Our Self-Appointed Mission - Weekly Blog # 846

 

         

 

Mike Lipper’s Monday Morning Musings

 

Our Self-Appointed Mission

 

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

 

 

 

“The World Turned Upside Down” 

“The World Turned Upside Down” played as the British Army marched off the Yorktown battlefield, ending the last military action of the American Revolution.

 

The Sunday announcement caused me to kill the draft of the intended blog for this week. 

  

With the letter announcing the end of President Biden’s campaign for a second term and his endorsement of Vice President Kamala Harris for President, the whole focus of what is important to investors changed. These events made me contemplate the meaning of the British army signaling the end of their military operation in America on October 19th, 1781. 

 

The rest of the world recognized that the US had become a world power one hundred and ten years later, on the 10th of December 1895, when the peace treaty ending the Spanish American War was signed. The US became a Pacific power for a while with their occupation of the Philippines. During the time from the end of the American Revolution and the end of the Spanish American War there were other wars, including the bloody Civil War. 

 

While I cannot determine what the critical events will be, or when they will happen, I expect it won’t be a smooth process. The Democrats are likely to form a circular firing squad. The Senate will be the center of power, surrounded by Governors, the money groups, and others who can make things happen from a protected position in the final run.      

 

Somewhat later the Republicans are likely to have their own internal battles between their top-down and bottom-up factions. 

 

While foreign governments and their internal forces were already influencing US activities and having an impact on US actions, it is more the case now. In the past it was the Europeans who played this role. Now the Asians will be the change agents. With President Trump’s desire for a weaker US dollar, he will have to successfully deal with China and Japan’s internal problems and also their trade with us. They are the two largest holders of dollars. China has grown twice as fast as the US for some time, although they are now close to a contraction. Due to changes in government philosophy, Japan needs to increase international trade. 

 

There is an increasingly large gap between the politically oriented stock market players and operating business managements. Quite possibly, the enthusiastic market players are going to wait to see how the following events play out, the attempted assassination of President Trump, the withdrawal of President Biden for his second term, and his endorsement of his Vice-President to replace him.

 

The US growth rate of consumer sales has been in decline for some time, causing executives to cut employment and dispose of less attractive operations. Companies have also had to juggle prices, quality, and the packaging of smaller quantities at old prices. 

 

Preview: 

I was preparing a piece on asset sector fund performance that I hope to finish if the world settles down. Past performance will likely be an aid in future selection. Perhaps next week. 

 

 

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Mike Lipper's Blog: We are Never Fully Prepared - Weekly Blog # 845

Mike Lipper's Blog: What I See and Perceive By Observing - Weekly Blog # 844

Mike Lipper's Blog: Preparing for a Recession - Weekly Blog # 843

 

 

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Lessons from London: Mistakes Repeated - Weekly Blog # 707

 

Mike Lipper’s Monday Morning Musings

Lessons from London: Mistakes Repeated

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

The Learning Process 

For thousands of years human bodies and emotions have not changed. One should therefore not be surprised we repeatedly make the same mistakes. Too bad because most of the time we only learn from our mistakes, and possibly those of others. One of the great advantages of visiting London and friends/colleagues of fifty years or more is the opportunity to ponder past mistakes. It is a particularly good time now, as the financial community is being forced to play a role in governing human behavior through directing corporate and market behaviors. My recent visit to London this week has brought me to this task. 

Humans often want more than they currently enjoy and search for things beyond their current condition e.g., defense. The search starts with the extended family, community, tribe, state, nation, alliances, supranational organizations, and corporations (particularly utilities and financial communities). Why is the list so long? 

The answer rests on the reliance of top-down thinking. A review of top-down mandate disappointments demonstrates that without well thought out bottom-up practical thinking, the desired grand idea fails to be carried out successfully. A couple of examples will illustrate the point. 

In the UK, wisdom is apparently equated with investment success and that is why most CEOs are replaced in their sixties. Independent directors also have limited terms. An extreme example is the likelihood that no chief investment officer or investment CEO has lived through a bond "bear market". It is now very popular for incoming CEOs/Chairs to be female or minority. Many are qualified, but one wonders whether they are the most qualified. Much of what is done today is done to obtain a high ESG numerical rating. In the future, as in the past, clients and shareholders could suffer from the single-minded thinking of graduates from elite universities, military regiments, or clubs. 

There are at least three Investment Trusts (Closed-End Funds) that are over 100 years old, and they can teach us two useful lessons. Each was a narrow sector fund investing in American Railroads, Texas Oilfields, Mortgages, and Rubber Plantations in Malaysia. Today we have many open end and closed end specialty funds. Some perform very well during a particular period of time but underperform more diversified portfolios over longer-term periods. The second lesson to be learned from these old sector funds is that when one invests in a narrow-based fund it may evolve into something quite different. The managers often recognize the need to invest in another type of business when the original one is no longer attractive. 

I am always looking for different ways to analyze investments and other activities. One successful multi-generation family uses an additional measure to gauge success, believing losing money is much worse than not optimizing the upside. In their relatively small number of losses, they measure the multiple that gross gains represent of gross losses. This approach appeals to me for endowment and multi-generational types of accounts. 

This week there is a dichotomy between a highly valued US stock market and the slightly negative performance of the generally lackluster major stock indices. A contrarian or good analyst might look at the US data for the week and notice the often inverse 6-month prediction reflecting the American Association of Individual Investors (AAII) sample forecast. The bullish forecast jumped to 48% from 42% the prior week. Additionally, 6.9% of the NASDAQ stocks traded hit new lows, while only 3.2% of the NYSE shares hit new lows.

In walking around the non-financial districts and shopping centers there were very few working ATMs to get cash. When commenting about this to veteran investors they commented that their children don’t use cash. Local bank branch sites are increasingly being used for restaurants or stores. (Similar trends are seen in the US.)

While traveling there is a risk of not reading financial news thoroughly. One article had the headline “Berkshire earnings tumble by two-thirds”. Only in reading the small print did one discover the comparison was versus the prior quarter, which had a very large investment gain. More importantly, third quarter operating earnings rose quarter to quarter.

Two observations that could have major long-term implications became known this week: 

1. Morningstar believes that a safe withdrawal rate of 3.3% from a 50/50 balanced retirement account would preserve capital through retirement. (I have my doubts considering government inflationary policies and demographic trends producing fewer productive laborers.)
2. Apparently, the Central Committee meeting of the Chinese Communist Party (CCP) did nothing to slow Chairman Xi’s goal of being in power to at least age 83.

Question of the Week: Any changes in your thinking?

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

https://mikelipper.blogspot.com/2021/11/do-you-believe-congratulations-are-in.html

https://mikelipper.blogspot.com/2021/10/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2021/10/are-we-listening-as-history-is.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Independence Day + 3 Investor Lenses - Weekly Blog # 688

 

Mike Lipper’s Monday Morning Musings

Independence Day + 3 Investor Lenses

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

Lessons From the Patient Genius of The Founders

Before the founding of the United States there were a number of democracies of free men. All these largely city-states failed to become large powerful nations because they did not carefully protect the rights of their minorities, leading to the collapse of their military and cultural defenses. The Founders struggled with this historic fact, leading to a thirteen-year period between The Declaration of Independence and the enactment of The Constitution. The Founders knew their history and presumed the new nation would have similar problems in the future. That is exactly why they created a government which protected the rights of its minorities, albeit imperfectly, with laws applied by an independent judiciary. Furthermore, they assumed future wars for independence would be fought by citizens, not a large professional military/naval force.

Most Americans invest in providing for themselves, their heirs, and specific institutions for which they care. Conceptually, when thinking about their responsibilities to themselves and others, they use one or more lenses to make investment decisions. The lenses are a telescope for the long-term, a magnifier to enlarge the picture, and a microscope to look closely at the details. To some degree the Founders were familiar with all three instruments. I look at the current investment challenges through the same instruments. However, I have given myself an easily available advantage in segmenting my thinking into sub-portfolios. These are largely based on the duration of future expected deliverables. Most subscribers to these blogs have not exercised the same option, but think about their bundle of talents, financial assets, and responsibilities as a single unit. My comments will address those united conditions.

The Current Picture

As is often the case, the current picture contains positives, negatives, uncertainties, and unknowns. I will briefly list some I currently believe are important and urge readers to share their views of other critical issues facing them, either in private or through discussion within our blog community.

1. Stock market prices are at or near record levels in the US and are rising elsewhere, including in Canada and Europe, but not yet in the Southern Hemisphere. However, close to half the listed equities are not really participating in the enthusiasm pushing US stock indices higher.
2. Overall market transaction volume is low and a good bit of the volume is from a new class of speculators lacking experience or business knowledge. An important portion of these transactions are being executed with borrowed money (margin) or options. While I am not too concerned about the future losses to these speculators, I am concerned that some sound stocks, brokers, and banks could be damaged.
3. A large group of the public and politicians have been schooled, not educated, at institutions with singular courses in top-down macroeconomics. Far fewer have sufficient knowledge of bottom-up microeconomics, starting with the family or a small business. (Remember, small businesses which are largely privately owned, employ half the working population. We all rely on them to provide relatively inexpensive goods and services.)
4. Government bond prices are expected to continue to decline, along with many high-credit-quality corporate bonds. (Traditionally, weak bond prices do not foretell strong future stock prices.)
5. One of the consistent conditions of life and prices is their cyclicality. Almost all activities are transitory, with different and difficult to predict longevity. The current bout of reported inflation is beyond supply chain issues. I suspect most readers hope the current rise in the valuation of their real estate won’t reverse quickly and hope recently hired restaurant and entertainment workers will receive lower wages soon. Most supply chain shortages are due to a multi-year period of unattractive future expectations profiting from capital expenditures. This has led to insufficient capacity expansion and high prices for existing production. The JOC-ECRI Industrial Price Index captures some of this phenomenon, rising +1.71% this week and +94.32% year-to-date. (While the index level has been dropping, perhaps due to lumber, I don’t expect it to go negative until there is a recession.)
6. For those mostly growth investors that use the telescopic lens, the biggest long-term risk is the growing autocratic attitude of the US and China, assuming no major political change. Governments choosing which companies should prosper and which should be curtailed has not produced good results for investors or customers, except during war periods. Competition, with its acknowledged faults, does better. The recent rearming of the Federal Trade Commission to perform anti-trust regulation should frighten all customers and investors. They should look at the prices paid and quality received for many goods during the Clinton/Obama terms. (Excluding the price of oil, which is now rising due to the Biden administration curtailing supply.)
7. The Founders and their early descendants wisely initiated judicial actions in the Justice Department and argued them in court. Today, almost every administrative department, SEC, IRS, and FTC have department judges reporting to Presidential appointed commissioners. This blatant abuse of administrative power has resulted in the formation of a new non-partisan, non-profit, civil liberties group, the New Civil Liberties Alliance.
8. The naivete of the Administration is a gift to the legal profession and other countries, as indicated below. 
• There is no definition of “fair share”, other than perhaps a flat tax, like a sales tax. 
• The hiring of thousands of new IRS employees is unlikely to bring significant net new revenue to the government, as taxpayers regularly hire the best and brightest tax accountants and lawyers.
• In terms of the global minimum corporate tax, when has the US won any negotiation with foreign governments? I suspect it will lead to less exports from the US and more companies moving their “headquarters” to selected “tax havens”.
9. China, which has its own internal problems, appears to generally be meeting the challenges thrown at it by the US. In March, China accounted for 16% of world exports. The last time the US reached that level was in the 1970s.

Portfolio Approaches

1. Don’t expect your big winners to continue producing similar returns. For example, our private financial services fund materially outperformed the major diversified market indices for the first six months of the year. However, after the current round of dividend increases and buy backs in the US, the portfolio will probably underperform. Why not sell? Using the telescope approach, I believe the collected talents within the industry, including the fintech segment, will be critically needed to build the new environment for managing risks and opportunities in the distant future.
2. Buying “cheap” stocks can continue to make sense if one uses a microscope, not a magnifying glass. The pundits and administrators believe that every stock with a low price/earnings ratio, or a low absolute price is a “value” stock. I recognize, due to the flow of buyers and sellers, that every stock enjoys a burst of activity related to large owners meeting their own needs rather than a change in valuation. The elements that make a stock of interest to buy are:

a. Imbalance between buyers and sellers

b. Specific economic trends

c. Change in management 

d. Share of market changes

e. New products or services  

Rarely does a company have more than one of these characteristics and few have all. Thus, most stocks labeled as value don’t perform, their period of attraction is shorter than the more expensive growth stocks.

 3. Don’t confuse trading positions and investment holdings. A trading position should be sold or bought because of a very current price move, with a small initial investment. A larger position should be added when one feels comfortable with the company’s communications. From time to time prices decline for good investments. Most stocks move down at least 50% from their annual high during a year. Don’t try to bottom fish, the relatively small gain, if successful, will probably be small compared to the long-term gain if you’d bought at the average price for the latest 12 months.

4. Expect unfavorable news to be published. If you understand the implications, it could represent an opportunity.

What other suggestions should I share with subscribers and/or use?

        

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

https://mikelipper.blogspot.com/2021/06/what-did-fridays-market-political.html

https://mikelipper.blogspot.com/2021/06/mike-lippers-monday-morning-musings-50.html

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.