• Jeff Matthews

Hero or Hypocrite? “The Buffett Rule” Then and Now

“The first rule is not to lose. The second rule is not to forget the first rule.”

—Warren E. Buffett, quoted by Carol J. Loomis, Fortune Magazine, 1988


Having recently celebrated his 81st birthday, Warren Buffett is not going softly into that good night. He is, in fact, going quite noisily ahead, making new friends—and new enemies—along the way.

His most visible friend, of course, is President Obama, who has gone so far as to name a new tax proposal after him (“The Buffett Rule”), following the Oracle of Omaha’s August 14 op-ed piece in the New York Times calling for higher tax rates for the rich, as follows:

“I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more…I would suggest an additional increase in rate.”

Buffett’s most visible enemy, now that his long-submerged but never denied personal brand of liberal Democrat politics has burst, full blown, into the open, is a collection of bloggers, politicians, political commentators and billionaires taken to excoriating Buffett for his high-minded, highly visible, and, they say, highly misguided stance on tax policy.

The centerpiece of the criticism is pretty straightforward: if Buffett feels so strongly about paying higher tax rates in the interest of fairness, nothing is stopping him from setting the example by voluntarily cutting a bigger check to the U.S. Treasury.

Buffett’s comeback is, and always has been, likewise straightforward: he simply follows the rules, he says, and the rules currently tax his earnings from dividends and capital gains at a lower rate than regular income.

It’s the kind of by-the-book self-justification that drives those who see Buffett as a rank hypocrite out of their minds, and reassures those who see Buffett as a hero in the current policy wars.


All this is unfortunate, because Warren Buffett, Political Guy had, until yesterday’s unprecedented share-repurchase announcement, largely wiped from the public mind Warren Buffett, Investment Guy—the supremely rational, highly quotable steward of Berkshire Hathaway whose track record for the last four-plus decades is, in fact, unequaled.

How “unequaled” is Warren Buffett’s track record, you may ask? Well, he literally turned his own personal investment of $100—that’s one hundred dollars—into a current net worth of close to $40 billion (and $62 billion at its peak, before he started giving it away).

To see exactly how he accomplished that unequaled feat, you can read “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (available at Amazon.com, here)which explains in plain English what made Buffett the Investor unique while also exploring the upsides and downsides of his extremely risk-averse management style…but we’ll provide one big clue here.

That clue is the original “Buffett Rule,” quoted above, which had nothing to do with raising taxes on the wealthy and everything to do with investing, and is worth repeating:

“The first rule is not to lose. The second rule is not to forget the first rule.”

So well did Buffett adhere to this rule of investing that in his first 46 years managing Berkshire Hathaway’s investment portfolio, Buffett had exactly two losing years (the stock market had 11 in that time), thus allowing Berkshire’s net worth to compound at slightly over 20% a year—an astonishing rate of growth, never duplicated.

But it is a track record that is increasingly underappreciated, because the old “Buffett Rule,” about investing, has been replaced by a new one, about taxing the rich.


The irony here, for anyone who has studied Berkshire Hathaway and Warren Buffett, of course, is that Buffett is as savvy in the taxpaying department as he is in the investing department.

His recent, high profile $5 billion investment in Bank of America, for example, was structured to minimize taxes on the dividends Berkshire will receive (insurance companies can deduct a large portion of dividend income, unlike mere mortals). This drives some bloggers crazy, but the fact is, Warren Buffett, as CEO of a publicly traded company, would be remiss if he did not attempt to maximize the after-tax benefits of all Berkshire’s activities. Shareholders expect and deserve nothing less.

Besides, Warren Buffett himself has always recognized the benefits of paying taxes at lower rates—via the same kind of low capital gains rates he currently criticizes. Indeed, he long ago wrote to his own investors the following:

“I am an outspoken advocate of paying large amounts of income taxes – at low rates.”

—Warren E. Buffett, July 10, 1963

The quote is lifted, verbatim, from a letter Buffett wrote to investors in Buffett Partnership LTD (the hedge fund Buffett managed, prior to taking control of Berkshire Hathaway) and it was Buffett’s way of telling his investors that he would not make investment decisions based on the cost basis of stocks in the portfolio, but, rather “on the basis of the most probable compounding of after-tax net worth with minimum risk,” as he also wrote in that letter, which you can read here.

(We’ve read all of Buffett’s early partnership letters, at least those available on that wonderful tool, the Internet, as well as every one of his Berkshire Hathaway letters, and advise any aspiring investor to do so as well.)

Buffett thus early on identified the minimization of taxes as a key to maximizing long-term investment success, and knew the way to do that was to generate wealth through investments that were held long enough to be taxed at lower capital gains rates—a benefit “The Buffett Rule” would attempt to end—and anyone who has studied his methods knows this.


Unfortunate as the uproar caused by Warren Buffett, Political Guy, has been by blotting out the accomplishments of Warren Buffett, Investment Guy, said uproar is especially unfortunate because it comes at a time when Warren Buffett, Investment Guy, has been busy on many productive fronts.

The Bank of America investment—a no-lose deal in the classic Buffett vein—was just one front. Another was his recent selection of a second investment manager, Ted Weschler, of whom we’ve heard nothing but good things (“a great, smart, smart guy” in the words of a former co-worker). And a third front—yesterday’s share buyback announcement—is literally unprecedented in Buffett’s 46-plus years at the helm of Berkshire.

But the most unfortunate aspect of all, in our view, is this: the original, no-nonsense, invaluable “Buffett Rule” has been replaced, in many investors’ minds, by a new, politically-oriented (and therefore vaporous) “Buffett Rule.”

And that first Buffett Rule was one any investor, no matter what his or her politics might be, ought to have memorized.

So much so we’ll repeat it here, for old time’s sake:

“The first rule is not to lose. The second rule is not to forget the first rule.”



Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com



© 2011 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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