Introduction
Institutions and families of wealth often think that one of their
highest purposes is to invest to benefit future generations. I agree with this
both professionally and personally in terms of several non-profit organizations
that I serve and my own family.
As extenders of their ancestors, future generations are beneficiaries
of the past’s assets and liabilities. However the greatest gifts that we can
pass on are not money, but reputations of integrity, compassion, and good
habits; particularly the willingness and ability to convert liabilities into
assets. The last phrase reveals my financial training and the shorthand of
reducing many problems to numbers. For me money is not an end in and of itself,
but an acceptable means of buying time and efforts of others beyond what I can
provide at the moment.
Portfolios for future generations
One of the most difficult tasks that I am faced with is the creation
and management of investment portfolios for the benefit of future generations.
These are portions of the portfolios of various tax-exempt institutions and
various multi-generation trusts. With these responsibilities in mind I
included “The Legacy Portfolio” in developing the Lipper Time Span Fund
Portfolios.
The 5 “D's"
In addressing the questions of how to invest for future generations (as
differentiated from investing for current needs), I am developing a thought
pattern in looking for characteristics that will guide decision making. The
future will be a continuation of the past assaulted by various forces of
change. I start the exercise in thinking about where to invest. The
characteristics that I have identified as probably useful can be summed up in
the “Five Ds”- Determination, Demographics (and psychographics), Discipline,
Debt, and Desperation.
Determination
Under the topic of determination I look for evidence that people want
to materially change their lot in life as difficult as that task may be. They
are willing to work hard and sacrifice for the future. My investment portfolio
friends will recognize that this is like active rather than passive investing
which is harder to do and will certainly be less productive during certain
periods of time.
There are 168 hours in the week; the strivers should be spending about
120 of those hours improving what they do at work and in family/community
development. We perceive some of this drive in almost every country, but much
more pronounced in certain Asian and I am told selected African countries.
Often a clue to this determination can be seen in business successes on the
world stage.
Demographics
Because of past wars, societal economic mistakes, and technological
changes, we have a world that can be easily divided into two parts. The first
is one which has an aging population that on average is not producing
sufficient numbers of new entrants into the work force to replace those who are
or should be retiring. Most of Western Europe fits into this category as does
China due to its past one child policy. The US is close to slipping into this
group, but immigration whether legal or not is still permitting the US to have
a rising work force potential. India and Indonesia are examples of societies
that are growing. (Whether they can find economically productive jobs for the new
entrants remains largely unanswered.)
Consumer marketing successes are not solely based on demographics, but
on psychographics which is a way of analyzing what elements of personality will
motivate people to buy particular items and when they will do it. I include psychographics
in my list of required characteristics to be evaluated.
Not enough young people are emigrating from regions with outsized aging
populations, a situation compounded by growing unemployment. This is largely true in Western Europe, but
not in Eastern Europe. Countries that have seen some of their youth leave include
Scotland, Ireland, Denmark, Sweden, Korea, Vietnam, Canada, Mexico and other
Latin American countries. The willingness to move signals taking responsibility
for one’s own future and not relying on the home country’s social fabric. This
personal initiative is a positive sign for future investing in both the
destination country and the traditional homeland.
Discipline
Regular readers of these posts have learned about my treasured
experience in the US Marine Corps. I am not focusing on that level of
discipline, as helpful as that was for me and a few others. I am spotlighting the
necessity of self-discipline learned at an early age in the home environment.
Elements of this self discipline can be seen in appearance,
punctuality, and work and study orientation. The single most important self-discipline
signal is effective time management. If we were to capture all of the unproductive
time wasted in the world, we could build better societies for all. One clue to
the level of discipline in society is the average years of schooling,
particularly if the time in school is broadening and not basically
memorization.
When analyzing a country or community, two telling indicators for me
are the cleanliness of the streets and homes plus the volunteer structure of
their organizations and their military. Switzerland, Israel, and Singapore are
leading examples of countries where discipline is considered to be important.
Debt
The basic economic model that runs the world is to produce, save any
excess earnings and to invest wisely for future spending. Notice that debt is
not fundamental to human economic progress. Yet it has become endemic to most
societies. People, and therefore countries, rely on the use of debt to meet
current gratification rather than waiting until savings can pay the bills.
Originally the use of debt was as a stop-gap measure to fit a specific, largely
unforeseen need. The four key elements of debt creation were:
1. The generation of cash earnings that
could repay debt
2. An
interest rate high enough to induce lending rather than consumption or other
investing
3. A
time-certain payment of interest and repayment of principal
4.
Sufficient collateral to reduce the risk of failure to pay timely debt service.
These principles are still the basis for undertaking private debt.
What has evolved in terms of government debt is deficit spending not covered by
tax revenues. The history of the world has shown that governments, no matter
how they are created, are not good borrowers. Their history is either to
directly default, or through the control of the central banks to inflate the
value of their currencies so the lenders do not get full value of their capital,
particularly after taxes are paid.
We all know that there are unexpected emergency needs that have to be
funded. In our personal and corporate experience that is one of the reasons to
have sufficient reserves to pay for the unexpected as well as the reasonably
expected needs. One of the less obvious reserve elements for individuals and
businesses is their unutilized borrowing capacity at reasonable interest rates.
Governments’ first source of additional funds is their unutilized
taxing authority and the second source is what they can borrow, hopefully
within their own currency. Countries with large outstanding debt do not have
the same flexibility of those with ample unused tax authority and availability
of credit. What makes matters worse is how governments generally invest. While
some of their spending can only be met by the government, much of the other kind
of largesse not so. All countries can use physical and intellectual
infrastructure improvements. The problem is all too often these efforts are
politically managed. In numerous cases many of these efforts would be much
better managed and cheaper for the society if they were done by the private
sector. (We are seeing just this sort of controversy within the spending
priorities of the Port Authority of New York and New Jersey.)
If the government sector continues to grow faster than the private
sector it will not be a favorable sign for investing. The current leadership in
China understands this balancing issue. Hopefully the new government in India
will also. The government debt overhang in Japan is troublesome.
Desperation
Those of us who have played sports or are about to meet important
people know that too much pressure can lead to unforced mistakes. Individuals
or organizations that are desperate to succeed are not careful or thoughtful
and can make mistakes. There is a point to growing too fast. Years ago, at a
bank, I learned that in trying to assess the future terminal price of an
investment not to use long-term growth rates above 25% in terms of earnings and
revenues. (In a slowing global economy I wonder whether future long-term growth
rates should be limited to a multiple of economic growth. For example in a 2%
real economic growth environment, the maximum expected future corporate growth rate
might be 10%; with 3% GDP growth a 12% maximum growth; and at 4% also 12%. This
suggests that a rapidly growing economy is using up some potential future
corporate growth.)
This concern for desperation does not rule out a “disruptive force”
coming into play. Cell phone sales had an explosive growth rate for awhile, but
as the marketplace fills the vacuum that cell phones’ disruption created, the
law of large numbers will exert itself and growth of this sector will continue
to be immense in actual number of dollars/users. However the percentage growth rate won’t be
very large.
Thus we need to be very careful of “desperate” people and
organizations.
Ongoing applications
For the truly long-term investor it may be wise to focus on youth
finding productive work with a Confucian orientation to savings, discipline and
loyalty.
Start small investments in “disruptive efforts.”
Average up on purchase prices when corporate developments are achieved.
Cut losses on companies that do not seem to have business smarts, even
with their technological successes.
Because I am in business to meet the long-term needs of investors and
beneficiaries, I am looking for mutual funds that can do a good job of
screening for the next generation’s winners.
Reader feedback
Feedback from readers is very important to me, I am fortunate to have
a blog community with many thoughtful readers and correspondents. (I try to
answer them all).
Thanks once again to Citywire
Global readers who have made my blog the # 1 most read fund manager
comments last week. The large number of managers in the City and elsewhere in
London make it one of the world’s best centers of fund knowledge.
Question of the Week
How do you invest for the portion of your portfolio that is furthest
into the future? Please let me know.
__________
Did you miss my blog last week? Click
here to read.
Did someone forward
you this Blog? To receive Mike Lipper’s Blog each Monday, please
subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com
Copyright © 2008 - 2014
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
Posts
No comments:
Post a Comment