This weekend I read The Essays of Warren Buffett : Lessons for Corporate America (Paperback)
What a great book. My wife was reading it between my readings. Warren Buffet is considered one of the best investors in the world. This book is a collection of his thoughts on investing and corporate ethics. Buffet is smart, funny, honest and sensible, a classic midwesterner. He has no pretensions, is very plain spoken and matter of fact about things. Having only read him and never having met him, I bet he is very funny and a great teacher.
His basic investing premise is based on finding good companies at fair value and then holding on for the long term. his record speaks for itself. He has limited time for the "action" offered by most investment banks and brokers, he prefers to study hard, invest and let good management take care of the rest. His essay's and thoughts are a joy to read and accessible to the layman.
One of the issues he discusses a bit is deferred tax. Ok are you still there. Deferred tax is a phrase that ranks with proctologist in terms of making people sit up, take notice and quietly slink away. If you have any money invested anywhere you should stick this out. Deferred tax basically means you don't pay taxes on something until later.
Lets imagine you are a brilliant stock picker for 20 years. Each year you buy and sell making a 10% profit. Of course there is a little tax to pay each year, but you don't worry, you are a good stock trader, picker, psychic etc. and are beating "the market". You get the fun and excitement of buying and selling and tracking "the market". We will call you Picker
Imagine you are a good investor and buy and hold and get 10% a year for 20 years as well. This is the boring approach to investment. The results are a little more exciting. We will call you Grinner.
Assuming that Picker and Grinner each has $1,000 to invest gets 10% a year and that Grinner has to pay taxes in the 20th year of investing on his entire profits. If taxes are 28% how much more money does Grinner have...don't worry I did the math for you. Grinner takes home an extra $3,312. Wow!
I built a simple spreadsheet for you to plug in your own numbers to see how this works. Download worksheet.xls
The moral of the story is to pick an investment that you believe in long term and stick with it for as long as it reflects good value. Hold, hold, hold. Your mileage may very depending on an IRA etc.