Not Much - Weekly Blog # 726

 

Mike Lipper’s Monday Morning Musings

Not Much

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

Anyone who has served guard duty instinctively senses some of their most dangerous moments being described as “not much happening”, just before dangerous things happen. This is my gut feeling looking at the US stock market activity last week. (Both the government bond and commodities markets moved under the strain of adjusting to supply shortages, including Russian Uranium.)

Calibrating “Not Much”

The main function of this blog is to assist investors in their thinking about long-term investments, typically extending from five years to multiple lifetimes. With that as a framework, the guiding math becomes clear. On the downside there is always the potential for a 100% loss, excluding any additional leverage losses or legal settlements. My long-term objective is multiples of the potential 100% loss, or to quote the great stock portfolio manager Peter Lynch, “ten baggers”. (Peter learned and worked for the late Ned Johnson, who died this week. Ned was the second CEO of Fidelity Management & Research. Ned was more than just a first-class money manager; he was a good selector of talent and found new ways to invest and market investments globally. Ned changed the investment business around the world. His daughter Abby, the third member of the Johnson family to be the CEO, is going even further.) 

If one gains multiples of loss positions it doesn’t take long to produce a satisfactory return, it just takes patience to ride out multiple-year periods. 

Every Journey Begins with The First Step

The first step begins with direction, chosen or not, and a small distance. With rare exception, first steps are consequential to the result, except when beginning a march to a meaningful end. It is this exception that drives me to focus on what happens each week. Most things don’t materially matter, but some do in the short and long-term. This is the reason I spend a lot of time and energy pouring over what happens. I will share my reactions to the surface elements of an inconclusive week.

Short to Long-Term Implications

• The NYSE up-volume dropped to 13.7 million shares from 20 million shares the week before, while the NASDAQ up-volume rose to 15.4 million shares from 10 million shares the prior week. Downside volume was essentially the same level each week. (I suspect some of the up-volume in the prior week was short-covering to curtail losses. In the second week the selection process favored tech stocks.)
• There has been some extreme performance year-to-date, with Commodities enjoying the best performance since 1915 (WWI) and bonds the worst since 1941 (WWII). 
• In the last 16 years, $2.6 Trillion went into bonds and only $ 1.85 Trillion went into stocks.

(Looking at the last two items raises the question as to whether the US dollar can retain its privileged position of being able to borrow globally in its own currency? It may be determined by where critical commodity resources are found.)

• The price of coal has risen to $330 per ton from $80.50 at the end of 2020. Little in the way of energy capacity is planned to come on stream before 2025. The call to end global trade and production is the opposite of what Adam Smith wrote about at the time of The American Revolution. There will likely be multiple sources of critical supply when sought, but at increased cost.
• East Coast US ports have been less busy recently. I suspect inventories have been restocked. Retail sales have also slowed or have been priced too high.
• Goldman Sachs and others have discussed an increased risk of a policy-induced recession 
• There is no doubt we have entered a global food shortage period, driven by the absence of supply from Russia/Ukraine, and others due to insufficient investment. Food prices will be going up partially due to a labor shortage.

Many of these noted problems are already impacting our markets, as others will in the future. Never-the-less, after this period of contraction it will eventually lead to a period of expansion and opportunity, if patient. The cyclical will turn to a favorable phase, allowing us to use our brains, capital, and patience to ride out the storm.

Help is on the way. 

  

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

https://mikelipper.blogspot.com/2022/03/relative-or-payout-returns-in-periods.html 

https://mikelipper.blogspot.com/2022/03/building-your-future-winning-portfolio.html

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

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A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Relative or Payout Returns in Periods - Weekly Blog # 725

 

Mike Lipper’s Monday Morning Musings

Relative or Payout Returns in Periods

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

Throughout life we learn that successful investing is an artform, which means that people with different perspectives view actions differently at different times. Thus, no single investment fits the needs of everyone. With that starting point, we believe successful investing is going to be different for each of us and should not be taught based only on numbers and regulations.

I believe the single most important starting point in investing is identifying the period of investment. Our current culture is very much focused on now, with the media reinforcing that view. To the extent a future period is mentioned, it is tomorrow, next week, month, or year-end. Even when we state the decision period, we don’t describe the terminal date. For example, we know that US stocks on average produce high single digit returns for long periods of time. Thus, an 8% return for 2022 could be forecast. That could be considered a good or bad return compared to alternatives. Early this week, a positive return half that size could have been acceptable. By the end of the week, any annual return below 20% would be considered dismal.

The financial and popular media place us in a relative world, making comparisons of what they believe are competitive investments. After all, stock prices are subject to the same risks and rewards! This is a gaming or gambling attitude. Most of the money we are responsible for use current investments to produce total returns for use in future periods. Consequently, we think about returns compared to the expected uses of the money, with sufficient excesses to cover periodic shortfalls. While the size of the excess pool could be based on actuarial assumptions, it is more likely to be a comfort factor. (One reason many bear market survivors don’t do well in future periods is that they carry with them the fear of even worse future markets. It is quite possible that after a large decline one should reduce the size of the excess reserves.)

PORTFOLIOS STRUCTURE

The first recommended step is to sub-divide the investment portfolio into time-focused sub portfolios. Considering the current unsettled global, political, and financial conditions, I suggest the first sub portfolio cover expected payments between now and the end of the first year of the next president. The excess over payments might be in the order of 30%, declining as stock prices decline.

The second sub portfolio should cover the period after the first, perhaps going through the expected lifetime of the principal owner. The reserve component should be no more than half the first sub-portfolio, because based on history markets generally rise 75% of the time.

The final sub-portfolio should anticipate being expended after the expected lifetime of the principal owner. The volatility reserve should be half of the second portfolio’s.

ASSINGING CURRENT MARKET DATA TO PORTFOLIOS

Caution: My investment views are for the most part contrarian to popular views. They take advantage of the historic experience that when contrarian views succeed, they have a larger payoff than popular views, whose benefits are usually already in current prices. However, contrarian expectations do not come into fruition as often as popular views.

Immediate Portfolio

The American Association of Individual Investors (AAII) six-month sample survey shows 22.5% being bullish and 49.8% bearish. Extreme readings are normally under 20% and over 50%. Market analysts use this as a contrary indicator. (When these numbers reverse, watch out.)

Up and down transaction volume is also something of a contrarian indicator. In the week ended Friday, the NYSE had more shares moving up than down, 20 million vs. 10 million. Normally they are more balanced. After a long period of declining prices, the next upward spike is often caused by short sellers or custodians buying to cover shorts that need to be liquidated. While the relief rally on at the “big board” gained all five days of the week, the DJ Transportation Index was up only 3 days, and the Utility Index was up only 2 days. (Unless the upward movement broadens out, the rally may not be able to sustain itself for long.)

Working Portfolio

According to a recent survey of institutional managers, growth stocks were not favored over value stocks for the first time in many years. Since 2007, the MSCI ACWI ex US Growth index has been flat (Morgan Stanley Capital International All Country). (If this view is maintained, the relative multiple of growth price/earnings ratios will decline and represent a bargain at some point. But it also may suggest that earnings will grow at a materially slower rate. Another possibility is earnings outside of US Growth companies growing faster than those in the US, along with their stock prices.

Estate Portfolios

Each week Barron’s publishes the performance of the 25 largest US Equity Oriented Mutual funds from my old shop. Only five management companies placed funds on this list: American Funds (Capital Group) - 10, Vanguard - 9, Fidelity - 3, Dodge & Cox - 2 and PIMCO - 1. The total net assets of the funds range from $125 billion for Growth Fund of America (Capital Group) down to $53.8 billion for Vanguard Wellesley/Adm. (Note: all these funds have been serving investors for many years and American, Vanguard, and Dodge & Cox have done a good job of capital preservation. This may be important to their fund holders and distributors, although at some point in the future I expect to see more capital appreciation-oriented funds on the list, at least for a while.)

In all the discussion on the availability of petroleum, politicians and US Government people forget that the Bakken reserves represent over 500 billion barrels and would last for more than 100 years at current consumption levels. I believe the combination of our fuel and refinery expertise makes this supply one of the cleanest in the world. Considering the declining number of US based refineries and the low margins in the business, there could be a temporary bottleneck that could be addressed. (Whether an investment management organization has a direct investment in energy or not, I believe a knowledgeable energy analyst is essential for a successful portfolio management business in the future.)

Question of the Week:

How much of your portfolio is focused primarily on relative returns vs meeting payout needs?

  

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

https://mikelipper.blogspot.com/2022/03/building-your-future-winning-portfolio.html

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Building Your Future Winning Portfolio - Weekly Blog # 724

 

Mike Lipper’s Monday Morning Musings

Building Your Future Winning Portfolio

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

Personality Shapes Portfolio Architecture 

One hurdle we give little thought is the modern mass production of clothes, foods, jobs, schools, and financial instruments (portfolios). Staunton Military Academy and the US Marine Corps were contributors to what I am today, but like everyone else I want to be unique. In that search to find myself, both my wife and I have turned to history to learn how others developed their identities. 

Focusing on how others have navigated their successes and failures, I am particularly interested in learning how to minimize losses. Large failures are typical of those who have achieved measurable success. Psychologists who measure the impact of winning and losing believe we feel at least twice as bad from losing. (I believe some of us feel even worse about losses. Losses delay our commitments to successful actions and use up some of our precious time.) People experience both successes and failures and some learn from their defeats, using that knowledge to build subsequent victories. For example, both George Washington and Abraham Lincoln suffered multiple losses before their victories. 

We Alone Are the Senior Architect of Our Investments 

While we may consult with various professionals, family, and friends, we are ultimately responsible for creating our investment portfolio and our lives. I have prepared an a la carte menu for you to choose from that is specific to meeting your investment personality needs. Instead of each alternative having prices or calories as a guide, I list a very rough risk/return identifier. (Through your own experience you can modify my judgements.) 

A la Carte Menu of Portfolio Vehicles 

Type             Risk Orientation

All on a single bet      Favored by entrepreneurs (Henry Ford 

                         was twice bankrupt before success) 

Concentrated holdings    Limited number of large bets with 

                         common risk characteristics 

 

Actively managed fund    Account/fund of less than 50 names 

Passive Index Fund       Fully invested + low turnover 

Combined Approaches      Risk avoidance limits upside 

Personally, I plead guilty to the last choice. Our big positions are centered on domestic and international financial services companies and funds. I use actively managed funds and fund management companies when I do not have confidence in particular companies, but believe their focus is correct. In doing so I use a fund or fund like vehicle as a common denominator play. 

Types of Declines and Expected Influence Structures 

The US stock market has been in decline for some time. In some respect you could go back to 2019 or earlier. The expansion of the NASDAQ Composite since the financial crisis may have ended in November 2021. Using that as a measure we have entered a bear market for at least two days, but it is not yet convincing. Both the Dow Jones Industrial Average and the S&P 500 have entered a correction phase, falling more than 10%. (The media called both the bear market and correction phase but cannot tie it to an economic or market measure.) Nevertheless, this may be a good time to assess the types of market declines and appropriate tactics and strategies: 

Correction Phase - According to S&P, the market is up +9% one year later. 

Bear Market - One year later the market is up +13%. (To the extent that the market indices represent one’s holdings and the account is eventually taxable, it doesn’t make sense to liquidate unless there is a specific problem that questions the future of the company. Most, but not all recessions lead to bear markets, so it is not a specific call for portfolio action. 

The real risk is an activist top-down government taking a normal cyclical decline and turning it into an active depression lasting a couple of years or more. If this is expected, the proper strategy is to cut expenditures as much as possible and shrink the portfolio in terms of capital commitment, but not names. In The Wall Street Journal, Jason Zweig recounts the incidence of Sir John Templeton buying 104 stocks trading for under $1.00, including 34 that were in bankruptcy. This was in 1939 before the US entered WWII. After the war he made a profit on 100 of the positions. (I do not expect a similar experience for the country, the market, or an investor, but the lesson shows the value of long-term investing, staring with low prices on the NYSE.) 

Which is Best Now? 

History does not offer a direct parallel. The closest that I have seen is the 6 months prior to the declaration of WWI. The immediate causes were the weak, isolationist, attitudes of the US government, plus the assignation of the Archduke, which was part of the unrest in Eastern Europe. Our fear is China supplying military goods to Russia as requested. This conceivably could bring a third world war.  

In deciding what to do, I suggest putting both the stock tables and the annual reports down. Evaluate your holdings as companies. Would you like to own all the company and never sell it? Warren Buffett views companies based on whether your children would be buyers of their products or services. 

After many successful years of investment, you may have an oversized highly profitable position and may have large loss positions to “harvest”, if you don’t think they will recover. These losses could be used to bring balance to your portfolio by recognizing the losses and simultaneously reducing some of the overweight positions in your winners. The freeing up of cash from both losers and slightly reduced winners creates a fund for reinvestment at a time when prices are reduced. 

Final thoughts: Understanding that making a series of correct investment turning point decisions is very rare, allow yourself to make mistakes, learn from them, and generally stay the course.

  

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

https://mikelipper.blogspot.com/2022/03/does-decline-influence-recovery-weekly.html

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Does the Decline Influence the Recovery? - Weekly Blog # 723

 Mike Lipper’s Monday Morning Musings

Does the Decline Influence the Recovery?

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

Positioning

As a contrarian I am comfortable sharing my view of the market with the majority. Sharing this view is not done to stand out among a crowd of students of the market, but to attempt to position myself and the accounts for which I hold myself accountable. Over time, the rate of return earned by the majority is less than some of the minority, who happened to be right for some reason. With that thought in mind, I will try to focus on the recovery from the predicted downslope we are in, looking across the unknown valley to the beginning of the recovery.

Where are We?

As is often the case, there are conflicting trends. In terms of stock prices, we are in a decline. Until it is finished, we won’t know if the decline is just a trading event, a correction, or a bear market. The media makes a distinction, defining a decline of 10% as a correction and a fall of more than 20% as a bear market. Using the most popular market indices the picture is muddled, with the NASDAQ Composite well into the correction phase, dropping -15.9% from its January high and even more from its all-time high in November 2021. The S&P 500 has flirted with the -10% level. (Based on the present length of the market expansion and the nature of changing stock leadership, I believe that we are heading for a bear market.)

The broader economy is also showing disturbing signs. The JOC-ECRI Industrial Price Index rose 2.8% last week and is up 31.3% for the year. January’s backlog data was up +19.6%, with the number of new orders up only +6.8% and non-durables up only +5.6%. In February, before the Ukrainian invasion, purchasing orders were down -3.8%.

“Buy the Dip” Advocates May Get a Bad Bounce 

This week in Seeking Alpha there were four different recommendations to buy shares of T. Rowe Price (a stock owned in both personal and managed accounts). I have had the pleasure and honor of meeting with all the firm’s Chairmen, going back to Mr. Price himself. I hope my heirs continue to hold these shares, although much like Berkshire Hathaway, I have concerns about a potential change in the shareholder base. The difference is price action may be signaling a long-term change in the valuation of the stock. The low price this week was $137.76, a long way from the 2021 high of $220. What is a bit more worrisome is the $137.76 low on Friday, on 2 million shares of volume. The high for the week on Monday was $145.11, on 1.6 million shares of volume.

I reviewed four recommendations of T. Rowe Price which touted the remarkable financial record of the firm and concluded the stock was a buy. I hope they are right; however, like most current recommendations to buy Berkshire, they dwell on history. When a stock drops by 1/3 and the “market” hasn’t fallen much, it raises questions as to the repeatability of the record. Clearly, if the record is repeated the stock is a great long-term buy, but if not repeated, it will disappoint shareholders staying on board. I have not read any reports questioning the long-term vitality of T. Rowe Price; however, I could dream up some worries that could cause disappointment if they turn out to be correct. 

The following is a brief list of issues that could go wrong in the future, which the firm has not dealt with in the past:

1. Private Equity and Private Debt have been important contributors to the gains in many of the firm’s funds and accounts. Almost every investment manager is fielding similar products. With so many firms raising money in the markets for “privates”, the purchase price demanded by entrepreneurs will undoubtedly rise, while about half of the privates offered to the public through IPOs declined in the “after-market”. One clue this phase may be coming to an end is the SEC demanding more disclosure from this sector. (Nothing like the Police showing up after a crime is committed.)
2. There is a trend of financial intermediaries merging into larger organizations. At some point the larger intermediaries will demand a bigger slice of the profits of the account.
3. Governments are concerned about a large portion of the voting population still without any, or sufficiently large, retirement packages.
4. With more pressure from clients or their agents, fees may come down, regardless of inflationary increases cutting profit margins.
5. An activist government may force advisory firms to go into less profitable businesses.
6. Some large settlements may be awarded by activist courts.

I believe the current management is aware of these and other risks, but bad things can happen to all of us.

Question?

What are the non-present risks that could hurt your investments?  

  

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

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html

Did someone forward you this blog? 

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.