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.