Mike
Lipper’s Monday Morning Musings
To
Win Long-Term,
Learn
From Great Presidents
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Losing is Part of Winning
In the US, we celebrate Presidents Day on Monday. A typical
US compromise that solved an immediate political problem and ignored the
long-term implications that would have benefited all, particularly investors. Numerous
Americans wanted to celebrate the birthdays of two of our greatest presidents,
George Washington, and Abraham Lincoln. However, perhaps for economic reasons
the political leadership decided to celebrate just one date, picking neither President’s
birthday but continuing to support the travel and retail shopping industries by
requiring Presidents Day always be celebrated on a Monday.
What these politicians lost in their efforts were critical
learning experiences. In terms of opposed contests, both leaders lost more than
they won. Washington in military battles and Lincoln in elections. Unlike many
of us, they learned from these defeats. (As Warren Buffett said, losing is part
of winning.)
Applying Learned Experiences to Portfolios
I learned a lot at the racetrack, but my objective was to
finish with more money than I started. Washington wanted the rebellion to
survive and by so doing he would force the superior power to concede defeat.
(The British marched out of Yorktown to the tune “The World Turned Upside
Down”.) Lincoln preserved the Union. Both Presidents needed selective reserves
to accomplish their goals.
Applying these lessons to portfolios, I am a believer in
taking risks on individual investments but avoiding the risk of a complete wipe
out. In a study of million-dollar retirement accounts at Fidelity, the winning
results used both stocks and bonds. I would rename the components equity risk
and interest rate/survival risk.
What I found interesting was the median account allocation of
70% stocks and 30% bonds for these millionaires. Currently, I have about 70% in funds/direct
equities and 30% in reserves, with about half of that in cash or bonds/notes under
two-year duration.
The Logic Behind a 70/30 Portfolio
Looking through a collection of portfolios over time and dividing
them into 10-year performance slices, it appears 80% of the equity slices go up
in value. As a fiduciary, I assume a more conservative approach with the 70%
equity risk.
I consider the overall portfolio to be a 20/20 portfolio,
with the “normal” equity risk assumption being 70%. This permits market
movements of 20% in either direction, without needing to change the basic
balance. On the downside, if the portfolio balance reaches a point of having only
50% in equities, I would add 10% of capital to equities. On the upside, once
equities reach 90%. I would rebuild a 10% optimistic reserve.
Not Built in Yet
We live and invest in a multi-speed world. Due to electronic
processing most commercial and agricultural world price trends are impacted at an
increasingly fast speed. Some of these trends reflect fast reactions to price
movements, which cause geographic rotation. Through last Thursday on a
year-to-date basis the S&P 500 generated a -0.07% loss and is essentially
flat, with Europe gaining +4.51%, Japan +13.96%, Australia +3.8%, and Canada in
local currency +2.56%. In most of these countries there are local and
multi-national producers who experience similar problems of prices representing
different costs, size-weighted efficiencies, local preferences, and legal/tax
regulatory differences. Customers and investors are quick to rotate their
actions.
On a longer-term basis the world is going through a period
of declining fertility rates, impacting local demand in the short term. On a
longer-term basis there will be fewer workers, which will result in retirement
capital being reduced and securities markets altered. Organizations active in
the markets are changing. On the one hand there is a desire to become bigger
and serve more firms and people, while others want to increase profitability and
remain small enough to grow profits per key player.
As populations age, they become more expensive to maintain,
particularly beyond their working ages.
In Conclusion:
We should all learn from George Washington and Abraham
Lincoln and adapt to change with sufficient humility, so we don’t become bystanders
passed
in the fast parade hurtling through.
Thoughts?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927
Mike
Lipper's Blog: Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly
Blog # 925
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