WARREN BUFFET’S ANALYSIS
Here, in case you missed it in the New York Times. In small part:
Stop Coddling the Super-Rich
By WARREN E. BUFFETT
Published: August 14, 2011
. . . The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.
Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.
I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation. . . .
Yesterday, Dr. K urged us to eschew DNDN (which Guru thinks is going up, but whose drug he believes should not have been approved) – on moral grounds. I suggested that the amount of harm one would do by buying shares would be negligible compared to the good one could do with the profit (should there be one).
Ed: “Oh dear! Using the proceeds of a morally corrupt investment to do good deeds in no way ameliorates the stain. Good ends do not justify evil means!”
☞ It’s not clear to me that it’s evil to buy these shares (or even that DNDN management is aware Provenge is useless, though Guru and Dr. K. are quite sure it is). The money you put up to buy the shares doesn’t go to the company, it goes to some seller (who could be planning to use the cash to feed starving children). In theory, of course, your adding – even infinitesimally – to demand for the stock buoys its price, so that if it needed to raise more capital (which I don’t think it does) it might get an infinitesimally better price. But infinitesimal harm strikes me as less consequential than concrete good. And there are loads of concrete good things to do with the profit from this trade, in case we make one.
Abe: “As I age and think about things like mitzvahs and tzedakah, I more and more think your good Doctor K may be on to something. I am torn. I own MO (formerly Philip Morris). Bought it right after the court case where they did not have to post bond to continue an appeal. Been very good to me ever since. My basis in the stock and its subsequent spinoffs returns over 11% per year in dividends alone. Still, I don’t know. Making money from tobacco? I have justified it with, ‘Well, the funds provided have served good purpose.’ Question may be, were those purposes good enough?”
☞ I expect they were. Nothing about your ownership helped sell more cigarettes. You didn’t fund the company’s expansion – they are funded from operations.
Russell T.: “Surely I’m not the only one of your readers who bought that lottery ticket? Should I sell? Hold? Buy more?”
☞ A lottery ticket is exactly how you should regard it – but, I think, quite a good one. No need to buy more if you already have it; no way anyone should buy it except with money he or she can truly afford to lose (it is a lottery ticket!). And because it trades so thinly, if you do put in an order, be sure to place a limit.
Guru writes: “They released earnings last week. Expenses have come down, including compensation expenses. They aren’t overpaying the managers at shareholder expense. They estimate they are well financed into 2014 – that will be plenty of time to see if the thesis about their drugs is correct. Lots of breathing room. The biology here is compelling!”