Introduction
Investors do not understand the current
stock markets. Globally most stock markets are rising and most have reported
record highs in spite of political instability. The driving forces are both
normal and novel. In many economies we are experiencing a normal cyclical
recovery as both confidence is rising and memories of past crises are receding. What is more novel is the exponential
growth in the use of technology to address many problems.
One of the advantages of being part of
this blog community is that we have a large number of thoughtful members. One
of the most responsive members has called to my attention a Financial
Times article by Jim McCaughan, the CEO of Principal Group Investors
with the intriguing title “Investors must get to grips with impact of
technology.” While contemplating this article I examined a report on the
S&P and the Dow Jones Sharia indices. These various stock market measures
show that in many of the emerging markets and frontier markets that cater to
those who wish to follow the Sharia laws for investing, that information
technology is the best performing segment. This is appropriate because the growth of technology is accelerating
economic growth. When illiterate farmers can price quotes and weather forecasts
daily on their cell phones, they will manage their own economics better. Their
families will also benefit when they can react with professional medical and
nutritional experts. Perhaps these advantages will become the most effective
birth control devices the developing world has ever seen.
In my continuing search for understanding
why so many very intelligent people continually make more economic and perhaps
political decisions that prove to be unfortunate, I suspect that they are
using faulty memories of incomplete and in some cases faulty data. It almost
seems the more PhDs and other credentialed “experts” that analyze a problem
the odds of finding the “Aha moment” decreases.
Measuring The Impact of Technology
I suspect that no class of financial
institutions has more learned PhDs than the central banks, particularly the
Federal Reserve System. Yet as a mass they have been surprisingly unsuccessful
in predicting inflation as it drives their policies. For example they rely on
payroll data and other information from the IRS. There is little attempt to
capture unreported income. In many countries the “informal economy” is of
sufficient size to question the aggregate, growth, and relative ranking in
global tables.
Perhaps the biggest failure to capture the
economic reality is in the measurement of consumer and commercial prices. On
the surface it is reasonable to assume that technology is deflationary
otherwise it wouldn’t be bought. The deflation is not just in reported prices,
but more significantly the added value that brought through technology. For
instance how much are we better off in general with cell phones than landlines?
What is the net benefit of shorter transportation time due to speed and safety
of mass transit? These are not easy calculations but suggest that the real
economy has been growing faster than realized due to the deflationary
technological input. Is this the reason that no developed country has hit the
2% desired inflation target identified by the New Zealand central bank?
On the other hand we should also be measuring and understanding the disruption that technology has caused in terms
of unemployment and wasted capital resources. Hopefully, we will see more
re-engineering and rebirth of former sites. For example some shopping malls are
becoming education, health, and service providers. Once services providers can
demonstrate value added through sales and retention skills, these wages will
move back to old industrial levels. They will accomplish this through smart
applications with personal choices through the use of technology.
What Does The Future Hold for
Investors? Avoid Reliance on Numbers
First, the question is flawed. The biggest
single mistake most individual and institutional investors make is to think of
the future as a singular event. One of the reasons we have evolved our TIMESPAN
L Portfolios® is to force investors to allocate their
resources to different timespans based on their own needs and proclivities. The
allocation of capital and intellectual resources is the single most effective method
to reach most goals.
Second, is how to handle the various types
of price declines (seasonal, cyclical, secular, normal, abnormal). As we can’t
avoid them, we need to set some policy goals as to which we “grin and bear it,”
make partial adjustments, radical change, or more appropriately different
actions for different timespan portfolios and/or different levels of fiduciary
and commercial responsibilities.
Third, questioning to perceived wisdom
based on unadjusted history. For instance, searching for persistence. Looking
backwards for various periods of time which are heavily influenced by beginning
and ending conditions there appears simplistically little persistence
particularly in top quartile performance rankings. Most individual and
institutional investors are goal oriented not ranking oriented. History
suggests that the main value to an investor is the timing of the initial
investment as well as flows into and out of the account. By definition the
biggest gains come from buying into a lowly regarded price and selling into
excessive enthusiastic prices. Persistence is rarely found in humans, sports
teams, and political leaders. Allow me to demonstrate with the use of fund
performance statistics from my former firm, Lipper, Inc., now part of Thomson
Reuters.
For the five years ending Jan 18th, 2018
the average S&P 500 Index fund had a compound growth rate of 15.36%. Not
only is this way above a historical average it is better than all other mutual
fund investment objectives except five, including Large-Cap Growth which had a
77 basis point better return. This may show the advantage that we have
maintained for a long time that for some remaining fund holders net redemptions
can be a positive, as all portfolios can use some pruning. More importantly,
performance while it does impact sales, is not particularly related to redemptions
which are more time based. Referring back to the main topic of this week’s
blog: technology, the best single performance group was the Global
Science/Technology fund which gained 22.09% vs. the average S&P500 fund
that gained 15.36%. While I don’t know who will be the winners for the next
five years, I think it won’t be the S&P500 index or the Global
Science/Technology funds.
Some Straws in the Wind
Before a significant storm often, there
are some straws in the wind. The following anomalies are noted:
Barron’s Best Grade
Corporate Bonds yields went up last week 8 basis points which means their
prices went down a proportionate amount. However a similar index of
intermediate credit grade bonds yields only went up 4 basis points. Typically
high grade investors are more safety oriented and credit investors more income
focused. The possible importance of these observations is to not worry about
the safety of high grade corporates paying off their obligations in a timely
manner. I believe the significance of the price decline is that these investors
and their dealers are worried about their near-term bond prices because of a
surge in the supply of high credit bonds. If these fears grow it can create
instability in the bond market which could impact the stock market either
because a change in outlook or a credit shortage supporting the stock market,
The AAII bulls are running again with 54%
of their weekly sample bullish compared with the pull back experienced the
prior week of 49%. The bears pulled in their teeth with a reading of 21%
compared 25% the prior week. Momentum is continuing.
__________
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Copyright © 2008
- 2018
A. Michael
Lipper, CFA
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