Sunday, July 30, 2023

Possible Investment Lessons - Weekly Blog # 795

 



Mike Lipper’s Monday Morning Musings


Possible Investment Lessons

 

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


 

  

Not Cured Returning Employee Risk

“Cancel Recession” or “Soft Landing” are the media headlines and expressed views of many investment pundits. They could be correct, which may be unfortunate for long-term investors. Through the ages people have identified the primary cause for various economic cycles ending. These historians could be correct, or their labeling may say more about them than the actual causes. Nevertheless, after an expansion, analysts often seek reasons for the next correction. I am one of those worrywarts.

 

The tip of the spear for most successful military campaigns is reconnaissance. (That is why, like Robert E. Lee, I look to find “the hidden road”. The hidden road allowed US troops, including a group of Marines to get close to Mexican fortifications undetected during the Mexican American War. The subsequent Mexican defeat is remembered in the Marine Corps Hymn.)

 

In many studies the focal point of a critical change in direction results from the growth of imbalances accumulated over time. While there are always imbalances in societies and economies, they occasionally reach extreme levels. My recon of current conditions suggests the following imbalances are present today:

  1. Wealth disparity within societies and countries.
  2. Technology gaps
  3. Demographic differences
  4. Educational levels
  5. Leadership characteristics
  6. Medical capabilities
  7. Rising levels of mistakes

 

In each of these situations the spread between the leaders and the rest is widening. At some point people will tire of waiting to catch up. Envy will drive some to seize the critical elements of perceived success. This can happen within a society or between countries.

 

We are currently in a bipolar or multipolar world. Critical players are not only the US and China, but also multipolar players including Russia, Islam, Japan, and the ROW (Rest of the World). The spread of technology, communications, and envy will at some point lead to conflict, for which we are not prepared.

 

The world has been somewhat prepared for these conflicts by the changes that occurred in the post COVID world. Many of these changes were instigated by slowing economic growth. The risk to discontinuation of these and related changes is an attitudinal switch from protection to expansive growth, labeled as no or little recession.

 

This is similar to the risk of a returning employee who has not gotten over his/her cold or other communicable problems, leading to widescale sickness throughout the worksite. We no longer require a doctor to notify us of a complete recovery, or the number of days without symptoms, etc. We may be taking a similar risk by assuming lower interest rates, more capital, and higher stock prices will be the cure for all our economic and social problems.

 

Most prolonged periods of growth happen after extended periods of contraction, which we have not yet had. We are instead experiencing the frivolous spending of dollars and time, with an increase in errors and short-term oriented leadership.

 

Current Briefs

  • T. Rowe Price executed a second 2% mostly non-investment staff labor force cut. It led to a significant price jump, similar to what Franklin Resources experienced.
  • The weekly AAII sample survey bullish reading backed off from 51.4% to 44.9%, with a smaller rise in its bearish reading, from 21.5% to 24.1%.
  • High-grade bond yields rose more than medium-grade yields, 54 basis points vs 18 basis points.
  • Chinese youth are exemplifying capitalism by not accepting manual labor positions in the hope of securing tech jobs.
  • Some retail goods buying may be anticipatory in an effort to avoid expected price increases and shortages.

 

Summary & Conclusion

There is an investment risk in accepting no recession or a small recession for long-term investment. Not all current data is supportive of the general prospect of a small price risk. While not predicting a new low is necessary to end the down cycle, it is possible. Watch the data carefully and correctly interpret the news between now and the presidential election prior to the winter of 2024. Be careful.

 

 

 

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Mike Lipper's Blog: Cross Winds - Weekly Blog # 794

Mike Lipper's Blog: Two Cycles Are Worth Watching - Weekly Blog # 793

Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

 

 

 

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Sunday, July 23, 2023

Cross Winds - Weekly Blog # 794

 



Mike Lipper’s Monday Morning Musings


Cross Winds

 

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

 

 

 

Frustrations

Geometric projections frustrate investors and others. Unfortunately, in life and business we are often taught that we will be rewarded if we follow straight lines. In our simplistic minds we translate that into a simple equation with a predictable outcome.

 

The truth of the matter is that nothing is really that simple. Almost everything comes with counter-indications identifying obstacles or hurdles. This week is a classic example of cross winds presenting different tracks from current popular views. As both a student at heart and an investment advisor to clients and my family, I view these cross winds as a learning opportunity.

 

Disappointing Earnings and Higher Stock Prices

(All of the stocks mentioned are personally owned and are not necessarily recommended for others.)

Two investment industry leaders, Goldman Sachs and T. Rowe Price, are going through an extended period of changing their customer mix and critical management people. In both cases, after announcing below general earnings estimates, their stock prices rose. In a somewhat similar fashion Discover Financial fell 18% and Interpublic declined 12% after shortfalls in their basic businesses, but after a one-day decline their stock prices rose.

 

When explaining these occurrences to my Good Wife, she mentioned that some investors were taking the price decline as an opportunity, feeling the identified problem was being remediated.

 

Experts Being Wrong

There are a bunch of classically trained, high-quality growth investors who for some time have been invested in segments of the largest players with disappointing results. This includes a number of the largest healthcare providers. Even after trimming some of their positions, these managers still on average have 21% more invested in the sector than the sector share of the S&P 500. While a number of these companies have potentially exciting developments in their R&D pipeline, which if approved should more than offset the patent cliff of their existing products or services. They are facing talked about pressure from the government to get prices lower as they expand their market. The rising economic growth of populations in Asia and Africa are opportunities for more growth.

 

Institutional investors who manage portfolios to meet long-term funding needs are particularly well suited for the ten to twenty-year cycle of taking an ill-defined idea to excess cash generation through dividends. Some individuals with long-term retirement needs or those who are looking to pass wealth onto heirs and charities over time are also well suited. Quite possibly more long-term healthcare financing should be in non-publicly traded securities.

 

Efforts to create new restrictions on mergers and acquisitions by this administration, like the FTC and Justice Department, are among the new risks facing large Pharma companies. These restrictions will raise the cost of healthcare and slow US development of new products and services. (This could be more destructive than a new land war.)

 

Messages from the Market

  • A Wall Street Journal survey of economists found 3 optimistic and 5 pessimistic.
  • The latest data on ETF flows showed domestic equity redemptions, with net purchases of international and tech funds.
  • After the market closed on Friday, I noticed on a list of stocks that 15 had showed gains over closing prices, while 7 showed losses. (This suggests that disclosures of important information should perhaps be done during trading hours.)
  • The American Association of Individual Investors (AAII) conducts a sample survey of its member’s estimates of the market 6 months into the future. Market analysts view these readings as contrarian signals. On balance, I believe the public is often more correct than the professionals. However, there is good evidence the public is late in identifying critical turning points. I view a reading of over 50% or below 20% as abnormal for bullish or bearish readings. This week’s survey showed 51.4% anticipating higher markets. Up from 41.0% the prior week, a cautionary sign.

 

Sometimes it is Better to be Lucky than Smart

I have twice recognized being lucky. In both cases I invested in a fund which for non-investment reasons decided to liquidate by distributing its portfolio to shareholders. It led to my first ownership of Apple at a very attractive price. More recently, a portfolio was transferred to me from a retiring, very sound, global equity income portfolio. One of its holdings was a company I had admired for a long time but had never purchased. I am now the owner of shares of Taiwan Semiconductor Manufacturing Company (TSMC) at an attractive price. The stock price recently dropped when the company announced its earnings would drop by 10%. The company also said its new Arizona plant would be delayed until 2025 due to its inability to get enough qualified labor. (They did not refute their expectation that semiconductors for artificial intelligence applications would grow at a compound growth rate of 50% over the next five years.) My purpose in mentioning these two unexpected gifts is to illustrate that if you are in the game of investing, some good and bad things can happen.

 

Yields on bonds are often good indicators of future stock market direction. Barron’s has 2 yield measures for high and medium grade bonds. The yield spread between these two indicators has narrowed from 97 basis points a year ago to 25 basis points today. This is mostly attributable to high-grade yields going up 102 basis points vs. 34 for the median grade. Since many capital spending plans are priced off the high-grade market, lower bond prices are a concern.

 

China

  • Only 20% of institutional managers expect China’s GDP to accelerate, compared to an earlier expectation of 80% looking for China to expand.
  • While the new president of the PBOC was trained in the west, the final decision on anything important governing the Yuan will likely be done by Chairman Xi.
  • Morgan Stanley has moved 200 people from the Mainland to Singapore to protect its internal data.
  • In the first half of 2023 Chinese box office revenues for American films was $592 million compared $1.9 billion in 2019. Implications?
  • James Mackintosh of the WSJ noted that Chinese securities prices are now at the same level they were 10 years ago.
  • For the week ended Thursday the best mutual fund sector was Financial Services Funds +3.89%. The worst was China Regional Funds -3.25%. (At least for this week, hedging my financial services holdings by owning some funds invested in China worked.)


Next Portfolio Steps?

You don’t need to know how to make a watch to tell the time.  Trying this exercise below gives the reader the chance to see the thinking behind some of the analysis. Each of the items mentioned could impact an investor’s investment actions. One way to determine whether they should is to assign a value to each item between 1 and 20 and convert that number into percentages between 5% and 20%. Disregard any assigned factor below 5%. (We are not that perceptive.) Add up the total remaining. Quite possibly the total will be over 100%. Take the total and divide it by 100, e.g., 100/150 = .67%. Reduce the value of each item by 67% and read the total which should be close to 100.

 

If that is the case. Ignore any reset value below 5%. What you’ll probably wind up with is some factors being the opposite of others. That is okay because it suggests an internal hedge, which is appropriate in many cases where there is a lack of full confidence in our views.

 

Treat the effort as an exercise and it may well open up other ways of seeing how you invest and could lead to useful changes. Please let me know how it works for you.

 

 

 

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

Mike Lipper's Blog: Two Cycles Are Worth Watching - Weekly Blog # 793

Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

 

 

 

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Sunday, July 16, 2023

Two Cycles Are Worth Watching - Weekly Blog # 793

 



Mike Lipper’s Monday Morning Musings


Two Cycles Are Worth Watching

 

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

 

 

 

Concept

I am basically a student. My reading of history, politics, government, finance, and sports, reveals that each trend reverses somewhat before following a different trend.

 

In selecting individual securities, the specific characteristics are often of primary importance. In constructing a managed portfolio, the analysis of sectors are important. In deciding whether or not to invest, cycles may be the most important factor. All of these considerations need to be adjusted for the identified needs of the owner of the asset. As an investment adviser I must consider these different responsibilities.

 

Below is a review of history through different cycles, along with a view of both the current period and various potential phases.

 

First Investment Cycle

In some respect an investment advisor is like a baseball umpire behind home plate calling balls and strikes. A famous umpire once stated that he calls them as he sees them. As an umpire I call them the same way. The difference is that my initial view utilizes mutual fund data. Not necessarily the best investment research media for all accounts in all situations, but a superior one for relatively unbiased analysis. Other measures rely either on a small group of expert analysts, media employees, or choosing to be listed in a specific marketplace.

 

Unlike the alternatives, mutual funds have in or out cash flows every market day and reflect the periodic decisions of their managers. Since there are more than 15,000 funds, this represents a large number of decision makers. Their results are much quicker at picking up the impact of investor decisions. (My old firm’s data is now published by the London Stock Exchange Group, which purchased it from a subsidiary of Thompson Reuters after it acquired it from me.)

 

Each week I review 107 mutual fund peer-groups over 11 time periods. This week I focused on the total investment return in three time periods: the 5 and 10 years periods and the period since the trough on 3/23/2020 through 7/13/2023 shown below:

 

Peer Group     5-Year    10-Year    Since Trough

Large-Caps    +10.20%    +11.26%      +23.62%

Mid-Caps       +7.42%     +8.99%      +25.74%

Small-Caps     +5.62%     +8.00%      +27.25%

Value          +7.26%     +8.01%      +24.63% 

Growth         +8.37%    +10.06%      +20.23%

 

Observations:

  1. Large-Caps won the last 5 years, but not the recovery.
  2. Small-Caps were the recovery winner.
  3. Mid-Caps with value orientation could be a reasonable bet, probably benefiting from M&A.

 

While “the market” is focused on reported inflation, consumers are not. Using the experience of retail consumers during Amazon Prime Days, the average order was $54.05, up only 3% from last year. A significant increase in buy now, pay later shows that consumers are managing their cash carefully.

 

According to a recent survey, 40% of asset owners are considering indexing. Equal weighting is gathering attention, a positive initial change that perhaps leads to active management later. The more investors congregate in the center, the less buying competition for attractive securities. However, for the best-selling opportunities buyers will have to wait until the too easy choice of the center becomes lonely.

 

Analytical Conclusion:

The current large-cap, growth leadership is unlikely to lead competitive investors much longer.

 

Despite the media hype that we are in a new “bull market”, investors for the most part are considering other issues. Top and bottom prices are established in the market, not through highs and lows in a calendar year. Using historic peak prices, the DJIA is 6.63% below peak, the S&P 500 is down 6.46%, and the NASDAQ is off its top price by 13.77%. We have therefore not been in a bull market. One can view what we have experienced as a rally or a correction. The NASDAQ Composite, the best performing index, hit its high on 11/19/2021. On that basis, we have been in a “bear market” with rallies for almost 2 years. This could be the first part of the feared stagflation, which could last for many more years, using history as a guide.

 

The Major Empire Cycle

One oversight of our Western European focused education system is not studying the repeated failures of various empire cultures around the world, not only in government but in business too. These problems could be avoided.

 

World trade is often the litmus-test relative strength evidence of growing and declining empires. We are entering the test period now. The World Bank noted that China contributed one half of annual world growth over the past few years. Due to current disinflation and deflation readings from China, it is expected to contribute only one third of the reduced size of world growth this year. This weekend The Wall Street Journal had a front-page headline stating “China’s Slowing Growth Has Many There ‘Losing Faith’ “.

 

Instead of the US taking a victory lap, we should be concerned. The math of the situation is that China’s import of US goods and services is dependent on their dollar earnings from Chinese exports. This is on top of Washington’s vote buying efforts restricting risk-oriented investment into the US. Odds are, a top-down Washington directed industrial policy is unlikely to produce positive results quickly.

 

One of the lessons I learned from college fencing was to respect my opponent and his abilities, including some that were not obvious. I feel the same way about China. Even though I have visited Beijing (central government), Shanghai (commercial power), and Shenzhen (industrial development) over the years.  I also spent additional time in Hong Kong where we had an office before HK was returned to China. I do not claim to understand how China really works. It however has one of the longest written histories of any large society, so I know it does work.

 

China has had some form of central government for at least 3000 years. Only rarely has it been ruled by an invader. Most of the time it has been ruled by a succession of dynastic families. Failing dynasties have periodically been replaced by palace revolts or revolutions from the south. During this long period it has been the leading country of the world at times, as well as its scientific leader. At one point it had the most powerful navy in the Mediterranean, before recalling it to be burnt due to politicians at the court not wanting any foreign entanglements.

 

There are two reasons for mentioning this. The first is to acknowledge the world power potential China could have had. The second is to demonstrate that China has always had an isolationist stance. Roughly 90% of its inhabitants are classified as Han Chinese today. Many other ethnic groups within their borders are carefully monitored. The largest being the 3 million Uyghurs and other Muslims which arrived before Marco Polo.

 

During the Song Dynasty (960-1279) there was a great deal of scientific advancement. This advancement was probably based on algebra, which the Chinese invented. Arab traders later used algebra and introduced it into the Muslim and European cultures. Other inventions from China were the abacus, gunpowder, binary code (genetic sequencing), paper making, and printing.

 

The basic unit in Chinese culture is the family. Families are often grouped into Tongs, some of which have led to Dynasties. Loyalty stretched from the family unit up to the courts of the leaders. Most of these units had a singular leader, generally the most powerful man and only rarely a woman. Even today, most groups are led by a dominant male.

 

The present leadership views its power as being derived from providing jobs, housing, and food for its citizens. At the moment there are no known potential rivalries for leadership. However, those on top are undoubtedly concerned about the large number of youths between 16 and 25 without jobs. They are not accepting low-level jobs below their educational expectations. There is two-way traffic for young smart people. Most move to western countries, preferably the US, when given the chance. However, there are a small minority working in the US who experience bias against them and return home, where they are welcomed.

 

Housing is another problem. While a lot of apartment building have been initiated, many are incomplete because builders spent the deposit money on marketing and other unfortunate expenses. The government, mostly through the provincial governments, is trying to help, but progress appears to be slow.

 

Two Conclusions:

  1. China is having recognized economic difficulties. However, their disappointing 5% goal for this year is many times larger than the somewhat rigged 1%-2% growth in the US, and no growth in Europe.
  2. China in the long run has some built in advantages, such as the Central Asian railroad into Europe which is being built to sell their improving quality goods. Their second big advantage that has become clear to the world is the poor-quality US government leadership, stretching from Afghanistan through Taiwan and into Ukraine. While China is having growing pains, the US is retreating.

 

Under these circumstances it is probably prudent to include some Chinese assets for global diversification as an important hedge against our problems here.     

 

 

 

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Mike Lipper's Blog: Retro, Forward, & Cycles - Weekly Blog # 792

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

 

 

 

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Sunday, July 9, 2023

Retro, Forward, & Cycles - Weekly Blog # 792

 



Mike Lipper’s Monday Morning Musings


Retro, Forward, & Cycles

 

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

  

 

 

Managing Money Motivations

There are two very different parties in a professionally managed investment account. The first is the owner of the capital who is primarily interested in investment performance, usually using current performance as representative of future performance.

 

The second participant is the manager of the account who wishes to maintain the relationship for a long time. The fully loaded cost of acquiring the account is usually not earned back immediately. Thus, the first rule for the manager is not losing the account. This is somewhat different than the motivation of the owner of the account.

  

Best Defense is to Keep the Account

Managers assemble a number of different securities into a portfolio so that not all of them decline by the same amount in most down periods, hopefully some will rise. One of the standard ways of accomplishing this task is diversifying the investment characteristics of the securities. The most important characteristic of a security is deemed to be its risk of declining.

 

The money management profession in many cases believes stocks and bonds have separate levels of risk of decline. The way this is expressed and managed is through a ratio of stocks and bonds, for example 60/40. This means 60% in stocks and 40% in bonds. The investment media has declared the 60/40 strategy dead following approximately 40 gainful years for bonds and 3 years of decline. The average performance of 107 mutual fund sectors over the last three years through Thursday, 41% have lost ground. All but one of the declining sectors were fixed-income oriented.  The one exception was Chinese Regional funds. (This confirms my view that we have been in a period of stagflation for some. We will be dealing with Chinese oriented funds in a subsequent blog.)

 

Understanding the Use of Numbers

The purpose of the ratios was to manage risk. Today there are many stocks that are less risky than some bonds or other credit instruments. A better name for this diversification function would be low risk, or high quality/high risk, or low quality. One should recognize that like almost everything else in life, risks move in cycles. Some Scottish Trusts started life owning only British gilts, and over time introduced stocks. Today, some of these trusts are almost exclusively invested in stocks, while maintaining their historic names. 

 

In the US, trust accounts have gone from 100% bonds to a 50/50 split. Trusts then moved to 60/40, with some advocating for 70/30 and even 80/20. What brings this concept of cycles to mind is in 1957, or there about, discussion I had with the venerable Professor David Dodd, who was teaching Securities Analysis at Columbia. He emphasized the use of balance sheet related data in securities selection. With the arrogance of a student, I suggested growth had become more important since the Depression, when he and Ben Graham wrote their seminal textbook on Securities Analysis.

 

He closed the discussion by explaining that the fund he was involved with had made lots of money buying discounted value securities. However, ten years later growth stocks led the market. Perhaps the good professor was right for professionals. Many growth stocks fell, including from the ’73 peak, whereas his value stocks held up much better. This experience convinced me that the appropriate diversification schedule is a cyclical pattern.

 

Are We Near a Change in Valuations?

There is some evidence that it is possible, if not likely, we are near a change in valuation. Fixed income yields have been inverted without a marked recession for over a year. Last week the US Treasury yield-spread between the two-year (4.93%) and thirty year (4.03%) was a remarkably narrow 0.9%. This suggests the long-term future is not as attractive as the current period, with potential recessions in the next thirty years.

 

This appears to be at variance with current estimates for S&P 500 stocks. Net income changes in the second and third quarter of 2023 are expected to be -8.6% and +1.7%, respectively. (These are net income changes, EPS estimates are expected to be -6.4% and +1.7%, respectively. This shows the benefit of firms buying back their common stock. Buy backs potentially help managements with their stock options, but possibly not in the long-term improvement of the value of the company.)

 

The “bulls” in the market are possibly relying on one of the oldest market forecasting devices, The Dow Theory, which requires both the DJIA and the Transportation Index to move in the same direction. In the latest week only two of the 30 DJIA stocks rose, with thirteen of the 20 transportation stocks rising. At this time of year seasonal inventory is moving toward the stores, but many stores are closing or hiring inexperienced staff.

 

With services and non-durables growing while durables are not, there is a long-term structural problem for the economy.

 

Conclusion:

Changes are coming and we need to manage them, or they will manage us.

 

 

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

Mike Lipper's Blog: Gravitational Waves & Investing - Weekly Blog # 791

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

Mike Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789

 

 

 

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Sunday, July 2, 2023

Gravitational Waves & Investing - Weekly Blog # 791

 



Mike Lipper’s Monday Morning Musings


Gravitational Waves & Investing

 

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

 

 

 

 Living & Investing within Uncertainty

We unconsciously make bets about a collection of futures at every moment. Scientists and other Seers have been doing this since the beginning of human time. The terms of our world have been evaluated, as well as how to gain, grow, preserve, and distribute wealth. I have come to a point in both my professional and personal life where I hope to find a systematic way to make investment decisions regarding money and the expenditure of time and effort in acquiring it.

 

This week, by mere coincidence, scientific teams in Europe, India, Australia, China, and the US, released their astronomical observations on what they perceive happening in deep space. Their observations are the result of 15 years of study using both land and satellite based large telescopes. (This knowledge is also being shared by nations building military applications.)

 

The research follows the theoretical work Albert Einstein did over 100 years ago. (Historical note, Einstein was a frequent guest and lectured at Caltech where I am a Senior Trustee.) The current work supports his theory that we are traveling through an undulating sea of intensity and are being attracted by the gravitational pull of large, dead, dark stars. At this point, we cannot predict how these intense, undulating pressures will direct our earth.

 

Coming back to earth and the subscribers of this investment blog. We should accept uncertainty as one of the undulating governors of future investment opportunities and risk. I am starting to corral a number of thoughts as part of a toolkit to develop appropriate investment policies tailored to particular situations.

 

3rd Quarter Risks for Money Managers

The bulk of dollars under management may have entered a period leading to the termination of trusted relationships, both contractual and/or personal. Relatively few formal or informal investment committees execute management changes during the summer, but they likely will after the third quarter when decision makers receive second quarter reports. These reports will not be happy readings in more cases than not. It is estimated that the earnings per share of the stocks in the S&P 500 index will fall by -5.7%. Combining this news with another bit of analysis, it may cause fiduciaries to question the reason they are paying fees to their existing managers.

 

In a second bit of analysis, if one subtracts the performance of the 28 stocks in the S&P 500 which gained during the first half, the remaining stocks lost money. For the six-month period, gains for the 28 stocks were larger than those in the first quarter. Many more had positive gains in June, as the number of winning stocks expanded significantly. However, the June 30th report may also reveal that there were losses for more than two years, as mentioned in last week’s blog.

 

Portfolio managers, anticipating the results of the 2nd quarter, may have plowed money into the six to ten global tech-oriented leaders of the first quarter. It is my impression that the Price/Earnings ratios of many of these companies expanded more than their underlying earnings growth, perhaps pushing them to over-valued levels.

 

My concern is that we could see a repeat of a lesson from the late 1960s, when two leading Boston based mutual funds with the rest of the market fell. At the time my brother’s firm was selling fund performance data for brokerage commissions. Our trading desk was in communication with both of these competitors, among others. Up to that time both funds had similar portfolios but following the decline the two managers followed different defensive paths. One sold its most over-valued stocks. The other, perhaps learning from his mother who was a broker on the Shanghai exchange, sold his largest and most liquid positions.

 

After the decline ended, the second manager was hailed in the press as a brilliant manager. So much so that he was featured on the cover of a well-known business magazine. This propelled him to start his own fund management company, which raised a lot of money but didn’t perform particularly well and merged out. The other portfolio manager had retired earlier.

 

Using performance records can only lead to unfortunate choices. At the racetrack, some bettors select the horse with the most winning races or a high win vs loss ratio. I have often found this to be a trap. The wins were over cheaper horses or those competing at less competitive tracks. Whenever trainers enter a horse in a race which had a number of higher quality horses with less of track record, the horse often does not live up to its win/loss ratio.

 

As a provider of performance analyses, we addressed this issue by creating a peer group under the rubric “Capital Appreciation”. The peer group housed funds essentially based on their win/loss ratio, not what was in their portfolio, like growth or growth and income stocks. Over time, fund marketing people and lawyers convinced us to give them the widest range of portfolio choices in their prospectus. Many ended up saying their funds sought capital appreciation and secondarily provided income. The delineation of the peer groups were too broad and was consequently dropped.

 

As a manager of accounts and a member of investment committees I seek to be invested in funds that meet the intermediate (5 year) and long-term total return needs of the account, not shorter-term results. I am anxious for my responsibilities to accomplish their planned distribution to finance their purpose.

 

Work in Progress

There is much more that needs to be discussed including responding to inputs from subscribers. Two additional topics require more space and your time. I am working on the tension between economics and the impact of China and the rest of the world. I would appreciate any comments on what I have produced as well as on the two topics that I am developing.

 

 

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

Mike Lipper's Blog: Manageable Risk - Weekly Blog # 790

Mike Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789

Mike Lipper's Blog: Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly Blog # 788

 

 

 

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Michael Lipper, CFA

 

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Contact author for limited redistribution permission.