Wednesday, March 20, 2013

03/20/2013 The Buffett conundrum

I’ve written about the Buffett conundrum before, but it’s time to revisit it.

Buffett has a puzzling stance regarding the relationship between government and industry.  He keeps crying out for the government to tax him more, and mocking those who are afraid of taxes and regulation.  At the same time, he is the master of the art of avoiding capital gains taxes by long term holding, and even avoiding dividend taxes by simply buying the entire company outright.  To add to our befuddlement, he is buying “green energy” companies on the hopes that government regulation will force profits his way.

When faced with such contradictions, there are three possible responses.

First, admirers will assume he is speaking so profoundly that when he doesn’t seem to make sense, we must be at fault for our pitiful intellects.

Second, former admirers will look at the obvious contradictions and conclude that he’s completely lost it.

I used to be in the first camp, upgraded to the second, and am dipping my toe in a third way of looking at the man:

Third – he has a hidden agenda.

Let’s assume that Buffett is BOTH a shrewd businessman and investor, AND STILL crying out for business and investment destroying policies.  Let’s also assume that he’s not playing some kind of “nyah nyah you can’t tax me” joke on the government.  He would know that the joke would be on us instead of the government.

Keep in mind that, unlike Mitt Romney who pays a ton of taxes and gives a ton more to charity, Buffett is holding everything in a death grip that will only be pried loose by the grim reaper himself.  He doesn’t sell, so he doesn’t pay capital gains.  He buys whole companies, so he doesn’t pay dividend taxes.  And he’s holding his charitable contributions for his will to avoid even the death tax.

So, these taxes he’s calling for do NOT affect him – at least not directly.

But what about indirectly?

A close read of that article has a telling quote from Buffett about his motives: “Let us unburden you.”

The statement is made both about CEOs who are afraid of government policies and also potential investors in Berkshire.

In other words, the destructive intrusion of government only affects us little folk who are collectively Buffett’s competition.  Once you reach his size, you no longer win by competition, but instead by the suppression of competition.  This is effectively the modus operandi of a monopoly.

And maybe his most recent years are revealing that monopoly is all he can still play:

As Bugs Bunny is fond of saying, “Of course, you know this means war.”

Higher taxes and regulations ON HIS COMPETITION, does indeed benefit Buffett, and that is precisely why he is crying out for them and getting medals from ideologues who don’t understand how they are being manipulated by Buffett.

So then, in the following posts I will show how to compete with Warren Buffett.  The goal isn’t to follow his TRADES, but instead to follow the METHODS that made him rich in years past.

If you follow his trades you’ll just make him richer by pumping up the value of the shares he already owns.  What you want to do instead is to anticipate his trades and the trades of other billionaires.  As small as we are, we can get into these value companies faster than he can – so instead of pushing up the value of shares he already owns, we can have him push up the value of shares WE already own.


This should be fun.



  1. Timothy, I've written before on your blog to correct some Buffett errors. In this post, I am a little speechless at how you could get so many easy things wrong. Easy because, for example, the Berkshire business model has been described in simple English for over 30 years, and you can read for yourself exactly why Buffett (Berkshire) buys whole companies. You didn't even come close to the explanation.

    Next, he's giving away 5% of his Berkshire holdings every year (to the Bill & Melinda Gates Foundation). After he dies his will will continue that.

    Tim, there is no secret here. All the information about the things you raise are well covered in Berkshire's annual reports in plain English. And Buffett does as he says, year after year after year.

    For some reason you have completely misunderstood the simple advice that Buffett gives investors: simple, but not easy. Buy companies you understand, with strong competitive advantages over the long term, and generate lots of cash. That's pretty much it.

    But, don't buy his companies, don't buy companies somebody else understands. This is unfortunately very difficult to practice. Somehow you have completed missed this whole idea. The statement "you'll just make him richer by pumping up the value of the shares he already owns" is completely ludicrous. He can only buy shares of companies with market caps in the tens or hundreds of billions of dollars. Anything any of us do won't make the tiniest bit of difference.

    I simple have no idea how you got any of these ideas. They look like uninformed mad ravings to me.

    I'm an admirer of Buffett in certain ways, and have learned a great deal about him. I don't invest like him because I have to invest the way that best matches my psychological makeup.

    1. LOL -- don't panic, Mike.

      The whole point of this sequence will be to show how to invest like Buffett and why a higher tax structure makes that more necessary.

      In fact, the "simple but not easy" quip of yours is almost the exact words I have in the draft of my next post (which I'll post if my wife will ever let me slow down on the spring cleaning...)

  2. Buffett has spent his whole life AVOIDING taxes ,he paid NO estate taxes because he gave his sons and daughters charities money instead of them directly and Gates got the rest and Buffett paid the government ZERO estate tax LEGally. But he thinks his buddy Obama is ok to take a 4 million dollar estate at 55%? WEB is the greatest investor ever but he is a hypocrite and suffers from rich white mans guilt. I agree that no person collectively is going to pump up the value of his shares. He owns great businesses that will do well with or without him.