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.

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A. Michael Lipper, C.F.A.,
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