Learning To Think Like Warren Buffett

That's the title of an interesting article found on page 29 of the February 14, 2005 edition of Business Week magazine. This article goes on to state that one way Warren Buffett became the world's most successful investor was by understanding how putting off tax payments can build wealth.

With his January 28th support for Procter & Gamble's two-step tax free deal for acquiring Gillette Co., Buffett seized upon an opportunity to exit a position without triggering a giant tax bill. Berkshire's gain on the 96 million Gillette shares that it has held since 1989 amounts to $4.3 billion. And now because it is reinvesting all of that gain into shares of the new company, the government will have to wait to collect its share of the profits.

But tax concerns are not the only thing that drives Buffett's decisions. He has proven that by selling winning positions for cash, such as his holdings in Disney and Freddie Mac. And taxes should be a greater concern to Buffett than to many others because Berkshire's 35% corporate rate is more than twice that of the 15% individuals pay on capital gains.

Therein lies a lesson for investors who may be trying to piggyback on Buffett's picks. Many assume that if he owns a stock, it's worth buying. But because Berkshire's tax rate is so high, Buffett bears less risk in holding overpriced stocks. After tax, he would give up only 65% of profits foregone by not selling at a high, while an individual would forfeit 85%. By the same token, on those occasions when he does sell and offer Uncle Sam his 35% cut, he's sending a loud signal that the outlook is bleak. But since Buffett never reveals what he's selling until he's done, it's hard to play copycat. Investors are better off trying to learn how Buffett thinks!

* * * * *