AN INVESTMENT LESSON FOR TIMBERLAND OWNERS FROM BERKSHIRE HATHAWAY
The best investment that Jim Vardaman ever made was his present to Virginia
for Christmas 1990. On 11/28/90 he paid $6,342.16 for one share of Berkshire
Hathaway Inc., the investment company run by Warren E. Buffett and Charles
T. Munger, and the framed certificate has been sitting ever since in Virginia's
office (she has traded in stock options for 20+ years). On 11/28/95, five
years later, Berkshire Hathaway closed on the New York Stock Exchange at
$31,050, so the share's value has more than guadrupled, a compound annual
rate of return of 37%.
Berkshire Hathaway is unusual in that it pays no dividends. In a lecture
at the University of Southern California School of Business in 1994 and
quoted in "Outstanding Investor Digest," Mr. Munger commented on what this
policy means to investors: "If you're going to buy something which compounds
for 30 years at 15% per annum and you pay one 35% tax at the very end, the
way that works out is that, after taxes, you keep 13.3% per annum.
"In contrast, if you bought the same investment, but had to pay taxes every
year of 35% out of the 15% that you earned, then your return would be 15%
minus 35% of 15% - or only 9.75% per year compounded. So the difference
is over 3.5%. And what 3.5% does to the numbers over long holding periods
like 30 years is truly eye-opening. If you sit back for long, long stretches
in great companies, you get a huge edge from nothing but the way that income
taxes work.
"Even with a 10% per annum investment, paying a 35% tax at the end gives
you 8.3% after taxes as an annual compounded result after 30 years. In contrast,
if you pay the 35% each year instead of at the end, your annual result goes
down to 6.5%. So you add nearly 2% of after-tax return per annum if you
only achieve an average return by historical standards from common stock
investments in companies with tiny dividend payout ratios."
If he ever invested in assets other than common stocks, Mr. Munger would
love the modern loblolly pine plantations that we create.
|
