Sunday, September 20, 2015

Hearing and Seeing Different Investment Views


Having just spent the last eleven days in discussions with portfolio managers, CEOs of banks and other investment experts in London plus global stock exchange leaders in meetings in Barcelona, I have been trying to find some common theme among these bright men and women. The single most common theme is the complaint,  “The world is far from perfect and getting worse with almost every bit of news.” This feeling is felt widely, which I attribute to the rise of populism on both the right and left of the political spectrum.

All Cash To Escape the Complaint

In spite of their complaints, almost no one is just sitting in all cash, which is not what I am advocating. But to own anything we must have a belief that on a relative basis at least some assets will hold value and may increase in value. Thus, we must be relatively happy about something or some things. Interestingly we don't often proclaim our happiness. Perhaps, we fear if we brag about what we own, it will be taken away from us. Many in the or around the investment community want to appear to be sophisticated so that they may join in with their lists of complaints. Rarely is any time to devoted to those investments or conditions that make them relatively happy.

There are very few portfolios that have 20% in cash. A holding of 50% in cash within a fiduciary account might be considered imprudent before a probate judge. This is not to say that we should not prepared for periodic drops of equity prices in the range of 25% and once in a twenty five year generation of 50% decline.

Bottoms Good and Bad

The reason we limit our cash accumulation is that we have studied cash hoarding by mutual funds and individuals. In many minds, cash can become too comfortable because there could always be another major drop. Off of some bottoms, the first 10 to 20% is often viewed as a rally in a bear market when it is really the easiest earnings in a bull market. Many are frequently surprised by the strength of the new market leadership. Above all we need to remember that we can and will be wrong from time to time.

Interest Rate Hike to 4%?

My readers will not be surprised that I was disappointed by the Federal Reserve’s inaction last week, including what was said by the Chairwoman. I did not expect what is analytically needed. The best result would be a single immediate jump to 4%. Many will feel my call for 4% is extreme, but they should examine the last two studies of the so-called "dot-plots" by the members of the Federal Reserve's Open Market Committee. In each case the highest rate called for was 4% or even higher in the furthest out period. If some members believe that such a rate will be called for because of economic stresses within the next two years, why not be preemptive now?

By immediately raising interest rates we will probably reduce the intensity of the bad loans being made. We will also make saving attractive to those who need to begin a life long activity of building their capital for emergencies and retirement. A careful observer should note that, as usual, the Fed is late to changes in the market place. I believe one should look at Main Street as well as Wall Street. The average interest rate being offered by a large number of banks has risen from its lowest level of 25 basis points to 30 basis points. This demonstrates to me that local banks want to attract more deposits so they can make money on more loans.

While I believe both our monetary authorities and our courts should be guided by what is appropriate for this country, there are lessons that can be useful in assessing our own problems. Some of the observers of the surge of refugees streaming into Europe are suggesting that a significant number of these people are migrants for economic reasons not for political reasons. Applying that distinction when we look at a substantial number of immigrants to the United States (including some of our original founders) we learn they came to the US for economic opportunity reasons. If we want to see growing economic opportunities in the United States we should be constructing opportunities to save and to invest, activities that the current level of interest rates do not encourage.

Come what may, investment managers will find reasons to complain and keep their investments in equity mutual funds and stocks including those in the financial services arena. Many mutual fund and other portfolios that I examine have as their largest investment sector various financial services stocks. 

Question of the week: Next week I am contemplating addressing value investing. Please let me know what aspects of value investing you would like me to address.

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