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Quote of the Day

Now we would rather stay put [not sell current holdings], even if that means slightly lower returns.

Our reason is simple: We have found splendid business relationships to be so rare and so enjoyable that we want to retain all we develop. This decision is particularly easy for us because we feel that these relationships will produce good – though perhaps not optimal – financial results.
Considering that, we think it makes little sense for us to give
up time with people we know to be interesting and admirable for
time with others we do not know and who are likely to have human
qualities far closer to average. That would be akin to marrying
for money – a mistake under most circumstances, insanity if one
is already rich.

Warren Buffett in his 1989 Letter to Shareholders. For more, see our ‘Read of Day’ below.

August 5th – This Day in Stock Market History

August 5th, 1861 – President Lincoln signs the Revenue Act of 1861 into law. The law would create the nation’s first personal income tax.

The bill was designed to help fund the civil war. Under the original version of the law, all incomes over $800 would pay a flat 3% tax.
(Adjusted for inflation, that would be equal to an income over 23 thousand dollars.)

Source: US Treasury Department

The tax law would change slightly over the next decade. This 3% tax would later include all incomes above $600, and a higher tax rate of 5% would be instituted for all incomes above $10,000.

This income tax would be repealed in 1872 after the Civil war ended and the country’s budget deficit improved.

In 1894 the nation began to attempt to reinstate the income tax, but a 1895 the U.S. Supreme court would declare personal income taxes unconstitutional. In response, the US government would pass the 16th amendment in 1913 which would allow the income tax as we know it today.

August 5th, 1899 – Henry Ford founds his first company, the Detroit Automobile Company.

Source: The Henry Ford Foundation

The business was to sell Ford’s first product – a motorized delivery “truck”. However, Ford was still ahead of his time at the end of 1899, sales would be low and Ford would quickly burn through his savings. The company would be dissolved just 18 months later.

It would not be until June 16th, 1903 when Ford founds what we know today as the Ford motor company.

August 5th, 1974 – President Nixon admits that he withheld information from the Watergate investigation. He would resign 4 days later.

Source: New York Times, August 6th 1974

U.S. stock markets would fall 40 percent as the Watergate scandal unfolded.

Visit our post here for more on the Watergate scandal and how it impacted the stock markets.

August 5th, 1997 – A bill is signed into law that creates the Roth I R A.
The accounts will allow Americans for the first time to save after tax money in an account that grows tax free, and has no tax consequences for withdrawals in retirement.

How much can you contribute to a Roth IRA?

Best August 5th in Dow Jones Industrial Average History

1932 – Up 4.98%, 2.97 points.

(This would be part of a massive 5 day rally in U.S. stocks that would lead to one of the best weeks in stock market history. For more, visit the August 6th This Day in History Page)

Worst August 5th in Dow Jones Industrial Average History

2002 – Down 3.24%, 269.5 points.

Read of the Day

Berkshire Hathaway 1989 Letter to Shareholders:

Because of the way the tax law works, the Rip Van Winkle style of investing that we favor – if successful – has an important mathematical edge over a more frenzied approach. Let’s look at an extreme comparison.

Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250.

Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we – taking in taxes of $356,500 vs. $13,000 – though, admittedly, it would have to wait for its money.

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