Buffett on luck, taxes and a challenge


“It is not very unreasonable that the rich contribute to public spending, not only in proportion to their income, but something more than in this proportion.” – Adam Smith, Wealth of Nations, 1776

Flipping The Australian Financial Review last weekend, comments from two of our most respected fund managers caught my attention. They contrasted nicely with market professionals who base their success on their ability to pick trends and identify large companies.

First, Kerr Neilson, Founder of Platinum Asset Management:

“… As a family we have always understood that good fortune is often only luck. Your origins have a huge impact on the course of life, and one bad turn doesn’t deserve a life in purgatory.

Then John Pearce, Chief Investment Officer at Unisuper, explained his good journey over the past decade:

“There are always many success factors, one of which is luck. “

Some academics spend their lives studying luck versus investing skills, and there are shelves of business books on the subject, but this article deals with a more basic luck early in life.

Warren Buffett on luck and the “ovarian lottery”

David Kass is professor of finance at the University of Maryland in the United States. According to CNBC, he was the first to publish Warren Buffett’s take on luck and the “ovarian lottery” based on the notes Kass made when Buffett was speaking at a graduate student event in 2013. Kass stood by remembers:

“Warren Buffett emphasized the importance of luck in his life, focusing not only on where he was born, but also when. His primary capital allocation jurisdiction worked well for him in the United States and during his lifetime. Having the chance to win the “ovarian lottery” is a major determinant of success in life in general and in business in particular.

Buffett was influenced by John Rawls, a Harvard philosopher who wrote a book titled ‘A theory of justice‘. He argued that a just society must be founded on principles that everyone agrees on before knowing where they stand in society.

Buffett explains it this way:

“Just imagine that it happens 24 hours before you are born. A genie comes and says to you in the womb, “You look like an extraordinarily responsible, intelligent and potential human being. [You’re] will emerge in 24 hours and it is a huge responsibility that I will entrust to you, determining the political, economic and social system in which you will emerge.

You set the rules, any political system, democracy, parliamentarian, whatever you want. You can set up the economic, communist, capitalist structure, set anything in motion, and I guarantee you that when you emerge, this world will exist for you, your children and grandchildren. What’s the catch? A catch – just before you emerge you have to go through a huge bucket with 7 billion plugs, one for each human. Dip your hand and that’s what you get … “

Buffett has spoken about this on several occasions since, so there are variations on what he said, but the principles are the same. Other times he has been more explicit about the individual:

“The catch is, you don’t know any details about what your place in the world will be. Your gender, race, nationality, health, intelligence level and all other defining characteristics are left to chance. “

What society will you build?

I guess most of us would create a world of opportunity, choice, equality and fairness in case we were about to be born in a refugee camp in Somalia.

Buffett says he and his business partner, Charlie Munger, won the Ovarian Lottery and after this incredible luck the rest fell into place. The ovarian lottery is:

“The most important event you will ever attend. It’s going to determine a lot more than what school you go to, how hard you work, all kinds of things.

In another interview, he explained the benefits of gender and race:

“The uterus from which you emerge greatly determines your fate for most of the seven billion people in the world. Just in my case: I was born in 1930, I had two sisters who had all the intelligence that I had, have all the dynamism, but they did not have the same opportunities. If I had been a woman, my life would have been completely different.

“You don’t know if you’re going to be born black or white. You don’t know if you are going to be born male or female. You don’t know if you are going to be born disabled or able-bodied. You don’t know if you’re going to be born in the US or in Afghanistan … I mean, Charlie – when we were born the odds were over 30 to 1 versus being born in the US, you know ? Just winning this part of the lottery is a huge plus.

Even when he started investing, the luck didn’t stop:

“We won it in another way by being wired in a certain way that we had nothing to do with, that allows us to assess companies well. And, you know, is that the greatest talent in the world? No. It just happens to be something that pays off like crazy in this system.

What would Buffett like to see?

The world we have created allows those in power, primarily in business or politics, to set the rules once they know where they stand in the ovarian lottery. Once we have accumulated our personal wealth, often through diligence, sacrifice and hard work, we feel entitled to keep it.

Warren Buffett is worth over $ 100 billion, so it’s easy to criticize him, but he says:

“The trick, it seems to me, is to have a certain balance that brings people who have the talents who can produce the goods that people want in a market society to produce them in large quantities, and to continue to want to do everything. their lives, and at the same time take the people who lost in the lottery and make sure that just because they, you know, at that point they got the wrong ticket, don’t live a life that’s dramatically worse than the people who were luckier.

And so, when asked about US policies that cut taxes for the rich, he replied that he didn’t need a tax cut. He said eliminating inheritance taxes when assets pass to another person at the time of death would be a “Terrible mistake”Because the American system already largely favors the rich.

“I don’t think it’s good for a society where there is a ton of inequalities to start with. I think this is a terrible mistake.

He also spoke out on lower taxes on capital gains than on wages, where he said: I will probably be the lowest paid taxpayer in the office. ” He supported a minimum tax on top earners like himself, which became known as the Buffett’s rule.

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Who dares to lose while Labor is based on principles

Without taking sides on individual issues, the main reason the Labor Party abandoned its previous policies on negative debt, capital gains and postage credits is not because party leaders no longer support ideas. The same people were fiercely in favor of these policies in the last election.

No, Labor has decided that there is no point in sinking into principle and that nothing can be obtained from the opposition. They have removed the policies because they know they cannot win by threatening the plans that millions of voters have hatched for the preservation of their wealth. Postage credits have become “retiree tax”. Political opponents falsely dragged out a “death tax” in the last elections, which was not on the political agenda. So it is better to be a small target.

Peter van Onselen and Wayne Errington have released a new book titled ‘Who dares to lose: pariah policies’. This explains why no political party is ready to threaten the favorable tax and social treatment of the family home when the greatest benefits go to the richest. The power of property is so strong that even adjusting policies for investors is difficult. They say:

“One of the problems, however, is that the baby boomer population bubble is having a disproportionate impact on electoral politics. If taxing the family home remains broadly an outcast policy, in post-pandemic Australia it will be at least more and more discussed. “

It’s unlikely for a while. No political party dares to threaten this sacred cow.

The acceptance of the policy that must have caused the most angst within the Labor Party supports the legislated third stage tax cuts which are due to take effect in 2024-25. At a time when the fiscal pressure to crack down on massive deficits is likely to be greater than ever, hopefully emerging from the pandemic, the third stage tax cuts flatten the marginal tax rate on income for anyone earning between $ 45,000 and $ 200,000 at 30%. A person with $ 200,000 will benefit from a tax reduction of approximately $ 9,000 per year. Between $ 180,000 and $ 200,000, the top marginal rate drops from 45% to 30%. The cost to the federal budget will be $ 19 billion per year.

Shadow Treasurer Jim Chalmers, who would hold the purse strings as treasurer if Labor wins the 2022 election, previously described these tax cuts as follows:

“The least affordable, least fair and least likely to be efficient, because high-income people are not as likely to spend in the economy as workers with more modest means”.

Higher incomes are likely to have benefited the most from soaring house and asset prices in 2020/2021, and now Labor is backing their tax cuts. This is the policy and the price to pay when people vote with one hand on their wallets.

What would you do?

Going back to Buffett’s question, it’s 24 hours before you are born, and you can set the rules of society. You look in a huge bucket and there are (now) over 9 billion slips in it, and one of them represents your life.

(Or you are an Australian politician facing a trillion dollar debt and at some point taxes have to pay for the expenses).

Start writing the rules.

Graham Hand is editor-in-chief of Firstlinks.


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