Mike Lipper’s Monday Morning Musings
Two Confessions
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
First, I have not sufficiently considered the world’s losses from our latest global war on COVID-19 and its follow-ons. As with any war it is easy to identify those who have died, but more difficult to identify those whose lives have been upended, particularly the psychologically walking-wounded. It is also too early to understand the likely impact on most of human life in terms of education, travel, commerce, real estate, and most importantly health. We can never entirely go back to the way we were. I need to figure out how the changes will impact those that I care for professionally and personally.
Second, at the instance of crafting my 700th blog, I should confess that I am not an original thinker or first mover. As a perpetual student of investing, it is my task to learn from the past and apply those lessons to present and perhaps future problems. In thinking about this mission it occurred to me that, much as I used to think that I was inventive, I am a product of my family. I owe it to all who may choose to use some of my thoughts expressed in these blogs, that much of my thinking results from my understanding of the actions of three generations of my family's focus on investments. At the end of this long blog you will see how I apply the experiences of the past to the current market and investing for the future.
One of our long-term subscribers, with a background in management and data management practices, has just published a book of poems. One of them has to do with his efforts to pass on his successful investment views to his family. Barry Faith has given me permission to republish his views below, showing him to be a kindred soul:
HELPING
A strong purpose in my life is investment in the future, and a key part of that is to have values that are passed down the generations.
Helping with our family Is the way I want to be.
Helping them to build and grow, Helping us to reap and sow.
With each passing generation So we build our family nation, Parent to child and so on
Long time after I am gone.
So set the ethos, live the creed, Create the thoughts, do the deed. Build for those yet to be born,
To that end let us all be sworn.
© Barry Faith April 2014
If you want to only see my investment insights without the historic background, go to the section titled "Current Views".
The Three Arthurs
At the beginning of the 20th century my grandfather moved from Philadelphia to become a member of the New York Stock Exchange. Over time with partners, he built a "carriage-trade" retail "wire-house" to serve both wealthy Americans overseas and locals investing in US stocks. The firm opened offices in London, onboard ocean liners, and elsewhere. (The London office was the first of three to bear our name. It was followed many years later by my brother's and my own firm. Through the years five Lipper firms were members of the NYSE. These firms were never headed by a son or younger brother succeeding the founder. This history may be why I believe generational succession is difficult to pull off. The younger generation is not a copy of the older generation.) My grandfather's firm developed a reputation for being an honest broker, acting as an agent, never as principal. There was no market making and no underwriting. While there were other brokers who were honest, he was referred to among his clients as “the honest broker”)
The next Lipper firm was my father as an independent floor broker. Although he never really liked that role, he enjoyed daily backgammon or gin rummy with other members of the lunch club. A few of the lunch club participants became his friends. He was not a student of anything, let alone the market, but he learned who were smart and trustworthy on the exchange floor. Through one of these people he bought stock in an electronic connector company that surprised me. At the time I was a junior a junior electronics analyst, looking deeper than he did. The key to the stock was a smart group of Texans being the dominant shareholders. They had the company open manufacturing plants in Puerto Rico and enjoyed a ten-year federal tax holiday. (I learned that tax management was a skill that could provide benefits, something not taught to in my Colombia University Security Analysis courses. This lesson was later applied to an accidental holding in Apple.)
The third Arthur is my brother, now living in California. He is the single most creative person I know. His career on Wall Street started as a way for him to return to Japan, where he experienced very happy "R&R" leave as a US Marine serving in Korea during the Conflict. He developed into a successful institutional salesman, selling his own statistical research and some very good fundamental research developed by his partner. Arthur's greatest skill was putting himself in the client's position and seeing ways to improve their business results, a skill greatly appreciated in the offshore fund market. I created a new NYSE member firm to serve these clients. I was later asked to join the firm to develop research for a broader universe. To support his clients' needs he opened offices in London, Geneva, Tokyo, and Buenos Aires, while I open a small research office in Washington DC. Some research work was done in each office, which I tried to coordinate. The Washington office was the first brokerage research office in D.C., where we focused on how the present and contemplated actions of the federal government impacted individual securities. (As with tax management, the impact of government actions were not taught in Security Analysis courses. Today, these two aspects may be more important than quarterly earnings estimates.) After the economics of the brokerage commission business changed in 1968, Arthur closed the firm in 1971. Later, his former chief trader talked him into starting a new institutional trading firm.
No family history of people influencing my thinking would be complete without acknowledging two remarkable women, as well as the legal profession on my mother's side. The lawyers were involved with wills and trusts, as well as the proper administration of them.
The first remarkable woman was the original's Arthur's wife, who really cared about people and arranged lavish but tasteful entertainment. She was often referred to as her husband's best salesperson. For many years at family dinners there was a widow of a late former busted client of the firm. Though her position was significantly reduced, she was treated with great dignity. (The lesson was to recognize one's own good fortune by taking care of other individuals who through no fault of their own were less fortunate.)
The second remarkable woman was my mother, who did not attend college but was able to be a critical assistant to Wendel Wilke during his second attempt to be the Republican Presidential nominee. She was later active in committees to support The Marshall Plan, the United Nations, and some other Democratic issues. I believe she was also helpful in getting my brother an appointment as a page in the US Senate, a life changing experience for him. She was what my grandfather called a "joiner", giving help and assistance to many causes. (This may be why I felt somewhat comfortable joining both The New York Society of Security Analysts and the International Society of Exchange Executives Emeriti, eventually taking leadership roles. These roles prepared me for sitting on Caltech's and The Stevens Institute boards, as well as the Columbia University Medical Center Board of Advisors. While I may have been helpful to these organizations, I learned a great deal concerning the politics of non-profits during a turnover of leadership and surrounding conditions.)
Current Views
Caveats: The most consistent product of the investment cycle is humility. The surviving veterans are mostly humble and will talk of their errors with me. I have made mistakes in the past, including some I may not recognize. My goal is to recognize mistakes more quickly and rectify them.
Popular Comments:
The US Stock Market has been in a narrow trading range for most of the year. Examining the numbers and dates enables one to see a more complex picture. The closing 2021 low for the S&P 500 was on January 4th, for the Dow Jones Industrial Average on January 29th, and for the NASDAQ Composite on March 8th. The different dates suggest there are at least three different stock markets going on. I believe the differences are not accidental and meaningful in terms of changing market structure.
The DJIA is a retail measure, not because retail investors invest in “The Dow”. But due to the time pressure on the electronic media and the reduced news hole in local papers in smaller markets and in the “fly over” portion of the country. The S&P 500 is the favorite of institutions with large amounts of money and limited staff, as well as former brokers now stylized as “wealth managers”. The last group are now freed from anti-churning rules designed to prevent them from trading to generate brokerage commissions. Although they now charge account fees, they are conscious that they need to be seen as active to earn their fees, particularly with new managed accounts customers. (Later in this blog I suggest lower turnover rates are favorable, especially for taxable accounts.) Wealth managers are particularly fond of ETFs and my guess is that this is the reason Equity ETFs recently suffered net outflows of $20 billion compared to the larger and more long-term oriented mutual fund net redemptions of $2 billion. I believe this is a major cause of the volatility expressed in the S&P 500.
Of the domestic market indices, my favorite is the NASDAQ composite. Most passive money is invested in stocks that predominate the S&P 500. There is relatively little wealth management money invested in the NASDAQ, particularly outside of the high-volume, NASDAQ listed, FAANG stocks, e.g., Apple. Why is this important? For the last several years the NASDAQ has led the other two market indices, going both up and down. A week ago, all three markets dropped, opening a major gap in prices. This week, the gap was barely closed by the rising prices of the other two markets, but not the NASDAQ. Market analysts believe a gap must be closed before a change in direction is confirmed. My view is to watch the NASDAQ for future market direction.
Wrong Treasury Message
Traditionally, most stock and bond markets around the world are priced off the market for US Treasuries. The yields on treasuries have not risen, not even in response to the Chair of the Federal Reserve as he reads the inflationary outlook, which during this Presidents term will be 5%. Despite this and the probability of larger deficits, foreigners are heavy buyers of US paper. To me this suggests much of the outlook outside of the US is not favorable.
The Pundits March in Wrong Direction
In analyzing successful investments over long-periods of time for taxable investors, there are four keys to investment success. They are in order of importance:
1. Terminal Price
2. Period Held
3. Purchase Price
4. Present Market
In the next pitch of a pundit/sales assistant, count the words spent on each of the four and you will generate a useful reliability ratio compared to others.
Personal Outlook and Plans
Because of my trading genius, I expect there will be a 10% drop soon after a purchase. Within a decade of purchase, a 25% decline is reasonable. Over 25 years or a generation, a fall of 50% could happen. What to do? If you refer to the four indicators mentioned above, the two highest haven’t changed, nor the purchase price, leaving only the present market indicator. As it is the least important, I recommend holding until fundamental information of structural change appears.
My current plan is to think through possible major changes and examine companies, sectors, and strategies I haven’t in the past. Suggestions are welcome.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/09/observations-prior-to-excitement-weekly.html
https://mikelipper.blogspot.com/2021/09/3-thoughts-to-ponder-weekly-blog-698.html
https://mikelipper.blogspot.com/2021/09/uncertainty-is-inevitable-weekly-blog.html
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A. Michael Lipper, CFA
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