Investors Focus on the Wrong Elements - Weekly Blog # 853

 

Mike Lipper’s Monday Morning Musings

 

Investors Focus on the Wrong Elements

 

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

 

 

 

Combing Mr. Buffett with Albert Einstein

Compound interest, the eighth wonder of the world, is wrongly attributed to Einstein according to the people at Caltech. Nevertheless, Warren Buffet stated, “He who understands it (compound interest) earns it. He who doesn’t pays it.” The better long-term investor understands it and uses it in drawing up his/her long-term strategy.

 

I have tended to use a long-term lens in my lifetime focus on mutual funds. My particular focus is the long-term, the ten-year record of the average performance of 30 equity fund indices for the last 10 years through August. Of the 30 only 7 had double digit returns, the highest being Health/Biotech which rose 15.67%. I also looked at the 25 largest stock mutual funds for 5 years, 17 of which produced double digit returns, with only one reaching the twenty percent level. It was Invesco QQQ Trust, which gained 21.30%.

 

This research reminds me of one pension plan a number of years ago which sold all its equities when the portfolio was up 20%. It was one of the best performing pension funds. Strange for me considering my background to suggest that superior performance could well be a signal to reduce investment. I say this knowing that every few years there is a period when one or more funds gain 100%. Strangely, none of these wonders makes the best performing list for the five or ten-year period.

The Media and Frequent Statements by Pundits

Traditionally, media outlets get more attention when the news is bad.   However, in covering the market and economy there is much space devoted to “happy news”. What seems particularly true is headline editors, correspondents, and allocators of space/minutes seem to share a single political view. It is occasionally worth reading to the end of an article where the other point of view gets some exposure. Operating margins for news distributors are under pressure, which has led to surveys where the number of people polled is only between 1,000 and 1,500. This might be okay, except that many people on the right don’t trust polls and media related agencies and thus do not participate in polls, often causing the prediction of incorrect election results.

 

What Should We Be Following

• Unlike the current situation in the US, many nations are seeing younger people move up. This is particularly true in the Middle East, Africa, and Asia.
• China is exporting surplus steel, which amounts to half of what they produce
• Our Presidential election on both sides exaggerates
• their commitment to integrity
• The pouring of money into small company start-ups will curtail the future of small business capital formation. The odds of repaying these loans and other bribes will probably be similar to the repayment of student debts. The unstated purpose of these programs is to hurt the families and friends of the would-be entrepreneur.

 

What elements are you watching to help make decisions about the two apparently unrelated games, equity markets and economy? How will global problems impact them?

 

 

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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?

 

 

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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.

 

     

 

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“SMART MONEY” Acts Selectively - Weekly Blog # 819

 

Mike Lipper’s Monday Morning Musings

 

“SMART MONEY” Acts Selectively

 

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

  

 

 

Dull Week with Some Clues

The stock market from mid-December through this Friday was flat, except for an early bubble in January. (I suspect the NASDAQ price surge resulted from the replacement of some holdings sold for tax purposes in the fourth quarter.) Market analysts suggest a flat price pattern might represent the smart money either accumulating or distributing meaningful positions. This suggests prices will either move up sharply or fall rapidly after a period of time. I will attempt to examine what I perceive as clues to future major moves.

 

NYSE and NASDAQ stocks declined for four of five days in the latest week. The DJIA rose for three days and the more professionally followed Dow Jones Transportation Index fell for three days. As a contrarian measure, analysts watch the latest weekly summary survey published by the American Association of Individual Investors (AAII). In the latest survey, participants raised their 6-month bullish prediction to +48.6 % or double their bearish guess of +24.2%. (Lucky for those who work in the market and those who live off of it. Individual investors have a good long-term record. From a contrarian viewpoint following them has value, because they are wrong at critical turning points.)

 

The number of publicly traded companies has been dropping for many years, mostly due to acquisitions, not failures. In 2023 there were 15,766 IPOs vs 17592 the year before. More significantly, the money raised dropped to $170 billion from $242 billion.

 

There are several thoughtful columnists who occasionally focus on financial history. John Authers of Bloomberg wrote “America is disinflating…disappointingly slowly.” He believes a major future expansion would require more problems than are currently visible. James Mackintosh of the WSJ warns investors that the market goes up and usually produces satisfactory returns in most 20-year periods. There are a few times it does not. (It’s important to remind investors that there can be times when investors won’t be bailed out in a given 20-year period. I wonder if that is why 30-year bonds and mortgages were created.) I believe he would have more confidence in recoveries if interest rates were set by the market and not by government fiat.

 

One problem with many economists, both within and outside government, is that they do not have enough appreciation for lessons learned from Asia and the Middle East. For example, we don’t seem to appreciate the products and technology that came to the West along the Silk Road. The following is a list of products or services that traveled the series of trans-Asian roads:

 

Silk, Hemp, Cotton, Wool, Paper (Paper Money). Fireworks (Explosives). Gunpowder, Tea, Horses, and algebra from India.

 

Working Conclusions

Recognizing that I don’t know what the future will bring, I turn to my investment/betting framework for a relatively conservative perspective. For the time period ended early 2025, I suggest there is a 60% chance of a significant US equity decline. The decline will perhaps be in the neighborhood of 20%, with an outside 50% chance of a full depression with an 80% drop. There are also two other possibilities at 20% each. First, a 5-7-year period of stagflation, and second, a 20% chance of below 4% GDP growth.

 

For estate planning purposes with a 30-year outlook, expect equity returns to be in the 5-9% range.

 

Your Thoughts?

 

 

 

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Pre, Premature Wish - Weekly Blog # 780

 

Mike Lipper’s Monday Morning Musings

Pre, Premature Wish

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

 

 

 

Motivation

After stripping away all the worries, details, and paperwork, the critical mission for analysts and portfolio managers is optimizing the capital of our clients, including their families. Despite our perceived brilliance, it is much easier to accomplish this mission during a “bull market” rather than a “bear market”. The biggest mistake and most difficult to recover from is missing the beginnings of a significant bull market, which is very easy to do.

 

Most of the time markets travel through various transitional phases:

• Early recognition by a few far sighted, but often difficult people.
• Growing acceptance.
• Almost universal acceptance, except for the worrywarts.
• Finally, the proclamation of a permanent condition. 

As the inevitable bear market becomes visible the process is reversed.

As it is difficult and dangerous to jump aboard an accelerating train, I prefer to board when it is marshaled in the yard. The difficulty of getting aboard requires an amount of brains, courage, and luck. That is precisely what I am attempting to do by focusing on conditions before travel begins.

 

Pre-travel Conditions

First, study past bull market journeys. Some start, but relatively few amount too much. Why? It may be that the damage done by the prior bear market was insufficient to get the necessary support. Additionally, the market may lack reasonably competent management capable of selecting the right track and able to keep the momentum moving in the right direction at increasing speed. Enough momentum to break the friction caused by others, including one’s own partners.

To start a bull-market you must first have been sufficient pain from the preceding bear market, with the ability to initially fund dominance over key doubters.

Today, there do not appear to be sufficient losses needed to be made up. However, for most of this calendar year there have been more shares sold at lower prices than bought at higher prices, both on the “big board and the NASDAQ. Most trading weeks there are more shares sold at lower prices than at rising prices, by a ratio of 4 to one. Buyers are labeled as accumulators and sellers as distributors by market analysts. Contributing to distributions are some investors moving out of dollar-based securities. The US dollar is in its fourth decline in fifty years. With the proceeds from their sales many investors are buying bonds, either for the first time or in quantities way beyond their habit. Others are investing in European and Asian stocks.

Currently, the risk of losing a little in bonds and stocks is probably close to being equal.  As new fixed income buyers venture into higher risk paper, the potential exits for higher risk paper to generate greater loses in fixed income than for stocks.

The total global economy is slowing. Not only in sales, but also in profits as margins narrow due to government policies restricting profits. There is a tendency to lower perceived risks.

After an investor loses more than expected, there is often an emotional need to quickly recover those losses. This is the second wave of money that will be sucked into buying stocks in a new bull market, and so the cycle begins again.

As much as I want to participate in a new bull market, it is apparently premature. Consequently, we must husband our resources and work to find relative islands of improving profitability.    

 

Thoughts?

 

 

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Michael Lipper, CFA

 

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