Bifocal Analysis: Short & Long-Term - Weekly Blog # 933

 

 

 

Mike Lipper’s Monday Morning Musings

 

Bifocal Analysis: Short & Long-Term

 

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

 

 

 

Short-Term

The data is so negative that brief and violent rallies are to be expected. Net stock selling has consistently outpaced buying for each of the last four weeks. For example, 85% of the NYSE stocks and 81% of NASDAQ stocks fell in the latest week. As Barron’s noted “cash is looking more appealing since stock market hedges, bonds, and gold are no longer working.” Employers are barely replacing the more expensive retiring labor in most manufacturing functions.

 

There is a new player in the game, private credit. For the most part issuers of private credit instruments don’t qualify for bank loans, and they don’t have long credit histories either. Much of this paper is held in new funds, which are being sold to retail channels. When one of these loans gets in trouble it is referred to as a “cockroach”. Jaime Dimon, the CEO of JP Morgan Chase (*) warned that where there is one “cockroach” there is likely to be more.

(*) JPM shares are owned in managed accounts.

 

Market analysts are concerned that the S&P 500 Index has been locked in a narrow 300-point band for the last four months, with optimists and pessimist exchanging positions. This week, the lower boundary line was briefly pierced. If the “500” drops 3% more, then the 400-point range will become a difficult region for the market to rise beyond for quite a period. This fear may briefly spark some rallies from the derivative and short players.

 

Longer-Term Implications of History

One purpose of recorded history is to explain what happened, at least in the eyes of the winning survivors. The survivors, or their intellectual heirs, construct rules as to why certain actions are repeated. If there are enough repetitions the rules become dictum, even though the battle conditions are different. We are taught from a very early age to follow rules without an understanding of the conditions that created them. This blind acceptance of rules has led to occasional great mistakes in politics, the military, sports, families, business, and of course investing. Historic labels often become shorthand for rules. For instance: Adam and Eve, George Washington, the NY Yankees, Democrats, Republicans, Chopin, etc.

 

As has been noted before, I learned basic analysis at the NY racetracks. One great lesson from racing lore was Man of War, which had 25 winning races in a row but lost his last race to an unknown horse named Upstart. Proving unexpected things can and occasionally do happen. My self-appointed task at the track was to guess the chance of the unexpected happening.

 

Applying the racetrack experience to investing I looked at the historical record of Warren Buffett and Charlie Munger for stocks and companies in which to invest. In an oversimplification there were at least three characteristics the winners had in common, the nature of customers, the characteristics of the workforce, and the discipline of integrity. (I suspect the last was penned by his long-term counsel and director Ron Olson, a fellow ex-trustee of Caltech.)

 

If the US stock market does decline materially in the period ahead, I will try to apply the track lessons learned. Charlie Munger taught Warren Buffett it was better to buy a good company at a reasonable price and not wait for a cheap price. For many years there were great companies we didn’t own because they were selling way above a reasonable price. I expect a number of these “beauties” will be available at reasonable prices during the next depression.

 

Next Depression

I don’t know when it will happen but based on human nature, I expect it to happen. The US has had only four Presidents that were restructurers: Andrew Jackson, Teddy Roosevelt, FDR, and Trump. Below are some parallels to the 1930-1942 depression:

• Each challenged the constitution and fought with the courts
• Weakened the controls on the banks
• Set the stage for war
• Weakened the currency
• Encouraged the retail public to invest in speculative vehicles
• Changed how the US was governed
• All Presidents, except Andrew Jackson, were involved with Japan

No historical comparison is identical, and the future may be different than the past, but odds favor a closer similarity.

 

Please share your views, there is much to learn.

 

 

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

Mike Lipper's Blog: This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

Mike Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931

Mike Lipper's Blog: Expectations Changing? - Weekly Blog # 930

 

 

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 – 2023

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

 

Mike Lipper’s Monday Morning Musings

 

This week’s Dichotomy/Bifocals Needed

 

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

 

 

 

1 week = 1 month, or 1 or more years

From this investor’s viewpoint, the previous five trading days could be seen as a great dichotomy. Seventy seven percent of NYSE stock prices declined and 66% of NASDAQ stocks. Additionally, the US dollar rose in price to 100.362 on Friday from 97.70 on Thursday!!

 

The stock price decline was supported by a sharply increased bearish reading in the American Association of Individual Investors (AAII) sample survey looking 6-months ahead, which rose to 46.4% from 35.5% the prior week. There was only a slight fall in the bullish six-month prediction which fell to 31.9% from 33.1% the prior week. Large publicly traded companies continued to report little to no hiring to offset those retiring.

 

One might have thought that worries about inflation would have had more impact, with the ECRI industrial price indicator rising to 130.99% from 126% the prior week. The index was up 9.59% for the last 12 months, but that didn’t seem to retard the jump in the dollar on Friday.

 

If one listened to the advocates of The President, the move in Friday’s dollar pointed to good times ahead. Other factors they mentioned were part of the reason the majority sold stocks this week, including on the last day of the week. We therefore have a dichotomy, which is a condition that can’t last or perhaps requires a different analysis?

 

The correct analysis is a condition that possibly occurs to seniors. That is the need to get corrective eyewear (glasses or implants). Perhaps we need to use one set of lenses for short distances and one for long or perhaps use bifocals.

 

We could be drawing close to the time when we will know whether the short-term optimistic view or the longer-term more pessimistic view followed by optimism is correct.

 

Watch the S&P 500

There are four major US stock market indices quoted in the press. The Dow Jones Industrial Average (DJIA) consists of just 30 stocks weighted by their stock prices, whereast he Standard & Poor’s 500 is weighted by market capitalization. The NASDAQ Composite is also capitalization weighted of about 500 stocks, although some stocks don’t have public records for five and ten years. The Russell 2000 Index is small-cap focused and suffers from a significant number of companies reporting losses. For analytical and investment purposes, most large financial institutions use the S&P 500 Index.

 

The S&P 500 Index closed at 6,632 on Friday, the lowest price in over four months. Market analysts believe a further decline of more than 3% will make a near-term market rise above its former high of 7,002 difficult for an extended period. The reason for this is, many of the investors who bought stocks before the decline will try to breakeven on the way up, making progress slow. 

 

Question: What do you think?

 

 

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

Mike Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931

Mike Lipper's Blog: Expectations Changing? - Weekly Blog # 930

Mike Lipper's Blog: Diversification - Weekly Blog # 929

 

 

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 – 2023

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Do Current Prices Lead Future Markets? - Weekly Blog # 926

 

 

 

Mike Lipper’s Monday Morning Musings

 

Do Current Prices Lead Future Markets?

 

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

 

 

Lessons From the Weatherperson

With condolences to too many in the US and Europe this weekend, no snow came down in Summit, New Jersey today. The purpose of mentioning this is not to gloat, because we will have our share of bad weather in the future. The purpose is to remind all of the lack of certainty in predictions, and to remind all that the real value of weather-people is making professional investors look good!

 

I have one advantage in the securities analysis game, another title for predictions. My advantage is I learned analysis at the New York racetracks. The first thing was to read the situation, which included the conditions of each race and many other details. The purpose of this exercise was to eliminate races that were difficult to analyze. For example, younger horses with little to no experience, or a clear standout quoted at very small odds. Remember, my prime objective was to leave the track with more money than when I arrived, after expenses. A goal only a minority achieved each day. (This led to never wagering all on any given race and having enough money to get home. Thus, I am not fully committed in my current portfolio.)

 

The next task was to compare the records of the horses, which usually produced horses with the most wins or fastest times. This exercise normally produced a list with the smallest betting-odds, and they would generally be excluded because the payoffs were relatively small. So much so that they would not even cover prior or future losses. (This is like coming to a highly favored stock in a late market phase)

 

With all these eliminations, what is left? What I found at the track and later at my desk were bits of information in public view, suggesting that on a given day a horse could do well and beat the more popular favorite. (This was and still is my current hunting ground for investments.)

 

The Big Advantage

There is a big long-term advantage in selecting investments over picking horses at the track. When the day at the track is over, the game restarts the next time you enter the track. With investing in securities your investment progress passes through a number of phases. I find it easier to pick securities, which will have more up phases than down. The big advantage is that after an up phase there is more at risk than what you initially put in. If there are subsequent up phases, your returns are the product of your initial investment plus the return on other people’s money. A study of the returns of successful people captures this compounding impact. 

 

Applying The Track’s Principles Today

Enthusiasm is the enemy of finding current bargains. Most long-term investors, if they don’t get punished by high expenses, taxes, and selling large portions of their wealth quickly, have a good record of growing capital. However, if they get sucked into the market when most are enthusiastic about its progress, they become victims when enthusiasm shifts. The greater the number of transactions the greater chance they will not only have poor returns but will lack the capital and the guts to buy when securities are cheap.

 

The 2026 Shift

One month is hardly conclusive that markets around the world are expecting a different game, but the S&P 600 Small Cap Index led most other US stock indices with a gain of +5.61% in January. (If that rate of monthly gains were to continue throughout the year, the annual gain would be over 100%)

 

By comparison, if a January S&P 500 Index gain of +1.45% continued for a year it would produce another double-digit return. The problem is that it results in a four-year period of double-digit returns. (I suspect the doubling of one of the small cap indices is more likely than a four-year period of double-digit gains in the S&P 500 Index. Goldman Sachs calculated that if only 1% of the capital invested in the S&P 500 moved to the S&P 600, it would raise the latter’s price by 37%.) For perspective, of the 105 Mutual fund peer group averages, only 8 were up double digits.

 

Now To The Real World

In the last 3 weeks the usually slow moving ECRI Industrial Price Index came alive with successive weekly readings of 131.20, 126.28, and 117.67. The gain over all of last year was +11.50%. The three biggest price-increases this week in The Wall Street Journal were Natural Gas +20.64%, ULSD (diesel fuel) +12.16%, and Crude +6.78%. (I wonder what the present Fed and the probable new Chairman after May will do.)

 

There are lot of other worrisome statics out there. In a recent report Michael Roberts listed some 17 economic return elements that are worth looking at. I have selected just a few of them for you to digest.

1. Healthcare and social services generated more than 100% of net payroll gains in 2025. Top decile earners now account for about 45% of total consumption. (These top decile earners won’t be the beneficiaries of the tax changes in ’26.)
2. Softer demand for luxury goods suggests financial stress is beginning to move up the ladder.
3. Layoffs have reached recessionary levels and wage growth continues to slow.
4. Creditors are increasingly unwilling to lend at historically low real yields.
5. A recent PWC survey of 4000 global CEOs found that confidence in revenue growth had fallen to a five-year low.

 

Next Two Years

Odds are, the next two years will be anything but smooth. The key to surviving this troubled period is maintaining capital in diverse financial and other assets. Gather as many resourceful people as possible into your circle. Stay alert and get comfortable with change. Lastly, share your thoughts with us.  

 

 

 

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

Mike Lipper's Blog: Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Is This The Week That Ends Instability? - Weekly Blog # 924

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This The Week That Ends Instability?

 

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

 Preface

I believe it was Lenin who said there are decades when nothing happens; and there are weeks when decades happen. Possibly, the four-day trading week beginning this coming Tuesday is such a period. In both the Financial Times and her podcast, Liz Ann Sonders of Charles Schwab* introduced the concept of the period we are going through as an extended period of instability. I am suggesting it is possible the beginning of the end of this period may have begun.

*Shares held in in managed and personal accounts.

 

Fund Data Sets the Table

Whether one invests in mutual funds or not, one should recognize that not only do many people invest in them, but more importantly, many fund managers get their training at fund shops. Thus, one can get an understanding of the institutional mind set by looking at fund data. In the five years ended last Thursday, the London Stock Exchange Group published my old firm’s weekly study of 105 equity related mutual fund peer-groups average performances.

 

The average performance of S&P 500 Index funds was 14.05% compounded for the past five years.  There were only five peer group averages that were better: Precious Metals Equity Funds +21.50%, Energy MLP Funds +20.79%, Commodities Precious Metals Funds +18.75%, Natural Resources Funds +17.30%, and Global Natural Resources Funds +16.05%.  There were just two better performing thematic categories, precious metals and energy. The narrowness of performance leadership proves how difficult it was to pick winners for the past five years. The leadership crown was indeed unstable.

 

Another way to identify the instability in economic data is to examine the tails of the best and worst 2 items shown in Saturday’s WSJ weekly price chart. The best was Silver +11.67% and the second best was the KOPSI +5.55%. The second worst price performance was Financials -2.33%, which was half as bad as Corn -4.71%, the worst performer. The gaps between the top two leaders and laggards suggest concentration is at play.

 

Turning Points Possible Next Week

On Tuesday, probably in the late afternoon, SCOTUS (Supreme Court of the US) is expected to announce its decision on the IEEPA tariff. The President has said he is prepared for an unfavorable ruling and has substitute measures in mind. At best this will be disruptive, and possibly inflationary. The ECRI industrial price index, which is normally slow moving, rose to 120.49% from the prior week’s level of 117.42%.

 

Markets are anticipating problems, either from Tariffs or possibly Iran. Sixty-two percent of the stocks traded on the New York Stock Exchange (NYSE) rose last week, while only fifty-three percent rose on the NASDAQ. The NASDAQ trades more tech stocks and the shares of younger companies. Thus, the junior exchange is likely to react more than the “Big Board” to news events. Retail investors, when not gambling, are more active on the junior market. One possible measure of this is the American Association of Individual Investors (AAII) sample survey, which reported 49.5% bullish for the next six months, up from 42.5% the prior week. What may be more significant is the 28.2% that were bearish. Many professional traders believe “the public” is wrong at turning points.

 

The Davos meeting begins Tuesday, with many political and economic leaders present and chatting. One doesn’t know what will be discussed and how meaningful the meetings will be.

 

Keep us Informed as to any Changes in Your Views.   

 

 

 

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

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923

Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

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 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

 

 

 

Managing Mistakes - Weekly Blog # 652

 

Mike Lipper’s Monday Morning Musings

Managing Mistakes

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

Mistakes are common in all endeavors. That is why we should learn from them and raise the fundamental question as to why we don’t. In the US we have entered a two-month period where almost all the candidates make mistakes due to oversimplification, incomplete statements, over-worked staffs, inexperienced candidates, etc. Some of these unforced errors will cause a few candidates to change their preferences.

The political world should learn from the experiences of both the sports and military worlds. Most of the time the declared winners are the side that makes fewer mistakes at crucial points. On a win-loss ratio, General George Washington lost more battles in the American Revolution than he won, particularly in the earlier years. He won at Yorktown because he benefited from battles won in the South by other generals using fewer European tactics. Additionally, weather in the Atlantic allowed the Allied French fleet to depart from New England and kept the British fleet harbor bound while British politicians in London grew tired of an expensive war.

How does this focus on historic mistakes apply to portfolios? Like most American election choices which are already made up, most portfolio owners are sticking with their plans. Modified only after the election as a result of foreign political changes. 

The Crux of the Problem: Unrealistic Plans

Some individual and institutional investors are unhappy with their portfolio results and are seeking to make small adjustments. There is rarely an almost perfect portfolio than can be converted to complete satisfaction by the change of a single security or fund. The crux of the problem is addressing multiple needs with a single solution. Most often investors have a diversified portfolio in mind, but due to an emotional need to be with the crowd their investment performance is closer to that of the popular indices.

True diversity can only be accomplished long-term by a collection of winners and losers at different points in time. In our everyday lives we are both self-insurers and hedgers, taking on physical risks at home and at work. While we may have fire and auto insurance policies, they are unlikely to pay off enough to totally substitute the new for the old. In effect we accept the shortfall as part of the bargain embedded in the contract. In other words, we chose to tolerate less than complete perfection. Yet in our portfolios we wish to avoid any deficits in actual or relative returns. Understanding how the markets and life rotate disappointments and mistakes hopefully gives us the opportunity to own winners where the gains are much larger than the mistakes.

The so-called mistakes may quite possibly be insurance premiums to be activated in future periods. I therefore favor dividing a single portfolio into parts, first in terms of risks and second in terms of desired delivery time. If one has only a single portfolio then any “mistake” is a negative, whereas a portfolio that addresses different levels of risks or different time periods provides some insurance. Today’s risks include changing tax rates, materially higher inflation, fall of purchasing power due to currency changes, technological changes, management changes, political changes, medical and health conditions, and the unknowns.

Could This Be the Time to Change?

One of the disadvantages in pouring over current data is that whatever occurred recently has little to do with what will occur subsequently. Nevertheless, the performance of equity oriented mutual funds for the week ended last Thursday could be indicative of future directions. In contrast to the slight decline of -0.85% for the average S&P 500 Index fund, 87 fund peer groups did better. The five peer groups averages that did best included: Base Metals Commodity Funds +2.49%, Latin American Funds +2.46%, Financial Services Funds +1.87%, Utilities Funds +1.58%, and Agricultural Funds +1.38%. I know of not a single portfolio that holds all five weekly leaders. The only common denominator is that these groups underperformed the S&P 500 for a considerable period of time, as did most of the other 82 peer groups. 

This is not only a US phenomenon, of 44 markets in local currencies only 15 Ex US markets gained, including 2 European markets (Moscow and Spain). In contrast to many of the pro-inflationary funds groups, the average 6-month money market deposit account interest rate declined to 0.19%, down from 0.22% the prior week and a three year high of 0.72%, signaling that many banks cannot find secure borrowers to lend to.

One additional symptom of a speculative market producing a lot of gains for some nervous holders is the change in trading volume on a year over year basis. NYSE listed stocks +7.84%, DJIA stocks +46.09%, NASDAQ +84.86% and Dow Jones Transport stocks +186.19%. Traders of volatile stocks are likely to look for future volatility.

Working Conclusions:

Clear investment answers are not likely to be revealed immediately after the US elections. I suspect we will be in for a period of excess volatility that will attract more cash off the sidelines. This uneasy period is not likely to end until most if not all the cash has been consumed. While this frenetic period continues, there will be time to transform a single portfolio into a collection of portfolios based on different needs and risk appetites. All portfolios should have sufficient reserves to absorb the mistakes that will occur without hurting the investment objectives too much.

Question of the Week? Are your ready for Changes?     

 

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

https://mikelipper.blogspot.com/2020/10/momentum-is-slowing-under-too-many.html

https://mikelipper.blogspot.com/2020/10/mike-lippers-monday-morning-musings-are.html

https://mikelipper.blogspot.com/2020/10/what-is-nasdaq-saying-to-whom-weekly.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.

There Is an Incredible Shortage… - Weekly Blog # 648

 

Mike Lipper’s Monday Morning Musings

There Is an Incredible Shortage…

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

“There is an incredible shortage” How often do we read such headlines? Is it true or just a clever ploy of some marketer trying to move extra inventory? Historically, one of the better clues to the existence of rising prices is the number of global locations in which they rise. Nevertheless, in an electronically connected world one needs to be on guard against manipulation, or the new term spoofing, which is an effort to represent a larger supply or demand than actually exists. The very fact that prices are moving suggests, at least temporary, that there is an imbalance between supply and demand.

I submit that there is an unusual shortage of good stocks to buy. The shortage is global and cuts through different market capitalization sizes and is possibly ending. FactSet identified a group of companies that have both price/earnings ratios over 20x and returns on equity of 20% or higher. They then compared their performance for the latest three months and one-year, as shown below:

Name                 Number   3-Month   1-Year

S&P 500                        +19.87%   +6.91%

S&P 500 20/20           107    +20.16    +7.32

S&P 500 Ex 20/20        395    +17.56   -10.43

Russell 2000                   +22.92    -8.48

Russell 2000 20/20       73    +30.08   +16.42

Russell 2000 Ex 20/20  1889    +25.53   -14.19

MSCI EAFE                       -5.18    +2.40

MSCI EAFE 20/20          97    +21.50   +12.47

MSCI EAFE Ex 20/20      819     -6.75    +5.15

Clearly, high P/E and ROE stocks performed much better for the 1-Year period and a little bit better for the 3-Month period. Better individual stock performance carried performance for a number of mutual funds. Year-to-date through Thursday, of the 104 equity-oriented mutual fund investment objective averages I examine each week, only 26 gained more than the average S&P 500 Index fund’s return of +1.63%. And just 12 groups had double digit gains. The lack of many winners is one reason 17 IPOs could be sold this week, a number of which are not profitable and were never profitable.

Not Everyone Believes

Rising stock markets thrive on the conversion of cash and other securities into equities. This process is well known as the market climbing a wall of worries. For many would be stock investors, we have a surplus of worries. There is at least $5 Trillion of cash in investors’ brokerage accounts that could come in. Also, I believe it is only a matter of time before bond and bond fund holdings are converted into stocks, hoping to repair the damage done by future rising rates of inflation and interest rates. 

There are no perfect forecasting indicators for determining the direction of the stock market, although one of the best for determining the future direction of the stock market incorrectly has been a sample survey of the membership of the American Association of Individual Investors (AAII). Each week they ask a sample of their large membership where the stock market will be in six months. The replies are divided into bullish, bearish, and neutral decisions. Many market analysts count on these judgements being wrong. 

Surprise!! we “smart guys” have been wrong. For most of the summer over 40% of the predictions have been bearish, as is the current reading. In addition, bullish predictions are currently the smallest of the three choices. Perhaps the redeeming/selling holders of mutual funds and ETFs have been following the AAII predictions, as they were net redeemers for the last seven weeks. The more active ETF holders, which are often traders, have primarily been selling index funds rather than actively managed vehicles.

There Are Some Long-Term Bulls

A very large brokerage firm with many brokers acting as investment advisors believes that we are in the early stages of a long bull market, which began with the pandemic. Additionally, a large bank complex sees no signs of a late stage bull market and sees the market expanding for at least the next three to four years.

My Advice

Investing is an individual art form. The correct long-term strategy consists primarily of setting your own long-term goals and finding different ways to accomplish them. The multiplicity of the roads you travel to meet your goals must hedge the almost guaranteed probability of being wrong or uncomfortable from time to time. For most of the rest of the current year, unless the market gives us a rare opportunity to buy some real bargains or prune existing holdings, is to relax and do nothing. Those who have true long-term investment objectives beyond the next bear market can dollar-cost average into sound businesses, allowing you to relax at night.

Question:

Are you helping your children and grandchildren understand what you are thinking during these unsettled times? It doesn’t matter if you are right or not. What is important is opening up communication about how you think and how you transition when wrong, as we all will be from time to time.

 

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

https://mikelipper.blogspot.com/2020/09/headlines-excite-dictate-or-respond-not.html

https://mikelipper.blogspot.com/2020/09/mike-lippers-monday-morning-musings-who.html

https://mikelipper.blogspot.com/2020/09/turning-point-or-bump-weekly-blog-645.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.

The Week’s Fashions and Our Most Dangerous Asset - Weekly Blog # 643

 

Mike Lipper’s Monday Morning Musings

The Week’s Fashions and Our Most Dangerous Asset

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

There are instances where very current observations can have long-term implications. The week that ended last Thursday night was quite possibly such an instance. Each week I examine a report on the performance of over one hundred different investment objective peer groups. Since the competitive game, not the investment game, is beating “the market”, I look at what types of funds that have beaten the S&P 500 Index Funds average performance. In the quiet lazy summer week, the index gained +0.40%. The following is a list of the seventeen peer groups that beat the index:

Base Metals Commodities   +2.83%

Precious Metals           +2.43%          

Energy Fund Commodities   +2.11%         

Large-Cap Growth          +1.83%         

Science & Technology      +1.60%         

Global Science & Tech     +1.58%          

Multi-Cap Growth          +1.52%         

Convertible Securities    +1.37%        

Consumer Services         +1.25% 

General Commodities       +1.13%

Agricultural Commodities  +0.78%

China Region              +0.77%

Global Large-Cap Growth   +0.77%

Global Multi-Cap Growth   +0.70%

India Region              +0.61%

Alt. Active Extension     +0.49%

Telecommunications        +0.45%

Most of these leading groups have been leading for some time, benefitting from momentum. The commodity owning funds look forward to higher prices for them and inflation for their customers resulting from shortages of supply.

One could say that these groups were deemed attractive by some pundits and their followers. Thus, if one would invest in most of these, the bet is not on the fundamentals of the underlying companies and commodities, but on the expected pronouncements of various pundits. To me, this suggests that these funds are likely to be more volatile than most funds. Thus, they make sense for those who believe in their trading skills or have a firmly held view of the investment cycles of the future.

CASH Is the Most Dangerous Asset in the Portfolio

Cash is a dangerous asset, not because it may lose some value, but because of how we exit from it. Remember, almost without exception every single loser we have had started from exiting cash. Potentially, the biggest problem in having cash is the way we think about it, our portfolio, and ourselves.

Whether we have a thousand, ten thousand, one hundred thousand, a million, ten million, one hundred million, one billion, or ten billion, as we jump each successive hurdle it gives to us a different attitude about ourselves, our status among others, and the safety of our situation. However, these emotional and intellectual highs can be very misleading. 

Cash is a receipt from past activities and its value changes imperceptivity every day due to the interaction of currency and inflation. Additionally, changes in tax regulation and investment/legal practices change the purchasing power of cash. Another critical element impacting how we feel about cash and other attributes of wealth is the perceived wealth of others, either foolishly published or gossiped. (The wealthy lists are not adjusted for present debts or future commitments. Some multi-millionaires have assets tied up and have little or no “walking around money”.)

The expected use of cash defines the flexibility of wealth. Large families in terms of number or generation of people need to think about the state of their physical, emotional, and mental health when considering future spending. Only some family members and their highly trusted advisors have a real understanding of the extent of cash and other indications of wealth. Often, no one has a complete picture of the emotions attached to assets/liabilities and how that influences their disposition.

Working Toward Solution Suggestions

The best suggestion I have is to adopt a holding company philosophy like Berkshire Hathaway, which is a holding of some clients and held in personal accounts. With over 60 operating entities and over 100 separate financial centers, their current operations retain enough of their cashflows to meet current needs and send the excess to headquarters for future investments.

The first suggestion deals with the proper identification of reserves to meet specific needs. It can include specific elements such as buying future residential property, education expenses, specific medical needs, and a loss of employment reserves. Determining the size of the specific reserve will at best be guesswork, but some numbers are better than none. A much more difficult task is guessing the range of future dates when the reserves will be tapped. It is at this point that an intelligent allocation of cash and risk/return assets should be made. The closer the likely expenditures, the higher the allocation of cash or extremely high-quality short-term paper. However, there are risks associated with funding long term needs with short-term paper and cash. My own view would be the following reverse ladder:

• 100% cash for assets to be spent in the next 90 days
• 80% cash for assets to be spent one year in the future
• 60% cash for assets to be spent two years in the future 
• 50% and no higher in cash beyond that 

My second suggestion is to divide one’s portfolio into two separate parts, the reserve element just mentioned and an investment portfolio with at least a ten-year view, potentially extending beyond multiple generations.

The investment portfolio should avoid holding cash except for a tactical reserve, with a time lock forcing some commitment if the tactical reserve remains after 18 months. Remember the following things:

• In an investment portfolio cash is a decaying asset due to inflation and currency. 
• If you must reduce or eliminate cash, the investment opportunities are vast and include some relatively safe alternatives. 
• Long-term successful investors often go through periods where they are very lonely.     

 

Questions of the week: 

1. Do you monitor the opportunities to invest investment cash?
2. Do you review your reserves periodically to ensure that they are appropriate? 
3. What was the last time you adjusted your cash levels and what was the result? 

    

   

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

https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html

https://mikelipper.blogspot.com/2020/08/more-to-learn-by-seeing-more-weekly.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.

Architectural Sway Points and Current US Stock Market - Weekly Blog # 611

Mike Lipper’s Monday Morning Musings

Architectural Sway Points and Current US Stock Market

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

Most of the time very tall buildings and highly valued stock prices don’t fall, but history shows that it is smart to worry about the possibility of it happening.

Buildings that are over 100 floors are largely a U.S. phenomenon. During the early days of New York’s World Trade Center, I was asked to join a luncheon club on the top floor of one of the towers. In the ride up to the club the elevator noticeably swayed. Upon arriving at the top, I could see for many miles out of the windows. I watched planes flying up the Hudson River that were below where I was standing. When pressed to join the club I commented that international clients were important to me and my business. I felt that these clients would be nervous due to the lateral movements of the elevator and the thought that they were above planes in flight. I was told not to worry as the lateral movements in the elevators would be dampened, and they were.  As the planes could clearly see the World Trade Center Towers, they wouldn’t fly too close. The increase in wind velocity from ground level to the 100th floor was anticipated by the architects, who allowed the building to sway in order to absorb the energy of the winds.

Unfortunately, as with many assurances, they did not address all risks that could befall those in the higher floors of the WTC. I had neglected to consider the landlord being the Port Authority. As its own governing body, the Port Authority did not need to abide by the stricter rules of the New York Fire Department regarding the width of the stair wells and some other fire precautions. Nor did I contemplate Boeing developing commercial aircraft capable of carrying more fuel than other airliners. Most importantly, I did not consider those planes being used as guided missiles. Nor did anyone else.

This is not the first time a structure tilted measurably. The leaning Tower of Pisa has become a teaching site in terms of soil movement, foundations, and architecture. We are now assured that tall buildings constructed after the tragedy of 9/11 will have a far lower death count and will probably remain upright.

Can we compare the attack on tall buildings and their ultimate collapse to the current US stock market? I clearly don’t know, but the life-altering experience of 9/11 causes me to wonder. Which assurances given will be proven to be somewhat faulty due to unexpected changes in conditions? As a professional investor for others, I feel compelled to consider the fall from high stock prices.

Being a numbers guy and learning from the great educational institution of the racetrack, the first thing I do is look at the long-term odds. From 1928 through 2019 there have been 92 years of data. Breaking the data into performance slices, the 30% gain for the S&P 500 Index in 2019 ranks in the top 21% for all periods. To expect similar results for 2020, or any subsequent year, is like betting on favorites at the track. It is generally not consistently a rewarding approach.

For the last decade S&P 500 Index Funds have grown at a 12.98% annualized rate. Mutual funds that did well during this period were growth oriented and had substantial investments in technology and consumer services. The worst performing funds were invested in natural resources. These trends appear to be continuing in 2020. Through Thursday, 13 of the top 25 mutual funds for the week were growth focused and 6 were technology oriented.

One of the lessons learned from the track is that good near-term performance brings more money, a bet on the continuation of the trend. At the track, the weight of money lowers the pay-off odds, which must be split among more bettors. In the investment races popularity attracts competition, as well as more scrutiny from governments and others who seek to share in the gains of investors.

One way to avoid some of the risks inherent in today’s large-cap growth stocks and funds is to re-examine small-caps and emerging markets. You could also examine a group like natural resources which has not had positive performance for a decade, with a particular focus on energy.

Question for the week: If you made a list of your fundamental investment beliefs and were forced to rank them, which of your top five could prove to be harmful due to changing of conditions?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/01/how-much-will-markets-decline-10-25-or.html

https://mikelipper.blogspot.com/2019/12/repeat-past-history-probable-or-just.html

https://mikelipper.blogspot.com/2019/12/mike-lippers-monday-morning-musings.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 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.

Investment Selection: “Horses for Courses”

Introduction

Each tool has its best single application. Each investment strategy has its best single application. In a similar fashion horse racing professional handicappers have often stated that there are "horses for courses." Meaning certain horses run better at certain race tracks than others. The most productive implementations of these choices are often the function of changed conditions from the immediate past.

As fund performance analysts and investment managers we have been urged to proclaim that past performance does not guarantee future results. Nevertheless all too many institutional and individual investors use past performance and particularly recent past performance as their primary selection screen. Many have taken this to the ultimate decision by investing the bulk of their money in Index funds.

The source of much of my analytical thinking came from handicapping horses races which is what track aficionados call analysis. The daily Bible reading for handicappers is the Daily Racing Form, (in  my day it was the Morning Telegraph.) In these pages the racing record of each horse is shown. From an analytical standpoint what I find of greater value than number of winning races are the conditions of the race to include which track, distance, time of the winner, time of the particular horse, weight carried relative to others, training times and conditions,  plus the names of the sire, dam, and sire of the dam and finally the conditions of the track. Professional analysts and portfolio managers can translate these factors into various selection screens in picking stocks, managers, and funds.

Selecting Investment Strategies for Different Portfolios

When choosing a bet in a race it is wise to start looking at the most popular which is called the favorite. The favorite is based on the most money being bet, not necessarily the horse that has the highest probability of winning. At the track and around the Investment Committee table most decisions are based on avoiding embarrassing losses, not optimizing the chances of large winnings.

The way I handle this challenge is not to bet on each race or every stock that is currently performing well. This tends to produce fairly concentrated portfolios of stocks, managers, and funds. The long-term (but evolving) focus is on a high aggregate dollar win/loss ratio. If you will, I am describing a contrarian bettor. However, as a contrarian, I should not disregard the weight of money bet on the favorite. This is even more true in investing than at the track because by definition popular stocks attract cash flow. In the short-term some investors can make them appear to be right.

Understanding the Investment Favorites

According to Moody’s^* “Globally 10% of all public companies account for 80% of all profits.” Therefore these companies have less credit risk for their bonds. Also, almost by definition, they are large capitalization equities. With the goal of reducing the chances of losses, most investors prefer large-cap stocks or funds. This is particularly true for endowments. 

Endowments are one of the four TIMESPAN L PORTFOLIOS^®, and depending upon on the needs of the account can be aggressively or conservatively invested.  Many of the standard endowment portfolio managers are getting frustrated as it has been a year on Monday since the S&P500 has hit a new high, and for the last four weeks the DJIA has been declining. (Perhaps there is some validity to the pre-air conditioning ditty of “Sell in May and go away.”)

The frustrated investors, the media pundits, and the various sales forces have not been paying attention to Charlie Munger, Warren Buffett, and their two investment associates. As a group, Berkshire Hathaway^* has been selective long-term buyers of stocks and companies. As the oracles of Omaha have often said, they like declining markets for their long-term holdings. Despite what they recommend for others, they are not buying an S&P 500 Index, they are selectively buying a small collection of Large, Mid, and Small-Cap stocks.

I believe that size does not define a stock as a good investment, but due to size many stocks have increasing difficulty making progress. (This does not mean that investors are blind to the attractiveness of some Large-Caps in their recent purchases of Apple^*, IBM, and Wells Fargo^*.) One of the reasons that they are more active now than when there is more enthusiasm in the market is Charlie Munger’s belief that is wise to buy a good company at a reasonable price rather than a less good company at a good price.

Applying Betting Principles to The Preakness

In a postscript to my blog that commented on The Kentucky Derby,  I urged bettors not to bet on its winner to Win the second race of the Triple Crown for 3 year-olds. I suggested to find a good Place bet. (A Place bet pays off if the horse comes in first or second, a Show bet pays off if the horse comes in first, second or  third. The pool  of money that is used to payoff winning bets is divided into three parts for a Show ticket, two parts for a Place ticket and one part for the Winning ticket.  Thus it is normal that winning tickets pay more than Place tickets and Place tickets pay more than Show tickets.) I felt the dollar odds would be larger if the Derby winner came in first. This was before I knew that the track would be muddy on Saturday, and based on past experience was an advantage to the eventual winner. Racing luck and jockey skill  produced the result. Regardless of the change in track conditions, my suggestion to make a Place bet on a non-favorite was valid.  On a money basis a $2 Place bet paid $3.20 whereas the favorite, which came in third, paid $2.20.

^*Stock owned in a managed private financial services fund and/or personally.

Question of the Week: What methods do you use when investing in Large-Caps and Small-Caps?

_________________

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

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com 

Copyright © 2008 - 2016

A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.