Prepare
to be Bullish, Long-Term
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
(N.B. in classical
documents was a Latin warning for the reader to be prepared for elements of
disbelief. Subscribers are likely to disagree with some or all points made.
Nevertheless, they should be digested, even though they might question your
firmly held beliefs. Some of these thoughts might even reinforce your own
beliefs. In medieval courts there was often a paid clown or “fool” who might
cleverly utter some thoughts that no one else would dare say. Perhaps, this is
the role of this blog.)
Focus on the Finish Line
Almost all commentary about
the market, economy, and individual prices without attempting to identify the end
period outcome is lacking. One lesson from the racetrack was the order of
finish from a particular race. The payoff parade was the actual running of the
race, not any of guessing, analysis, or handicapping bettors did before the
race.
As both an investor and a
registered advisor, I attempt to make a guess at either the actual or relative
return after an extended period. The minimum time period I am comfortable using
to make an investment decision is five years. One reason I pick five years is a
lesson learned at the track about the element of surprise, or “racing luck”, in
any given race. In longer races there is greater opportunity to recover from a
surprise than in shorter races. The second reason to focus on a five-year
period was highlighted by the communist party. (I suspect they copied various
business plans in the 19th century by instituting a 5 year political term.) Many CEOs also negotiate a five-year term with
their board of directors for incentive compensation.
2028!?
Most money in the
securities market is invested to meet retirement obligations or long-term capital
expenditure needs. Those responsible for attempting to meet these needs should
be judged by their performance over longer periods.
While you can never
clearly identify the type of period we are presently in, I think it is the
responsibility of the investor to make his/her best guess, as the type of market
will probably impact the results.
2022 Change
While no single event is
likely to change the direction of society or the economy, there is often a
headline occurrence which can serve as a useful label. The single change that
became a turning point for me was the COVID Pandemic. The Black Plague occurred
centuries ago, and there were serious pandemics in the Spanish Flu in the1920s.
However, for the most part pandemics in the modern era have been rare.
The reaction by the US
government, led by the teachers’ union, materially changed the progress of society.
Focusing exclusively on the securities markets, 2022 was a down year, due to
curtailment of work and formal education. Governments rarely let a crisis go to
waste and by 2023 government expenditures and curtailment of selected
industries had enhanced inflation. Appropriate parallels were made with FDR’s
elongation of a recession into a depression.
First 9 Months of 2023
Perhaps it is ironic that little New Zealand’s central bank was the first to call for a 2% inflation goal and have its current indices generate a minus in front of them. The US may not be far behind, with Real Estate -5.4%, Consumer Staples -4.76%, Healthcare -4.09%, and most concerning, the S&P 500 equal weighted up only +1.79 %.
Where’s the Upside?
Almost all life is
cyclical, with the largest gains resulting after major declines. The longer the
current period of stagflation, the longer the hidden actions of building future
earnings power will be at work.
On a longer-term basis, continued
federal government deficits are a symptom of important twin deficits. Capable
management throughout society, and the inability of the educational system to produce
students suitable for current jobs. From pre-K to PhD, schools are producing
unmotivated students who are ignorant of the world and irresponsible, primarily
due to the views of their instructors.
Parents and employers are slowly exerting pressures for change, while businesses are evolving to meet the current needs of their customers. A non-recommended example is ADP, a company in our private financial services fund. The company started 74 years ago as a payroll service business. Today, with over one million clients, they have evolved into a Human Capital Management business providing a much larger contribution to their clients.
The Public Accounting Oversight
Board has stated that they are finding an alarming number of errors in audits.
We are finding the same trend in providing many services to clients, which presents
an opportunity. One other opportunity might be the mismatching of expected
industrial demand for “modern” cars, data centers, and equipment to change the climate. To
support these efforts there is a need for large quantities of high-grade steel production
and there are no provisions to expend production.
Savings, possibly the
biggest contributor to the value of stock prices in 2028 will be in the hands of
a new generation of political leaders and managements of profits and
non-profits. Hopefully they will make better decisions than in the recent past.
Please share with me your
thoughts.
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Mike
Lipper's Blog: Selling: Art & Risks, Current & Later - Weekly Blog #
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