Table of Contents
Praise for Even Buffett Isnt Perfect
Janjigians closely reasoned new study of Warren Buffett, warts and all, will be mined by prospective emulators everywhere stocks are traded. Among other features, the several myths of Buffetts practice are matched against performance realities.
Robert H. Stovall, Sr., managing director and strategist, Wood Asset Management, Inc.
In 2006, Warren shared with Bill the Buffett fortune. Now, Vahan shares with us the Buffett wisdom.
Sam Stovall, chief investment strategist, Standard & Poors
This is exactly what has been missing from the litany of Buffett books. Vahans razor-sharp arguments make this book a uniqueand importantwork for every Buffett friend or foe. Dont buy another stock withoutreading this book!
Barbara Marcin, portfolio manager, Gabelli Blue Chip Value Fund
Vahan Janjigians insights and observations about Warren Buffett show that hard work, diligence, and patience usually result in investment successbut a little luck helps also. However, Janjigian points out that Buffettis far less than perfect with regard to taxes and taxation.
Leon Charney, host and moderator, The Leon Charney Report
This is one of the best Buffett books to come along in years. Vahans thoughtful and provoking presentation is a must-have book for any investorwho wants to build on the very best of Warren Buffett.
Liz Ann Sonders, chief investment strategist, Charles Schwab & Co., Inc.
Dedicated to
Ross Abdallah Alameddine Christopher James Bishop Brian Roy Bluhm Ryan Christopher Clark Austin Michelle Cloyd Jocelyne Couture-Nowak Kevin P. Granata Matthew Gregory Gwaltney Caitlin Millar Hammaren Jeremy Michael Herbstritt Rachael Elizabeth Hill Emily Jane Hilscher Jarrett Lee Lane Matthew Joseph La Porte Henry J. Lee Liviu Librescu G. V. Loganathan
Partahi Mamora Halomoan Lumbantoruan Lauren Ashley McCain Daniel Patrick ONeil Juan Ramon Ortiz-Ortiz Minal Hiralal Panchal Daniel Alejandro Perez Erin Nicole Peterson Michael Steven Pohle, Jr. Julia Kathleen Pryde Mary Karen Read Reema Joseph Samaha Waleed Mohamed Shaalan Leslie Geraldine Sherman Maxine Shelly Turner Nicole Regina White
Foreword
Vahan Janjigian is particularly well qualified to write about Warren Buffett. While the Sage of Omaha has been the subject of a number of books, this one is unique. It is neither a love letter nor a put-down. Vahan is an excellent stock picker he oversees the Forbes Special Situation Survey and the Forbes Growth Investor newsletter, and his performance has been excellent. Subscribers have benefited from Vahans acutely analytical, nonemotional methods. Vahan thus has the insight to truly appreciate how unique Warren Buffetts own extraordinary performance at Berkshire Hathaway has been. He carefully, patiently explains Buffetts disciplined and farsighted approach and how it has evolved as Berkshire Hathaways assets have grown.
But this isnt just an informed analysis of the Buffett phenomenonVahan skillfully uses the mans insights and successes to teach you things you need to know to do well consistently in the market. And Vahan carefully analyzes other investment strategiesthere is more than one way to do well on Wall Street.
The trouble with most investors is that they ricochet from one approach to another. Few have Buffetts ability to stay with stocks for years on end. And few have the ability to constantly apply the various strategies Vahan examines here. But if you are willing to put your emotions on the shelf, this book will be a treasure trove of insights.
No investor always gets it right. Human beings are incapable of doing that. Buffett himself has a hard time selling stocks he has bought. He often rides his winners too long. But by having a sound, consistent approacheven if modified over timeBuffett has done fantastically well.
Luckily, you dont have to be Buffett to get excellent stock market returns. The miracle of compounding means that any careful investor can achieve long-term real success.
What makes this book especially valuable is that Vahan Janjigian does not wear blinders, wisely recognizing that investing does not take place in a vacuum. His chapter on taxes is a must-read for everyone, especially politicos. Amazingly, a genius like Buffett is shortsighted in this critical area. When Arnold Schwarzenegger decided to run for governor of California, Buffett advised him to advocate an increase in the property taxes, something that would have kept Arnold on a Hollywood movie lot rather than moving him into the governors mansion.
Like many in Washington, Buffett thinks the rich should face higher income tax rates. He is also a full-throated advocate of high death taxes.
Buffett believes that we live in a great country and that those lucky enough to do well in it should pay a greater proportion of their income in taxes. The irony here is that if Buffetts advice was followed, the economy would perform poorly and the value of Buffetts investments would take a hard hit. Just look at the miserable performance of equities and the economy during the high-tax 1970s.
What the Sage and too many others dont recognize is that taxes are a price and a burden and not just a means of raising revenue for the government. A tax on income is the price you pay for working; a tax on profits is the burden you bear for being successful; and the tax you pay on capital gains is the price you pay for taking risks that work out. The principle is basic: If you lessen the burden on positive things such as productive work, risk taking, and success, they will occur more often. Raise the price and the opposite will happen. As Janjigian points out, the top 1 percent of income earners in America earn 21 percent of the incomeand pay 39 percent of federal income taxes.
Buffett is equally obtuse on the subject of death taxes. He favors retaining them, believing that the government should take a big chunk of your wealth. Otherwise, your heirs might get it and the windfall could undermine their character and tempt them to lead lives of irresponsible indulgence. Perversely, though, death taxes punish capital creation and frugality. Whats the point of accumulating an estate if a big chunk of it will simply fall into the hands of the government? As Vahan notes: Wealth is what is left over after taxes have been paid. Our Founders might have put the issue this way: No taxation without respiration.
The death tax has a peculiar impact that Buffett and other supporters overlook. When rates are high the very wealthy find ways to avoid them. Buffetts own death tax liability will be low since he is giving away most of his money to the Bill & Melinda Gates Foundation. The truly rich set up elaborate trusts and other stratagems to keep their capital intact, and that usually means the heirs cant get their hands on it directly. The wealth is thus preserved. Without a death tax most assets would pass directly into the hands of children and grandchildren, most of whom dont have the entrepreneurial instinct; therefore, the money would be quickly recycled. Thats human nature. Look, for instance, at the Forbes 400 list of Americas richest. Today it contains not one du Pont and only one Rockefeller; both families twenty-five years ago controlled formidable fortunes.
Believers in high taxes studiously ignore history. The big Reagan income tax rate cuts of 1981 and 1986 turned a stagnant economy into the worlds most dynamic. The U.S. share of global GDP went up sharply, as did the share of Americas equity of the worlds total equity value. Because Reagan wanted to win the cold war, thereby rebuilding our dilapidated military, and because Congress wasas usualaddicted to domestic spending, federal outlays mushroomed and the national debt went up $1.7 trillion. What skeptics refuse to recognize is that the wealth of the nation during that period went up $17 trillion. There is not a CEO around who wouldnt gladly exchange $1 of debt for $10 of equity.
