Introduction
For
equity investors and many workers, things are going well. While the upturn is
relatively new it is pushing out fears of declines for many. Investing is an
art form that pulsates through various themes and it would be wise to recognize
past patterns of their ups and downs. Some look to history for specific fact
bases to avoid. A more useful review of the past is identifying
emotional/psychological patterns that repeat themselves throughout history.
One of
the advantages of being steeped in the history of mutual funds is one can see
repeated patterns which in the past have acted as beacons of troubled waters.
These beacons identify past problems without promising avoidance of future
ones. In my ongoing study of mutual funds and similar vehicles I am seeing four
potential subsets of problems that current investors should be tracking in
their investment thinking. Non mutual fund investors often have parallel
concerns.
1. High Growth Investing
In
most stock markets most of the time there is a subset of traded securities that
is leading the market higher. Often these are either reporting or expected to
report higher earnings. Their products and services either at present or in the
future have little in the way of completion. Some of their perceived advantages
may be temporary. These high growth performers enjoy stock price momentum. In
the current market place these would be the FAANG + Baidu & Tencent. These leaders have driven the performance of
a significant number of mutual funds and other managers. Their upward momentum
can reverse quickly due to any real or perceived changes in their advantages.
2.
High Quality Growers
A coterie
of high performing funds was divided into two groups of strongly performing
funds and stocks, (1) high growth, and (2) Long-Term quality. Coming out of the
recovery phase of the equity stock market decline, ending in March of 2009 and
becoming more pronounced after 2015, the perceived to be high future growers
gained momentum. A second group of stocks rose in prices but at a slower rate
of appreciation. This second group was often developing a broader product line
with a higher service component than some of their higher earnings competitors.
An interesting question is when the high earnings stocks and funds enter a
decline will the companies that have a better balanced business portfolio be
treated better?
3. Agent Career Risk
One of
the emotional realities of employing an Investment Advisor is that often in the
mind of the capital owner is the distinction as to who is responsible for the
investment gains and losses achieved. Emotionally the gains are in part
attributed to the wisdom of the owner and losses are largely consigned to the
agent/investment advisor.
As of
the time of decision making whether an agent is to be retained or not there are
two very different quandaries. The first is the past record of the account
including the various alternatives that could have been used plus the cost and
bother of execution. In addition, one needs to add into the mix the personality
of the capital owner, including tax attitudes. Another important consideration
what should be the measuring rod for comparisons and what is the relevant time
period. The second set of questions starts with a belief as to the nature of
the future investment period and the likely differences from the recently
completed period.
4. Capital Concussion
The
future is always difficult to predict. This is particularly true today. We have
entered the first of what I suspect will be a series of changes in tax laws,
regulations, and court cases as well as state and local changes. Further these
changes will impact both individual needs and desires of present and future
beneficiaries. These evolving changes in total may dramatically alter not only
each of its investments, but also the structure of the investment markets.
__________
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Michael Lipper, CFA
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