Mike
Lipper’s Monday Morning Musings
Biggest
Investment Hurdle: Complexity
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
First Priority
An investment priority should be logging changes to your investment
policies, although most investors do not maintain such records. To paraphrase
the late and great Charlie Munger said that Warren Buffett was a learning
machine. His point was, Warren benefited from the losses he sustained. He had an
investment history of making very few repeated mistakes.
Most profitable investors also make relatively few mistakes,
in part due to most mistakes forfeiting more opportunities than money. To avoid
future mistakes, it would be helpful to have an insightful roster of mistakes.
The real painful mistakes are repeaters.
Tools of Repeating Errors
Many repeating errors of judgement rely on an automatic
mathematical response. For example, if “x” happens then do “y”. This is a
non-thinking action. It does not adjust for changes in critical conditions that
might impact the current situation.
On a very basic level, buying is different than selling.
Investment buying is often based on market prices being wrong but are likely to
change soon. The seller on the other hand believes in the relative
attractiveness of a security that will shortly decline in price. In both cases
the investor believes that he/she is ahead of the bulk of the investment market.
These are the actions of someone who wants to be among the leaders. This is in direct conflict with successful investors
who prefer to be lonely and contrary to the crowd.
Understanding Complexity
Berkshire Hathaway (*) developed a system of categorizing new
investment information into three buckets, “yes, no, too hard”. Berkshire’s advantage
was structured on the combined experience of the late Mr. Munger and Mr.
Buffett. This experience included knowledge of over 60 different companies they
owned and the knowledge of various securities they previously owned or looked
at for more than 100 years combined. Where most others saw complexity, they saw
investment opportunity.
(* Berkshire Hathaway shares are owned in client and
personal accounts.)
Can’t Avoid Complexity
In the modern global world, one cannot avoid complexity. However,
with some hard work and experience you can reorder many elements into
positives, negatives, and judgements to be determined. With this structure one
can put odds on each critical item, leading to a preponderance of positives or
negatives worthy of action.
An example of factors that surfaced this week in the media are
shown below:
- Wall Street Journal Headline “Foreign Stocks outperform S&P…”. This could cause many US accounts to add foreign stocks and funds. However, the largest collection of stocks that Americans buy are multinational stocks listed overseas. In many cases the largest portion of these portfolios are invested in US operations, which is a negative if your purpose is to participate in European and Asian growth. (The same could be said about US listed multinationals with significant sales abroad. This includes Coca Cola, a large holding of Berkshire. The same could be said about Apple.)
- The Federal Reserve is concerned about a bifurcated economy consisting of technology and older companies. Both sides have significant foreign sales.
- This may be the wrong time for the proposed cut in bank supervision. Both banks and non-bank financials are increasing loans to lower-quality companies.
- While some believe oil is being priced attractively, natural gas prices are even more attractive. Also, Copper has historically performed better than gold.
- The “Buffett Premium” is disappearing just as insurance driven earnings are very strong.
- Cash in portfolios should be used in the short term, either as a basket to buy favored stocks or to reduce exposure to over-capitalized companies and increase return on equity.
- In latest week there were more declining stocks than rising stocks.
Each of the mentioned items could be attractive buy or sell opportunities,
depending on one’s view.
What do you think?
Did you miss my blog last week? Click here to read.
Mike
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A. Michael Lipper, CFA
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