On taxes, super-rich individuals and well-heeled corporations have gotten away with murder these past 60 years. Consider the tax rate for U. S. nonfinancial corporations traced a consistent downward slope from the 60% plus rate in the early sixties. In the postwar years, it was even higher.
Former President Trump did some work, too, and we’re down to a 21% corporate rate. For decades corporations sheltered much income by holding earnings abroad. Easy to prove as well that top-heavy income inequality reduces middle-class income. So far, net income redistribution, worldwide, runs under 1%. When does carried interest for hedge fund partners ever get taxed as ordinary income? This rate goes back to the fifties when there were just a handful of partnership operators. The IRS foolishly granted an exemption in incentive management fees. Now covering hundreds of billions earned by these honchos.
I drew a postwar trend line on corporate taxes and came out at 40%, where we stood early 1980’s. Assume the current rate nearing 20%, shortly becomes history. Any higher rate shouldn’t severely impact the market because stocks get capitalized on their growth rates, pretax.
Looking at Microsoft Corporation MSFT, for example, the pivotal metric for me is pretax operating income, net earnings per share. Further, if I considered its book value, I’d have thrown the baggage out long ago. Focus on operating cash flow, the wherewithal a company controls to build out its footprint and build new franchises.
Microsoft sells at 25 times operating income which has compounded at 25%, year-over-year, quarter after quarter. Forget about its book value of $134 billion. The stock sells over 7.5 times book, so a long way down if anything serious goes wrong. I’m assuming operating cash flow next fiscal year at over $100 billion. The multiple here is 20 times. This satisfies me on valuation.
An underlying investment strategy is, own the best secular growth stocks and mainly avoid cyclical, basic industrials. Nothing wrong with healthcare, ethical drug houses, and financials like Goldman Sachs GS and Citigroup C.
American Express AXP is a great example of the buy and holds strategy as typified by Warren Buffett, but even AXP was badly burned in the 2008-’09 financial meltdown. My story on Warren dates back to the early sixties when we both became initial investors in American Express. The stock had plunged on what became known as the "salad oil swindle." They owned a tank farm leased out to carry inventory in liquids like salad oil.
Tino DeAngelis, a commodities operator, leased some tanks for his salad oil inventory. Then leveraged, he traded commodities futures and tapped out. When Amex went to check on their salad oil tanks, they found just a thin top layer of oil, the remainder dirty water.
Their write-off on the Tino caper came to $68 million or so. At that time serious money. Meanwhile, their “green card" was taking off. Management, Jim Robinson, swore to me that they would bury Diner’s Club and then did so, growing receivables over 30% per annum.
Nothing is forever, but Amex has come back time and again. It touched down at $20 in 1998 and under $10 during the financial meltdown in 2009. Just 5 years ago, American Express sold at $60, now $150, tracing new highs.
Of late, the market capitalization of Berkshire Hathaway (NYSE: BRK-B) has pushed into new high ground, over $550 billion. American Express is a $150 billion piece of paper and doubled this past year. In the Berkshire top 10 portfolio positions, AXP ranks fourth at approximately $20 billion. Warren hung tough.
Before tossing Buffett more accolades, consider BRK underperformed its benchmark index, the S&P 500, for the last 5 years. He did saw off a huge position in Apple Inc AAPL a couple of years ago but bypassed Microsoft and internet paper-like Amazon.com Inc AMZN and Facebook Inc FB. Nobody’s perfect!
My powerhouses are Microsoft, Amazon, Facebook, and United Healthcare Group UNH. Since 1965 Amex’s compounded price gain of 20% ran near 2 times the S&P 500. The original cost basis was $1.3 billion.
BRK owns 5% of Apple with a $31 billion cost basis now worth $1.3 trillion, a home run in any league. Embrace growth, cyclical growth, and financials. The internet still beckons, namely Facebook and Amazon. Microsoft is a hold. United Healthcare covers me in healthcare while my financials embrace Goldman Sachs, Citigroup, and Bank of America BAC.
Lest we forget, American Express sold down to $10 in the 2008-’09 financial meltdown, thereby wiping out a decade’s appreciation.
What did I do with my Amex paperback in 1964? Held on a couple of years, then banged it out and patted me on the back. The last time I looked, Buffett has more money than yours truly.
Martin Sosnoff and his managed accounts own: Amazon, Facebook, Microsoft, Citigroup, Goldman Sachs, United Healthcare Group, and Bank of America
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