Ravi, thanks for another fine discussion! It put some substance into Charlie’s comment that the truly great company will allow us to sit on our asses.
But, as you note, we can easily fool ourselves. This leads to another valuable quote, this by Richard Feynman: Don’t fool yourself; and remember, you are the easiest one to fool. One way we fool ourselves is by not using even a rudimentary form of accrual accounting, which public companies are required to use.
Many years ago I used to keep a detailed spreadsheet of my net worth. To not fool myself I included a rough estimate of deferred taxes. I once showed this spreadsheet to a banker from whom I was seeking a loan. He was impressed—and gave me the loan, which I surreptitiously used to buy some more Berkshire shares.
I once tried to persuade the publisher of the portfolio management software I used for clients—and still use it personally—to write a report that would include an estimate of deferred taxes. Unfortunately, this was not easily done. Such a report would have included the deferred tax on retirement accounts as well, which, properly, should be deferred at earned-income rates, since distributions are taxed at earned income rates. The deferrals should also include one’s applicable state-tax rate. I would have happily sent clients such a report. It would have been sobering—and honest.
There is an added advantage of long-term deferrals. I liken it to finding a possibility to marrying well and learning to live with volatility. I first bought Berkshire—I’m trying not to brag—in ‘79 at 196. An A Share, as it became, now trades at around 540,000. At 25% (Federal + State) each share now has around $135,000 in deferred taxes imbedded in it. That deferred tax continues to work for us adding a significant fillip of return to our after-tax net worth.
Personal finance accounting is really lacking in many areas in addition to lack of accounting for deferred taxes. The other really major problem involves accounting for depreciation on homes, both for owner occupants and investors. People consider a home affordable if they can manage the mortgage payment, property taxes, and HOA fees without thinking about maintenance. I always tell people to reserve 1% of the structure's value per year for maintenance. Same for cars. The HVAC in the home I purchased a couple of years ago was installed in 2012. At some point over the next 5-10 years, I'm sure that I'll end up spending thousands of dollars to replace it and I'll have the money for it so I don't create special accounts for this sort of thing, but I think most people really should.
I appreciate the personal tax liability frame of mind, as I also find myself guilty of the IRA vs taxable account behavioral shift
Ravi, thanks for another fine discussion! It put some substance into Charlie’s comment that the truly great company will allow us to sit on our asses.
But, as you note, we can easily fool ourselves. This leads to another valuable quote, this by Richard Feynman: Don’t fool yourself; and remember, you are the easiest one to fool. One way we fool ourselves is by not using even a rudimentary form of accrual accounting, which public companies are required to use.
Many years ago I used to keep a detailed spreadsheet of my net worth. To not fool myself I included a rough estimate of deferred taxes. I once showed this spreadsheet to a banker from whom I was seeking a loan. He was impressed—and gave me the loan, which I surreptitiously used to buy some more Berkshire shares.
I once tried to persuade the publisher of the portfolio management software I used for clients—and still use it personally—to write a report that would include an estimate of deferred taxes. Unfortunately, this was not easily done. Such a report would have included the deferred tax on retirement accounts as well, which, properly, should be deferred at earned-income rates, since distributions are taxed at earned income rates. The deferrals should also include one’s applicable state-tax rate. I would have happily sent clients such a report. It would have been sobering—and honest.
There is an added advantage of long-term deferrals. I liken it to finding a possibility to marrying well and learning to live with volatility. I first bought Berkshire—I’m trying not to brag—in ‘79 at 196. An A Share, as it became, now trades at around 540,000. At 25% (Federal + State) each share now has around $135,000 in deferred taxes imbedded in it. That deferred tax continues to work for us adding a significant fillip of return to our after-tax net worth.
Sorry, Ravi, I hit send prematurely.
Personal finance accounting is really lacking in many areas in addition to lack of accounting for deferred taxes. The other really major problem involves accounting for depreciation on homes, both for owner occupants and investors. People consider a home affordable if they can manage the mortgage payment, property taxes, and HOA fees without thinking about maintenance. I always tell people to reserve 1% of the structure's value per year for maintenance. Same for cars. The HVAC in the home I purchased a couple of years ago was installed in 2012. At some point over the next 5-10 years, I'm sure that I'll end up spending thousands of dollars to replace it and I'll have the money for it so I don't create special accounts for this sort of thing, but I think most people really should.