Observations: “You can see a lot just by observing” Yogi Berra - Weekly Blog # 679

 

Mike Lipper’s Monday Morning Musings

Observations:

“You can see a lot just by observing” Yogi Berra

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

                          

Investors Should Learn by Observing Others

The art of investing is based on observing elements that others do not see or interpret. One example is a comment from a young person about investing. She asked, isn’t the most distressing investment Bitcoin? I saw this as a learning moment and replied that the most distressing investment is cash.

Except at the very beginning of an individual’s investment career, cash should never be the predominate asset in their portfolio. However, cash whether people know it or not, sits at the very center of the concentric circles that make-up an investor’s portfolio. Even when one buys or sells an investment, it momentarily passes through a cash phase. A more important point however is that when an investor contemplates their entire portfolio, they do so in terms of its cash value. Furthermore, the level of cash serves as a rough guide for the current confidence in the remaining holdings, which should include perceived liabilities.

Most investors prefer to combine their investments into a single documented portfolio. This minimizes the time and emotion of comparing current assets with future needs and desires. Just as I don’t have only a single hammer in my tool kit, I also don’t believe in a single investment view or portfolio.

Managing and Measuring

You can’t cope well with problems/benefits or assets/liabilities you can’t measure. Every element of our lives cannot and should not be measured to the fifth decimal place. Initially, the most important decisions are binary, good or bad. Only later can you attempt to analyze how good is good or how bad is bad. Some portion of  concerns may revert to using cash as an imperfect measuring tool. 

At this point in the development of my thinking I find it useful to divide tasks into segments, assigning problems/benefits and asset/liabilities to separate portfolios, usually based on when cash will be needed to pay for the desired result. This segmentation allows me to assign different assets to different problems, potentially suggesting the use of different assets and investment strategies.

Regardless of whether you maintain a single portfolio or multiple portfolios, you need a framework to decide whether you are accomplishing your goals, moving in the right direction or need a mid-course correction. In the next section I briefly suggest the elements to use in building a portfolio measurement approach.

Framing the Measurement   

Critical end dates and periods to measure and analyze choices:

12/31/21

11/10/22 (For US Taxpayers)

12/31/31

Retirement

Estate

Multi-Generation

Most important decision centers:

Capitol Cities – Washington, London, Beijing

Capital Cities – New York, London, Shanghai

Size of loss tolerance 

10%

25%

50%

100%

Cost (for long-term holdings)

Investment Policy or Critical Personnel Changes

What Yogi Might Observe Today

1. This week, the normally more speculative NASDAQ market is less “bullish” than the larger cap NYSE market in terms of the percent   of traded issues reaching new highs, 11.8% for the NASDAQ and 22.7% for the NYSE. Short position changes last month had the NASDAQ increasing +2% and the NYSE +1%. 
2. International Markets performed better than US: Taiwan (+19.5%) was the best performer, followed by South Africa, Canada, Singapore, France, and Hong Kong. The US followed Hong Kong with performance of +11.4%. South Africa and Canada are metals and energy driven.
3. T. Rowe Price’s target date funds reduced their commitment to US stocks due to lower expectations.
4. Robert Kaplan of the Dallas Fed thinks the Fed should recognize increased speculation by considering an increase in rates.
5. Some believe the real reason for increases in government spending is to increase the deficit, in order to raise taxes on the “wealthy.”
6. Hunter Lewis, developer of the “endowment” model at Cambridge Associates, believes it is outmoded since most academic endowments and  pension funds  use it and rely on important allocations of private equity and real estate.
7. Warren Buffett at the Berkshire Hathaway (*) annual meeting noted two things of general value: 
1. None of the 30 largest stocks by market capitalization from 30 years ago are on the list today.
2. Reports from their 60 plus affiliates indicate inflation in their costs.  
• (*) Owned in Private financial Services Fund and Personal accounts.
8. Medina Spirit led all the way to win The Kentucky Derby. The colt was purchased for $1,000 and was the 6th most favored horse in the race. It was Bob Baffert’s 7th Derby winner.

My interpretation of these observations is to be careful with short-term oriented accounts.

What do you think?

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

https://mikelipper.blogspot.com/2021/04/four-letter-words-to-sounder-investing.html

https://mikelipper.blogspot.com/2021/04/the-other-side-weekly-blog-677.html

https://mikelipper.blogspot.com/2021/04/mike-lippers-monday-morning-musings.html

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A. Michael Lipper, CFA

All rights reserved.

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Contrarian Observations, Not Predictions, But Concerns - Weekly Blog # 573

Mike Lipper’s Monday Morning Musings

Contrarian Observations, Not Predictions, But Concerns

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

Contrarians look at the world differently, searching for misleading, generally accepted view-points. My purpose is to not to be contrary, but to look for opportunities to reduce risk and make an unexpected profit. While one of the maximums of trading is that “the trend is your friend”, the contrarian believes that all trends eventually end. After the trend ends there is a shift in direction, often a dramatic one. This week’s blog looks at several current observations that could be sign-posts for a change in direction. The prudent investor should consider these to be possible early warnings signs.

Long-Term Observations
Through the 18th of April the average US Diversified Equity fund gained +15.86%. This rise is significantly higher than the 2019 earnings per share projection for the underlying stocks in the portfolios. If there were no further performance gains by the end of the year, the performance comparison versus the historic gains of the S&P 500 since 1926 raises some questions. Of the 92 completed years, only 42 or 45.6% were better than the 4 ½ months of this year. An actuary would question further progress in 2019.

In reading “The Unlikely Reformer”, a book by my friend Matt Fink. In the book he discusses the history of Carter Glass (Glass-Steagall, Federal Reserve Act, Securities & Exchange Act of 1934). The book makes much of his deep concern for the amount of bank issued credit used for speculation by Wall Street. Today there are some that are similarly concerned, but not about the retail credit used in buying stocks. The concern is about the build-up of corporate credit, which has been issued under very liberal terms for acquisitions and buy-backs of common shares. One of the multiple causes of the Great Depression was the explosion of credit. Some see a similar pattern regarding the explosion of credit issued largely outside of the banking system. 

Intermediate-Term Concerns
Two mouthpieces are telling us not to worry about inflation.

• Robert Kaplan, the president of the Dallas Federal Reserve Bank, ex Goldman Sachs partner and Harvard Business School Professor stated, “No Threat of Inflation”. 

• Bloomberg Business Week’s cover asks, “Is Inflation Dead?”. 

There is an old Biblical Expression “Man plans, and God Laughs”. One of the things I learned from the racetrack is that occasionally a long-shot wins. Surprises are normal in the history of economics, business, politics, and markets. Though the rate of inflation has been low for many years, I suspect it may not continue.

There has been wide dispersion in the performance of equity mutual funds for the five years ended April 18th. The average S&P 500 index fund gained +11.31% annualized, while the average Financial Services Fund gained +8.37% and the average International fund gained +3.33%. Looking to the future, the odds of a similar performance spread and rates of gain are at best questionable.

Shorter-Term Questions 
The three stock price composite indices around the world currently performing best are Shenzhen +38.8%, Shanghai +30.5%, and NASDAQ +20.6%. All three indices are fueled in part by a combination of technological products and services, easier credit, and IPOs. Are these gains sustainable?

A partial answer to the question above is reflected in the two largest ETF short positions as a percent of the shares outstanding: iShares China Large Cap 17.3% and SPDR Bloomberg Barclays High Yield Bond 17%. I don’t know whether the bulk of these holdings are for hedging purposes or directional bets in a speculative Market.


Question of the Week:
Did anything happen last week that is causing you to change your investment positions or attitudes? 




Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/04/not-yet-peak-luck-lessons-weekly-blog.html

https://mikelipper.blogspot.com/2019/04/investing-in-quality-for-growth-or.html

https://mikelipper.blogspot.com/2019/03/investment-committee-and-investors-be.html



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To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

Copyright © 2008 - 2018
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.