A Squandered Opportunity

This is from the Wall Street Journal this week and it is absurd.  Millennials are missing out on the greatest edge they have investing – time.

Source: Start Now

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

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

Leon Cooperman on the Four Reasons for Selling a Stock

4reasonsellstock2

 

What is your sell discipline?” Okay, and I say. We sell a stock for one of four reasons. The first and of the highest quality reason, is that we bought a stock at X ’cause we thought it was worth X plus 30 or 40 percent, and it goes up 30 percent. Nothing has changed. We sell.

Source: Hurricane Capital – Business Analysis & Investing

Picking High Quality Stocks

Sources of Durable Competitive Advantage

Source:  The Building Blocks of Investing Nirvana

According to Buffett’s Alpha,  Warren Buffett’s outperformance has been generated by investing in cheap, safe, quality stocks.  So how do investors trying to follow the same strategy define “quality”?

One way to define a quality stock is to look for attributes of the business that set it apart from competitors, and allow the business to sustain through the ups and downs of the economic cycle.  High quality stocks are profitable, provide predictable stable cash flows and make investments of capital to set the stage for further growth opportunities.

Each of these traits is attractive in its own right, but combined, they are the proverbial goose that lays the golden egg, enabling a continued cycle of cash generation, which can be reinvested, begetting more cash, which can be reinvested again or returned to shareholders.