Quote for the Week
Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. 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 there 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 can 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…
There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded. — Charlie Munger (source)
From the Archives
Last Call
- News You Can’t Use – The Joint Account
- The Poem That Changed Charlie Munger’s Life – Kingswell
- Tiger Management: 50 Lessons from 50 Tigers – A Letter a Day
- Nine Lessons the Market Taught in 2024 – L. Swedroe
- Narrow Markets are the Exception, Not the Rule – RBA
- Have We Been Partying Like It’s 1999? – P. Krugman
- Mind Over Money – J. Clement
- 20 IRA Mistakes to Avoid – C. Benz
- The Battle for Better Air – Asimov Press
- Colossal Squid: The Eerie Ambassador from the Abyss – BBC