What We Can Learn from Warren Buffett’s Tax Returns

In response to Donald Trump’s claims in  the second US Presidential Debate that Warren Buffett uses the same tax loss carryforward that may have allowed Mr. Trump to avoid paying Federal income taxes, Warren Buffett has released his own tax data disputing that claim.  The takeaway from the data released shows an important strategy that has allowed him to accumulate so much wealth.

First, Mr Buffett doesn’t report much taxable current income for a man with a net worth of over $60 Billion.  In 2015 he reported an adjusted gross income of $11,563,931.  While that represents a sizable income, investing that alone wouldn’t get him to a net worth of that level.

Delay, Delay, Delay

However, what we can learn from his reported income is that once you have a steady source of income that supports your lifestyle you can make time and the tax code work for you.  Compounding over a long period of time by owning shares in a company and not selling has allowed Mr. Buffett to increase his wealth dramatically.  Building wealth requires long-term thinking and a willingness to deny instant gratification.  Look for businesses  that can’t be disrupted, have a big addressable market, and have a competitive advantage that bars new entrants from wanting to compete.

Once you decide to invest in a business make your holding period the same as Mr. Buffett’s, “forever”.  Compounding, delaying or never paying  any taxes on the increase in the value of the investment, and long-term thinking has built Mr. Buffett’s fortune and can provide a roadmap for us all.

Some Tax Facts for Donald Trump

Third Quarter 2016 Asset Class Returns

Asset Class Index Performance YTD 2016
Emerging Markets MSCI EM 13.8%
REITs NAREIT Equity REIT Index 13.13%
High Yield Bonds Barclays Global HY Index 14.49%
US Bonds Barclays Aggregate 5.8%
US Large Cap S&P 500 7.84%
Commodities Bloombery Commodity Index 8.63%
Developed Intl. Markets MSCI EAFE -.85%
US Small Cap Russell 2000 11.46%

Stock Splits are Going Extinct

A split “wouldn’t change the intrinsic value of the company and doesn’t provide any real benefit,”

“we want shareholders who focus on the investment itself, rather than on the currency it’s denominated in.”

Source: Death of the Stock Split: It’s Value Not Price That Matters – MoneyBeat – WSJ

Quant Who Coined Risk Parity Says Wall Street Has It Wrong 

Nowadays, it’s a rare selloff that isn’t blamed on the growing heft of a strategy called risk parity.

Source: Quant Who Coined Risk Parity Says Wall Street Has It Wrong – Bloomberg

Valuation Expert Finds Fault with Tesla/SolarCity Deal

I’m not the only one who thinks the combination of Tesla (TSLA) and SolarCity (SCTY) is “ludicrous“.  Aswath Damodaran, a Professor of Finance at NYU and one of the leading experts in corporate valuations, has taken a hard look at the valuation used by the bankers in order to justify the deal and come away outraged at the hijinks of the process.

In fact, it is far easier to make the case for reverse synergy here, since adding a debt-laden company with a questionable operating business (Solar City) to one that has promise but will need cash to deliver seems to be asking for trouble.

Source: Musings on Markets: Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal

Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds

Hedge funds that have relied on people to make bets are hiring quants like never before in search of answers to lackluster returns. They’re playing catch-up to firms such as Renaissance Technologies and Two Sigma Investments, among the leaders in using complex mathematical models for investing.

Source: Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds – Bloomberg

Buffett’s Method of Success

Buffett regularly makes the difficult, sound very easy. His knack for simplifying things, in a way a mass audience can understand, often gives the false impression that investing is easy.“Simple, but not easy” best describes it.Still, his simple messages get misinterpreted often. It leads some people to believe you can do it too without much effort. Others seem to think Buffett has a super secret formula that always spits out winners and he just refuses to share it.If only that were true.

Source: Buffett’s Method of Success • Novel Investor