Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

      

Mike Lipper’s Monday Morning Musings

 

Collateral Rewards, Risks, & Opportunities

 

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

   

 

 

Motivations

The attempt to be successful and original is hard work, as being an originator seldom leads to investment success. Better results come from striving to be an early participant in an investment idea. Great individual analysts search for a single great idea, usually an idea that few if any recognize.

 

Somewhat later and perhaps deservedly less successful are those who are early recognizers of those with great investment ideas or themes. The second group are collateral players, including public and private pundits working to identify these opportunities.

 

At one point in my professional life, I was a candidate for the first group. I devoted some of my time as an analyst to visiting plants, doing walking tours of workspaces, and attending industry sales presentations or government conferences. In order to accomplish these tasks, I often commuted on the earliest and latest trains. In addition, I also read numerous trade journals, which I no longer do.

 

Today, my “remote” research consists of reading or watching business communications, visiting buyside managers and their analysts, and walking through shopping streets and malls. In effect, my first glance at new products and services is when they are introduced to the buying public, so I am going to be late in recognizing new trends. The only offset I have is my prior experience, having seen many things in the past which may have some bearing on present and possibly future trends.

 

What Are Most Missing

Much has changed in the sixty plus years I have been watching.

1. Disclosure rules have changed.
2. Corporate executives meet investors and analysts in tightly scripted conferences or small meetings.
3. The published data is largely statistical in nature and is focused on the immediate past. Much time is spent on complaints about government restrictions and disclosure requirements. Two examples are the focus on demographics and worker counts. (This is the same trap political pools fall into.) A much more expensive and insightful source of useful information is psychographics, rather the demographics. While two workers may have the exact same job classification, one might be solely concerned about wages and hours while the other seeks career opportunities well beyond the current paycheck.

 

Questions Need to be Asked?

• What are the implications for the four largest net free cash flow producing companies, which reported over $50 billion each? This suggests to me that risk-taking finance and technology companies will be central to funding the future and could be its beneficiaries.

Net Free

Cash Flow

$ Billion

Goldman Sachs           $143 

JP Morgan Chase           87

Apple                     85

Google                    69

• The American Association of Individual Investors (AAII) is often viewed as a contrary indicator at turning points and last week the indicator switched direction. Those with a bullish outlook rose to 30.4% from the prior week’s 23.4%, while those who felt bearish fell to 41.4% from 53.7%. (The size of the switch and timing is unusual.)

• Lessons from the past for possible use in the future? In the 1930s the US shrunk its defense strength below its WWI level, while restricting oil exports from American companies to Japan. It also refused to permit the offloading of a ship of European refugees. (These actions were taken by FDR, whose portrait is the most prominent in the current White House. It hangs in the room where the President meets with current world leaders and US politicians.) 

 

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