Friday, May 1st 2020

Betting on taxes


Benjamin Franklin once famously stated, "nothing is certain except for death and taxes." His quote, applied more broadly, is actually a recipe for some of the world's best investment ideas.

We tend to think of taxes as an annual springtime ritual that we pay to the IRS. But in reality, government taxes are just one type of tax. We all pay other types of taxes every day. Taxes are just necessary payments to maintain access to "something." Businesses that are effectively tax collectors are often wonderful businesses - paying them is almost as certain as death.

Here are some examples of taxes that millions of humans regularly pay without even realizing it (our clients own them in their Titan Flagship portfolios... they're the tax collectors here):

Apple (AAPL) - tax on our digital lives Netflix (NFLX) - tax on our quarantine entertainment Amazon (AMZN) - tax on goods being delivered to us Visa/Mastercard (V/MA) - tax on credit card consumption

In times of crisis, investors are often quick to misprice these tax collectors as "nice-to-haves", focusing on near-term tax revenues instead of the underlying taxable behavior itself. This creates an opportunity.

For example, as global commerce slowed in March-April, investors extrapolated worst-case scenarios for Apple. Layoffs >> less discretionary income >> less money to spend on iPhones.

But remember: the taxable behavior is what matters here. Apple takes a cut whenever we pay for apps on our smartphone. They are the landlord of our digital lives. As long as that continues, taxes will have to be paid. Sure enough, Apple and other tax collectors have experienced a massive rally the last few weeks as they've begun to report Q1 results.

We do expect volatility for the foreseeable future. Near-term tax revenues are on the fritz for virtually everyone. But our clients should rest easy knowing they're collecting taxes on some of the most stable, fast growing behaviors in human history. These are taxes that ol' Ben would bet on.

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