Reluctant Excuses: TINA to FOMO; Good News: Historical Trends to Apple Store; Accelerating Momentum: Incomplete - Weekly Blog # 505

Introduction to FOMO

Changing sentiment appears to be a much stronger force than earnings taking the stock market higher. A couple of years ago, investors reluctantly were buying equities in the face of expected rising interest rates, relatively slow earnings growth, and expected political turmoil. Their excuse for this questionable decision was TINA, There Is No Alternative. Over the last fourteen months this excuse has given way to another symbolic abbreviation FOMO, Fear Of Missing Out. During these last fourteen months and the first week of January, 2018, the S&P 500 has not had a single month decline. Momentum has become the mantra for the buyers as well as the larger audience of holders. In the last calendar year the leading investment performance factor within the S&P 500 universe has been the momentum stocks that gained 28.27%.

Will it Continue?

This week we had two very insightful experts publish their views of the year ahead with clues beyond. Byron Wien published his annual ten surprises that he believes have at least a 50% chance of happening and that his wide circle of global contacts believe have less than a 33% of happening. One of his surprises is that the market will take a 10% correction during the year. He thinks that a recession will not surprise us until at least 2019.  Further he recognizes that there may well be other surprises during the year that none are expecting. Nevertheless, one could interpret his views that stocks markets in general will be well behaved.

The second very worthwhile piece published this week was by Jeremy Grantham of GMO. Jeremy by nature tends to be on the bearish side. Thus it is a bit surprising that he entitles his piece “Bracing Yourself for a Possible Near-Term Melt-Up.” While he does acknowledge that we could have a 20% decline that he believes would be helpful, he also does not see a near-term recession. Like Byron he sees the S&P 500 as going well into the 3000 territory. B/t/w, his firm has an equity fund that is among the leaders in the institutional league.

The odds are that these two gentlemen will prove to be correct and I hope so. However, when I mention odds I am force to think of the lessons that my experience bought at the major New York racetracks which can be briefly summarized as follows:

1.  Past performance is good to organize one’s memory, but can be less useful in predicting the future.

2.  Each race (Market) is different with different horses and conditions.

3.  Different odds lead to different earnings.

4.  It is not the number of wins that counts, but the size of winnings taken away.

 5.  As a contrarian one can win more money by occasionally betting against the crowd.

Good News: Historical Trends to Apple Store

One of the reasons to own rather than loan is that over long periods of time human life is generally getting better. Most of the time we don’t get this message from our political leaders and their supporting pundits. If there weren’t problems to be addressed we might not tolerate governments and their expenses. Thus, we do not see a lot of publicity about the long-term progress we have made some of which from an article by Max Roser can be shown below:

·       Since 1990 there have been 130,000 people fewer in extreme poverty every day.

·       Globally in 1800 there were fewer than 100 million that could read. Today 4.6 Billion can read.

·       In 1800, 43% of the newborns didn’t see their fifth birthday. In 2015 child mortality was down to 4.3%. Improved health and nutrition has made us taller and smarter.

·       These and other positive trends are continuing and accelerating.

Part of the reasons for this progress is due to technology which marches to its own drummer. Technology itself is driven by the desire for increased profit. I refer to profit not in an accounting or monetary sense, but a desire to improve one’s own life, often to improve the lives of ones for which the individual cares.

This thought occurred to me this weekend when I accompanied my wife to the Apple Store at The Mall at Short Hills. It was by far the busiest store in the mall with both customers, salespeople, support staff, and in effect, trainers. It only took a little more than an hour to exchange her watch for a different model and synchronized it with her iPhone. During that time I had a chance to look at a very diversified group of customers waiting patiently to be served and an equally diverse sales and service group on a packed sales floor. 

What occurred to me is that we were experiencing an ecosystem which is building loyalty and a knowledge base both for customers and a helpful, well-trained sales force. In many ways each person in the store was looking for ways to improve his or her condition in a personally profitable way. (The visit made me happy that I have been a very long-term shareholder in Apple and reinforced my faith in their eco-system in spite of periodic hardware and software glitches.) 

The potential of Apple and its good competitors to deliver very useful products and services addressing many of our unmet needs suggests to me the rate of human progress will accelerate in the years ahead and will probably benefit my grandchildren, great grandchildren and their children.

  

Accelerating Momentum: Incomplete

In a market that relies on sentiment to drive its momentum, one can not wait on published financial and economic results. One should be paying attention to what consumers at all levels and investors are doing as well as saying. Recently I have been commenting on the AAII weekly survey of a sample of its members. As I have said previously, a normal distribution of the individuals' opinion is roughly 40% bullish and 30% each for neutral and bearish. This week the bullish reading exceeded 59% and the bearish number was about 15%.Two weeks ago the numbers were 50% and 25% respectively. Clearly a symptom of accelerating momentum

The siren of the rising stock market has not sucked in all the available money that is fearful of missing out. The banks (particularly the small and regional banks) have not lost cash deposits to the stock market. As a matter of fact, this week the average money market account dropped its rate to 0.30% from 0.33% the week before. The drop may be caused by less demand for loans or possibly that some banks were bulking up their cash items for year-end statement purposes.

Some market observers and I are carefully watching the yields on treasuries. Each major stock market decline had rising yields as money sought safety away from actual or perceived credit risks. Some feel a ten year yield above 2.50% could be alarming.

What to Do?

If economist Jeremy Grantham is correct that we are in a “melt-up” and there will be a 20% decline before the eventual recession which could trigger a bigger decline one may want to shift some of one’s equity positions into highest available quality. That would not have hurt you too badly in 2017 when the quality component in the S&P 500 gained 19.51%.

At this time large market caps with reasonable balance sheets yield above the ten year treasury. Not a great deal of actively managed investors and high market liquidity can be used as bond substitutes. Because we can always be surprised I would own a bunch of these. They may include AT&T, GM and GE plus a few others. If one becomes addicted to investing in quality stocks for the long run, there are more in the small cap arena than elsewhere, but these are for investing not cyclical trading.

Question of the Week: Do you agree or disagree with my analysis?     

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The Critical Difference Between Experienced and Expert

Selecting winners is part of my game. I am essentially a student of other's investment experience. The general failures to be ready for Brexit and the success of extreme politicians is a wake up call to understand the critical difference between experience and expertise which are also found in the art form of selecting long-term investment winners.

I have spent many enjoyable hours attending classical musical concerts of the New Jersey Symphony Orchestra and other great orchestras and too many painful hours at Operas. Both of these are experiences, but in no way could I become a professional musician. Time spent on an activity lengthens one’s memory of experiences.  Note that the combination of a great orchestra leader and a great orchestra can make the rehearing of a familiar piece seem new and exciting.

We never know what the future brings to us. Will it be an exact repeat of the past or something quite different? The difference in terms of satisfaction and progress can be quite different. Thus we build portfolios of mutual funds and other managers that have experienced experts who have the wisdom to recognize that something is quite different than the past. 

Experienced, Not Expert

The so-called "experts" who predicted the English would vote to remain within the EU and the political pundits who had extreme confidence that the central political forces would keep centralists in political power proved to be experienced not experts. They are not alone in this distinction. Today numerous professional investors including many of the bright analysts and portfolio managers that I have known for over fifty years are very frustrated by the current stock and bond markets. One regularly hears that this is the most unloved bull market. Based on past experience, the current levels are not only unattractive but close to being beyond "nosebleed" levels because past standard ratios are flashing danger signals. The reasons they stay invested are the two abbreviations “TINA” and “FOMO.” (There Is No Alternative and Fear Of Missing Out.)

I like attending repeat performances of music, politics, and investments. I get unnerved with the new, that for which we are not prepared.

Perhaps sharing a Marine Corps tradition with my battle trained Marine Recon. (Reconnaissance) brother has caused me to expect and look for change. In addition, being a senior trustee of what has been recognized as the world's leading research university, Caltech, has very much focused me on looking forward to dramatic changes.

Dr. Simon Ramo

An example of the type of leaders that Caltech has produced is Si Ramo who was entrusted by the US government along with his partner to create a company that developed the intercontinental ballistic missiles which not only gave us many years of strategic security but was an important contributor to our space program. This past week the University, where he was a trustee, celebrated his life having recently died at 103. 

As Dr. Ramo was a globalist, an entrepreneur as well as a member of Caltech's investment committee he might well had noticed that in the first half of 2016 the S&P500  had a small gain of +2.69%,  where Brazilian Dividend Aristocrats were up +82.34% and an index of Low volatility Bovespa stocks were up +77.74%.  Not only did some Latin American stocks do well but many Canadian stocks were up 20% or more. I believe he might have brought up to the investment committee whether these results were just recoveries from deeply depressed markets or had some future portents.

Let me give examples of a very successful experienced portfolio manager with a leading ten plus year record and a single stock that proved that most investors were not the experts that they thought they were.

Many Thought He Was a Great Manager

In the 1960s there was a mutual fund manager whose picture was on various magazine front covers and was world renowned. I studied his portfolio over the years. With rare exception he picked stocks from a list of 120 large cap stocks usually having a portfolio with a list of 60 names. His record was such that he was able to leave one of the strongest mutual fund management houses and start his own fund company that subsequently went public. In the 1970s the market changed as did the market structure and in the end his company disappeared. My analysis is that he was well experienced for the markets of his time, but did not have the expertise to recognize the changes that were occurring or know how to play the new game. (Sound familiar?)

The single stock was one that could well become an entire course in a business school. Started in a garage, the company produced a differently focused computer and developed many new pioneering products, thus creating new market segments over several year, but its financial picture suggested that probably it would go bankrupt.  Its president was fired. Over the next several years he learned to be a businessman and a technological leader and his newly founded company was acquired to bring him back to the company he founded. 

Over the next two decades the company created new products for markets that didn't exist until the new products opened the doors to new markets. As the company became recognized for its technological, stylistic, and business successes, it became the single most valuable company in the world's stock market. This was surprising to many professional investors who came to the party late and as often happens sold out when normal cyclical patterns emerge.

This month, while down from record levels, its earnings came in better than was expected by the virtual cottage industry that now follows the stock. Thanks to dumb luck I have owned a few shares of Apple since the 1970s in part because of the life-changing attitude that my late daughter who was learning-disabled daughter had with the Apple II computer I bought her. She enjoyed working on a device that was intuitive and patient as well as forgiving. The ability to change people's lives suggested to me that this was something different than a number of other computer companies that have subsequently disappeared.

Both of these examples illustrate the difference between experienced and expertise. (Not mine, but Steve Jobs and Tim Cook.)

To some degree we are all captives of our and other’s experiences. However, as investors we should be looking forward to finding elements of expertise.

Are you doing this, and will you share how you are doing it? 

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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.