Sunday, August 7, 2016

Bet on Experience, the Future, or Both?


Securities sales people tell me that their customers think the current market phase will continue into the indefinite future. This could well be because the peddlers are conscious of the legal and financial risk to them and their firms of failed predictions of the future. (Media pundits and politicians are not similarly constrained.) To be fair it is easier to think about the future as an easy extrapolation of the present as this is how most of our brains are wired much of the time. The neuroeconomists at Caltech suggest that many brain functions are essentially memory banks of experiences of the individual and/or accepted others. 

The accepted others that inhabit our brains are most often those that are considered experts by some. Often these "experts" are just recapturing past experiences rather than successfully addressing the future. For example, the venerable magazine The Economist has opinions on a wide breadth of topics, usually economic or political in nature. In the July 30th edition it extended its "expertise" to the probable winners of the PGA Championship which was held at our local golf club Baltusrol. The magazine listed the predictions of the top ten finishers plus two others. Sadly for those who followed this "expert" opinion, only six made it into the top 15 or a hit ratio of 40% which is a little higher than winning favorites at most racetracks. Most importantly the magazine never mentioned the ultimate winner, Jimmy Walker. As an "expert" predictor it failed just as it did on the outcome of the vote on Brexit. But in each case it could have questioned its own predictions if it was more conscious as to what was happening in its field of study.

In the world of professional golf tournaments in the last year, Jimmy Walker was the fourth first-time winner of a major championship. In terms of Brexit, The Economist missed the growing disenchantment of large elements of the population with their central government.

I am going to make a gamble and share with you a bet on the future which is not currently popular and is against the views of a firm that I have the highest regards for and is an investment in the financial services fund that I manage. Goldman Sachs' economic research group has recently published a sixteen page report on “The Outlook for Post-Election Fiscal Policy.” It essentially suggests that little will change after the election and the new US Congress is seated.

Based on the last 8 or more years, this prediction is highly reasonable. Besides being a racetrack trained contrarian I try to be a good observer of our times. As with the Brexit vote and the winner of the PGA, I am wondering whether 2016 is a year of change, perhaps as dramatic as 1848.

Structuring for both Experience and Change

I believe the job of the portfolio architect is to position the long-term portfolio to produce reasonable returns relative to the risk of meaningful capital loss whatever the environment the portfolio vessel is traveling. I have developed a portfolio structure that is time sensitive to both experienced extrapolation and significant future changes. The TIMESPAN L Portfolios® can be filled with separate accounts, hedge funds, private equity/venture capital accounts, and real assets, or in our case, mutual funds.

Four Segments of TIMESPAN L Portfolios®

Lipper Advisory is working on one account that contains four segments which could be separate portfolios. In this case, the design underway calls for approximately 10% of the assets to be consumed over the next two years to meet grants and expenses. As this first pool is exhausted it will be replenished from the next portfolio of about 49%, from a portfolio that is generally mainstream and presumes that extrapolation of present trends work. This commitment is somewhat high in the belief that over the next five years (the expected duration of this portion) there will be a meaningful down market and at the same time emergency grants may be needed by some of the grantees. A greater portion of this portfolio may be in value-oriented securities and funds including Europeans selling at significant discounts to US stock prices. 

The third portion is to be focused on investments that will come into fruition in the future with a planned duration of at least the expected terms of the CEO and the investment committee. In this case approximately 31% of the assets would be so devoted. Most of the securities and funds selected would be headquartered in some 25 or so vital cities that have both a significant grounding in STEM education and a discipline of savings. Currently in addition to the US there is more focus in Asia, but awareness of selected innovative work is also being done in Europe and selectively in Africa and Latin America as well as Canada.

The final portion is a 10% commitment to producing capital including income in the distant future to give the next generation of leadership and grantees the wherewithal to continue the mission.

This structure should be modified to meet each client's specific needs in terms of ratio of commitments, asset allocation, manager selection and other needs. Over time modifications should be expected as conditions change.


Last week’s blog mentioned the beginning of my Apple investment, which occurred in the 1970’s not the 1960’s.

Question of the Year: Will 2016 - 2017 be a period of dramatic change, and what are you prepared to do about it?   
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A. Michael Lipper, C.F.A.,
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