning principal
($9,350)
Adjusted basis at end of Year 10
$2,092

10. Year 11 Dividends Return on Basis
In Year 11 dividends would grow to $2.59/sh.
Dividend collected on 830 shares = $2150
Annual return of 103% on the adjusted basis ($2092) for the 830 shares owned.
Average adjusted basis = $2.52/sh.

11. Ways to Reduce Cost Basis
Tranching
Selling ROPs
Stock Buybacks
Dividends
Selling ROCs
Selling some shares after doubling

12. Scenario leading to ATW buy:
Stock price slide nearly 90% over 3 years while setting records for profits and cash flow
Industry deep recession and hard times coming for ATW
Before slide PE = 10, in Jan ‘16 at 1 times earnings
Concerns about debt at 4.5 times earnings.
After digging into debt, decided to invest.
HERE is my adjusted basis spreadsheet on ATW.

13. Case of Atwood Oceanics
Risky Business investment in Jan resulted in reduction of cost basis to $(17.00) within 11 months through
Tranches
Selling Puts
Selling Calls
Selling some shares