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  • Martin Sosnoff

The Prolonged Rape Of Shareholders

These managements need shaping up. They’re horrendous. They take money from the peasants, and then find mercenaries (lawyers) to protect their castle. Mainly by brow-beating the peasants so we attack the castle. 

Wait. I don’t want to call shareholders “peasants.” Don’t put that in the article. Call them an “oppressed majority.” Carl Icahn. 

Nobody, even a hundred years ago, cared who paid what for whom. Decades ago, I tried to buy a public savings and loan operator. The stock sold below book value, but the price quoted to me was 1.5 times book. Nobody could justify the price but that’s what it was. Sometime, somewhere, somebody sold out for 1.5  times book. It became precedent. 

But, the price of money intervened. It was too high for me, so I walked away. I realized the cost of money determines the price for practically everything except, perhaps iconic art pieces. 

There’s only one way to make serious investment money. You must have a schema. It may begin with extropilating financial ratios based on recent years’ statistics. Today, the Magnificent Seven aren’t analyzable by historical yardsticks.

Starting with Apple and Microsoft, such 7 stocks, make up 70% of the NASDAQ Index. Call it insane hysteria at work,  but it’s what we’ve got. I own Microsoft with 10% of my assets because I think it’s analyzable. If this is hubris, I’ll pay dearly for it. You’re entitled to one luxury in your portfolio, but that’s enough or they’ll carry you out.

This chart on the ratio of dividends to GDP unnerved guys on valuation for the market in the sixties and early seventies. Growth stock mania was led by Morgan Guaranty Trust. Later it took the deep recession of 1973-’74 to crush such overvaluation, a decade long process. 

I remember walking through the Egyptian Room of the Metropolitan Museum in New York with Saul Steinberg, who liked to hold his annual meeting in the cozy Grace Rainey Rogers Auditorium. Saul was coming off a very good year for his insurance business at Reliance. “Look at those poor mummies”,  he said. “ They are my older shareholders from the sixties when all I knew how to do was buy in French. I am 40 years old now and I have learned to sell in French as well. The slippage in world trade that practically destroyed Saul’s container shipping business he had dumped. 

I wanted to call attention here on the disbelief in growth stocks back in 2013–‘14. Nobody remembers this period when Apple sold at a discount to the market along with Microsoft, Oracle and Cisco. Eli Lilly and Merck sold at market premium. My capital conservation metric is operating cash flow because it shows the wherewithal management has to grow their footprint. 

Finally, we get to Elon Musk and his exercise in pure greed turned me off permanently. If ever you pick up an annual report and it begins with “Your company” blah blah blah, fling it into the wastebasket at your side. Not your company. It’s their company and you’re being treated like a 5-year-old. 

Fifty years ago, when we measured management's salaries and add-ons relative to their workers' pay,  the ratio was 10 to 1. This ratio can run now at 50 to 1 or even higher. Proxy statements tot up to 100 pages. They are designed by management’s lawyers as boring, even unreadable as possible in small type size. Boeing’s report is a good example of shareholder misuse. 

For me,  this is outrageous mufti-pufti.

Musk was anything but bashful in his package: first, he took 5 million shares 5% of Tesla’s capitalization.  This performance awards  provided for options on 20 million shares over 8-years if performance goals were met over an 8-year period. 

Musk’s ownership end of 2019 stood at 20.8% of Tesla‘s market capitalizations. Enough is enough,  Elon. 

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