• About
  • Disclaimer
  • Links
  • Market Wisdom
  • Practical Wisdom
  • Video/Audio Market Wisdom
  • Video/Audio Practical Wisdom

Zone of Competence

~ Dollars, Sense, and Probabilities.

Zone of Competence

Tag Archives: Thanksgiving

Charlie Munger and The Miracle of Tax-Efficient Compounding

28 Thursday Nov 2013

Posted by JC in Uncategorized

≈ 4 Comments

Tags

Alpha, Charlie Munger, Compounding, Gratitude, Taxes, Thanksgiving

On this Thanksgiving, I’m thankful for the wisdom of Charlie Munger and the miracle of tax-efficient compounding. Charlie is Warren Buffett’s plainspoken and less-famous partner. This is his quote on the simple but stunning power of tax-efficient compounding:

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.

This isn’t exciting to talk about, but it is where the rubber really meets the road in terms of investment success. 3.55% per year outperformance after taxes is incredible, and you don’t have to pay a hedge fund “2 and 20” to get it.

Wes Gray at the Turnkey Analyst does the math on how much difference this can make on an initial investment of $100 over 30 years:

Microsoft-Excel-mungertax11

Alpha is interesting; taxes are AMAZING.

You end up with $4,235.43 for the 13.3% strategy and $1629.81 for the 9.75% strategy.

Charlie Munger Translation: Taxes and Alpha Are the Shiznit!

This should be in neon lights. The tax-efficient strategy gives you a 4,235.43% return over 30 years, while the tax-inefficient strategy gives you a 1,629.81% return over 30 years. That’s up more than 42 times versus up more than 16 times. On a $10,000 initial investment, that’s a 30 year total of $423,543 versus $162,981. Stunning results.

Alpha is investment-speak for risk-adjusted outperformance of a benchmark. It is the Holy Grail for which all investment managers aim. But the impact of taxes is more important and less talked about. Turn off the noise on CNBC and focus on maximizing your after-tax return. It may not make for exciting dinner-party conversation, but what matters is not what you earn, it’s what you keep.

Recent Posts

  • Reason in the Internet Age: How you can avoid getting stampeded into poor conclusions and buying into silly conspiracy theories
  • Climate Change is a Real Problem, but Current Renewable Energy Technologies Can’t Replace Fossil Fuels Without a Huge Nuclear Buildout. Because, Physics.
  • Larry Fink’s Convoluted & Coercive Solution to the Problems of Indexing
  • The Wisdom of Charlie Munger: You Have a Moral Duty To Be Rational and Reasonable, and To Eliminate Your Own Ignorance
  • Investing Equals Decision Making Under the Condition of Uncertainty

Recent Comments

Carl (@carl4light) on Larry Fink’s Convoluted…
JC on Larry Fink’s Convoluted…
Carl (@carl4light) on Larry Fink’s Convoluted…
A Half Dozen Or So T… on Lessons From The Kinder Morgan…
How the Republican P… on The Notorious AIG

Archives

  • November 2020
  • August 2019
  • January 2018
  • December 2017
  • November 2017
  • July 2017
  • June 2017
  • January 2017
  • July 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • December 2015
  • November 2015
  • August 2015
  • June 2015
  • April 2015
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013

Categories

  • Uncategorized

Meta

  • Register
  • Log in
  • Entries feed
  • Comments feed
  • WordPress.com

Blogs I Follow

  • Dividend Growth Investor
  • FRED Blog
  • Falkenblog
  • Bronte Capital
  • Fundamentalis
  • 25iq
  • Dragonfly Capital
  • Dash of Insight
  • Calafia Beach Pundit
  • The Brooklyn Investor
  • A Wealth of Common Sense
  • Clear Eyes Investing
  • Crossing Wall Street
  • Dr. Ed's Blog

Blog at WordPress.com.

Dividend Growth Investor

Dollars, Sense, and Probabilities.

FRED Blog

Dollars, Sense, and Probabilities.

Falkenblog

Dollars, Sense, and Probabilities.

Bronte Capital

Dollars, Sense, and Probabilities.

Fundamentalis

25iq

My views on the market, tech, and everything else

Dragonfly Capital

Dollars, Sense, and Probabilities.

Dash of Insight

Dollars, Sense, and Probabilities.

Calafia Beach Pundit

Dollars, Sense, and Probabilities.

The Brooklyn Investor

Dollars, Sense, and Probabilities.

A Wealth of Common Sense

Dollars, Sense, and Probabilities.

Clear Eyes Investing

Dollars, Sense, and Probabilities.

Crossing Wall Street

Dollars, Sense, and Probabilities.

Dr. Ed's Blog

Dollars, Sense, and Probabilities.

Cancel