What can a family learn from one of the most successful investment partnerships of my lifetime?
Last month, I read Tren Griffin’s book on Munger and re-read Warren Buffett’s Owner’s Manual for Berkshire Hathaway.
I read them NOT to figure out how to make money. I read them for ideas to make myself more useful to my family and make less mistakes in my decision making.
A successful partnership is characterized by:
- Shared responsibility and shared benefits
- Trust and open communication
- Confidentiality, only when necessary, rather than secrecy
The role of the managing partners:
- Allocate capital
- Structure incentives
- Seek to embody shared values
- Communicate via stories
- Resist the urge to seek an edge
Financial Strategy, for capital allocation
This is important. Even financially-sophisticated families get caught up in the noise that constantly surrounds us.
Keep It Simple
- Focus on sustainable cash flow divided by capital employed
- A fundamental reference point is the 30-year rate on US government securities
- Treat deferred tax as a valuable, unsecured, non-recourse loan from the government
My recent article on the Boulder real estate market used the above.
Understand the value of deferred taxation
If you sold everything you owned (right now) then how much tax would you have to pay?
Many would be proud of a low number. I know that it would make me feel safe.
Buffett and Munger would argue that you want this number as high as possible.
In my family’s case, we would have to pay 6% of family assets, on a portfolio with an average investment age of less than five years.
Historically, we’ve earned ~15% per annum on family capital. I don’t expect that to continue, so let’s assume the family earns 7.5% going forward.
What’s the value of NOT selling and letting the 6% deferred tax asset continue to compound?
7.5% of 6.0% is an extra 0.45% per annum.
Let’s make that number real.
Express it in dollars and compare to your family budget.
- In our family, it’s equivalent to our federal income tax bill
- In a friend’s family, it’s equivalent to what they pay for professional advice
- In another family, it is more than they save each year
If your advisers churn your assets then they are costing you much more than their fees.
View percentages in dollar equivalents.
Berkshire has bought sub-par business in the past. However, so long as the businesses have decent management, good labor relations and generate a little cash… they stick with them.
It’s like my wife’s cats.
- When she goes out of town, they pee on our bedding and furniture.
- Most weeks, they barf a few times around the house.
- However, the kids love them and are aware of their faults.
By sticking with the cats, despite their faults, I demonstrate loyalty to the entire family.
That said, I’ve made the point…
We’re not replacing the cats.
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