Selling: Art & Risks, Current & Later - Weekly Blog # 803

 

Mike Lipper’s Monday Morning Musings

Selling: Art & Risks, Current & Later

 

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

 

 

 

Most Difficult Decision

After a decision is made to purchase one or more securities the level of complexity escalates through one or more holding periods. The act of selling has immediate performance implications, but also has implications for the rest of the lives of the investor, their inheritors, and various governments. Because of these implications, the decision process should consider factors wider than the simple decision to purchase.

 

Decision Making

Individual investors often start their investment process by thinking about “their” money and its personal use. Over time their thinking may broaden to include their responsibilities, leading them to start thinking of themselves more as fiduciaries. Most investment money, including that in various institutions, is managed with fiduciary principles in mind.

 

However, when we bring a professional fiduciary into the picture, the decision dynamics evolve. The fiduciary unsurprisingly wants to be compensated. More importantly, in our litigious society fiduciaries want to avoid being sued. Most suits are decided on the basis of the 1830 Putnam vs Harvard (Prudent Person) case, which holds the fiduciary performance standard to what other prudent people would do with their money. This is a backward-looking judicial view. (This approach created the performance measurement business, which benefited the author and my various associates.)

 

While this approach is addressed by the so-called “Prudent Person” decision process, it doesn’t make a lot of sense for a forward-looking investor. For example, if a manager stays fully invested in a speculative securities market decline and vastly underperforms a more diversified portfolio, he would be judged imprudent for the declining investment period. However, if the measurement period included the recovery and a subsequent growth period, the entire period might be much longer than desired for a more conservatively managed account.

Where Are We Today?

Since we look at investing through short to long-term periods, the following views express an opinion, not a prediction as to three stimuli.

• Investors are fleeing China, driving many prices down. If you are a trading investor who values short-term performance, it might make sense to reduce exposure. However, there are two reasons that suggest the opposite.

1.    Betting against volume normally works better than the opposite.

2.    Without the growth of Chinese exports, world growth will be constrained.

• The three major US stock market indices had a dull to sloppy week. The S&P 500, representing the bulk of investor’s capital, fell slightly through a technical barrier. While not a prediction, it could suggest the calendar year might finish with small gains for the year. If that turns out to be true it would confirm we are in a period of stagflation similar to FDR’s depression and a model for Joe Biden.
• All three dominant political leaders: Biden, Trump, and Xi, were/are concerned with the need to create employment opportunities for younger voters and spenders. History shows others using effective ways to accomplish this goal.
• In ancient Rome, legionnaires were awarded captured farmland to provide food for Roman staff. It also served to cultivate political capital. The building of the viaducts was also needed to bring food to Rome.
• President Eisenhower pushed a national highway system, which improved interstate commerce and employed private workers. Ike had the benefit of several knowledgeable brothers, which were Presidents at local banks and Universities.
• Xi has possibly built the biggest and fastest railroad system in the world. US rail and airport infrastructure is way below many third world countries.

Now it is Your Turn

The ultimate value of these blogs is to raise discussion of these controversial views. Let’s hear from you.

 

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Mike Lipper's Blog: Investment Thinking During a Lull - Weekly Blog # 802

Mike Lipper's Blog: Need For a Correction Decline - Weekly Blog # 801

Mike Lipper's Blog: Not Yet! - Weekly blog # 800

 

 

 

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Investment Thinking During a Lull - Weekly Blog # 802

 

Mike Lipper’s Monday Morning Musings

Investment Thinking During a Lull

 

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

 

 

 

The most important and precious investment commodity is not money or reputation, but our time. Throughout a good bit of 2023 the US stock market rose and fell but went nowhere in many weeks. Perhaps we have entered a period of stagflation, with our cash flow squeezed by rising expenses and slowing gross investment returns during periods of low equity volume. In other words, it was dull despite what happened in the economy and political sphere.  

    

Many of us wasted the most precious investment thinking of our time. Most investors focus their time on trying to guess the next integer of return in their portfolios, when they should be estimating the cash flow needed to meet expected expenditures. Second, we should attempt to estimate a termination value at death, or the liquidation of the estate. 

 

Far too many investors have a collection of securities resulting from transactions focused entirely on the reasons to buy or sell a specific security. This can be appropriate if you are blessed with specific trading skills. However, very few are so blessed. Over time, most investors get more benefit from a diversified portfolio. One such portfolio for a newly retired person not expecting to trade the account might have the following components:

• High quality long-term fixed income (1/2 in US Treasuries and ½ in AA corporates)
• Large-Cap Growth
• Asian Equities (Exporters or high savers)
• All-Cap recovery candidates currently producing net operating cash flow below average for the last five or possibly ten years.

It is not important for this exercise whether one agrees with the sector choices. 

 

The key to the exercise is that each sector is assigned a weight. The job of an intelligent portfolio manager is to set the outer limits for each sector. When a sector’s boundary is breached, an adjustment should be made to return the portfolio to a sensible balance. 

 

Many of our big winners were established early in our investment history. It would be unwise if most of our winners were bought at roughly the same time. A good portfolio should have a combination of new and old winners based on the current situation, including key people. 

 

Prices move throughout time, often based on “leaks”. Studies of leaks reveal that between ¹/₅ and ¼ are known in the market before official notification. Investors should be aware that news leaks frequently happen during wartime or dull periods. 

 

What are your thoughts?     

 

 

 

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Mike Lipper's Blog: Need For a Correction Decline - Weekly Blog # 801

Mike Lipper's Blog: Not Yet! - Weekly blog # 800

Mike Lipper's Blog: What Do Single Digits Mean? - Weekly Blog # 799

 

 

 

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Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

Blog 800 Correction

 

Mike Lipper’s Monday Morning Musings

 

 

Blog 800 Correction

 

 

Below is part of the first section of the blog we posted last week. We unfortunately overlooked a typo in the last sentence of the second paragraph. The sentence should have stated “With the 1000^th blog less than 4 years away”. Our original posting stated “With the 100^th blog less than 4 years away”.  We apologize for the error and thank our readers for calling it to our attention.

The Thinking Behind Blog 800

When I realized the 800^th blog was coming up I tried to think of something special to discuss, like a critical turning point at the beginning of a new long-term market cycle. I see a turning point in the future which will begin a new corrective cycle. It will address multiple imbalances facing the US stock market, a reflection of increasingly problematic domestic and global problems.

 However, it now appears we are likely going more toward a shallow dip, which could be labeled either a “soft landing” or a ripple in a stagflation period. Regardless, the underlying tensions continue to build and they will eventually lead to a deep corrective stage. With the 1000^th blog less than 4 full years away, I have high confidence we will see a major correction.

Need For a Correction Decline - Weekly Blog # 801

 

Mike Lipper’s Monday Morning Musings

Need For a Correction Decline

 

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

 

 

 

Need For a Correction Decline

Long-Term investing includes long-term up or down trends, some periods of stable prices or stagflation, and peaks/valleys. We will travel through each. There are both market and economic cycles. The steepest is when market and economic cycles roughly coincide, or when the market cycle slightly precedes the economic cycle. All important cycles are due to imbalances exploited by traders taking advantage of the rest of the market. As we have not had a corrective cycle for many years, I believe we are due.

 

There are many recognized imbalances, but I am focusing on one generalized area called demographics. Demographics involve people in terms of numbers, earnings, births, deaths, recognized skills, education and perhaps recognized political leanings.

 

In our last blog we dealt with national productivity at the individual level. We already pay attention to total national productivity. Most developed countries are experiencing declining numbers of workers due to age. This has been a major concern throughout history in terms of the ability to put large numbers of citizens in uniform. Increasingly, a high percentage of the population (77%) are not deemed suitable for military service in the US, although the US Marines have been able to meet their enlistment requirement. Due to physical condition, education, criminal record, or attitude, the majority are not suitable to protect their homes or allies. (As you read this blog, ask yourself how many young people you know would volunteer to join if we suffered a September 11^th, 2001 type attack. I suggest one of many reasons for their attitudes are expressed in their schools and homes. American citizens and our allies should be worried.)

 

Other concerns

Lack of useful leadership throughout society has resulted in people seeking corporate and government solutions for major problems. This has led to a collection of politically skilled CEOs who are not good operational leaders. Very few of these leaders are prepared to commit to the kind of periods we enjoy with private companies and institutions.

 

One example occurred this weekend when I unexpectedly spent a few days at a good local hospital receiving treatment. A single medical officer commented that hospitals had become understaffed when COVID reduced their critical support staff.

 

This past week saw poor results in the financial industry. Three measures, including the NYSE and NASDAQ, saw over 70% of their listed securities decline in the weekly WSJ price results for markets, commodities and currencies. There will eventually be positive operational results, but probably not until major senior managements are changed.

 

Please share your views and correct me where I am wrong.

 

 

 

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

Mike Lipper's Blog: Not Yet! - Weekly blog # 800

Mike Lipper's Blog: What Do Single Digits Mean? - Weekly Blog # 799

Mike Lipper's Blog: Some Past Errors Create Future Problems - Weekly Blog # 798

 

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Not Yet! - Weekly blog # 800

 

Mike Lipper’s Monday Morning Musings

Not Yet!

 

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

 

 

 

The Thinking Behind Blog 800

When I realized the 800^th blog was coming up I tried to think of something special to discuss, like a critical turning point at the beginning of a new long-term market cycle. I see a turning point in the future which will begin a new corrective cycle. It will address multiple imbalances facing the US stock market, a reflection of increasingly problematic domestic and global problems.

 

However, it now appears we are likely going more toward a shallow dip, which could be labeled either a “soft landing” or a ripple in a stagflation period. Regardless, the underlying tensions continue to build and they will eventually lead to a deep corrective stage. With the 100^th blog less than 4 full years away, I have high confidence we will see a major correction.

 

Regardless of the timing and depth of the correction, we remain largely invested in equities and stock funds. These funds will need guiding principles to survive the correction and prosper from the following “bull” market.

 

Sources of My Guidelines for Long-Term Successful Investing

• Fidelity has published their views on 5 mega trends.
• Marathon in London has written about the benefits of low turnover and stable managements.
• Howard Marks expressed his views on escaping extreme investing.
• Finally, my own observations on the investment decisions of funds, commuters, and actuarial lessons on betting.

 

Productivity/Profits- Fidelity

Fidelity probably invests in almost every investment any place in the world. They serve different types of clients in many capacities and countries. Of the 5 Mega Emerging Trends, the most easily measured is the slowdown in the growth of productivity, more specifically in the productivity of labor. Labor is easily measured in terms of the number of hours committed to work, likely for compensation. (What is not evaluated is the quality of the work.) The number of hours worked in the US is in the upper portion of the lower half as shown below:

   More than US      US    Less than US

UAE          2709  1892   UK        1866

India        2480         Germany   1783

China        2392         Australia 1669

Mexico       2220         Canada    1664

South Africa 2154         France    1565 

Thailand     2108

Poland       2085

Indonesia    2043  

Philippines  2039  

Russia       1965

 

Implications

1. In a world that has higher interest rates and is short of opportunities, there are more places competitive with the US.
2. When US proclaims politically motivated holidays, such as Labor Day.

 

In an article by Howard Marx, he warns about extreme stock prices. When extreme enthusiasm pushes prices to record highs or lows, investors sell stocks priced for perfection, or buy/retain stocks which can never generate good news. Most of the time securities trend in one direction or the other. A dangerous condition is when all opinions on a security are totally one-sided. Very few investors understand that it is rare for there to be no salvage value for knowledgeable investors with patience and legal backing.

 

An example of too many one-sided beliefs was the 50 institutionally favored stocks in the early 1970s (Nifty Fifty). It was believed that these stocks could be bought and never sold, after the recommendations of the leading institutional brokerage houses didn’t work out. In 1972 the list contained Eastman Kodak, Polaroid, Sears, and Kresge. In the years that followed, all four disappeared through bankruptcy. To demonstrate how much reputational power these stocks had. One senior investment officer was an early promoter of Polaroid and managed to ride that performance into being hired as the senior investment officer at a New York based mutual fund house. He didn’t last long in a company that was studied daily, including its longer-term performance.

 

Marathon in London has a successful record with its European fund and others. They are a low portfolio turnover shop who pay a lot of attention to industrial and corporate capital cycles and meet with long-term senior management extensively. They are very proud of the 26% of their portfolio that has been held for more than 10 years in the European fund. Those positions represented 45% of that portfolio at the end of the period. When I visited them, I was amazed at their detailed knowledge of their companies, managements, and critical competitive information.

 

There are many investment lessons I have learned from just observing and listening to people. For example, I suspected the market was getting frothy in the late 1960s when a person I commuted with on a 6 AM train mentioned he had gotten a personal computer and was going to stay home and day trade a handful of stocks. He was a mid-level executive at a famous financial institution and appeared to have average intelligence. I was working for a firm that had a very active trading desk that regularly dealt with some of the sharpest trading shops. Very occasionally I heard one-side of a phone conversation between the traders. I felt I needed a translation regarding their words and tactics. I am sure my former train buddy knew no more than I did about institutional trading. Hopefully he learned quickly or found a new job. I never saw him on the train again.

 

I owe UPS a gift for the two investment lessons I learned from them this week. There was a public announcement that the company was offering early retirement to 167 senior pilots. Each of their planes carries about 30,000 packages and is designed to fly every day. Consequently, in terms of delivery capacity, it meant UPS would deliver 1.8 billion fewer packages or these packages would be flown by less expensive junior pilots. It suggested to me that UPS was expecting less business after their expensive settlement with their truck drivers. Within the week our friendly regular UPS driver delivered some low value drug store items, which may have come from a warehouse or a local store under half mile away. In either case, it was not a bullish indicator for me.

 

During the very same period institutions were locking into long-term investing in the nifty-fifty stocks, there was a more valuable lesson a few miles from Wall Street. On a Saturday in June of 1973 the Belmont Stakes was run. It was not much of a contest. Secretariat won by 31 lengths, setting a track record. While that was interesting, the real lesson of the day was that I didn’t bet on what was clearly the best horse in the race. More importantly, I did not bet on any horse in the race. When Secretariat won, the horse paid $2.20 for each $2.00 bet. What I learned was that even with the best horse in the world things can happen, or if you will “racing luck” might happen. (Sounds as if I was conscious of Howard Marx’s avoiding absolute certainty.) I was practicing good actuarial science, which excludes events so rare that they are unlikely to reappear. What I learned was that to not bet is a bet. Wagers should only be made when the odds of winning are high enough to cover losses in the past or in the future.

 

Conclusion

Investing should not be considered a single chance to make or lose money. The more you are aware of the world around you, the better your chances of finding some winning investments and keeping your losses small.

 

 

 

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

Mike Lipper's Blog: What Do Single Digits Mean? - Weekly Blog # 799

Mike Lipper's Blog: Some Past Errors Create Future Problems - Weekly Blog # 798

Mike Lipper's Blog: Inputs to Implications - Weekly Blog # 797

 

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.