Introduction
Probably
the single most common investment mistake is to have a single portfolio to meet
multiple needs. My suggested cure for this malady that has to leave investors
not fully addressing needs is to divide the single portfolio into sub
portfolios to focus on specific timespans and their funding needs. Thus, when I
look at investing my first focus is on the desired cash flow to meet
beneficiary needs in specific timespans, (Lipper Timespan Portfolios®
).
Today
I am focusing on the probabilities for the rest of this calendar year or about
eight months. I am also looking at a period of recovery in stock prices after
the next recession, which the strong odds will come about over the next eight or
so years. Finally, I am looking to the period beyond my personal control or
influence on various investment committees in terms of replacing very
successful investment managers after a long period of successful and faithful
performance.
The Remainder of 2018
As
of today the only thing that will come out of the 2018 US mid-term elections is
more words about the implications for the 2020 elections and some legislation in
2018 which will probably be wrong. Thus stock prices at the end of the year
will probably reflect largely what is known today. One of the advantages of
learning security analysis at the racetrack is first to identify the most
probable result of a future race. This leads to picking the favorite (which
almost always is confirmed by the lowest payoff if correct).
My
nomination for 2018 is that we have seen both the high and the low for the year
in the first quarter. This would result in a gain or loss of somewhere close to
half of 2017’s gain. In this case I suggest that there is a 50% chance that we
have seen the high and low for the year already. The remaining fifty percent could
be divided in half again with a 25% chance that we go through the last top of
the market and/or we retrace the gains of 2017. If one combines the most likely
50% with a new high or 25%, this would produce a 75% chance of a satisfactory
return for most investors completing ten rising years.
Probable Causes for 2018 -
Gains
Frequently
I have referred to the weekly survey conducted by the American Association of
Individual Investors (AAII) which is very volatile in part because its sample
size is small. In the latest week 37.8% were bullish for the next six months,
33% were neutral, and 29.2% were bearish, as opposed to 42.8% being bearish two
weeks ago. Stock markets don’t go higher when all the available money is
already committed. A major brokerage/wealth management firm is suggesting its clients
should sell into any rise.
Another
source of cash is investors adding to their account into a rising market and
the market is rising. Each of the three major stock market indices have the
very same looking chart of a narrow rising channel starting from the February low
points. If upside price momentum starts heating up, the old highs could be
challenged. (While my clients and I would enjoy these gains, in a contrarian
view breaking out of the old high could suck in all or most of the available
cash and that would eventually lead to a major decline.)
Probable Causes for 2018
- Losses
A
couple of weeks ago the Masters Golf Tournament concluded with a new young
champion, Patrick Reed. His win verified the old expression, “You drive for
show, but you putt for dough.” In a similar fashion, stock price movements are
what gets the crowd’s attention, but in the fixed income marketplace winning is
achieved by avoiding losses.
Traditionally
fixed income is a seemingly dull game for the professionals. While individuals
may buy bonds they often hold them to eventual maturity. They don’t trade them.
Also they rarely pay attention to credit instruments such as loans and
mortgages. Not only is the total fixed income market larger than the stock
market in most countries, it is the source of financing of governments and
large corporations.
Compared
to equity returns, most fixed income instruments trade off their promise of
periodic payments of interest and principal return versus lower average total
returns on stocks. However, various trading organizations have leveraged their
fixed income investments with borrowed money, usually from banks or the credit
markets. Whenever leverage is used a small price decline can shrink the value
of an investment to a leveraged owner.
Most
brokerage firms, bank trading desks, and some hedge funds use leverage to
support their fixed income investments. The origin of most stock market
declines is a reaction to traders having their loans immediately called and
their collateral holder immediately liquidating the collateral without regard
for price. That is one risk. Other risks have been created by the central banks
of the world that have manipulated interest rates down so much that investors
have become desperate to find satisfactory yields. This has led to an expansion
of the use of credit instruments beyond bonds. This has led to a situation,
according to Moody’s *, for the first
time in recent memory outstanding high-leverage loans now exceed the outstanding
amount of high-yield bonds. In effect, leveraged
credit investors are trading off their safety for yield. That won’t always
work.
*An equity in our private
financial services firm
In
Europe and some parts of Asia, gold is a normal part of many conservative
investors’ portfolio. This is not true for most US portfolios. From my standpoint it doesn’t matter whether
one owns gold or not, but what matters is what others are doing. A current
buyer of gold sees trouble ahead. Each of us can probably create a list of
future troubles. That doesn’t matter in terms of one’s own beliefs, what
matters is when more people believe it. The way I follow it is represented in a
chart that in the recent past depicted a high was established in September of
2017. Since January of 2018 there have been three attempts to meaningfully to
supplant it. The chartists tell me that gold is in a rising triangle from a
December bottom and could go through the 2017 peak on the way to challenging
earlier higher peaks. If this were to happen I would be concerned as to equity
and debt values.
Concerns of Jamie Dimon, Warren
Buffett and Charlie Munger
Jamie
Dimon at JP Morgan Chase plus Warren Buffett and Charlie Munger at Berkshire
Hathaway have spent considerable time and thought about short/emergency and
long-term succession. I am struggling to do so as well. I have sat on a number
of non-profit boards who when faced with the need to relatively quickly replace
a retiring CEO look for someone that possesses a skill set that the older CEO
did not have and that seems to be more important than continuing the good
attributes of the retiring CEO.
Since
my professional responsibilities as well as family requirements have to do with
the replacement of investment managers, largely of mutual funds, it appears
easy to replace funds that are deemed to become poorly managed in their
execution of their process, which is much more important than periodic poor
investment results. What is difficult to do is to replace a successful manager
such as the three gentlemen mentioned. No two people are exactly alike and
future periods are going to be somewhat or completely different than the
successful periods that we have enjoyed in the past. Do we search for a copy of
the successful manager? Do we look for some one quite different? What are the
missing skills that will be needed in the future that are not needed presently?
How do we assess success? How long a trial period is reasonable, particularly
if we enter difficult times? I would be greatly in your debt if you could send me
an email or even a snail mail with some of your views to these questions.
__________
Did someone forward you this blog? To receive Mike Lipper’s Blog each Monday
morning, please subscribe using the email buttons in the left margin of
Mikelipper.Blogspot.com or by emailing me directly at
Mikelipper@Lipperadvising.com
Copyright © 2008 -
2018
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
Posts
No comments:
Post a Comment