Sunday, October 16, 2011

Frustration is Widespread and Normal


As almost everything in the modern telecommunications world is abbreviated, for those who have just landed on the planet OWS stands for Occupy Wall Street. Similar to the “Arab Spring” or the various color revolutions, OWS activities were spread through social media, in this case to a reported 868 cities around the world. The apparent rationale for crowding a large number of young people and some older into a constrained space easily accessible to the media, is to vent their frustration as to the lack of jobs and other grievances. (This Saturday when we were briefly visiting Carnegie Mellon University, I noticed a sign on a very crowded bulletin board advocating to bring OWS to Pittsburgh to “occupy” Mellon Square in the middle of the financial district. No one appeared to be taking any notice of the signs; this group of very smart students appeared to be focused on their difficult studies and other normal university activities.) From what I read, the crowd which does not appear to have a leader, is frustrated with their joblessness, as we are for them, but also upset about the distribution of wealth in their communities. They seem to believe that the financial services companies have deprived them of what is, in their opinion, their rightful share of the wealth of the community. They may fear that the coming cutback in government spending will reduce their lot in life even further.

At the moment, these masses of people can be properly called a crowd, not a mob. Mobs have leaders, often self-appointed. Mobs led on by their leaders can express their anger in non-violent activities. All too often, non-violent activities in the eyes of some, impinge on the rights/privileges of others. To protect both sides, the forces of “law and order” try to keep each group separated and calm. Unfortunately, all too often one side or the other, often the original protesters, lash out against “the authorities,” creating a series of violent eruptions, which can be taken to its extreme: open rebellion. Historically, some of these rebellions can lead to bloody revolutions, which in the end defeats both sides, for example the French and Russian revolutions. This risk is why it is wise for global investors to keep a wary eye on these crowds.

OWS concerns

Some of us are also frustrated. We are frustrated with the current generation of protesters who in many instances have not prepared themselves to find work in a changing world and often appear so self-centered that they are not helping out with their extended families or charities. Most importantly, they do not recognize that they themselves, their parents, and their grandparents have benefited from a society that has been willing to give us more services than we have been asked to pay for in taxes, fees, or volunteer work. In the US we have allowed a number of our school systems to cease teaching either civics or geography. Civics, properly taught, would have emphasized the individual’s responsibility to the community and the society in general. Geography is essential to economics. One quickly learns that land, water, and other resources are not equitably distributed. Some elements are better than others and are worth more. The fights to gain these basics shape our world’s history. Any reasonable students of geography and therefore economic/military history, would focus on the incipient power of China. They would be able to explain that except for about the last two hundred years, China has been the leading economic (and in some ways, intellectual) power in the world. With this knowledge, one would be wise not to play the “China Card” with the political crowd.

My own frustrations

The people in the milling crowds are frustrated because they do not have the appropriate tools to solve their problems. In a very much less important way, I am frustrated in my inability to answer a mutual fund search question. I was asked by a very savvy investor to come up with one or more “deep value” mutual funds. As with most terms in the world of funds, there are not complete definitions, but a series of concepts. One would think with the ability to tap into my old firm’s ninety-odd fund classifications, I could easily find a couple of “deep value” funds. This is not the case; so I must rely on artistic instincts to complete the search. In the past, poorly performing funds would excuse their poor performance by saying they were holding securities that were priced with big discounts to their intrinsic value or even better future prices. Over long periods of time they never get into a market that recognizes the values they perceive. To avoid waiting for the market to recognize these managers’ brilliance, I am looking for funds which base their choices on three attributes.

The first attribute is a massive change in the supply/demand equation for the products or services of the company. Often this kind of search puts one into commodity types of companies. The risk of getting a massive change on the upside is that it can also go the other way. Further, often changes in government regulations can cause significant alterations in the supply/demand balance. Because of the sources that cause change, the successful investor has to have deep contacts with the users and regulators of these products and services.

The second attribute is simply price changes. Not the kind of changes that emanate from the first attribute, for that is a given. The second attribute focuses on a relative price of a company and/or a sector relative to the larger universe of investments. There are times when the relative value spread gets to be too large between what is considered to be the best investment and second or third or possibly the tenth best investment. The skill required here by the portfolio manager is to pick up the changes in momentum between the current leaders and the others too far behind. Trading skills are very important for this kind of manager, both in stocks and other financial instruments.

The third attribute is usually an abrupt change in management which comes with radical changes in policies and how the company is run. There are activist managers who try to force these kinds of changes. Sometimes they are successful, sometimes not. Change is not always good for the investor. Occasionally a management change in one company makes other stocks more attractive.

All three of these attributes require a great amount of patience on the part of both the fund manager and the fund investor. A successful deep value fund(there have been some) should not be the only fund in one’s portfolio. As a manager of accounts devoted to a portfolio of mutual fund investments, we would normally own funds that have a variety of characteristics.

I am developing my list of “deep value” candidates; I would appreciate suggestions from any member of this blog community.

Did you miss Mike Lipper’s blog last week? Click here to read.

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