Repeat Past History Probable or Just Possible? - Weekly Blog # 609

Mike Lipper’s Monday Morning Musings

Repeat Past History Probable or Just Possible?

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

Historical Lessons 
Like most professional investors my first tool in dealing with an uncertain future is my knowledge of history. I pay particular attention to military history and horse race betting. The growing enthusiasm for the US economy and stock market is leading many other markets higher. An almost universal belief persists that 2020 will not see a recession. One sign of a top is excess enthusiasm and we appear to be marching quick-time along that path. Military history warns of the dangers of a sneak attack.

Many historians studying the last two World Wars point to the underlying causes and the immediate events preceding them. The underlying cause of both wars was the presumed weakness of the US, both economically and militarily. It lacked the ability to maintain the global balance of power when presented with increasingly aggressive drives by Germany and Japan. The initiating causes presented to the public were the assignation of the Archduke, heir, to the Austrian Throne and the sneak attack on Pearl Harbor. These events gave political cover to the leaders who sought to defend their countries by going to war.

I am not predicting these types of events, but I am aware that they can happen. Consequently, I’m examining possible triggers for a meaningful reversal of the current enthusiasm, which could cause chaos in both the stock market and greater economy. The resulting chaos would not be so bad, except to investor egos and confidence. Sun Tzu, the earliest great military/political strategist is quoted as saying "In the midst of chaos, there is also opportunity."

Contrarian Signs
1. In the US the fixed income market is much larger than the market for stocks, a reality not captured by the media. The owners of fixed income securities expect to either own them through maturity or play price peaks and valleys, adding or subtracting price movements to their total returns. As the terminal value at maturity is known when these securities are issued, investors become much more aware of anything that could reduce their value. Most issuers are directly or indirectly influenced by the movement of interest rates and are therefore much more sensitive to economic conditions than most stock buyers focused on corporate prospects. Fixed income securities prices often move six to eighteen months before the stock market reaches a peak or trough.

Adjustable mortgage base rates have started to rise, although they are well below the rates of a year ago. The yield curve for US treasuries is rising, especially for maturities that are five years or longer. The year-to-date average total return for the 43 General US Treasury mutual funds is a way above average +10.69%, but has declined -2.01% in the fourth quarter through last Thursday, suggesting the deterioration is relatively new.

"Bond Risk Seen in Leverage Loans" was the headline in the weekend edition of the WSJ. The article focused on the ratio of credit rating downgrades to upgrades, with 3 times the number of downgrades to upgrades on traded loans. The Financial Stability Board also noted the weakened documentation of loan agreements, i.e. weakened covenants.

2. One of the more common places to hide from expected market, currency, or economic declines is precious metals. Currently, there are 65 pure stock fund investment objectives tracked by my old firm. Of these, only 7 are up over 30% for the year through Thursday. In third place are the 76 Precious Metals Funds which have averaged +37.41 % year-to-date, with 16 being among the top funds for this week. Interestingly, the price of physical gold is not higher than it was this summer, suggesting stocks of gold and other precious metals mining companies are viewed as having better prospects than the price of the metals. This may be true, as their earnings will benefit from both their debt structure and their high fixed-cost operations.

3. In December, corporate insiders sold an unusual amount of their own shares. It could be that they need cash to exercise some options coming due, or that they fear capital gains tax rates will rise materially.

4. In the latest week, half of the 20 stocks in the Dow Jones Transportation Index declined. As passenger traffic is good, I suspect sellers are expecting lower than forecasted freight revenues, which aligns with the lower expectations of their industrial customers.

5. There is not much difference in the five-year total return performances of the following four investment objectives:

Domestic Sector     +5.79%
World Sector        +5.89% 
World Equity        +5.93%
Mixed Asset         +5.82%

All had hoped to beat the leading equity investment objective, US Diversified (USDE) +8.99%. It appears that on average, being diversified produced a roughly 3% advantage over more narrowly constructed funds. It is worth noting that the five-year returns were roughly equal to the progression of earnings and returns on equity, although those observations should not apply to a portfolio of funds gaining 20% or more.

While each of the following investment objectives generated way above average gains for the past fifty two weeks, they did not outperform the USDE funds return of +29.93%.

Domestic Sector   +25.54%
World Sector      +26.70% 
World Equity      +24.26%
Mixed Asset       +19.71%

The last category was hurt by the inclusion of poorer performing fixed income and international holdings.

6. Of the 17 non-leveraged peer groups of funds within the USDE classification, seven performed within the range of the above-mentioned groups of funds. Offsetting these slower performing funds were four growth fund peer groups and S&P 500 Index Funds. However, as stated in earlier blogs, one should look deeper. You should recognize that the NASDAQ Composite has been the leader of the popular stock indices for some time. This composite added 1000 points in 176 trading days. Nearly one third of the gain was attributable to the five stocks shown below. The table displays their gains and weight in the NASDAQ Composite:

                                 Weight in
Stock Name Wtd Gain     NASDAQ Composite
Microsoft         +56%              8.8%
Apple             +83%              8.4%
Amazon           +23%              7.1%
Facebook          +58%              3.6%
Alphabet "C"      +31%              3.5%

Many stocks in smaller market-cap peer groups also benefited as suppliers to the five stocks mentioned above. The key observation is that the gains in the averages are not representative of many stocks. Thus, some of the enthusiasm for the market and the economy may prove to be misplaced.

Investment Conclusions
For many long-term accounts, this is not the time to be adding additional risk. Because we are late in the investment cycle, disappointments could trigger sales. Particularly large gains have unbalanced many accounts and should gradually be re-adjusted.



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2019/12/faulty-decision-processes-at-change.html

https://mikelipper.blogspot.com/2019/12/investors-are-worrying-about-wrong.html



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Three Portfolio Political Risks - Weekly Blog # 491

Introduction

What should be normal for an investor and particularly for a portfolio manager of other people’s money after a particularly good investment performance, one should question what can go wrong. Traditionally, September is the worst performing month of the year. Not only was it a positive month in 2017, but most of our advised accounts produced better than their individual performance benchmarks.  Since we utilize fixed income funds, both bond and money market funds as buffers to equity fund performance, most of our accounts are benchmarked against the Lipper Balanced Fund Index which is reported daily in The Wall Street Journal. The long-term record of that index is to produce returns between 5% and 10% with most of the time in the 7%-8% range and these are the normalized expectations for this benchmark.  We need to keep in mind that that past performance is no indication of future performance, and that investing includes the possibility of loss of principal.

Some of our clients’ investments were in mutual funds that gained over 20% and a few in the 30% range. These funds were invested internationally and/or invested in the top five stocks in the S&P 500 or their international equivalents. As we manage diversified portfolios we also own funds that did not do as well as the top performers.

I mention these results as a prelude to my natural caution; I am casting around as to what can go wrong.

What should be normal for an investor and particularly for a portfolio manager of other people’s money after a particularly good investment performance, one should question what can go wrong. Traditionally, September is the worst performing month of the year. Not only was it a positive month in 2017, but most of our advised accounts produced better than their individual performance benchmarks. In the first 9 months of 2017 we are producing returns at two to three times normal long-term annual expectations. We have invested some of our clients’ money in mutual funds that have gains of over 20% and a few in the 30% range. Following what should be the normal reaction after such results I am casting around as to what can go wrong.

A lot can go wrong. At the moment the three most prominent concerns all have a political base. As a classically trained securities analyst,  I normally ignore the political world, in part I have observed that contrary to most people’s logic, news follows the market rather than the other way around. For example the so-called Trump Bump actually started in July of 2016,  not at the election time. One reason for generally ignoring the shifting currents of the political world is that I am a securities analyst, more comfortable with financial statements and operating conditions than attempting to be a political analyst.

Nevertheless the three biggest risks to stock portfolios emanate from political decisions. Remember that Bernie Baruch when testifying before the US Congress was defending himself and his transactions that were labeled speculative. Reminding the Members of the derivation of the verb ‘to speculate’ was to see far (into the future). Recognizing that I may be wrong about any one or all three political risks, I will discuss each in order. The order chosen is in the probability of happening and the inverse order of magnitude of potential risk.

Risk #1:  Top Potential Casualties

Politicians strive much more for power than policy. In a capitalistic society there is almost always conflict between political power and the power of money. Often it is hidden but rarely is it not present. The battleground between the opposing forces is public awareness which is in control of selecting the levers that make our society progress. The following is an incomplete list of industries that the federal government curtailed through various measures since the aftermath of our very destructive Civil War, in roughly historical order. After identifying the industry or company in parenthesis are the government actions.

Railroads (Interstate Commerce Commission on tariffs); Life Insurance (licensing by individual states); Banking (Federal Reserve and Federal Deposit Insurance Corp.); Steel (tariffs and labor disputes); Standard Oil (trust busting); AT&T (breakup) and commercial airlines (deregulation). I am not suggesting that some of these actions weren’t in response to public concerns, but in these cases the net results were to force the companies to drastically change their ways which may or may not have helped the public more than it hurt them.

As a very powerful Speaker of the US House of Representatives once stated, “All politics is local.” In most communities the movers and shakers typically are a small group with a lead the following sectors: Banking, Newspapers, Auto or Farm Equipment dealers, Doctors, Insurance Agents, Retail trade and Real Estate. If a number of these feel threatened by new types of competition, they have an easy access to their political leaders in Washington - particularly when their regular political campaign contributions are remembered.

Today the five largest market capitalization stocks in the Standard & Pours’ 500 are increasingly being looked at as threats to the established  commercial and therefore political order. The five are Apple^*, Facebook, Amazon, and the two classes of  Alphabet (Google). Their combined market cap is $ 2.9 Trillion or in the same region as the annual incremental addition to the US national deficit. Clearly their very market successes create envy, both in the financial markets and public sentiment. Much more important in my mind is each of the leaders can be seen as an unintended threat to the cabal that runs our political structures on both sides of the aisle. I will very briefly identify the threats that can be conceived: 

^*Held personally

Apple is encouraging communications at numerous different levels which is destroying land line phone companies, local newspapers, and local financial institutions. Facebook in the last US election was the source of both valuable and manipulated news.

Alphabet (Google) is the ultimate supplier of “authoritative” information putting our teachers and professors to shame.

Amazon has just about destroyed the local book store and is seriously hurting the retail trade. Its very success has driven its stock prices up at a greater rate than the rest of the stocks in the S&P500, accounting for perhaps 25% of this year’s gains in some measures. It also is one of the reasons that active managers who own more of these and similar stocks are outperforming the identified indexers as well as the closet indexers. European governments have been among the first to try and corral these companies and could reduce their residents’ use of these products (which has happened in China.)

I don’t know how the political power class will attempt to rein in the power of the new uses of technology, but they may only be as successful as the Luddites in delaying the march of automation. While at the moment I am worried and expect the rumors or actual governmental moves to force a give up of some of the large stock price gains, I am betting that these companies’ lobbying and other efforts will blunt any serious moves.  However, my tolerance is perhaps at the 33% level. If your level of tolerance is less, be aware of the perceived risk.

Risk # 2:  Repatriation: Pandora’s Box

Be prepared for disappointing results from the temporary repatriation tax holiday. Politicians and to some degree central bankers are steps behind investors and corporations in their recognition that we are in a post-national world. A good bit of the foreign earnings of US corporations has been generated from sales of products and services to non-US residents. To the extent that the foreign branches and subsidiaries have paid for their US capital and research services, the foreign activities represent potential spin off candidates. This is the case for a number of multi-nationals.

If they fall for the tax trap and bring all of the foreign earned capital back to the US, they are probably good candidates for sale as they don’t believe in their own future particularly if the bulk of the repatriation goes to buy-backs which helps the existing management and hurts future owners.

Often when we invest in a foreign to the US fund, we are investing in foreign multi-nationals. This is similar to when non-US residents invest in our funds. In truth all over the world, most large financial institutions invest in large caps globally. They assume that the companies will be managed to achieve the highest prudent return long-term, not to solve local tax issues to reduce the size of unwise deficits. It may take awhile for the politicians to recognize that investors have felt the need to defend themselves from their own local governments, at least by diversifying into different legal and tax jurisdictions. Whether we like it or not we have entered a post-national world. One can expect the politicians to fight it and try to refocus investors on their home market, but it won’t work unless they encourage the locals to make their market the most attractive in the world. This probably won’t happen, unless we drastically shrink the size of government and regulation. 

The risk is that when repatriation for sound reasons does not produce the flow of money into the US that the politicians were expecting, the politicians won’t see that they are the crux of the problem. Most likely they will wish to penalize international investing, which will be counterproductive and hopefully won’t last too long.

Risk # 3:  Lessons from French and Russian Revolutions

The overall theme of recent elections in India, Great Brittan, US, France, Germany, and possibly Japan and Catalonia is that voters are angry as to their current position and want change. Many, if not most, of the current leaders were seen as change agents to solve the perceived deep problems. However, the problems are indeed deep and have been growing for forty to eighty years, Thus, they won’t be solved quickly in all likelihood. That is where the risk comes to the surface and the fearful lessons from the French and Russian revolutions. In each case the initial uprooting was led by a middle class leader who was attempting to fix the old system. It didn’t happen fast enough and there was some mismanagement of resources due to inexperience. In a short time the awakened masses lost patience. The mob or perhaps an organized crowd consumed the change agents and became enthralled with more radical leaders. For forty years I have been expecting a wave of change agents which could have come from either the right or left. If they can’t produce quickly, they will be replaced. The replacement can come from either extreme, but almost certainly will be extreme. This threat can only be headed off if the change agents get some quick early victories and start to come up with some extreme approaches themselves to head off more extreme approaches of the new radicals.

Question:

What are the three political risks ahead of us?        

__________

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"Smart Money" vs. the Weight of Money

Introduction

One can divide people into two groups: the insecure and those that attempt to manage their insecurities. As we get older we all make physical, psychological, political, and financial mistakes among others. Almost all veteran investors are insecure to some extent about their investments. Because of our insecurities we look for guidelines to avoid making bad mistakes. Unfortunately we often ignore guidelines and signs with which we disagree. Instead, we search for guidelines and signs which we agree.

Smart Money

Due to our investment insecurities we search for and want to follow "Smart Money." Those people that are recognized as being successful as investors have so-called Smart Money in their investments.  One of the reasons in my prior life as a provider of mutual fund performance information that I was frequently quoted in the press was that the media and other pundits wanted to identify winning funds in order to focus on what those funds were doing at the time. Rarely was the discussion about how they were smart. 

As part of my investment management responsibilities for clients, when I interviewed various "winning " portfolio managers and some of their key analysts about both their thought processes and their selections, I was disappointed. All too often their research was shallow and focused only on incremental changes of significance. In many cases their current success was due to market rotation and relative value compared to then-popular securities. Some analysts and portfolio managers were truly perceptive and were deep thinkers. In my search for enlightenment I found a number of very smart investors who were not in the public eye. Often these and some of the portfolio managers of publicly traded funds did mostly their own research and were not reliant on brokerage research. On the other hand, I was unimpressed with those that followed the portfolio changes made by Warren Buffett, Peter Lynch, John Templeton, and John Neff. Their reported activity was sufficiently delayed from the time of transactions and at different than current prices. Further, their purchases typically fit their specific portfolios needs.

One approach to finding smart money is the basis for a good bit of technical market analysis. In a flat or down market a stock price (along with an increase in its volume) goes up, which can be recognized in charts, there is a belief that someone or a group knows something that the rest of the market does not. Therefore, they may be smart money. We will only know when the surge in its stock price ends.

Weight of Money

I was introduced to the importance that some professionals place on "The Weight of Money" many years ago as the leader of a group of analysts on a global trip largely focused on mining investments. When we were in Australia, one evening I got a call from a client of our firm from Tokyo who intently interviewed me as to the reactions of the analysts to various companies. After we talked for quite awhile I asked him why he was so interested about the analysts’ reaction rather than what I learned about the companies. He had a very good global internal research department and probably was the best single client of most institutional brokerage firms. Further, both he and I recognized that while my analyst companions on the trip were more than competent, they were not for the most part "the lead" analyst in the stock.

Our Tokyo-based client explained to me that the change in the amount of buying or selling in a stock could have a disproportionate impact short-term on the price. The weight of money rather than fundamentals could have more impact. As he was a manager with traditionally very high turnover in international markets, his focus on the aggregate views on a stock made sense to me.

The Weight of Money Can Mislead

Often what could properly be described as the weight of money is mistakenly labeled smart money. There were three instances in the last week when the weight of money might have given investors the wrong signal. The first two operate out of the best single investment laboratory that I know in terms of practical analytical skills. Early in the week it was reported that the British bookmakers had an 85% belief that the Prime Minister would get the mandate she wanted. This was foolishly taken as an analytical conclusion. Bookmakers have no particular forecasting skills. What the 85% represented was that 85% of the money wagered on the election saw a significant Tory victory. I suspect that the majority of the money bet came from in or around London and was not geographically dispersed. Bookies made a similar miscall in terms of the BREXIT referendum.

The second misread was the betting on The Belmont, the longest race for three year horses in the US. The beaten favorite came in second with final odds of 5/2. (Which means if the horse wins, the bettor wins $5.00 for every $ 2.00 bet.) The winner paid $5.00 for every $1.00 bet or twice the amount on the favorite and was the second favorite. At the racetrack, the pari-mutuel payoff is similar to the old bookmaker’s calculation of the different level of moneys bet less taxes and track compensation. This is a dollar weighted input. With only a cursory look at the local newspaper’s pre-race article, my intellectual choice was the eventual winner in part because he was more rested than the favorite and there was enough early speed in the race that the favorite and a number of other horses would be slowing down in the home stretch when the leading jockey in New York was giving a brilliant ride on the winner. Favorites don't win often enough to pay for their losses.

The final misread from those who rely on the weight of money argument occurred on Friday which may be an echo of a substantial decline of many years ago. Up to Friday the five following stocks: Facebook, Amazon, Apple*, Microsoft, and Alphabet (Google) represented 41% of all the gains earned by the stocks in the Standard & Poor’s 500 through the end of May. Thus 59% of the gain came a net basis from some 495 other stocks. While these five were not the most heavily owned stocks in the index, they were substantially owned. One study indicated that among large mutual funds, over 80% of them owned at least one of the five. Many probably owned Apple as it is the stock with the largest market capitalization. On Friday these five as well as many tech companies fell more than many other stocks, even though the Dow Jones Industrial Average was up a little bit. It is possible for awhile that the five may give up their performance leadership as part of normal rotation.

*   I have been a long-term holder of Apple shares in a personal account.

Perhaps the five are the modern equivalent of "The Nifty Fifty" which was a group of approximately fifty stocks that out-performed the general stock market from the late 1960s into the peak in 1973. As with the current five, The Nifty Fifty started their ascension coming out of a bottom. Most stocks reached their peak in 1968 but the averages did not top out until 1973-74 period. While there is some disagreement as to which stocks were in the fifty, the criterion was either a JP Morgan list of one decision stocks (only buy, never to sell) or the highest price/earnings ratios. There was a great overlap between the two lists. A number of the companies had very bad investment performances after the peak. Some were merged out and a few filed for bankruptcy. However most survived and a some prospered; e.g., Walmart.

  

I do not know what the future holds for this year's five leaders. I do know that if a portfolio has only a partial interest in the five, below the commitment in the various indices, it is the equivalent of being short that particular name if the name rises in price relative to the index. Historically, the stocks with the highest price/earnings ratios can fall the most. On an immediate basis Friday's decline closed the remaining price gap which made the best performing index, NASDAQ, vulnerable.

An Important Caution

S&P Global has lowered the credit rating of Massachusetts because it has not been building reserves that were required by the state legislature. This should be viewed as a general warning that eventually there will be a need for these reserves. It may be a number of years away from a significant economic recession with a market decline. I am sure that it will happen, as it always has as a correction from too much leverage in the system. I am not worried about the aforementioned five stocks, as most appear to have large cash reserves. I am concerned about others who often have an increased demand for their services when the general public are having difficulties.  In some cases this could cause partial or total liquidation of their investment portfolios. The time to add to one's fortress is when the sun is shining.

Questions of the Week:

1.  What Smart Money signals are you finding?

2.   Is the weight of money important to you?

3.   Are you building your reserve?

__________

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Investment Success Dependent on Having Goldilocks’ Peers and Avoiding Confirmation Biases

Introduction

Long-term investment success is much more dependent on people than the elements within a portfolio. This is my conclusion after studying both investments and investors. Everyday there are "learning moments" in watching and trying to understand behavior.

“Goldilocks’ peers”

Last week's blog briefly mentioned the running of The Preakness and the focus on the first three horses. I failed to point out the interaction among the first three across the finish line. While there were other horses in the race, the first three were jockeying for position with “Goldilocks' peers” for the winner (from the fairytale “Goldilocks and the Three Bears”).  The winner benefited from this interplay as the two leading horses were expending a great deal of their energy on dueling each other for the lead in the relatively short home stretch. The exertion tired them a bit and allowed the well-positioned horse under an expert jockey in the final steps to rush past the first two that were tiring. I am guessing that the race would have turned out differently if either the stretch battle or the positioning of the eventual winner was further back.

I apply these observations to competitive investing within assigned investment objective leagues. Thus, a good investment analyst of performance should understand each of the likely competitors strengths and tactics. Just focusing only on one's choice is insufficient. The eventual performance winner says as much about the peers as about the winner, but far less noted by the pundits.

Recently my associate Hylton Phillips-Page and I used portfolio structure data on fixed income from our old firm now known as Lipper Inc. In the fixed income world there are fewer investment objective leagues than in the equity universe, so there needs to be deeper analysis. I was interested in understanding why two different short-term funds were not among the leaders. What we quickly found was the league that they were being measured in had a wide assortment of different strategies being used. The maturity and quality constraints on the funds in question were much more severe than the bulk of the competitors. Thus in the current bond market the funds that were allowed to take more maturity and credit risk were producing better near-term results. Thus the owners of these funds were handicapping their choices. However, this could well be appropriate as these funds in the owner's constellation of fund holdings were designed to be reserve elements against a major bond and stock market decline. When we narrowed our view to funds that were similarly constrained, the tactical skill and relative expense ratios were more than appropriate. Thus for the owner's vantage point the key is to examine the constraints applied and not the specific choice of funds.

Confirmation Biases

(With the exceptions of the focus on mutual fund performance and the analysis of five leading securities the following thoughts and quotes are from a recent article of Farnamstreetblog.)

Often what passes for considered judgment is actually a summary of our memory. The problem with that is our memory is selective at what it retains. C.S. Carroll said "We are what we believe we are." From an investment standpoint, Warren Buffett's quote is very insightful: "What the human being is best at doing is interpreting all new information so that prior conclusions remain intact." (Luckily, according to Charlie Munger, Warren is a learning machine.) Through the ages there have been similar quotes from Tolstoy, Francis Bacon and all the way back to the ancient Greeks by Thucydides. As an appropriate warning to today's investors is the latest advice from Charles Schwab & Company:  "Investors  shouldn't get too caught up in the political wranglings with respect to investment decisions....but remain focused on your longer term goals." Perhaps the best way to identify the power of our biases is a poem by Shannon L. Adler which follows;
  
Read it with sorrow and you will feel hate.

Read it with anger and you will feel vengeful.

Read it with paranoia and you will confusion.

Read it with empathy and you will feel compassion.

Read it with love and you will feel flattery.

Read it with hope and you will feel positive.

Read it with humor and you will feel joy.

Read it without bias and you will feel peace.

Do not read it at all and you will not feel a thing.

One of the persistent biases we are subjected to is that Large cap funds under perform "the market." Those that spout this probably have never read a full prospectus. Rarely are funds designed to beat a securities index chosen by a committee to represent the market. From their inception, mutual funds were designed to convert savings into an investment program to meet eventual funding goals. These goals included some attention to periodic declines in the market and the need for daily liquidity and reasonable costs.

What I find of interest is that I have not seen a single media mention of the following:

Through May 25th , 2017, the year to date average of the S&P 500 Index fund is up 8.53%.

Investment objectives which doubled the 8.53% above to 17.06%, including funds that did better and worse than average, were as follows:

Global Science & Tech.	+24.73%
India  Region	23.27
Science & Tech	20.56
Pacific (ex-Japan)	20.18
China Region	18.62
Emerging Market	17.16

Quite a number of the much maligned Large-cap funds owned some of the five tech stocks that produced over half of the S&P 500 gain.

More interesting to me is that the longer maturity Mixed Asset funds also beat the market. For example the Target Date 2055 funds averaged +9.65% plus the Mixed Asset Aggressive Growth allocation was up +9.62%. In addition the average of the Target Date funds with maturities between 2035 and 2050 beat the market, Further, the average Emerging Market Local Currency Debt fund was up +8.74%.

I am not suggesting that a bunch of mutual fund portfolio managers suddenly took smart pills. What I am suggesting is that the market is dynamic and there are usually opportunities to wisely invest in funds.

The dominance of global and domestic Science and Tech has been mentioned above.  Also mentioned is confirmation bias. Biases are short cuts to prolonged thinking and occasionally difficult judgments. I am concerned that these two streams of thinking may collide soon. As previously noted five tech companies represented over half of the stock price gains of the S&P500 so far this year. They are Apple, Alphabet (Google), Microsoft, Amazon, and Facebook. Note that three of these were prominent in our discussion last week on Berkshire Hathaway and Sequoia Fund. My concern is that there may well be  confirmation biases at work due to the use of shortcuts to analytical judgments at work here and particularly by the media. Four of the five leaders have over half of the revenues from what is deemed to be a single source. (Facebook 97% from ads, Alphabet 88% ads, Amazon 72% products, and Apple 63% iPhones.) Without any specific knowledge of these companies, just based on my historical memory as an electronics analyst, all of these will eventually see a decline in some of their revenues from these identified sources. When and if this happens perhaps their stock prices will decline. From my viewpoint this could be a good buy point as all five of these companies appear to have promising developments underway. One may have to be patient due to the short cutters’ disappointment  which follows a quote from Robertson Davies "The eyes sees only what the mind is prepared to comprehend."

__________

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Copyright ©  2008 - 2017

A. Michael Lipper, CFA

All rights reserved

Contact author for limited redistribution permission.