Is GameStop the Missing “Event”? - Weekly Blog # 666

 

Mike Lipper’s Monday Morning Musings

Is GameStop the Missing “Event”?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

In the “Bubble”, Seeing the Trees and Not the Forrest

In recent blogs, I examined evidence of a stock market bubble about to burst. Is this week’s explosive coverage of the short squeeze battles of a handful of relatively small stocks, the classic unrelated event that leads to actions triggering the rapid deflation of general market prices? Could be, and it is worth thinking about.

Markets regularly fluctuate between high/low prices and valuations. Most of the time, they stay within an envelope around a loosely defined center. This is the type of period where stock and fund picking produces relative good and bad returns, getting the attention of both individual and institutional investors. The game dramatically changes at the two extremes. At both ends the driving force is the actual level of liquidity in the marketplace. The relatively few stocks that have high, two-way market volume get most of the action and attention. The others either don’t trade or have significant price gaps between trades. The deflation of a bubble is when prices rapidly collapse.

In the prelude before the bubble breaks, there are often signs of structural deterioration preceding some seemingly unrelated event, which spurs reactions. This can be the telltale sign of a bubble breaking. Two examples of these events come to mind. The assassination of the Austrian Archduke and the passage of the US Smoot-Hawley Tariff Act of 1930. In both cases, from a global standpoint, they were not earth-shattering events, but the reactions to them led to World War I and the global depression of the 1930s. 

In both cases, various political leaders used the event as an excuse to make aggressive moves, resulting in tragedy. The murder of the Archduke and his wife became an excuse for aggressive, militant nationalism and an attempt to change the political structure in central and eastern Europe. It in turn eventually brought the US reluctantly into the war and was a contributing impetus to WWII. 

The Smoot-Hawley Tariff was a political attempt to bail out the highly leveraged farm sector in the US. It raised import tariffs on agricultural and industrial products by 20% and was quickly followed by 20 other countries.

Possible Application to the GameStop Short Squeeze

Very little of the popular media coverage on the short squeeze of GameStop and a small number of other stocks starts with the recognition that short selling requires a margin (loan) account, funded by cash and/or securities. The buyer of the shorted shares looks to the selling broker, or in some cases a bank, to supply the shares. This requires the broker to borrow the shares from other shareholders or purchase them to make the delivery. If the broker borrows the shares, the firm must pay a rental fee or find another customer who owns the shares. To facilitate the trade, margin accounts permit the broker to loan out shares in margin accounts, using them as collateral to raise capital to support transactions. 

The broker is often forced to buy shares in the market to make delivery in less liquid stocks. The mere fact of the broker buying pushes up the price, turning the broker into a short seller, having delivered the newly purchased shares. The broker must recapture the money it spends and occasionally if it borrows too much it may face forced liquidation of the firm. If this becomes the experience of many, there can be an effort to get the regulators to declare a “corner” in the stock, where they order the cancellation of all trades above a given past price. It thus wipes out some of the gains of the short sellers and reduces the losses of the brokers. (This has not happened in many years.)

How Did this Happen?

1. In a period where there are large operating business losses, there is a political impulse to bail out the unfortunate to secure their future votes. To the extent the bailout is not quickly repaid with interest, it is in effect socialized, making the profitable portions of the economy pay the losses and any shortfall in repayments.
2. Payments to individuals during the current pandemic where in many cases saved and not immediately spent.
3. Many states have legalized both sports and casino gambling to tax it. This probably enlarged the gambling population and transferred public wealth to gambling interests.
4. Currently, many are working from home (WFH) and sitting in front of their computers. Some have temporary cash to spend and in the absence of their normal sports betting vehicles they have developed trading relations with electronic brokers. 
5. Our educational process in schools and at home does not distinguish between gambling and investing. Furthermore, people and many politicians don’t differentiate between borrowing to meet current expenditures and capital invested in long-term assets. Long-term assets, like new plant or other capital expenditures, create new earning assets which in many cases become new collateral.  

What May Happen?

1. The popular media will likely produce numerous stories of individuals with losses. This will provide politicians with an excuse to produce more regulation, which will be expensive and send more investment overseas, and/or into non-public activities.
2. The future “Debt Bomb” is now in the hands of the government, but with the shrinking share of the loan market at banks, credit conditions will loosen and the private sector debt burden will grow. Underlying every major collapse is the extension of too much credit and the resultant leverage. 
3. We live in a dynamic globe. Most financial systems are quite extended, with little room to handle medical, weather, technology, military, and political surprises.

What to Do?

For those portfolios structured to meet payment responsibilities over the next five years, this would be a good time to prune portfolios. The following actions may be appropriate.

1. Create a schedule to recognize all loses serially between now and June 30. Thus, create a capital gains shelter for sales of winning positions.
2. Examine winning holdings that need a current bull market to reach the investors’ price objective.  Sell at least half.
3. Sell at least half of all positions in stocks where current management’s decisions seem inappropriate.
4. Build an opportunity reserve for two new purchases.
5. Increase exposure to stocks that trade beyond your home market.
6. Expect surprises and usually invest against the first identified decision.
7. Read carefully what companies say. One Dow Jones Index company expects earnings in 2021 to equal those reported in 2019. Even if that happens, the company will not have produced sufficient earnings to cover the then expected growth rate for the two-year period, leaving their growth at least 10% behind the original plan. This should cause one to make some changes, either to the portfolio or to expectations.

Working Conclusion

Become more engaged and start managing your portfolio, holding a collection of investments that can both absorb some losses and find new opportunities. 

What Do You Think? 

 

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/01/are-we-strolling-promenade-deck-of.html

https://mikelipper.blogspot.com/2021/01/contra-messages-weekly-blog-664.html

https://mikelipper.blogspot.com/2021/01/the-wisdom-of-3-wise-men-weekly-blog-663.html

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Are We Strolling the Promenade Deck of the Titanic? - Weekly Blog # 665

 

Mike Lipper’s Monday Morning Musings

Are We Strolling the Promenade Deck

of the Titanic?

Are there Parallels?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

In the early morning of April 15th,1912 the largest ocean liner afloat sank. The ship was supposedly unsinkable, yet five days after its maiden voyage it sank, with a substantial loss of life and confidence. Are there parallels to the global stock markets? I do not know, but there are sufficient lessons that can be learned from the losses sustained almost one hundred years ago.

Parallels

Titanic 1912

As with any tragedy there were errors of both commission and omission, summarized as follows:

• Recognition of the impact of weather: Unusually warm April weather over the northern icepack detached an unexpected flow of icebergs of several miles, plus. the combination of a moonless night and glasslike seas.
• The owner’s decision to increase the speed to 24 knots (25 miles per hour) to achieve a record crossing for publicity purposes.
• An inexperienced crew properly trained for emergencies led to confusion regarding the proper off loading and fully loading of lifeboats.
• The ship was briefly turned the wrong way while the radio room crew dealt with faulty equipment as it sent out the social messages of passengers.
• The belief that four watertight compartments could keep the ship afloat, except from the top. (Six compartments were ruptured with long glancing blows below the waterline.)
• Failure to instruct and lead passengers in evacuation procedures.

The errors could essentially be summed up in terms of speed and surprises.

Concerns of Global Stock Market Parallels - 2021-?

Since the beginning of time markets have collapsed under excessive speculation, driven at high speeds with too much lose debt creation and growing social structural imbalances, needing only a surprise and an event. Some of each of these are already now present, except for “the event”. Apart from hitting an iceberg, we may already be experiencing some of the other characteristics presaging the bursting of a bubble. I hope not, but much like the lookouts on the Titanic I perceive some unexpected things ahead.

Clues

Markets depend on speculation to determine prices as it views the future and compares it to the present. This is healthy and only becomes dangerous when it gets too popular and raises prices way above a sustainable level, depriving more mundane investments of investment support. 

• This week, the stocks showing the biggest price gains were in order: solar, electric vehicles, energy, China tech, and emerging markets. 
• The biggest flows went into commodities and global stocks. High yield (formerly called “junk” bonds) rose twice as much as investment grade bonds. 
• An indication of speculation at one main street broker is the over three times as much money going into exchange traded funds (ETFs) as going into mutual funds.
• Margin debt in November set a record and is probably still rising. The banking system can earn an acceptable return leaving money at the Federal Reserve, which has opened the opportunity to other credit providers who have fewer loan-quality constraints.
• Increased volatility is usually looked at in terms of rapidly rising prices, but it also reflects sharply falling prices e.g., SPACS after mergers. This may be why the average dedicated short mutual fund gained +12.27% vs +1.52% for the average S&P 500 index fund in the latest week.
• Survey data is again found to be wanting, in this case beyond the realm of politics. The Philadelphia Federal Reserve Bank survey of Manufacturing predicted a gain of +11.8% vs +26.5% actual, not a useful navigational aide.

Debt can be used to pay for operating expenses or expand capacity. In the first case it fills a hole left by equity not used to pay for the debtor’s current operations. It is thus a substitute for equity capital but does not provide capital for expansion. Currently, most debt raised by individuals, companies and governments is not used to add people, improve productivity, or expand capacity. Thus, debt is not being used to invest in the future and its repayment will be a burden on the future, unless there is high inflation.

The CEO of the company owning the Titanic issued orders but was not in a position to see if they were quickly and efficiently carried out. Considering the difficulties the new administration is having with Congress and within its own party, one wonders about the actual results of its announced policies?

The Remaining Question

Since investors cannot avoid periodic downturns, how should they manage their portfolios? I do not know of a good cookbook type recipe answer. I suspect the multiple answers will largely be a function of your ability to withstand pressure on your invested financial, emotional, and intellectual capital. The most vulnerable will be agents managing other people’s money, who have career risk. The least pressure for the self-assured is managing your own capital, as you don’t have to endure unexpected calls on capital. Most professional managers are much more in the career risk camp. For them, the key question is the acceptable level of decline from peak and the expected time until the account fully recovers. Another question might be how much longer the capital base takes to fully reach the expected level. The successful manager’s business longevity has as much to do with his/her communication skills.

At the other extreme is the manager of her/his own capital. While no one can unseat this manager, they are at risk of doing great damage to their capital by unwisely shifting policies to accommodate current market styles. Very few investors are successful at repeatedly changing styles. I have been investing for sixty years and during that period I have been lucky enough to own positions that have risen in price by many multiples of their original cost. However, I have also had a limited number of positions that have turned out to be worthless, or close to it. The nice thing is that the mistakes lose a percentage of wealth, whereas the winners grow exponentially. This week I noticed that one of my financial services holdings quadrupled in price, although I have owned it since 1991. A good, but not spectacular 7.2% return per annum. My correct bet was that the company’s management were big shareholders and were good at what they were doing. The key to their investment success was that as their business changed, they also went through successive management changes. Technologically, the firm is a great deal different than the 1991 model, but their attention to the needs of their employees and customers is very much the same.

Conclusions

1. We cannot avoid meaningful declines; they are only a matter of time. One needs to be prepared for declines and increases that last longer than expected.
2. Patience and communication skills are of equal importance to success, as is the never-ending development of investment skills.

What Do You Think? 

 

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/01/contra-messages-weekly-blog-664.html

https://mikelipper.blogspot.com/2021/01/the-wisdom-of-3-wise-men-weekly-blog-663.html

https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html

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Contra Messages - Weekly Blog # 664

 

Mike Lipper’s Monday Morning Musings

Contra Messages

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

Megaphone Messages

This week is the inaugural of the President, where he’ll deliver his acceptance speech, supposedly on COVID-19. All too much of the media will focus exclusively on these activities. Others may label the speech as the first salvo of the new administration’s redistribution of wealth plans. The shame of the coverage is that there are a number of messages that will get no or little coverage but will impact investors. As a public service, I will briefly discuss a number of these messages that in some respect are contra to the “Happy Talk” many will hear during the week.

Quieter Messages

Short-Term

Job creation needs to adjust to the world that currently exits and will exist in the future, not those before the pandemic. The expected spending releases from the effective distribution and use of vaccines and therapeutics will do nothing to improve productivity, particularly in services jobs. Furthermore, the release won’t automatically lead to the capacity expansion needed to solve bottlenecks. Some of the Biden proposals create new tech jobs, but the entire tech sector only has 2% of the country’s jobs. 

Current and future inflation hurts lower income people who have fewer offsets than those who are wealthier. Government data on inflation does not capture rising prices or declines in quantity/quality at supermarkets and bodegas. This week saw a +2.28% increase in the JOC-ECRI Industrial Price Index, bringing the year over year increase to +28.76%. Perhaps a further indicator of the market’s expectation of inflation is the increase in the price of gold mining companies, while the current gold price remains relatively stable. 

In the first week of 2021 the average S&P 500 Index fund declined -0.20%, while the average US Diversified Equity Fund rose +0.85%. This brings the year-to-date results for index funds to +1.10% vs +3.95% for diversified stock funds and follows a full year when S&P 500 Index funds underperformed.

Longer-Term

Citigroup’s model of Panic and Euphoria one year ahead has turned negative on the outlook for stocks. Jamie Dimon, CEO of JP Morgan Chase, is more afraid of Fintech activities from “Silicon Valley” and Walmart (*) than domestic banks. Banks are losing share in the financial market. The old regulatory regimes both in the US and elsewhere are not adequate for today’s and tomorrow’s markets.

(*) Held in personal or managed accounts

The bond market yield curve gets steeper each week, suggesting long rates will rise way past 2%. The higher fixed income interest rates go, the more competitive they become with stock prices.

Is 2021 the beginning of the “Last Hurrah” for the two US political parties? In the US and UK, both main parties have evolved historically and in some cases have changed names. With both the Democrat and Republican parties internally split, party discipline is likely to be ruptured. While the public believes internal battles are driven by major policy differences, as they say in golf “drive for show, but putt for dough”. The three critical battles will be on the role of seniority, the value of the right experience, and the role/power of major contributors.

What to Do?

Expect volatility to increase. The NASDAQ price movements may be more insightful than either the Dow Jones Industrial Average or the S&P 500, and certainly more than the Russell indices. 

Current prices are important, but less important than long-term future prices. This may be a reason for most investors, individual or institutions, to have the bulk of their money invested for the long-term.

For those with an emotional or psychological need to follow prices, should adopt a trading philosophy focusing primarily on what other market participants are doing. I find investors that on average do poorly are better predictors than those who do reasonably well.

I believe almost all of us are impacted by events and trends beyond our borders. Those marginally investing internationally should primarily invest to hedge their domestic investments, hoping their foreign investments do less well than their domestic holdings. Those investing above 20% of their wealth beyond their borders should be looking for opportunistic investments they cannot find domestically, both in terms of price and quality. Historically, after someone gains wealth they begin investing against their local government, believing that if things go well in their home-country they will have the opportunity to do well too. If the domestic market is troublesome, foreign markets may be attractive to gain stability and opportunity. 

I recognize these are controversial views and welcome your thoughts.  

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https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html

https://mikelipper.blogspot.com/2020/12/stud-poker-new-swamp-game-weekly-blog.html

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The Wisdom of 3 Wise Men - Weekly Blog # 663

 

Mike Lipper’s Monday Morning Musings

The Wisdom of 3 Wise Men

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

                   

Those who spend a great deal of time, energy, and emotion investing are truly “career” investors, whether they do it for a fee as a professional agent or as a personal investor. The successful ones focus on areas beyond security selection, including policy decisions. They are scouts leading away from capital destruction and toward capital appreciation. To do this, their natural position in the march of time is to be way ahead of the parade of followers of current trends. Successful investors are often lonely, fearful of falling into an avoidable trap, often searching for clues that others have found.

US investors will suffer a new government beginning in ten days, made up mostly of career politicians who participate in a former government producing slow, uncertain growth and loss of relative strategic power. Asia, particularly China and to a lesser degree India, plus the Middle East and Africa, represent challenges and opportunities likely to drive higher investment returns relative to those in Continental Europe. Under these circumstances, as a contrarian, I am paying attention to three investment wise men.

Jason Zweig wrote in this Weekend WSJ, “In theory investing is all about markets: in practice it is more about marketing.” Jason was addressing the old tale that stocks and funds are not bought but are sold, largely based on the marketing of past performance. The easy approach for salespeople and others is to extrapolate the immediate past. In the commodities markets, which often exhibits long trends, there is the motto “the trend is your friend”. My study of sports, economies, politics, and markets is that all trends either end disrupted or exhausted. The longer the trend, the more competitive forces will seek to replace the presumed longevity of the trend.

Jeremy Grantham of GMO points to the career risks of being too premature about future drastic changes in direction. He was admittedly three years early before the Japanese market topped out. In another instant, he lost half his clients in one strategy by being premature. The lesson here is to gradually withdraw and add to various sectors or philosophies. While it may be emotionally satisfying to go “all in” or “all out”, it is extremely arrogant in terms of career risk. We should also remember that the prime function of markets is to create humility. We can be wrong.

Benjamin Graham has been called the Father of Security Analysis and was a successful fund manager with both wins and losses. He said “Never mingle your speculative and investment operations in the same account, nor in any part of your thinking”. I don’t remember when I came up with the idea of creating sub portfolios for different purposes, but earlier he was focusing on different approaches for different investment purposes. At the racetrack it is called “different horses for different courses”. 

I often advocate sub-portfolios for different time periods to meet spending needs. As the weakest securities disappear in terms of impact over time, the longer a portfolio functions the greater the odds of success. Almost all the accounts we have held for twenty years or more are profitable. Under today’s conditions of increased uncertainty, I wonder whether two new sub portfolios should be set up. 

• The first would have a four-year duration based on the probability that much of what the incoming administration accomplishes will be reversed by a new administration in 2024. I am particularly focused on tax rates and regulations. 
• The second trading portfolio would have a one-year focus based on the effective timing of new legislation and executive order implementation. It would trade on the rumors of the progress of various political actions. 

Despite the financial media focus, the bulk of equity investments are long-term, both for retirement and estate building purposes. We have just finished an above average ten-year period where US Diversified Equity Mutual funds averaged an annual gain of +12.69%, with the median fund rising +11.71%. To do better than these results one needed to be invested in growth-oriented funds, which were more volatile than other stock portfolio peer groups. I have doubts that the next ten years will be as good as those in the past. Considering my outlook for interest rates, inflation, the value of the dollar, demographics, and technology, performance of no more than half the level of the last ten years might be viewed as heroic. One might even predict a lower return. (Interestingly, if we did experience a low ten-year growth rate, the following ten-year rate would probably be much higher.)

Current Updates

• For the first week of 2021, the average S&P 500 Index fund gained +1.30% vs +2.59% for the average US Diversified Equity fund, continuing the pattern of underperformance delivered in the last half of 2020.
• The AAII weekly sample survey of its members’ views for the next six months is 54% bullish and 26.6% bearish. Market analysts treat this as a contrarian indicator. 
• An interesting mathematical insight is that these ratios are approximately 2 to 1. They are in the extreme range and I would not be surprised if they reversed, with the S&P Index funds doing better and the six-month trajectory of the market doing worse.
• The JOC-ECRI Industrial Price Index remains stubbornly high, generating a +26.6% gain year over year.
• Truck tonnage carried is moderating an early spike.
• The S&P 500 was up for the first five days of 2021 and more often than not that heralds a positive year. The full month of January is a stronger predictor.

Critical Question:

Do you regularly examine your investment policies or is most of your attention spent on security selection?

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https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html

https://mikelipper.blogspot.com/2020/12/stud-poker-new-swamp-game-weekly-blog.html

https://mikelipper.blogspot.com/2020/12/mike-lippers-monday-morning-musings.html

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Anticipating Topping US Stock Market for Portfolio Managers vs. Stock Pickers - Weekly Blog # 662

 

Mike Lipper’s Monday Morning Musings

Anticipating Topping US Stock Market

for Portfolio Managers vs. Stock Pickers

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

                           

                   

                           

Warning: How Markets Approach Tops

Perhaps fittingly, markets reach tops in a similar fashion to countries going to military wars. There are two phases. The first can go on for a lengthy period of a year or more, with the slow destruction of the ability to successfully fight back. The second is an immediate event, which galvanizes the opposing forces into military action. The assassination of the Archduke in WWI and the Attack on Pearl Harbor in WWII are two examples. In both cases the general population was not paying attention to the deteriorating conditions and they were truly surprised by the triggering events. Those in power were not surprised that an event could trigger hostilities and there were premature warnings if one looked for them.

With the US stock market nearer a probable peak than a bottom, I sense an oncoming peak followed by a meaningful decline. I just don’t know when, although I have a pretty good idea who will be blamed for it.

Topping Signs

The first sign is the public’s wish for a better year than the last, often expressed as a bigger gain in the US stock market. The raw gains for the Standard & Poor’s 500, with dividends reinvested, was +18.40% for 2020. A level roughly twice the long-term average of +9% to +10%. The average S&P 500 index fund, with $1.9 trillion entrusted to them, gained +17.91% with dividends reinvested and management, administrative, and transaction expenses deducted. As good as these results were, they were below the average return for US Diversified Equity Funds, a gain of +19.14% on $10.3 trillion in assets. Even with the history of a strong November and December being followed by a year producing returns of +10% or more, one should be cautious in expecting the 2021 return to be better than 2020. 

Excessive speculation with increased leverage weakens all but the strongest financial structures.  Excessive speculation is often an open invitation for enemies to embark on bold adventures (Pearl Harbor). There is no doubt we are experiencing rampart speculation, 2020 had the fastest bear market and included a record level of IPOs and an equal number of SPACs (Special Purpose Acquisition Company). In addition, 2020 saw a record level of margin debt and a new generation of inexperienced investors rapidly trading on home computers, somewhat like the “roaring twenties”. 

Accelerating inflation also weakens the defense mechanism of a society. The JOC-ECRI Industrial Price Index ended the year at +24.44%, with 81% of the weekly prices rising in the weekend edition of the WSJ. Other cracks are also visible in the economy, with landlords and their banks speculating on when and if their tenants will pay their rent. One also hears of some officially unemployed workers only willing to work off the books. Integrity is often forgone in periods of speculation and inflation.

We should not attempt to remove all speculation from the markets, as we would be killing opportunities to take risks that have paid off very well in 2020, shown in the performance of the following mutual fund averages:

Alternative Energy Funds     +92.89%

Global Science & Tech        +65.00% (C)

Science & Technology         +52.21%

Multi-Class Growth Equity    +42.89% 

(C) Canadian Information Technology stocks +80.65%

Typical Stock Pickers Play Differently

Picking stocks is an old art form encompassing both short-term gambling and long-term investing. One of the main mental attitude differences between an almost exclusive focus on picking stocks and portfolio management, is that stock pickers focus almost exclusively on the performance of individual holdings, whereas professional portfolio managers focus on the performance of the entire portfolio. This usually leads to a stock picker having a more limited number of holdings, with many driven by the same market dynamics. Many newer stock pickers are entertained by the frequent examination of price volatility, intending to hold if his/her stock prices rise relative to other immediate alternatives. The focus is often on what is happening in the market and/or in the headlines, not on the fundamentals of the company which happens to have the same name as the stock. If the stock disappoints, the player sells and either buys something else or totally withdraws from the market, until a new wave of speculation gets his/her attention. In viewing the history of stock-pickers, one is reminded of what is said about pilots “There are old and bold pilots, but there are no old bold pilots.” 

That speculation burns out many inexperienced traders is unfortunate, not only for them but also for the nation. We have reached a point where the number of new companies equals the number retiring, either voluntarily or involuntarily. Among the reasons are demographics, labor and other capital productivity, regulation at various levels, and tax rates. One of the reasons US productivity was a world leader was the birth rate of new ventures and the success of some. Among the biggest advantages a stock picker has is that he/she does not have to play and record of results is not known. If the record is self-disclosed, it may not be believed. 

The Professional Portfolio Manager Plays a Different Game

The biggest risk for most professional managers is career risk, either losing employment or reputation. Furthermore, the portfolio manager is constantly being measured against supposed peers and externally identified time periods. At times absolute and relative investment performance are paramount and at others presumed risks is critical, whereas for some accounts cash generation is most important. For example, in 2020 the same account could be a relative leader or laggard and finish the year with very acceptable results, depending on the period selected. In some cases, when an institution borrows money during a period of economic strain, cash generation or volatility is critical to making payments or maintaining credit ratings. Because of COVID and a disruptive economy, some institutions have become much more sensitive to short-term results, whereas others look at the same characteristics through a longer-term lens and see new opportunities and risks.

In contrast to the stock picker, a portfolio manager looks at each investment not only in terms of its investment merit, but also its role in creating the appropriate balance in an account in terms of risk and reward. While a stock picker would ordinarily be delighted to have every one of his/her holdings do well, a professional portfolio manager would be concerned, fearing a change in the impetus driving the market could make the portfolio a very risky vehicle. In income-oriented portfolios, the timing of flows is critical to meet payment obligations and that can put constraints on the structure of the portfolio.

Unlike the private investor, most professional portfolio managers can’t afford to be out of the market, as most outstanding performance requires ownership on key turnaround days. The best a manager can do if the market is moving differently than what is perceived to be correct long-term, is shift the relative volatility of the portfolio, with a willingness to move quickly into higher volatility when the trend is what it should be.

How are You Protecting Against Unwarranted Speculation?

• Ignore?
• Raise Cash/Short-term vehicles?
• Change Volatility?
• Prune holdings which don’t help?
• Or something Better?   

I like quoting Ben Graham, not only because of his well-earned knowledge but because of the New York Society of Securities Analysts gave me an award named after him. He is quoted as saying “the essence of investment management is the management of risk, not the management of returns.”

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2020/12/stud-poker-new-swamp-game-weekly-blog.html

https://mikelipper.blogspot.com/2020/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/12/searching-for-surprises-weekly-blog-659.html

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Contact author for limited redistribution permission.