Warren Buffett explains...
Warren Buffett explains how taxes,
Wall Street greed, and executive ego help him get rich
Warren Buffett's annual messages to the shareholders of Berkshire Hathaway are always full of interesting observations about the business world. This year he treated us to a brief explanation of how the tax code, the predatory instincts of Wall Street, and the frailties of human nature create an opportunity for him to make money:
At Berkshire, we can without incurring taxes or much in the way of other costs move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. Thats important: If horses had controlled investment decisions, there would have been no auto industry.
What he's saying is that some businesses are profitable, some businesses are promising. Coal mines, for example, make money. But solar power is exhibiting more potential for growth. There's money to be made in shifting funds from the profitable businesses to the promising ones.
Shifting money from profitable businesses to promising businesses is what financial markets are supposed to do. But, Buffet says, there are three impediments that make it harder to do this impediments that his company is in a unique position to overcome:
- Taxes: A profitable company can pay dividends, flushing cash out to its owners. Its owners could then invest their money in promising new businesses. But the government makes the shareholders pay taxes on those dividends. By owning a diverse array of unrelated businesses, Berkshire can simply shift money from the profitable ones to the promising ones without needing to pay taxable dividends. Buffett is known as an advocate of the "Buffett rule" that would make very rich people pay higher tax rates on their dividend and capital gains income. This would be costly for Buffett personally, but improve the outlook for his business.
- Wall Street: Even without taxes, reallocating capital normally faces the significant problem that Wall Street intermediaries grab lots of the money for themselves. That's the "other costs" that Buffett is talking about. The services of investment bankers, hedge fund managers , and even mutual funds don't come cheaply. Allocating capital is often more lucrative for the people in a position to grab some of the money flying around the room than it is for the people whose money is being thrown. That's why for normal people passive investments are usually best . Buffett can shift money between his different operations without paying middlemen.
- Ego: This is arguably the biggest one. When profitable companies get interested in investing in new businesses, they tend to want to find related industries. So Microsoft has turned its Windows and Office profits into the XBox, Bing, Windows Phone, and other technology businesses. Buffett says it is more lucrative to invest across the whole range of businesses, without regard to adjacencies or synergies or anything else. Since his company is a pure holding company rather than an effort to actually manage anything, it's easy to be objective and dispassionate.
Of course these structural explanations for Berkshire-Hathaway's success only take you some far. Picking the right investments is still hard. But Buffett's letter is a reminder that his success isn't just skill or luck, it's also based on some big structural factors.
Warren Buffett explains... , by Matthew Yglesias , Vox
Tags
Who is online
34 visitors
Interesting observations from the world's best businessman.
Some might say world's third best.
So what makes him the best?
C'mon Dean! How about -- just ONCE! -- you address the subject of the article, rather than my one-line Reply.
Ye-e-e-e-e-e-e-e-e-e-e-e-sh!!!
I addressed your comment. I did not see anything in the article claiming he is the worlds best businessman. Are you saying your comment is off topic? Take a look in the mirror before accusing others of being off topic.
Dean... my very dear Dean...
Let's look at the following sentence: "Interesting observations from the world's best businessman."
What is the essential point of this sentence? Is it "world's best businessman", or is it "interesting observations"? Which clause onlysupports the other?
Would the sentence have changed meaning if I had written "third-best businessman"? Of course not.
The purpose of the sentence is not to underscore "best" but to underscore "interesting".
So... if you wanted to address the real topic of my Reply... you would have returned to the article and discussed My Buffet's observations. You did not do that.
You derailed, to "who is the world's best businessman?", which is not at all the topic of the article.
You do this all the time, Dean. I don't know if this behavior is due to laziness (you never bother to read the articles, so you cannot react to anything in them), or to purposeful vandalism, or to some sort of reading-comprehension problem. Or to a combination of all three...
In any case... Here's a challenge: Are you capable of writing a thoughtful reaction to the content of the article?It would be good practice for you, if your motives are not simple vandalism.
Buffet also uses the government to monopolize. That is why Obama is against the XL pipeline to protect Buffets monopoly on the train transportation of the oil.
I'm not your puppet. When you say jump don't expect me to say how high.
Dean... I am not imposing anything!
There are only two possibilities:
I am trying to be optimistic -- trying to give you the benefit of the doubt. I prefer to not believe you to be a vandal.
But, Dean! Your Replies are so often "beside the point" that they cannot be a random result. There is a real, regular, consistent problem.
To be honest, I suspect that the simplest explanation of the phenomenon is the correct one: You often do not read the article before posting a Reply. You Reply only to the author's First Reply. In the present case, you could not react to "interesting observations" (because you had not read them), so you reacted to "best businessman", which was ... "beside the point".
I personally don't care one way or the other, Dean. It's you who look silly with systematic "beside the point" Replies. If you want to appear shallow -- responding without reading -- then be my guest.
I was trying to be helpful.
The point of this article, for those of you who are reading impaired, is that the rich have ways of hiding their money legally (i.e. hiding capital), and don't pay taxes on it. These are benefits that most others do not have. There used to be benefits offered to the middle class (like tax deductions for life insurance and deductions for interest paid on credit cards) but these went bye bye during the Reagan administration, in the 1980's.