The Most Tax-Efficient Investment Strategy of All Time

Back in January of 2015, I landed a meeting with a well-known value investor. While I won't name-drop him on this blog, I will say he has a career measured in decades, and should be familiar to most of my readers.

How did I land the meeting? Via cold letter, in a textbook application of "The Tim Ferriss Method" outlined in The 4-Hour Workweek. The section is called"How to Get George Bush Sr. of the CEO of Google on the Phone" (Thanks, Tim!)

And it Worked.

So there I was sitting in his conference room, waiting for him arrive. The purpose of the meeting was to learn more about value investing with an earnings power approach, rather than asset-based value investing. 

I noticed on his bookshelf: ​

• Value Investing: Graham to Buffett and Beyond
• The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers
• The Little Book that Beats the Market
• The Most Important Thing

And then the man walked in and started lecturing right away. I shut up and started taking notes:

Earnings power vs. asset-based: Asset-based investing is higher turnover, and less efficient from a tax perspective.

I was surprised; I had never given much thought to the tax implication of various value investing strategies.

He continued: Imagine that you buy a company, watch earnings power grow, and never sell. And then toward the end of your life,  you give it to charity.

How much tax will you pay? 

Me: "None", mentally noting he made no mention of dividends.

That's right; taxes will never be paid on it.

[Pause for effect]

This is essentially what [Warren Buffett]  has done. Of course, Berkshire Hathaway subsidiaries pay taxes, but shareholders do not unless they sell.

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There you have it, the most tax-efficient investment strategy of all time. Total taxes paid: zero. No retirement account needed.

Our conversation meandered from there. He asked me if I'd read The Outsiders. He shared his thoughts on who are some current outsider CEOs.

​He also told me about a company he was currently buying. He wouldn't share the name, but said it had a pre-announced bad quarter with some weakness in its energy related divisions. He believed the news immaterial, and he had been researching the company and its competitors for over one year.

Based on the fact pattern, I pieced together a guess on which company he was referring to, and his 13F filing confirmed it a few months later. Less than a year later the company was acquired. 

His admin walked into the conference room exactly 30 minutes after our meeting began. My allotted time was up. I thanked him and went home to review my notes.

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Not investment advice. Not a solicitation to invest. Don't take candy from strangers. The links above are affiliate links, if you were to click on one and then buy something Amazon would pay me several cents.