Sunday, October 25, 2015

Announcement + Misplaced Focus Hurts Results

Announcement for Timespan L Portfolios®

I am very pleased to announce that our affiliate, Whitridge LLC has been awarded Registration No. 4,837,713 by the United States Patent and Trademark Office for the designation of Timespan L Portfolios®.  Timespan L Portfolios is a unique strategy designed to address the multi-faceted needs of significant investors within an idea of creating a structure that can be used for many decades into the future.

Information for competent investment advisors and other financial institutions wishing license information for this service is available.

For more information, email me at:

Misplaced Focus Hurts Results


In sports, wars, politics, and investments why do smarter opponents with more resources lose to more agile competitors with less resources? In selecting funds for long-term investing we make a practice to analyze the successful and unsuccessful managers. History is replete with examples of seemingly smarter, bigger forces with substantially more resources losing critical battles. Often the losers believe in their own superiority and that they will produce a never-ending series of victories. Napoleon said that "God is on the side of the bigger battalions," then went on to be defeated at his Waterloo by smaller forces he had beaten previously.  In addition Napoleon did not use his battle trained reserves well. Today we are seeing the rise of "populist" political leaders globally, either on the Right, the Left or even by established political parties and their leaders. This phenomenon is little different than the fall of various “Investment Kings” to different managers who are practicing the game dissimilarly and often much more narrowly.

One of the first clues that a manager will not succeed long-term is the amount of space he/she devotes to the economy and current politics in views and writings. Few future winners start their investment pitch with a discussion of GDP (Gross Domestic Product). I agree with the current number two in China who suggested some time ago he did not trust the numbers produced by his government staff as they were “man made,” which suggested that they could be either inaccurate or corrupt for political purposes. He preferred to rely on industry statistics produced in the private sector; e.g., electricity, freight car loadings, and bank loans (to private companies and individuals) .

The error of focusing initially on the economy is that it starts the thinking process of viewing things from the top down. This is a useful exercise for those that use, or perhaps abuse, the media to pontificate to unsuspecting audiences. It also is a prepaid mechanism when something doesn't work, (“The economy or the government did not do what was expected.”)

Many years ago I was exposed to a much more successful way of thinking which is bottoms up. Often, after a busy day of visiting many portfolio managers in his city, I had a private dinner with at that time was the leader of the single most successful fund group in the world. I thought our dinner table conversation would be about broad fund industry topics and politics which was dispatched quickly. What really turned him on was analysis of individual stocks that weren't well followed. The discussion often focused on what was the critical analytical approach to various companies and most importantly, about the relative strengths and weaknesses of different managers. Occasionally I would come up with new thoughts for him. With only some success I tried to apply this approach with him on some of his various leading funds. Ultimately these insights were of great use to me and eventually my investment clients on the likelihood of the continuation of various "hot hands" who were doing extraordinarily well exploiting various inefficiencies in the market. I recognized many of these aspects for I had travelled with a number of his analysts and portfolio managers.

Today when either an associate or I visits funds we zero in on bottoms up details from portfolio managers and spend as little time as possible following top down chatter. The same approach leads to more fruitful conversations with CEOs of public and private companies. Apply the same approach to how you live your life. The details of what you have to do today is much more important than the top down topics called upon in today's media.

Bottoms Up Factoids

The job of an analyst is to review an enormous amount of bottom up type of details that when combined with previous knowledge or beliefs lead to areas of future analysis (or for the moment to be added to the discard pile). The following are from my readings of this week.

1. Emerging Markets Local Currency Debt funds was far and away the best performing fund classification for the month to Thursday, +4.36% to bring its year to date loss to ­-9.70%. This class of funds that earlier in the year was being heavily pushed as an extra income provider was quite volatile and produced equity type performance as distinct from acting like a high yield bond fund.

2. According to The Economist most equity markets were strong, 37 out of 43 showed gains with half equaling or performing better than our Dow Jones Industrial Average. However, only 15 were positive for the year. This suggests that with selectivity one can beat US results. In our Timespan L Portfolios® there can be roles for international funds and stocks in both the Endowment and Legacy Portfolios.

3. For those who believe in sector rotation, using FactSet data, three out of ten S&P 500 sectors, Health Care, Industrials, and Consumer Staples are nine years from their prior peaks. If one combines a contrarian streak and some bottoms up knowledge of removing capacity from production, there could be surprisingly selective good performance within the next year. As this is more of a cyclical play as far as the Timespan L Portfolios is concerned, the most logical space for these kinds of investments would be in the Replenishment Portfolio.

4.  An article by Matt Ridley in The Wall Street Journal proclaimed, "Most technological break-throughs come from technologists tinkering, not from researchers chasing hypotheses." I believe a well managed research program that can recognize commercial opportunities is worthwhile in companies that have large enough operating earnings to afford long-term research and development. However, I am much more interested in companies that have a  history of sound development. The Endowment Portfolio should have some representation of well managed research and development companies. The Legacy portfolio could hold the "wild card" type of investment.

In reply to Questions of the Week

I read and think about your questions and replies. This week is in part an answer to DB and his thoughts on GDP. He will get a more complete reply directly.

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 

Copyright © 2008 - 2015
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Sunday, October 18, 2015

To Win, Escape the Crowd


Big wins are most often surprises. Typically they arise from lonely corners of the investment world. Having known a number of the portfolio managers that have produced surprisingly good investment performances, I have detected a pattern. First, while intelligent, the winners are not measurably smarter than their competitors. Second, they seek information in the nooks and crannies of the world. They look broader and deeper than most. Third, they derive confidence from the realization that few, if any, share their views of what they have discovered

The interesting question is why do the winners succeed and equally bright, if not brighter, managers with larger staffs of competent analysts and in many cases greater commission power do not? I believe I have some clues to this result, and further I have some thoughts about current potential areas of future success.

The Enemy of Wise Selections are Labels

One of the early academic screens for determining intelligence in children is a test that shows a number of objects and the youngster is asked which of these things are like the others. We identify intelligence with the ability to group like things together. Later on we learn to put labels on groups having similarities. Too often children grow up seeing the world as a collection of labels. They become programmed to make judgments by collecting enough from different labeled characteristics to give them a winner. 

Our educational system combined with our fears of making "stupid" (i.e., unpopular) decisions forces people into what quantitative analysts call central tendencies. Thus, people assemble their decision matrix based on labels with investment names like growth, value, quality, size, etc. Luckily for the US Marines, when often facing massive forces on the other side, the opposition leadership relies on labels and equates two units of equal size but of different experience and expertise to be equal. Of the many things we learn as Marine Corps officers are the characteristics of the individual Marine that will govern the likelihood of success.  The same philosophy works in the investment world.

As a junior securities analyst, for a period of time I was assigned to cover the domestic steel industry. At that time they all used the same production process with the same raw materials. When looking at the majors, many in the financial community chose the steel stock that had the lowest price/earnings ratio. I remember coming to my seniors and suggesting that two of the stocks were worth more than the average P/E in the group, because one was more integrated with its own natural resources and the other had mills much closer to its big customers and thus would have lower transportation costs. (Years later I was happy to note that these two were the last to go through major reorganizations.) The important analytical lesson was the willingness to dissect the labeled specimens.

Looking For Needles in a Haystack

Each weekend culminates my week's effort to find investment value. The first screen I use is to determine where the bulk of the investment thinking is on any given subject. The second is to scan widely various statistical arrays to find elements of change that do not appear to be  believed by "The Crowd."

Barron’s  “Big Money Poll”

This week Barron's published an annual article that reviewed results of an extensive list of financial and economic questions answered by a large number of substantial institutional investors. As part of my two step approach for uncovering winning investments I paid particular attention to views shared by 70% of the respondents to this "Big Money Poll." As regular subscribers to these posts perhaps realize, I tend to examine contrary points of view. Certainly not all contrary views will prove to be correct, but when they do turn out to be right the magnitude of future price moves is considerably larger than when the more popular view succeeds.

With that caveat in mind, please look at the following readings from the poll:

  • In terms of the equity market 76% of their clients are neutral. (53% of the managers are bullish.)
  • 75% of the managers do not foresee a 10% or greater decline.
  • Three stocks are expected to rise:  Alphabet 87%, Apple 77%* and Berkshire Hathaway*. 
  • 72% think that IBM will decline.
  • 73% saw no deflation.
* Stocks owned personally or in my managed private financial services fund.
    Three Insights from Mutual Fund Data

    Because of my background and my management responsibilities I also look carefully at mutual fund data to see if any of the data flow is predictive or at least coincident with changes in investment attitudes. Three items worth commenting are shown below:

    1.  While mutual fund investors redeemed $2.2 Billion net from equity funds, $4.7 Billion went into equity Exchange Traded Funds (ETFs). As most of the dollars that go into ETFs are believed to be from institutional type investors, this reinforces the Big Poll finding that the managers are bullish. (Perhaps these largely index fund purchases are being made to hedge individual stock short positions.) I believe the outflows from traditional mutual funds are not a sign of dissatisfaction, but the absence of offsetting fund purchases. The sellers are often in the process of changing their assets around to meet lifestyle needs. The absence of retail sales volume  buttresses this argument.

    2.  Secondly, the average Precious Metals fund gained +8.33% for the week ending Thursday. This gain, driven by the gold price, brings the year to date loss to -7.63%. To me, this gain is indicating that buyers are viewing precious metals in more of a monetary sense than as an inflation hedge. An index of funds investing in Base Metals is off much more, -12.80% which suggests that investors are not currently expecting rising inflations.

    3.  The third item is a comment by an investment manager at Prudential that the widened spread on "junk bonds" versus similar maturity treasuries is getting interesting. I am intrigued with the fact that the average General US Treasury fund over the twelve months is up +5.59% and the average High Yield Mutual Bond fund is off -4.40%. A reversal of performance would be quite a surprise.

    Finally, I scan lots of material and this week found two other items that are worth thinking about. The first is that small/mid sized businesses make the point that their second biggest problem is finding qualified labor. The first is taxes. The other item of interest is a statement in a US government publication that the presence of high frequency traders in the treasury market may be giving the illusion of liquidity.

    Bottom Line

    If you want to make winning investments, look deeper where others don't, and avoid reliance on labels.

    Question of the Week: Do you have some examples of winning investments that you would like to share?

    Did you miss my blog last week?  Click here to read.

    Comment or email me a question to

    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 

    Copyright © 2008 - 2015
    A. Michael Lipper, C.F.A.,
    All Rights Reserved.
    Contact author for limited redistribution permission.

    Sunday, October 11, 2015

    Was the first week of October the Bull Market?


    When everything was falling in price in August, I suggested that one should start to place orders to buy some of the "falling knives" which had the biggest declines, around -20%. These items included commodities and commodity related investments as well as TIPS. My view was that off a bottom there is often roughly a ten percent "relief rally" and this was the easiest money to earn in a new bull market.

    In the period from October 1 - 8 , 2015, the following six out of 96 equity oriented mutual fund classifications' investment objectives produced double digit returns:

    Natural Resource funds                   
    + 14.34%
    Precious Metals funds                     
    +  13.58
    Global Natural Resources funds      
    +  13.32
    Equity Leverage funds                      
    +  12.04
    Energy MLP funds                             
    +  11.18 
    Basic Materials funds                         
    +  10.76

    As we know the price of crude oil rose 9% during the week, but there was more to these gains than the oil price pop. While there was undoubtedly a rush to cover various short positions, there were some participants that were sensing the potential for future inflation. More will be needed for the investors in these funds to break even for the year. Even after the double digit gains for the week, five out of the six groups shown above were still down double digits. (Equity Leverage funds were down -9.72% for the year to date.)

    Smaller gains were made in the week by 93 out of 96 investment objectives tracked by my old firm now part of ThomsonReuters. Only few of these were able to show gains for the year. These tended to be large growth funds often with meaningful positions in the much politically derided Health/Biotech group. At least Moody's is concerned that we have not seen the bottom of oil prices, they have lowered the credit ratings on five US regional banks which have substantial energy loans outstanding. Being a contrarian I would watch these for an entry point, as I am convinced that in time the underlying collateral will be good on balance.

    Even though we are not traders (as we invest for lengthy periods) we need to be aware of others in the marketplace. The risk for the trader is that the double digit that some funds enjoyed fulfilled "the easy 10%" pop expected after the sharpness of the summer declines. Now the trading question becomes whether the August lows will need to be tested in order to put in the low for the year, if we are going to have a meaningful recovery before the US presidential election year.

    We Don't Care

    As long-term investors we are not very excited by this year's performance unless it has significance in terms of the implications of meeting our clients’ longer term payments needs of their distant beneficiaries. Why am I so relaxed at the moment? First, I believe last week's move was in recognition of some changing attitudes beyond the "oil patch." As is often is the case, I look to the fixed income world for guidance. Domestically, taxable bond fund classifications showed gains, albeit small. These for the most part were funds that trafficked in lower credit rated paper. For people to bid these up they could not be very concerned about a meaningful recession. The other message that I perceived was that the poorly performing TIPS funds gained while other US Government Bond funds showed minor losses.

    Foreign Signals

    Emerging Market Bond funds, in local currencies, produced the best returns among fixed income types by a wide margin last week, +4.44%; in contrast with Emerging Markets Debt hard currency issues +1.84%. Bond funds which invested in more developed countries gained +1.3%.  My interpretation of these results is, at least for the week, that market participants were suggesting the meteoritic rise in the dollar was at least peaking.


    The investing public that is glued to the media is fearful of triple digit price changes in the Dow Jones Industrial Average. Using the somewhat less volatile S&P 500 since 1928 according to Factset/StockCharts, the days with a 1% (Up or Down) occurs every four or five days. As a matter of fact I set my computer alerts to only inform me when prices move at least 2% and don't consider action below 3-5%. The New York  Federal Reserve Bank is somewhat addressing these concerns in the corporate bond market that has had bank trading capital reduced by 75%. They maintain that there is ample liquidity to absorb sudden shifts in prices. (Interestingly enough, they did not address what in theory is the deepest fixed income market in the world, the market for US Treasuries. Because of rapid global trading of these instruments through computer interfaces by non-bank dealers and investors, I am worried. During hectic periods of unwinding "carry trades" when treasuries are collateral for borrowings in more exotic paper, I am concerned by the chance for some indigestion.) 

    Question of the Week: How are you addressing this market, did this week mean anything?

    Did you miss my blog last week?  Click here to read.

    Comment or email me a question to

    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 

    Copyright © 2008 - 2015
    A. Michael Lipper, C.F.A.,
    All Rights Reserved.
    Contact author for limited redistribution permission.

    Sunday, October 4, 2015

    “Fox” Forecasting vs.
    Data Dependent Hedgehog


    The great and late Yogi Berra, said "You can observe a lot by just by watching." I will attempt to see the future by observing the results of the recently concluded third quarter of 2015. My attempt will be as a “fox” forecaster rather than a “hedgehog,” as described in a new book, The Art & Science of Prediction by Philip Tetlock and Dan Gardner. They divide predictors into two animal groups the hedgehogs who focus only on a very few variables in order to hedge future results and the foxes who recognize that the future is too complex for simple forecasts. I am with the second group.

    Hedgehog Capsules

    The third quarter saw almost every asset class decline in price except US
    Treasuries. The two largest economies in the world showed signs of slowdowns, albeit China from a much higher growth rate than the US. The manipulations of the leading central banks continued. Those that were data dependent extrapolators did some selling and less buying for their long-term obligations.

    Foxes Look for Changes

    As dependable as the laws of gravity, I look at various declines as setting up a change in direction. As a young analyst I got frustrated at market bottoms because they very rarely got to be real cheap or almost steal price levels for long. What I neglected to put into my mathematical projections is that other potential buyers were also waiting for a good entry or re-entry price. These buyers were less patient than I was because they had fiduciary responsibilities and had a lot more money that needed to be deployed. They bought the cheap stock at good prices and didn't wait for my bargain basement prices. This experience taught me to begin buying when prices get into the fair level in view of their long-term future value. This is not to say that I am unworried about a major rip in the market structure that could delay the turnaround for a long time, and there is a potential one today that will be identified later.

    How Should Analysts Work?

    All too often what passes for analysis is a description, often detailed, of what already exists. Analysts should focus their attention on the future risks and opportunities. In other words, they should recognize that they are part of the tribe of foxes as predictors. To be successful more attention should be paid to the forks in the road as turning points and far less on trends and the determination of central values.

    My Analytical Applications

    I start with the absolute certainty that no narrowly defined trend will continue in its present configuration. Thus, I look at extreme performances as the most likely trend reversals at some point along their route. Guessing that there are strong odds on a trend reversal is relatively easy. The timing of the turning points is more difficult. It may be sufficient to recognize early that a turn has already happened or is in process. One of the great advantages of being a chart reader is the emotional ability to accept the turn without fully understanding the causes for the turn. Often the people and the conditions that cause the change in direction will be learned later, long after the easy early money has been made.

    Currently I am focusing on the worst performing sectors of various markets. I recognize that not all of the poor performers will turn to be good performers and not at the same time. Some of the bad performance is due to poorly executed or too expensive strategies. Nevertheless, when there is massive under-performance by activities that were formerly viewed to be well managed, the instincts of the fox in me want to explore further. After assuring myself that what I am seeing is cyclical behavior, as a good US Marine Corps officer I start to prepare my plan of attack.

    First I am focusing on investments that have declined around 20% compared with general declines of 5 to 10% through the end of the third quarter. In a gross over-simplification most of these formerly very successful investments have for many years reacted to falling commodity prices. In most cases (in an age old pattern of increasing supply too far in advance of demand) the clearing of the demand level was achieved by lower prices. Quite possibly prices would
    have eventually declined without the slowdown of growth in China and the widespread application of lower cost extraction techniques for oil and particularly gas. Combining these factors with the two largest economies becoming less manufacturing and more services-oriented, the general price levels’ secular rise fell off their trend line to reported slower augmentation.

    Having been exposed to past industrial cycles, I expect the excess supply will be eventually absorbed or removed from near-term production. Further, while population growth is slowing in many countries, the existing populations are increasingly exposed to more expensive lifestyles. Thus, I expect we will see reported inflation rise. As a matter of fact, I believe the cost of living for the readers of this blog and many of those who they are responsible for are already
    experiencing upward effective price changes, above the vaunted 2% level.

    How Do My Portfolios Represent These Concepts?

    I have a number of portfolios for different purposes and timespans. (At your leisure I would be pleased to discuss the application of the Timespan L PortfoliosTM to your specific needs.) Most of my timespan oriented investments are long-term and some very long-term. The guiding principles of my choices are to avoid substantial long-term losses with major positions and at the same time produce a more than acceptable return. This translates into some Canadian and Australian investments. I wish to stay within my circle of
    competence as is often suggested by Charlie Munger and Warren Buffett. Thus, I invest in each of these commodity based currencies in mutual fund management companies and closed-end funds. I also have a position in the largest commodity fund management and selling organization. Further, in believing in the continuing treachery of central banks to savers, we have a significant portion invested in global fund management organizations as they are avenues for people all over the world to partially escape the debasement of their currencies. For those that must have some of their money in fixed income, we have used TIPS (Treasury Inflation Protected Securities) and for clients who can accept some volatility, income loan participation funds.

    Changes in the law may improve the quality of these loans if the banks must keep a small portion of the loans on their balance sheet.

    What Should You Do?

    My recommendation would be to begin a buy program of investing in the prospect of a long-term increase in inflation either through a commodity, direct or related investments, and in the worst performing US government issues of the last year, TIPS. I would slowly average into these positions by adding to them 1% a month or a quarter. When they move up in price by at least 9%, you may want to consider taking a full normal position.

    However, There is a Big Disruption Risk

    When there is a large scale disruption in the marketplace all securities and investment plans are impacted, as a rapidly falling level of trading capital needs to be quickly redistributed from strong holdings to meet pressing repayment demands.

    The history of monetary demand management by the Federal Reserve is that market bubbles are reduced by opening new arenas for speculation. When we were facing the collapse of wide-scale speculations in "Dot-Coms" the Fed and the Federal Government made highly leveraged, poor credit quality attractive to new home owners and institutional investors. The result was the "sub-prime" collapse. As this was getting painfully unwound a new and bigger bubble was created in using US Treasuries on leverage for collateral purposes in “carry trades.” Because the credit quality of the Treasuries were unquestioned by all except Standard & Poor's, one could borrow heavily against them. The borrowed capital was then used to buy higher rate paper, often emerging market debt. These countries were borrowing US dollars at lower interest rates than what was available in their more knowledgeable local markets. Many of these borrowers were reliant on commodity prices remaining firm which currently is not the case.

    At the very same time with the advance of high computational and communication speed, high frequency traders were attracted to the market. These inter-market dealers with their use of algorithms already represent, I am told, over half of the trades in the market. Many believe that they are abusing the market dynamic in Treasuries as they have in other markets. A number of sound, well known hedge funds have complained about these activities in terms of stock prices not representing real demand levels. My guess is that
    something will be done about these specific abuses. My further guess is that the regulatory authorities will be reluctant to further constrict the Treasury market when the US government has to continually borrow money. Eventually the regulators will be forced to curtail these activities, but that is only likely to happen after a major disruption.

    With Possible Disruption Ahead

    Invest cautiously. When and if the disruption does occur, treat it as a periodic change in market structure unrelated to the underlying economy and as a buying opportunity.

    Question of the Week: Are you preparing to change your style of investing?
    Did you miss my blog last week? Click here to read.

    Comment or email me a question to .

    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 

    Copyright © 2008 - 2015
    A. Michael Lipper, C.F.A.,
    All Rights Reserved.
    Contact author for limited redistribution permission.