On Taxes, Patience, Death, and Extreme Wealth Creation

When Howard and Lottie Marcus met in 1942 in New York City, all had been taken from them. 

Two of Howard’s three sisters, a niece, and his mother and father were killed in a Lithuanian concentration camp. The Nazis took Lottie’s older brother from her parents’ home in Germany and shot him, and her parents were deported to concentration camps. Her father died at Terezinstadt in Czechoslovakia, and her mother was gassed at Auschwitz in Poland.

It was a bleak backdrop for their wedding day, not long after they first met.

At the end of their lives, 104-year-old Howard and 99-year-old Lottie Marcus, the residents of a modest two-bedroom San Diego apartment, were to bequeath half a billion dollars to Ben-Gurion University in Israel. 

It was the largest charitable gift in the history of Israel.

Howard and Lottie Marcus had led modest, unassuming lives. They had humble careers—Howard as a dentist, Lottie as an administrative assistant—how then was it possible for them to make the astronomical donation they did?

The answer lies in extreme patience, differences in taxation of ordinary income and capital gains, and a partnership that led to extreme after-tax multidecade wealth creation, the goal of investing. 

In the early 1960s, mutual friend Ben Graham introduced the Marcuses to Warren Buffett, who was running a small partnership. Through all the ups and downs of Berkshire (see Owner’s Manual), the Marcuses stayed the course and were great partners, despite over 13,000 market days to sell in the six decades to come. They stoically held with equanimity, a collective family temperament forged in the most tragic of circumstances but also in the optimism and faith that life has its peaks and valleys, but with hard work, things get better.

For the better half of a decade and the majority of my fourteen years of teaching, I have started and ended my semester with the story of the Marcuses. The story of the Marcuses is a foundational one in investing to me. It shows the extreme power of multidecade compounding, the necessary temperament to accomplish it, and recognizes the crucial impact of taxes on returns (which is rarely acknowledged by the investment industry’s marketing complex). The goal of investing is the highest absolute return net of fees, net of taxes over long periods of time, and the Marcuses have come as close to the peak of that mountain as anyone. 

But it teaches so much more than the path of extreme wealth—the Marcuses show us why wealth ultimately matters. 

Howard and Lottie chose to give their wealth back to the world, despite the cruelties it had imposed upon them earlier in their lives. They chose to give their wealth to charity and water research in service of others; extreme wealth creation in and of itself is of little ultimate meaning, a fact I try to impress upon my students.

Much can be accomplished over the fullness of time from even the direst of circumstances with compounding. Compound hard work, compound knowledge, compound relationships, compound service, and yes . . . compound interest. A fact most clearly demonstrated by Howard and Lottie Marcus and their extreme after-tax multidecade wealth creation.

So, let’s talk about the math of it all, starting with the math of our tax system. 

The holding period for U.S. stocks has gone down dramatically in recent times, with the average hold period today being less than 6 months.1 Warren Buffett once remarked, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Today, investors are far removed from the long-term business ownership for small savers that the stock markets were created for and far removed from the Marcuses’ multidecade attitude of partnership.

With low-to-no-cost trading costs—made possible by the internet and mobile apps, often promoted in a gamified fashion—investors end up paying a tremendous penalty for their short-term ownership due to taxes.

The goal of investing, to us, is to achieve the highest absolute returns, net of fees, net of taxes, a fact that is often lost and obscured while combatting the daily psychological and behavioral pressures to trade. The overwhelming majority of organizations and individuals are not tax-exempt and therefore are subject to paying substantial taxes on income and capital gains.2

Setting aside trading costs to buy and sell a security, we investigated the mathematical difference in post-tax investment returns from holding a stock for decades as a business owner and a partner versus trading the stock annually. Our annual hold assumption is conservative, considering the average hold of a U.S. stock is half as long, or about six months. 

Short-term and long-term capital gains are taxed at vastly different rates. Short-term capital gains taxes, taxation on maintaining an investment for less than one calendar year, can be as high as 40.8% on gains. While long-term capital gains, holdings that have been held longer than one year, top out at 23.8% on gains. Short-term taxes are more of a drag the higher the returns and the longer the duration of time. For example, a stock that compounds at a 10% return for 25 years but is traded annually and pays short-term gains can leave you with 50%+ less wealth than that of lower long-term capital gains rates. If returns compound at 20%, you are left with 78% less wealth over 25 years.

The majority of long-term wealth creation comes from compounding uninterrupted, untaxed investment gains over decades. Short-term owners who lock in capital gains and losses have fewer dollars to reinvest, which creates a significant difference in wealth creation versus a long-term owner over the fullness of time. Despite having the same annual stock return, the long-term owner emerges with a far greater return than the short-term trader, a difference of increasing significance over time due to compounding.

Long-term owners create the most wealth by investing in great businesses and holding for as long as possible, allowing them to defer paying taxes on gains until the end. Long-term capital gains tax rates are more favorable than short-term capital gains tax rates3, but even if we assume short-term capital gains taxes are the same as long-term capital gains taxes at 23.8%—a trader over 25 years still pays taxes 25 times versus a long-term owner who pays taxes once, or none if they continue to hold. In a market where the average annual return is 10%, over 25 years the short-term trader has less than half the wealth versus the long-term owner. And that excludes transaction fees of trading.

Finally, short-term investors must add in a far greater buffer to achieve the same fair value net-of-taxes return as a long-term investor. Consider the disciplined short-term trader who sells only when they believe a stock is overvalued. If the short-term trader bought a stock at $50 with the belief that the stock should double to $100, at the top end of the short-term capital gains tax rate of approximately 41%4, the trader would only take home a net profit of $30. To achieve the true double net-of-taxes gain they invested in, the trader would need to wait until the stock reached $134 to take home a net-of-taxes $50 in profit (the economic double). 

The tax code incentivizes people to hold onto investments for periods greater than one year by offering much more favorable tax rates. Despite this, the overwhelming majority of individuals, hedge funds, and mutual funds do not take advantage of this, with an average holding period of less than one year.5 There are countless reasons why people decide to sell in the short-term: a stock experiences significant declines, a stock experiences significant gains, and the opportunity cost of not owning a different stock, to name a few. Yet, an often overlooked but dramatically meaningful factor when selling a stock is the interruption of compounding untaxed investment gains and the tax implications of doing so. To help contextualize the impact of interrupting untaxed gains on long-term wealth creation, we explored the opportunity cost of short-term thinking versus long-term thinking on identical businesses over the same time period.

How Much Are Short-Term Capital Gains Taxes Costing Families?

In short, a lot!

Let’s explore a hypothetical example using Walmart to illustrate the tax implications of holding for the long-term (as a Berkshire Hathaway-type business owner) versus the short-term.

On October 1, 1970, Walmart went public for $16.50 a share. Two friends, Jim and George, had been working at Charlie’s Super Store, a small private chain of stores located in the Los Angeles area. The two friends had seen the IPO announcement in the Wall Street Journal, and each decided to buy $1,000 worth for $16.50 a share. Jim invested because he saw the power of the discount, large box format retail model and thought the Walmart concept could grow nationally and become a great success. George, on the other hand, had just received his annual bonus and decided to buy Walmart only because Jim did.

On the first day of trading, Jim bought $1,000 of Walmart at the IPO price of $16.50, owning 61 shares. George also bought $1,000 of Walmart at the IPO price of $16.50, also owning 61 shares.

Long-term Jim6

im invested because he believed in the long-term viability of the business and never thought about selling his shares unless the competitive advantage shifted dramatically, or the price was extremely nonsensical. Jim stayed aware of company events, focused on the company’s competitive advantage, and only on occasion would check in on the value of his original investment. In 2022, nearing retirement 53 years later, Jim decided to sell his shares.

What was Jim’s $1,000 investment in Walmart worth on December 31, 2022?

Nearly 35 million dollars!7

Jim, after selling his Walmart shares and paying Uncle Sam his 23.8%8 long-term capital gains tax, was left with 26,821x9 his original investment. His investment had compounded at an impressive 21.5% CAGR over 53 years, and he earned 26,821x his original investment of $1,000.

Short-term George

George, on the other hand, didn’t spend time thinking about the long-term potential of his investment in Walmart. He’d constantly look at his brokerage account and felt compelled to trade his $1,000 dollars of stock each year. George would constantly flip-flop between thinking Walmart was overearning and underearning, selling each time along the way.

Like clockwork, George would buy Walmart stock at the end of January (every new year, Jim would convince him to re-buy Walmart) and sell it at the end of December. Some years, George made a ton of money, and in other years, he lost money. Luckily, the tax code allowed him to carry forward his losses to offset taxes on potential future gains.10 But every year that he had a gain, on average, George would pay the short-term capital gains tax rate of 37.8%.11

When asked why he traded so often, George being (refreshingly) honest admitted that his emotions would get the best of him: he was quick to sell when he thought he might lose the short-term investment gains and equally quick to sell when the stock declined. He bought and sold Walmart every year for 53 years (1970 to 2022).

What was George left with after all those years in this illustrative case?

After paying Uncle Sam one last time, George netted about $737,000.12 A 13.5% CAGR over 53 years—an incredible return—but nowhere near Jim’s after-tax 21.5% CAGR and 26,800x+. On a relative basis over 53 years, George’s high turnover and resulting high comparative tax investment strategy cost him nearly $26 million dollars and a 26,000x return on his investment versus his best friend Jim, who held onto his shares and capitalized on much lower long-term tax rates.

For George’s short-term trading strategy to match the after-tax dollar return of Jim’s $26.8 million, George would require a 34.4% return each year over 53 years, significantly higher than Jim’s 22.2%, to achieve the same after-tax CAGR of 21.5%! 

While we are all-in believers in the astounding returns and ownership of the knowable, trackable, rarefied, greatly competitively advantaged, multidecade companies, the point on short-term versus long-term taxation is true also with the averages. If George and Jim each invested $1,000 in the S&P 500 index in 1970, then in 2022 post-tax, George’s short-term approach would have left him with $8,500 (4.2% CAGR)13 versus $35,000 for Jim (7.0% CAGR). The impact of trading and a shorter time horizon left George with 76% less after-tax money than his good friend Jim.

Figure I: Jim and George’s Walmart Stock Value Over Time (Post-Tax) *14

*Note: Jim, in the example above, pays long-term taxes in 2022, whereas George, who buys and sells his shares annually, pays the short-term tax each year from 1970 until 2022. For George, we applied the current short-term capital gains rate schedule for all gains from 1970 to 2022.

Multigenerational Wealth Creation

The power of patience persists in the afterlife as well. Jim, ever the multidecade thinker, planned to pass his Walmart shares to his children.

For argument’s sake, let’s say Jim passed away on December 31, 2022, and in his will, he left all of his Walmart stock to his son James. The federal exemption for wealth transfer upon death in 2023 is $13 million. This means that any value received by James, up to $13 million, would not be taxed. Only the value above $13 million was taxed at a progressive schedule.

In this example, George’s children would not be lucky enough to pay any taxes on the $737,000 George made in Walmart because their stock value is well under the Federal Exemption of $13 million, and they are left with much less money than James’ family.

In the scenario that Jim passes on his stock to the next generation, the math is as follows:

  1. Walmart stock value upon Jim’s death is $35 million.
  2. The 2023 Federal Estate Exemption amount is $13 million.
  3. $35 million minus the federal exemption limit of $13 million = $22 million, the amount to be taxed at the progressive schedule. 
  4. The progressive tax to be paid is approximately $9,000,000 or a roughly 25% tax rate, which means that James inherits the full value of her father’s Walmart stock, less 25% of taxes to be paid on the estate.

The additional favorable treatment of the estate tax upon death is that the capital assets
rebase their cost basis to their fair market value at the time of death. Jim’s original $1,000 cost basis for Walmart in 1970 is disregarded, and the new cost basis of the stock is the fair market value at the time of death, less taxes paid on the estate, which is approximately $26 million. This means that should James sell a portion of his Walmart stock in the future, and then he will only have to pay capital gains on the amount above the fair market value of Walmart after estate taxes are paid—James’s new cost basis for this gift is $26 million instead of his father’s original $1,000 investment.

This multigenerational tax treatment further proves how valuable holding onto a stock as a true business owner can be. There is no way to avoid the estate tax upon death but by continuing to be an owner through his death, Jim maximizes the wealth transfer to the next generation. For instance, if Jim had sold his Walmart stock days before death, he would incur long-term capital gains of 23.8% and the estate tax would be triggered at the time of death, leaving his heir James with $21 million vs. $26 million.

Indeed, there are only two certainties, death and taxes. On death, we don’t have much advice to offer by way of personal longevity. But on taxes, there are distinct advantages, and a bit of long-term thinking can make a huge difference.

The Power of Long-Term Thinking

For owners of knowable, trackable, competitively advantaged businesses, the magic of compounding and the incentives in our tax system are highly aligned with the patient, the disciplined, and the long-term-minded. At Worldly, we strive to be more like Jim and less like George—understanding and monitoring our companies’ competitive advantage, owning for decades, and taking full advantage of long-term tax incentives to build generational wealth.

Howard and Lottie Marcus epitomized this mindset. They patiently achieved a near 23,000x post-tax return on their 57-year ownership of Berkshire Hathaway shares, generating extreme wealth alongside their multidecade partners Warren Buffett and Charlie Munger. $1,000 invested in Berkshire Hathaway in 1965 became $23 million by 2022. Those same shares over the same time period, traded by a short-term thinker, would have returned 564x post-tax, or $564,000. (In other words, a penalty of 98% for being a trader instead of a true long-term owner—a steep price to pay.)

For us, the legacy of the Marcuses is much deeper than the astounding half a billion dollars of wealth they made over their lifetime from the most harrowing of beginnings. They show us the greater purpose that extreme patience and long-term compounding could offer—a powerful reminder of the transformative impact that multidecade wealth creation can have.

Figure II: Howard & Lottie Marcus vs. Rory’s Berkshire Stock Value Over Time (Post-Tax) [15]

Note: Howard & Lottie Marcus, in the example above, pay long-term taxes in 2022, whereas Rory, who buys and sells his shares annually, pays short-term taxes each year from 1965 until 2022. For Rory, we applied the current short-term capital gains rate schedule for all gains from 1965 to 2022. 


  1. “Buy, sell, repeat! No room for ‘hold’ in whipsawing market” by Saikat Chatterjee and Thyagaraju Adinarayan (https://www.reuters.com/article/us-health-coronavirus-short-termism-anal/buy-sell-repeat-no-room-for-hold-in-whipsawing-markets-idUSKBN24Z0XZ)
  2. In the United States for 2021 (2022 data not yet available), there were 261 million tax filers, with more than 99% representing taxable organizations and individuals. The remaining 1% were tax-exempt organizations and individuals which include charities, public support organizations, political and lobbying activities, conservation easements, certain art and museum collections, endowment funds, private schools, fundraising services, and hospital organizations. Source: www.irs.gov.

  3.  Short-term capital gains tax ranges from 10% for gains less than $10,275 up to 40.8% for gains greater than $540,000. Long-term capital gains range from 0% for gains less than $41,675 up to 23.8% for gains greater than $459,751. These ranges include an additional “net investment tax” of 3.8% applied to gains above $200,000.

  4.  40.8% = 37% income tax rate for gains above $540,000 + 3.8% net investment tax for gains above $200,000.

  5.  United States Mutual Fund Turnover and Returns, 1991-2020 by Gene Hochachka. From 1991 to 2020, the average turnover for a large cap fund was 73% and for a small cap was 87%.

  6.  No relation to Jim Sinegal, founder of Costco, though spiritually similar!

  7.  Jim’s $1,000 investment in Walmart at IPO through December 31, 2022 was worth $35,198,293 (excluding dividends reinvested) with a pre-tax MoM 35,198x and annual rate of return of 22.2%.

  8.  The highest long-term taxable gains bracket is 20%, however an additional “net investment tax” of 3.8% is applied to gains above $200,000.

  9.  Jim’s post-tax amount after paying long-term capital gains was $26,821,338, excluding dividends reinvested.

  10.  Capital loses can be carried forward indefinitely to offset future capital gains. Individuals may use up to $3,000 of loses each year to deduct against their ordinary income and are able to carry forward the remaining capital losses to offset future gains. In our example we carried forward all capital losses to offset future gains.

  11.  We assumed the capital gains tax rate of 2022 to calculate historical taxes from 1970 to 2022. Today’s, short-term capital gains tax ranges from 10%, for gains less than $10,275, up to 40.8% for gains greater than $540,000. 

  12.  George purchased $1,000 of Walmart at IPO in 1970 and bought and sold it every year until 2022, incurring short-term capital gains. At the end of 2022, upon his final sale and tax payment to the U.S., his post-tax investment was worth $737,138, excluding dividends reinvested. In our analysis for George, we applied the current short-term capital gains tax rate for all gains from 1970 to 2022.

  13.  Post-tax price return CAGR excludes dividends and their different taxation schedules. All analyses in this paper are ex-dividends, one-off dividends, or otherwise. As dividends are reinvested and aggregate returns increase, the power of long-term vs. short-term capital gains taxation differences only increases in favor of the long-term.

  14.  This chart and data do not illustrate or represent a portfolio that is managed by Worldly Partners Management (WPM). There is no representation that WPM has or will achieve similar returns for the portfolio it manages.

  15.  This chart and data do not illustrate or represent a portfolio that is managed by Worldly Partners Management (WPM). There is no representation that WPM had or will achieve similar returns for the portfolio it manages.


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