The almost exclusive focus of many US citizens and those that have investments or trade with the US is on the results of the Presidential election. Historically this is foolish. Going back through recorded history of elections from around the world, we have learned that even if they want to, politicians do not deliver on what they say. In this particular election this view will be most likely sustained. I am much more focused on who will be the ranking minority member of important Senate committees. That individual's political skills and priorities will give us the most useful clues as to what will pass through the House-Senate reconciliation committees when the two houses pass different pieces of legislation.
The second focus should be on the various strengths of the "K Street" lobbyists on both legislation and executive actions. All of these considerations are short-term and will in all likelihood will be overcome by currently unseen or at least unpredicted events.
With so much focus being paid to the very immediate, as a contrarian I look to the longer term implications of this and the various European elections that will occur within 12-15 months in the future.
I don't know who the winners will be despite my personal opinions on who should win. However, it is easier to identify the most likely losers. As an old broadcasting stock analyst in years past, I could count on a surge of political spending on broadcast and print media advertisements during election season. These buys helped the cyclical earnings pictures of the media companies. It also set the need for political organizations to raise substantial amounts of money to pay for these ads. In handicapping an election the candidate that raised the most money would be the betting favorite to win. The election in 2016 is different. One side clearly raised the most money, but as always big money comes with ties. Either because of these ties or other reasons the big contributors may not have bought the election. At any rate they had to pay much more than candidates who used virtually free media exposure who are getting a much smaller cost for exposure and getting a higher return on their investments. The longer term implications of this condition is that the broadcasters and producers of print publications are going to be less valuable in the future. Ultimately the real losers from this switch to sound bites over the internet may well be the voters. There will be a dearth of long form, well researched, unbiased journalism. Unfortunately as of the moment not many people will pay for it. (I hope I am wrong as I personally own a fund that owns media stocks. Luckily they have substantial investments in domestic and international cable and internet investments.)
An Investment Research Parallel
Whenever I speak with CEOs of public companies or fund managers, the older ones complain as to the quality of research being produced. I believe it is the result of a similar economic pattern that will be applied to many media stocks. The market will no longer pay for the time and energy of in depth research. One of my great learning experiences was commuting with Arnold Ganz, my brother's research partner. He regularly produced forty page research reports that were of the quality of legal briefs. The analyses spent a great amount of time on the motivations of managements as they chose different approaches to the future. There were a handful of pure research firms that did nothing but produce high quality research. None of these independent firms exist today, but I believe there are a few individual analysts with a small market audience working by themselves or very small groups.
Two Statistically Significant Events Happened This Week
After 108 years the Chicago Cubs won a thrilling World Series. The Cubs win is significant for long-term investors for two reasons. The first is the unfortunate need for patience along with continued efforts to improve. As an entrepreneur, investment manager, and investor I have experienced various plans for the future that have not worked out. For example in the third quarter many publicly traded fund management companies reported earnings declined greater than their revenue declines. Instead of operating leverage working for them as usual it worked against them. They elected to keep on spending for talented people and technology rather than cutting back. These managements were practicing what I learned in the US Marines. I was told by a senior officer we never get judged by the success of plan A, because we never get to complete it. We get judged by plans B through Z or some combination of those. The lesson was in combat one needs to be able to adopt to change conditions and execute the best one can. This philosophy rests on intelligent patience of looking for the new opportunities as they evolve. Unfortunately when we teach about dealing with life's investment problems we don't teach patience. The success of the Cubs was based on the patience of their fans, but also adopting a strategy that another successful team previously used in their winning season.
The second political and investment lesson from their victory was that the weight of money doesn't always win. Growing up in New York City it was easy to cheer for the New York Yankees, particularly after the New York Giants were suckered out to move to San Francisco by the transplanting of the Dodgers to Los Angeles. After all, the Yankees had the biggest stadium, largest TV audience and earned the most money. That worked well until some large financial institutions determined that they did not manage their farm teams well enough to produce new superior talent. This year's World Series was between the Chicago Cubs and the Cleveland Indians. Neither team benefited from the bi-coastal television audiences available to the Mets, Dodgers and the Yankees.
Often in the investment world there is the belief that the largest players can get better results because of their size and presumed talent. This is often called the “weight of money argument.” I first came into contact with this concept when I was leading an around the world mining focused analyst trip for the New York Society of Security Analysts. One night on the trip I got a call from the senior international investment officer of a large US investment group who was inquiring as to what were my trip mates’ reactions to our visits that day with some Australian mining companies in which he held big positions. Considering how deeply his firm did their research, I said I could not imagine that we learned anything that he did not know. That was not his reason for asking me in the middle of the night. He was interested in my guess as to whether the analysts would be likely to recommend the purchase of the stocks in which he was interested. In effect, he was attempting to gauge the future value of those shares based on the weight of money. This approach is not different than those who today are betting on which political campaign will win on the basis of the amount of money they have to expend. With the Cubs’ win this year it may not be an effective strategy to bet on the bigger payrolls of the other teams.
The second statistically noteworthy event of the week was the ninth consecutive day of the S&P500 decline. This has not happened since December of 1980 or before many of today's money managers were in the business. While the aggregate decline over the period was only
-3.1%, many of today's more trading-oriented managers are used to being able to trade successfully against a trend. In the commodities world this is called trend following and trading. The importance of this event is not its direct impact, for on October 19th, 1987, the market declined -20.47% and over a two day period in 1929, -22.50%, but rather a signal that we have entered into a different type of market than many of today's investment managers and investors are used to. They may have to exercise some patience as they search in their normal playbook for plans B-Z and adopt to changing conditions. This week could be interesting for them.
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A. Michael Lipper, C.F.A.,
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All Rights Reserved.
Contact author for limited redistribution permission.