Introduction
In last week’s post I
mentioned one of the slogans used in the US Marine Corps, “Adapt, Improvise,
and Overcome.” As today, November 10th is the 238th
birthday of The Corps, I was thinking of all the adjustments it has had to make
to become the nation’s premier fighting force. Though The Corps can handle almost
any mission assigned to it, much of the slogan has to do with overcoming
the rigidities imposed within itself and the US Defense establishment. I wonder
whether Pope Francis is using a similar approach as he tries to adjust the
behavior of the Roman Catholic Church, which could have impacts on many other
organized religions.
Less cosmically, while
painful in some cases, we are seeing a number of current adjustments that are
subtly or perhaps not so subtly adjusting investment thinking as outlined
below.
Lessons
from the Twitter IPO
Twitter with the help
of its lead underwriter Goldman Sachs* had a successful launch of
its IPO. While they did raise the price of the offering several times similar
to Facebook, they did not adjust the number of shares being offered as Facebook
did. The NYSE, the venue for the aftermarket, went through exacting trials under
stressed conditions that NASDAQ* did not with Facebook. The
President could have learned a lot from the Twitter launch and adjusted his
attempts to re-launch a somewhat more successful Obamacare.
A
possible lesson to be feared
In a syndicated column
by George F. Will entitled “The Enigma of Janet Yellen,” the author was concerned that by past experience and
training, Ms. Yellen has been amenable to penalize savers to benefit equity owners
around the world. He fears that in the absence of fiscal policy leadership, monetary
policy led by the Fed is going to in effect, become the conscience of the
government, and lead to adjusting our social priorities through the use of
various monetary devices. If Mr. Will’s concerns are realized, the rate of
inflation will rise and the dollar may shrink.
Unwinding
of the 4% rule.
For many years’ wealth
managers within or outside of trust departments have believed that a 4% withdrawal
rate during retirement was possible without destroying the capital base. Today, based
on the current low interest rates, some careful advisors are more comfortable
with 3%, and T. Rowe Price* believes 2.8% is more prudent. If these
lower numbers are to be believed, spending and saving efforts will need to be
adjusted. A similar exercise is needed for a number of endowment and foundation
boards to contemplate.
Liberal
Arts needs to be liberated
Currently a significant
number of liberal arts colleges are facing declining enrollments, rising
expenses and less than great returns on their too small endowments. Part of
their problem is that often these organizations are governed with a high level
of rigidity. Even in government, during periods of stress high-priced workers
can be laid off. Granting tenure in higher education is often a one-way street,
in that after being granted it, the tenured ones can stay employed as long as
they want regardless of their productivity.
One of the fields of study that should be examined by the payers of college tuitions is Macroeconomics. Robert Shiller, a 2013 Nobel laureate wrote a blog published by the Guardian entitled, “Is Economics a Science?” He properly questions whether it is a science like Physics. He accurately says that the study of Economics has to do with policy. I suspect that is how this course is taught which could have some benefit to Political Science majors whose aim is the Presidency or slightly lower. On the other hand, Microeconomics introduces some techniques which could be useful to both consumers and producers. In my particular case the focus on price-setting with different degrees of inelastic supply and demand was useful in my business and investment career. What I am suggesting is that the rigidities found in much of the non-profit world need to go through serious adjustments and that will happen whether the occupants of the various ivory towers like it or not.
One of the fields of study that should be examined by the payers of college tuitions is Macroeconomics. Robert Shiller, a 2013 Nobel laureate wrote a blog published by the Guardian entitled, “Is Economics a Science?” He properly questions whether it is a science like Physics. He accurately says that the study of Economics has to do with policy. I suspect that is how this course is taught which could have some benefit to Political Science majors whose aim is the Presidency or slightly lower. On the other hand, Microeconomics introduces some techniques which could be useful to both consumers and producers. In my particular case the focus on price-setting with different degrees of inelastic supply and demand was useful in my business and investment career. What I am suggesting is that the rigidities found in much of the non-profit world need to go through serious adjustments and that will happen whether the occupants of the various ivory towers like it or not.
Investment
thinking is being adjusted
All investment
organizations are being caught in a pincer movement of lower investment returns
in equity, debt, commodities, derivatives and cash concurrent with rising
expenses for technology, compliance, marketing, and keeping their good people
from going entrepreneurial either directly or to smaller shops, such as hedge
funds. In this light it is interesting that Goldman Sachs* will no
longer produce research that is based on “growth at a reasonable price.” This
is a policy that worked well in the mutual fund business for many years. In his
leadership days at Fidelity Magellan, Peter Lynch was a major proponent of this
strategy. In Peter’s search for good investments he found a large number of
companies who were growing, not with a high growth rate but who were selling at
prices that did not presume a continuation of their growth rate.
How
are we are adjusting?
The first thing I do is
look under the hood of various labeled classifications to see the spread of
options that have been grouped under a simple label like growth or large cap.
While it is useful to know how a manager performs relative to his peers under
varying conditions, markets are not two dimensional up vs. down, most of the
time they are in some form of equilibrium. The more you study people, the more
different they appear to be. This is why an All-Star team picking the best
player for each position often does not do well against a team of good players
that has played together benefitting from natural leadership within the group.
I am looking to add a
new fund to our portfolios. My key concern is whether the fund being examined, which
is in a particular market phase, will add or subtract to the results of the
existing portfolio.
One of the adjustments
that I am making as I move away from labels is to look for good, understandable
managers in broad categories. That is why I now group equity managers for my
purposes under the banner of “equity exposure.” Because of the dynamic changes
in the world’s intellectual leadership, I expect that the rate of adjustments
will accelerate. I need to pay attention to these changes as they creep over
the various time horizons that we must accommodate.
How do you expect to
adjust to the future?
*Owned personally, by my private
financial services fund, or both.
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