According to Warren Buffett, the worst wager of his life was his decision to purchase a majority of shares of Berkshire Hathaway, then a failing textile manufacturer, in 1965.
At the time, Buffett had previously made a verbal agreement with then Berkshire Hathaway president, Seabury Stanton, to sell his shares back to the company at $11.50, but when it came time to sign the agreement, Stanton had lowered the price, so the story goes, to $11.36 per share, a 14¢ difference. This so angered Buffett that he decided to buyout the company just so he could fire the president.
In hindsight, he would later say, had he kept a cool head and invested that money elsewhere, he would have seen exponentially greater returns than those he’d amassed with BRK over the years.
Buffett adores parables, like this, always narrated in his famously folksy tone.
While the minutia of Warren Buffett’s opinions and the degree to which these statements may seem incongruous with his business dealings have been covered in the media, ad nauseam, there has been very little insight or practical discussion with regard to the third wealthiest man in the world: statements seem to be analyzed without any regard to context and motives are rarely considered in relation to the past or the future, such as with Eric Bolling’s meditation on whether Buffett was “completely a socialist” after the Oracle of Omaha’s Op-Ed piece ran in the New York Times this summer and the New York Post’s own succinct referral to Buffett as a hypocrite for Berkshire’s failure to keep up on its own tax obligations,
It's, perhaps, emblematic of the low state of the news that an anchor can, with a straight face, accuse the most prolific capitalist in history of being a card carrying socialist.
So when Warren Buffett states that the rich aren't paying their fair share in taxes, the public can be assured that media outlets across the country will shortchange them (pun intended) on their coverage of the subject.
In 2005, after a prolonged legal action against the IRS in U.S. District Court-Nebraska, the judge presiding over the case ruled in favor of Berkshire Hathaway and ordered the IRS to pay the company $23.1 million in damages plus interest. Today, again, even as Buffett continues to speak out in favor of increasing taxes on the wealthiest, his Berkshire Hathaway finds itself in a standoff with the IRS over $1 billion in unrecognized tax benefits. To clarify, a tax benefit is an allowable deduction for, in this case, a corporation, which reduces their amount of tax owed. One example of a tax benefit is the Federal Renewable Electricity Production Tax Credit for corporate investment in eligible energy production, which allows in some cases up to a 30% tax credit upon filing. So, an unrecognized tax benefit is exactly as it sounds, a tax benefit that the IRS does not recognize without, at least, further inquiry.
This does not necessarily indicate that Berkshire Hathaway has failed to pay appropriate taxes to the government, but it certainly exhibits a lack of desire to pay any tax as superfluously as Warren Buffett’s public statements might otherwise indicate.
Treasury Secretary Timothy Geithner who, like his predecessor Henry Paulson, has not shied from accepting Buffett’s counsel on big government decisions, insisted that the Obama Administration would refrain from offering suggestions to Congress on how the “Buffett Rule” should be implemented, but that legislators should consider the “spirit” to be a “guiding principle” of any tax reform bill that is to be considered. Whatever the case, there is no evidence to suggest that Secretary Geithner nor President Obama nor any members of Congress in support of Buffett’s mandate will push for anything other than more tax law on top of the already voluminous Internal Revenue Code in this country.
The twenty volumes, roughly 20,000 pages of government tax code, Title 26 Internal Revenue Code of the U.S. Code of Federal Regulations, are available at the U.S. Government Printing Office for a fee of just under a thousand dollars. A dizzyingly convoluted body of law with a scope of consequence that reaches beyond, perhaps, any other in America—so much so that current Defense Secretary Leon Panetta stated, “If we don't do something to simplify the tax system, we're going to end up with a national police force of internal revenue agents.”
It seems puzzling, at best, that Warren Buffett and his supporters have not, then, explicitly championed the simplification of tax code, rather the opposite seems to be true: more tax code to be piled on top of the already byzantine system.
How this would then benefit anyone who does not possess an army of tax lawyers similar in scope and dedication to those in Warren Buffett’s employ seems dubiously unmentioned by its advocates.
Warren Buffett, though, never much of an overt social activist in the past, is neither careless in his investments nor his choosing of battles. One could deduce that the wealthy Nebraskan would most like to see an increase in alternative minimum tax on high-income earners, which would likely include increased taxation on capital gains.
An increased capital gains tax would effectively reduce the liquidity, available cash, in the market and allow a company with a massive war chest, like Berkshire Hathaway, to gobble up value stocks at discounted prices while competition is left withering in the wind.
“Intelligent investing is somewhat against human emotion,” notes Professor Robert P. Miles, author of the Warren Buffet CEO, “only five percent of investors can buy when most others sell and sell when most others buy.”
“If the market dips, why wouldn’t he take advantage?” he adds, “With a constant source of income, such as GEICO or General Re or OBH, he can just lower premiums and when customers come running, fill the truck up with cash as he needs.”
Whereas many other corporations might squander their profits on dividends payments to their shareholders, Berkshire profits are diverted toward the acquisition of other revenue generating resources, which further improves the cachet of BRK stock while offering shareholders what essentially amounts to dividends payments through periodic shareholder “buybacks.” This practice of compounding value through technicalities, as well as Buffett’s relatively prudent, fundamental investment style, has contributed in no small part to Berkshire’s success over the years and it seems any tax reform, whether applied to long term capital gains or not, would little diminish the incentive to invest in Berkshire for those who can afford to do so.
Also presumably not lost on Buffett is the fact that any increase in capital gains tax would have little negative influence on foreign investors who could, over the long term, then at least partly fill in the gaps that may develop, if another downturn in the U.S. financial markets should become truly dire. This is particularly true since the advent of the China Investment Corporation (CIC) in 2007, which, though still relatively small, has since doubled in size with, as yet, scarcely realized growth potential. The mercurial Buffett, who had not-so-long-ago implored consumers to “buy American,” has since unequivocally gushed over the “investment opportunity” that an emerging China, a country run not without some irony like one massive conglomerate, presents. One such bet on the emerging economy in the East was a 2008 Berkshire investment of several hundred million dollars in Chinese electric car manufacturer BYD, which Buffett decided on partly at the suggestion of his now disgraced former protégé David Sokol.
In Warren Buffett’s 1990 letter to shareholders, he stated, “The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.”
Again, it could be easy to see that invoking a "Buffett Rule" increase in capital gains taxes would slow the market through increased pessimism, as well, which would be multiply advantageous for the savvy investor:
First, in Buffett’s mind, if something sounds good, such as his call for an increase on the tax of the wealthy, and to make such a statement would be of little personal consequence, why not say it?
According to Alice Schroeder, author of the Snowball: Warren Buffett and the Business of Life, Buffett is a man who has always craved a certain degree affirmation and acceptance from people. One such personal rule the Berkshire Hathaway CEO follows is “criticize categories, complement people,” for this reason; he was always very conscious of what people thought of him and, as a result, careful never to personally offend anyone, if it could be helped. Statements affirming his desire to see a more “equal” tax policy in this country would certainly be in keeping with this Buffett rule—the Berkshire Hathaway chairman has long cultivated his image as a harmless, if quirky, grandfatherly figure who just happens to be the second richest man in America.
Second, and slightly related, Buffett has long felt a sense of what could be called predestined greatness, which he masks with ample instances of self-effacing humor, as if his innate talents were meant to radiate through the land. As a child growing up in Omaha, he would sit on his friend’s porch and record the license plate numbers of every car that passed down the street. The reasoning was that, as there was a bank at the end of that street, if that bank were ever robbed, the odds were high that the young Warren would have the license plate number of the culprit, which would make him the key witness in the ensuing police investigation.
Of course this single incident is by no means evidence of any compulsion, but the pattern of illogical pretense of duty masking a self-serving design would be repeated on several occasions, as when Buffett took the helm of a sputtering Salomon Brothers in 1991 and again in a now famous 1999 speech warning of the dangers of investing in technology and again during this recent financial crisis and, now, again with the “Buffett Rule.”
Third, again, increased capital gains tax would slow investment and the market, which is nothing if not an ideal climate for a “value investor” with relatively limitless reserves to invest in stocks with comparably depressed prices.
With a sense of near religiosity, Buffett seems to believe, and has said as much on many occasions, that the American economy is destined to recover to its pre-crash levels of prosperity. He’s even gone so far as to predict that the housing market would fully recover in two years. So, with this view, what would be the harm in seeing the stock market take a substantial dip only to swoop in, yourself, and buy an abundance of value stocks at bargain prices?
Warren Buffett has said, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off,” but that isn’t necessarily accurate.
The volume of shares traded in the NYSE in the 1970s was 260 times smaller than the volume of trading, today. It, also, does not take into account the changing demographic of stock market investors with the now unprecedented levels of working Americans who possess stock portfolios.
In his 1998 letter to shareholders, Warren Buffett stated, “Our future rates of gain will fall far short of those achieved in the past. Berkshire's capital base is now simply too large to allow us to earn truly outsized returns.”
Since then, Berkshire Hathaway has scored some impressive investments and acquisitions, but the conglomerate has also suffered setbacks, as most recently with its disclosure that national disasters, such as the earthquake and tsunami in Japan, cut its first quarter net income by more than half in 2011—much of the holding company’s income is derived from its insurance and reinsurance businesses. The end result has been that BRK.B stocks, while not a bad bet by any means, have certainly not given Warren Buffett ample cause to celebrate over the past few years.
With Buffett’s days numbered as chairman of Berkshire Hathaway, he’s put a great deal of thought into whom will replace him at the helm of the company he built from the rubble of a floundering textile manufacturer. His solution, seemingly an executive triumvirate: his son, Howard G. Buffett, as non-executive chairman, “preserver of the culture” of his father’s company; according to Robert Miles, who teaches a graduate Executive MBA course on Warren Buffett’s leadership style at the University of Nebraska at Omaha, “Todd Combs or Ted Weschler (who first met Buffett after Weschler paid over $5 million to win a private lunch with the Berkshire chairman) would likely be selected to take the CIO position; Matt Rose, CEO of BNSF (Burlington Northern Santa Fé Railroad, a Berkshire Hathaway subsidiary), Greg Abel at MidAmerican or Tad Montrose who manages General Re, any could be the likely choice for CEO. You’d need three men to replace Buffett.”
Warren Buffett is hoping to see the preservation of his legacy by ending his management of Berkshire Hathaway on a high note. His proclamation of the need for a more equal tax assures that his business will prosper in a tenuous market or his reputation will flourish as an advocate for the people or, if nothing beneficial comes of it, his statements would have no real adverse effect on himself nor his legacy, which is a margin of safety that the Oracle of Omaha can certainly appreciate.
For the American people, though, to naïvely accept his unsolicited advice on tax reform would be akin to inviting a benevolent dictator to administer our upcoming presidential election.