Do As Warren Does, Not As Buffett Says

RCM ^ | 11/17/2014 | Jeffrey Dorfman

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Trying to invest like Warren Buffett has such a long history that numerous columns have been written about how to construct portfolios of companies that the writer posits Warren Buffett would like. Other investors or money managers simply build portfolios of companies in which his Berkshire Hathaway has substantial holdings. Multiple books have been written on how to invest like Buffett. Still, it is always worth reminding, particularly as the subject of tax reform bubbles up in Washington, D.C. once again, that while imitating Warren Buffett can come with large rewards, listening to him is a much less rewarding strategy.

With tax reform talk in the air, discussion will resume about Warren Buffett's well known position that the rich should pay higher taxes (he also favors the estate tax). Yet, it is far more instructive to note that while advocating for higher taxes on the wealthy Buffett has continually done everything in his power as an individual and as a corporate CEO to minimize both his personal taxes and his company's corporate taxes.

Two recent news stories reminded all of us that as year-end tax planning and portfolio rebalancing comes upon us, there is much to copy in what Warren Buffett does. First, there is his repeated tax-advantaged use of appreciated stock holdings. Second, there is his love for dividend-paying stocks.

Buffett's Berkshire Hathaway just announced a purchase of Proctor & Gamble's Duracell battery unit which demonstrates how to effectively avoid taxes on capital gains. Berkshire owns $4.7 billion worth of P&G stock with an apparent cost basis of $336 million. That leaves Berkshire Hathaway facing a potential $1.66 billion corporate tax bill. However, Berkshire plans to give those shares back to P&G in exchange for Duracell along with $1.7 billion in cash