Introduction
We are all victims of time management. In school, our classes are
usually under an hour; we select articles to read based on headlines; our media
diet is largely based on twenty second sound bites; our instructions to and
from co-workers are brief. In almost all cases these inputs start with an
overarching declarative statement followed by the identification that there are
supporting details, but these are rarely discussed. The initial overall statement
is designed to be accepted without any serious debate. Whatever details that
are mentioned are all expected to be in support of the grand top down
statement. Over a lifetime of inquiry in just about every activity, I have
learned the best defense against the power of the grand statement is the phrase
“God is in the details.”
The “Franklin Close”
The American Revolution, unlike most revolutions, was not about the
transfer of property to aggrieved masses, but about tax and trade regulations.
(The Boston Tea Party was a symptom of a detailed complaint.) One of the
wisest, politically most successful, and a good investor/merchant was Benjamin Franklin.
Dr. Franklin’s technique in bringing together the strong personalities of fellow members
of the Continental Congress was to arrange a list of the positive arguments on
one side of the page and the negatives on the other side. His skill was shown
in that the number of supporting details was often uneven. Thus the side with
the most arguments usually won. For years this technique was called the
“Franklin Close.” In his presentation he
appeared to have martialed all the important details and thus his preferred
solution had the benefit of seeming to be a well balanced point of view. In the
give and take of the debate, the wording of the overall proposition was
modified and the final version received general support.
In today’s world the top down statement is expressed as an immutable
law for which there can be only full acceptance. Further, because of time
constraints and general impatience there is no room for a thorough discussion
of details. Typical of these top down pronouncements which lead inexhaustibly
to a specific investment conclusion are: “If interest rates go up, the mid-term election
will dictate the next US president.” “A rise in the price of oil is bad,” etc.
Why I am wary about Top Down analysis
As a professional analyst I am trained to take either side of these
top down pronouncements. Often, I find that the proponents do not have the
command of all the relevant facts and certainly do not understand the other
side. For example, I could proclaim that the US economy is getting better for our
local town because I saw a placard in front of a bank reading “We are making loans.” While
the overall view may be correct, extrapolating from a single or a small number
of signs does not constitute proof positive. Occasionally there are technical
factors which drive a particular input that can be misleading. For example, in last week’s post I noted with surprise the sharp rise in the
average interest rates paid by banks from 0.37% to 0.43%, a significant change from
one week to the next. I mentioned that it could be caused by some technical
factor. This week the rate dropped back to 0.40%. I was hoping that the sharp
increase in the week before was a sign that banks needed deposits because of a
surge in loans. While this may be true, I suspect that at least half of the
sharp run up in rates may have been caused by some banks who for regulatory
purposes wanted to show more deposits that would reduce their ratio of loans to
deposits.
Successful investors are concerned about
specifics
When I spend time with successful investors, particularly with
competitive portfolio managers, they quickly dispose of geopolitical, economic,
and interest rate discussions. What they want to talk about are individual
investments and the details behind them in a balanced discussion. Often they
use a modified “Franklin Close” to cap their views. The other evening we were
having dinner with a well-known manager. He was concerned about a particular
trade in Japan. I found it interesting that there was no chatter about the
general economic outlook for Japan. When I really go into detail with a manager
I discuss the significant losses that he or she had. It is almost like the
proverbial fishermen when they chat about “the one
that got away.” These are not top down exchanges.
The biggest problem with those pundits and others with their top down
pronouncements is no one has a particularly good record of being right on the
specific view or its impact on the price of specific securities. Perhaps we can
secure better results if we require history teachers to stay with facts and
most importantly figures and avoid thematic lessons. Maybe economists should only
teach microeconomics, not macroeconomics; and there should be no
financial/investment briefs in the media without someone representing the other
side of the page. These modest proposals will not happen, thus my advice is to save
your attention capital for detail discussions that are balanced.
Facts that could cause future trends
The following comments could foreshadow important future trends:
1. Company-sponsored
sports events such as softball with other firms are declining. Though in the
past this activity has led to inappropriate hiring practices, such events were
considered team-building for employees.
This decline symbolizes a
significant change in business philosophy, and this is having impact on overall
employment totals, length of employment, and long-term valuation.
Lifetime employment is being
curtailed as being too expensive in its current and retirement phases. Some may
question the productivity advantages of more senior employees, I don't in
intellectually challenging occupations such as the investment
advisory segment for intelligent clients. There was a time when
to be considered well-managed an organization had to have a deep bench and one
or more good replacements for each critical role. This is not the case today in
many instances. As I have been involved both as a buyer and seller, I know that
part of total acquisition cost is often restarting the firm, thus impacting the
value of the deal.
A
lower terminal valuation should lead to a lower current price earnings ratio. Therefore
one could say that striking out in industrial softball is a bad play for both
the economy and the markets.
2. US World Cup Team member Omar
Gonzalez‘s comment: “We will never give up, it is ingrained
in US spirit.” (A possible return to a wider belief in US exceptionally?)
3. Martin Wolff in the Financial Times noting that the US recognizes the correctness of
the BIS cautionary statements, (mentioned in my last week’s post) but does not
accept its austerity solution. In the US we continue to want to “have our eat cake
and eat it too,” even if it makes us eventually sick.
4. PIMCO Total Return Fund is having net
redemptions, but its ETF version has net sales. This shows that investors,
perhaps guided by advisors or gatekeepers are reacting to the poor performance
of the last couple of years, whereas hedge funds and other more speculative
investors are looking forward to markets where this portfolio will do
absolutely and relatively better. This dichotomy shows the very real difference
between mutual fund and ETF investors inhabiting the same portfolio.
What are you seeing that might influence your investments,
particularly anything that will cause you to transact?
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Copyright © 2008 - 2014
A. Michael Lipper, C.F.A.,
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Contact author for limited redistribution permission.
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