Avoiding Many Mistakes - Weekly Blog # 834

 

         

Mike Lipper’s Monday Morning Musings

 

Avoiding Many Mistakes

 

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

   

       

Numbers Are Not the Answer, Questions Are

This is the season of the year when investment managers are often chosen. This is particularly true now, with US stock market leadership evolving. There is a debate between the short-term attraction of growth and fundamental long-term concerns over the global economy and political structure. We may have entered the early stage of replacing current leadership in business and in Washington. Because the future appears uncertain, group decisions through committee are more likely. (A historic lesson from military and political history is the larger the group, the less dynamic the decision.)

 

The first step in making an investment discussion is often to gather the easily available numbers. The first problem with gathering numbers is the motivation of the sources. In the investment arena, the major providers are groups who wish to publish data for direct or indirect sale and/or profit. Another source is regulators who wish to provide standards leading to evidence for lawsuits. Neither of these sources try to help others make wise investment decisions.

 

At this point in my professional life and practice, I am trying to make informed and correct investment decisions for specific users, including my family and myself. The following discussion are some of the indicia I use to ask some of the right questions.

 

Critical Questions in Search for Profitable Investments

1. Rarely the first question and more likely the last, is understanding the motivation of important individuals involved on a personal and group basis. Different answers should be expected depending on whether the mindset is one of a publicly traded investor or a sole ownership, and all gradations in between.
2. Obtain quarterly performance since inception for at least ten years, or shorter if there was a significant change of individuals or operating philosophy.
3. Understand the choice of perceived peers and their performance for the period where their critical philosophy and personnel were in place.
4. Get the percentage of time the investment occupies in each quintile. If potential investors are satisfied with mid-quintile performance, eliminate all candidates who don’t have 75% of their results in the 3^rd quintile. If the account is a significant turnaround buyer, focus on managers with 25-50% in the 4^th and 5^th quintile. (This is based on the reaction of many investors to the pain of losing, which is felt twice as much as gaining an equal amount. If the pain multiple is higher e.g. 4x, the loss tolerance level will be lower, perhaps as low as 13% or in the range of only five quarters out of 50.) If the buyer insists on avoiding problems, screen for a manager that has performance primarily in the second quintile, but no more than 25% in top quintile.)
5. Voting members of the committee, are they making choices or reaffirming choices made?
6. How important are inputs from marketing/sales and trading? Who are the top 10 brokers and top 10 marketers for the organization?
7. Recalculate the published turnover of the portfolio to include the greater of sales & purchases. (The SEC mandated measure is based on the smaller, because of their concern for “churning”. Identify the major sources of inflow and withdrawals? From the portfolio perspective, how much of sales is replacement of positions and how much stems from disappointments?
8. What are the management responsibilities of the portfolio manager and who does he/she report to? Can he describe his personal and major family portfolios?

 

Items of Interest you may have missed.

1. Daniel Henninger wrote a column in Thursday’s WSJ titled “The Counter-Revolt Begins”. He lists a number of instances where decidedly left leaning communities have passed local regulations and laws to bring back some safety to their cities and states. These include San Francisco, Los Angeles, the District of Columbia, and the states of Oregon and New York. Wealthy university donors are also insisting on changes.
2. The global financial community is consolidating as intra-industry acquisitions occur. Computershare is buying BNY Trust Company of Canada. Several top financial advisors at JP Morgan also left in a single day.
3. PGIM of Prudential is following the trend and has applied to the SEC for a new class of Exchange Traded Fund shares for their mutual funds. They are following DFA, Morgan Stanley, and Fidelity. (This may bring more money into the ETF industry. It answers one of my concerns for redeeming ETFs in thin markets.  A surge in bond and small-cap redemptions on a crisis day can be helped by accessing the open-end fund’s resources. Until Vanguard’s patent protection expired, it was the only fund group that could do this.
4. All 32 global equity market indices rose this week.
5. AAII publishes bullish, bearish, and neutral indices from a sample survey of their members market views six-months out. They show rare confusion in the retail market this week, where all three numbers were in the 32-33 range.
6. Also, Copper prices are often referred to as Dr Copper because the metal is used in so many products. Copper has been used as a type of currency in some countries with limited or expensive markets for dollars. This week’s copper prices were near an all-time high.

 

As always, I am searching for good thoughts from bright people such as you.   

 

 

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Mike Lipper's Blog: News & Reactions - Weekly Blog # 833

Mike Lipper's Blog: Better Investment Thinking - Weekly Blog # 832

Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

 

 

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A. Michael Lipper, CFA

 

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News & Reactions - Weekly Blog # 833

 

         

Mike Lipper’s Monday Morning Musings

 

News & Reactions

 

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

   

       

 

Current Picture

For most purposes, the single best measure of the US stock market is the Standard & Poor’s 500 Index. After four weeks of decline, year-to-date through Friday the SPX has retreated 5.94% from its high, although it is still up 5.46% from its low year-to-date. So far, it has given back more than half of its gains for 2024. For the same period the Dow Jones Industrial Average (DJIA) has 15 stocks rising and 15 falling. Probably more significantly, only 6 of 20 Dow Jones Transportation Index stocks have risen. Even more significant, only a single market index rose out of the 32 domestic and international stock market indices that S&P Dow Jones tracks weekly. Expanding the universe to include commodities, currencies, and index funds, only 26% rose this week.

 

For those who wish secondary inputs, the following facts may be of interest:

1. The bullish portion of the weekly AAII sample survey is at 38.3%. A few weeks ago, it briefly reached over 50%. (Market analysts have labeled the AAII readings a contrarian indicator, believing the index represents retail investors who are always wrong.) That is not true! While retail investors are often believed to be wrong at turning points or late to a change, they have a reasonably good long-term performance record. In this case the over 50% reading was achieved in a quick run up, which subsequently dropped to its current 38% reading. This is not far from the mathematical neutral of 33% for each of the three sub-indices. On a long-term basis they may well be correct.
2. The only large geographic region showing growth in the number of listed companies is Asia. Thus, it is somewhat surprising that both Morgan Stanley and HSBC are laying off Asian investment bankers. These are smart people.
3. Residential insurance is absent from the normal inflation calculation. While it is of no significance for renters who have seen no important increase since 2018. Homeowners over the same period have seen their insurance costs go up over 50%. (I wonder how many other omissions there are in government data,)
4. Almost all attention in the forthcoming election has been focused on the top of the ticket. To me this is unwise. Whichever candidate sits in the White House in January will be a lame duck. This President cannot help members of Congress get re-elected in 2026, 2028, and 2030. There is a reasonable chance many voters will not vote this year due to the presidential candidates. To the extent this is the case, the missing voters will come from the center of their respective parties. This will allow the fringe elements in both parties to get more power to shape congressional committees.

 

China Impacts & Questions

Whether the US likes it or not, China is becoming the nation that will impact world trade and growth. In the first quarter of 2024 China’s GDP grew 5.3%, while US GDP grew 4.6%. Something curious happened with some of the Chinese numbers. Industrial production gained +6.1% while prices fell -2.7%. We know that China is selling scrap copper and other strategic products to Russia. (This should cast some doubt on Chinese statistics and their meaning.)

 

Long-Term Considerations

The Managing Director of the International Monetary Fund (IMF) is concerned that growth in the twenty's decade will be “tepid “. Jaime Dimon, CEO of JP Morgan Chase (*), has questioned the general belief that petroleum usage will peak in 2030.

(*) A position held in personal accounts.

 

The standard M&A game is getting more imaginative, at least in the mutual fund management company arena. Amundi, the French investment manager, is selling its American fund assets to Victory Capital for a minority interest in Victory Capital. What made this deal attractive to both participants is that each gained access to the others distribution functions in their home markets, negating the need to build an independent administrative base.

 

The Managing Director of the IMF is concerned about global growth, referring to this decade as the “tepid twenties”. Her concern about growth is partially based on the low level of productivity in much of the world. I share her view, particularly focusing on the US. If you break apart the productivity gain between financial and labor, I suspect labor’s contribution would be quite low. My guess is excessive regulation and less than useful education is holding us back.

 

A recent study shows that interest in the current election is probably at a low point for youths, with only 32% of eligible youths showing any interest in the election. In 2020 it was 56% and 2008 it was 67%. Within two generations these non-voters will be in control, which happens to be when current retirement capital will be feeding some of the current beneficiaries. GOOD LUCK TO ALL.

 

Any Thoughts?

 

 

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

Mike Lipper's Blog: Better Investment Thinking - Weekly Blog # 832

Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

 

 

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Michael Lipper, CFA

 

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Better Investment Thinking - Weekly Blog # 832

          

Mike Lipper’s Monday Morning Musings

 

Better Investment Thinking

 

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

   

       

 

The late and great Charlie Munger gave Warren Buffett his greatest compliment when he called him a “thinking machine”. His compliment implies that Warren is always thinking and trying to improve his investment process. In last week’s post-script at the end of the blog I introduced the concept of needing to focus on the process of selling. Early this week I had a conversation with one of the more perceptive members of a monthly investment discussion group. He was concerned that they hardly ever discuss the process of selling.

 

Selling is often prompted by the need to raise cash or the need to free up cash for reinvestment. Currently, we have quite possibly entered a period where it would be prudent to develop a meaningful cash reserve for later equity reinvestment. Admittedly, it runs the risk of not fully taking advantage of the rising stock market.  It is with that thought in mind that I am introducing the thinking of Professor George M. Calhoun, with some concern as to the structural risk it might expose.

 

George’s views have been shaped by the following experiences.

• For 25 years George worked for various tech companies.
• He is a Professor at The Stevens Institute of Technology, where I am one of the trustees.
• At Stevens, George supervised the development of the Hanlon Financial Center, a live trading room.
• He won a National Science Foundation award for creating the Center for Research Toward Advancing Financial Technologies (CRAFT).
• George is a regular contributor to Forbes.

George Calhoun has written extensively on the causes of inflation, in discussions on: Dangers created by Money Market Funds, Cash Shortages, Recession Signal, Dry Powder, and Contrarian Indicator, parts of which are included in the link to the article below.

 

 

Collateral Damage From Fed Policy (3) – Money Market Funds, A ‘Powder Keg’? (forbes.com)

 

 

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Mike Lipper's Blog: Preparing for the Future - Weekly Blog # 831

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

 

 

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Michael Lipper, CFA

 

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Preparing for the Future - Weekly Blog # 831

          

Mike Lipper’s Monday Morning Musings

 

Preparing for the Future

 

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

   

       

 

The fundamental job of an equity investor and manager is to grow current assets to fulfill future needs. Since we don’t know what the future will be or when it will be, we should consider a range of possibilities. My training at the racetrack and the US Marine Corps supports viewing the various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those facing us today.  

 

The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned. 

 

Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work. 

 

I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.

 

Management Structure is Not Optimal 

The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers. 

 

Another Focus Should Be Updated 

 I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road. 

 

PS 

This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.

 

Like most analysts and others commenting on investments, I have done the easy half of the job by supplying my thoughts on the buying function of investing. The much more difficult function is the disposal of investments, which is normal for the investment related committees of the two tech-oriented universities on which I serve. The reason for this one-sided effort is that making a buy decision is relatively easy.

 

By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:

• Likely reaction when other critical investors find out.
• Tax implications.
• Impact of the decision on the rest of portfolio.
• Dealing with beneficiaries.
• Legal aspects.
• Performance results.
• A least 10 other factors

I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.

 

Next week, most of the blog will be devoted to an article produced by a brilliant well-rounded Professor from the Stevens Institute of Technology. The article explores how government actions had an unintended inflationary impact.

 

I am very interested to hear your reactions to this experience.

 

     

 

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

Mike Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830

Mike Lipper's Blog: Fragments Prior to Fragmentation - Blog 829

Mike Lipper's Blog: Collateral Rewards, Risks, & Opportunities - Weekly Blog # 828

 

 

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.