Analyst Calendar: Preparation for 2026 - Weekly Blog # 895

 

 

Mike Lipper’s Monday Morning Musings

 

Analyst Calendar: Preparation for 2026

 

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

                             

 

 

Analysts should attempt to get ahead of the stock market. Starting next Tuesday, we are entering the second half of 2025. Using the performance of Large-Cap US Diversified Mutual Funds as a broad indicator of the experience of US investors, the first quarter of 2025 was relatively strong, but April’s second half was weak. Perhaps it was due to concerns about taxes, tariffs, and international turmoil. The Market slumped into June, then recovered through the final four weeks of the quarter, bringing average performance back to mid-single digit gains, with half in the last week, despite a 9% decline in the value of the dollar. Not a great foundation for the continuation of two 20% gaining years.

 

Starting next week, analysts will quietly begin gathering their thoughts on preparing forecasts for the next calendar year. For the most part they will not have the benefit of the proclaimed or quietly guided company estimates. The estimate for 2026 will be more difficult than prior years. Not only will there be comparisons of two 20% plus years, but it is also unclear what taxes, tariffs, and the value of the US dollar are likely to be. There are two other quandaries that should be addressed. We have entered a period where there is a shortage of necessary talent at companies. For tech companies there is a struggle to find AI personnel at prices approaching Wall Street levels. Industrial and service companies have approximately 400,000 open positions, despite many announcing plans to lay-off workers. To some degree, this speaks to the quality of present workers and their attitudes.

 

Another concern is the level of IPOs threatening private equity portfolios with unattractive opportunities to sell some of their holdings. These sales are necessary to raise sufficient cash to pay the dividends expected by present holders and retail buyers. Private markets could contract quickly, constricting private securities firms. An investment trend is normally near the end of its popularity when it becomes dependent on retail buyers.

 

The answers to these questions may not be determined in the third quarter. Even though the fourth quarter is the second highest selling period of the year, it may not provide quick answers for marketing forces expected to produce results.

 

It is possible the market may be saved through efforts in the unofficial “fifth quarter”, which can deliver either surprisingly good numbers or poor ones, setting up a splurge in the first quarter of 2026. These will rely on the increasingly popular “adjusted” sales and earnings per share numbers created through skilled accounting approaches. These are often approved by the firms’ accountants and are not objected to by the regulators.

 

The problem with this exercise is that it makes the following year more difficult for analysts and investors to understand the base for the real earnings power of the company next year.

 

Buyers be thoughtful.

 

 

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

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Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

 

 

 

Mike Lipper’s Monday Morning Musings

 

Confessions & Confusion of a “Numbers Nerd”

 

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

 

 

 

Numbers Tell The Story

 My education at Columbia University, the USMC, and taking the CFA taught me that numbers tell the story. My brother and I created a company that sold mutual fund data for some of the largest fund organizations in the world. The problem is it was the wrong story. I fell into a trap common on the numbers loving Wall Street.  The trap is using numbers as a tool for many applications for which they were not intended.

 

The original sin was using the changing price level to make investment decisions, +10% or -8%. This leads to being happy with +10% and unhappy with -8%. Raw numbers can be misleading, until you understand the usage of numbers and their appropriate comparison.

 

Early in my career I called on the partner and treasurer of a management company who informed me he didn’t need our service because he had found something better. I asked to see this remarkable comparison. He showed the performance of all funds, regardless of mission, in his city! He was using the hometown comparison to set the wages of his workers. (Luckily, an outside lawyer working with the independent fund directors immediately recognized that what I was peddling would be essential for the directors.)

 

This experience brought home that there were at least two different needs in the same shop. The treasurer had an operational need to gage the competitive availability of labor needed for the fund’s work, while the lawyer wanted the directors to know how each of their funds were doing competitively.

 

Numbers in the right context are critical. An example of this is the +10% -8% example. The +10% is quite poor in a league averaging +20%, with the best at +30%. The -8% could be superior when the competitive average is -20% and the worst fund is down -30%.

 

Some psychologists believe losses are twice as painful as the pleasure of gains of similar magnitude. This probably averages out, with losses happening in one of four years in the US, but more frequently in other countries. I believe this pain level should also be addressed in terms of age. The older the individual, the less time they have to fully recover. Many of us rely on gains from investments that have been successful in the past, and our faith in them builds over time, so when they fail it is more destructive.

 

This is one of many reasons that relatively little money flowed into SEC registered “China Funds” this week, even though 13 of them were in the 25 best performing mutual funds. Small-caps pulled ahead of mid-caps for the week, which had performed better this year.

 

Before treating the above as purchase suggestions, I quote from Jaime Dimon “Past Performance is not indictive of future results.” However, I regularly look at investments that have done poorly for a long period of time.

 

Current Environment

Most democracies are unpopular and are favored by a decreasing number of supporters. Even in the US the Ex-President won a narrow victory, benefitting from a significant number of non-voting Americans.

 

With long-term productivity adjusted for inflation, higher than normal interest rates, a decline in the dollar, the near-term outlook is not good. This is perhaps the reason many smart companies are laying people off.

 

Please share your views with me, particularly when you feel I am wrong. I need your help.

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Lessons From Warren Buffett - Weekly Blog # 852

 

         

Mike Lipper’s Monday Morning Musings

 

Lessons From Warren Buffett

 

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

 

 (Many subscribers will receive this blog on the regular Monday schedule, but some distributors are taking Monday off, so you may not see this blog until Tuesday.)

 

 

As Often the Case, Media and Other Pundits Missed the Opportunity to Learn 

The August 29th New York Times headline stated, “Berkshire Hathaway Hits $1Trillion in Market Value”. However, the headline was essentially a current events piece, which missed an opportunity to plum Mr. Buffett’s actions. In so doing, they learned no lessons from his current and historic activities derived from an extremely successful professional investment career. 

 

Caution: Bias at Work 

Berkshire Hathaway is the largest position in my personal accounts. Perhaps more significantly, I share a responsibility with Mr. Buffett, I manage money for personal accounts. We are not managing money for our own benefit, but for our heirs. In my case, it begins with starting to care about the fourth generation. 

 

This orientation leads to largely investing strategically, which means positions are permanent unless conditions change materially. This desire separates Mr. Buffett and me from most professional/individual investors who are more focused on tactical approaches. Most investors react to sell signals, while we focus on disappointments as a need to re-underwrite. We hope to add to our holdings at cheaper prices while extending our holding period. 

 

Strategic Diversification 

Changes occur at different times for different opportunities, making it wise to take advantage of changes with different tools. While Buffet is always looking for lasting value, he has found a way to take advantage of these situations with different tools.

  

Berkshire was initially mostly a buyer of cheap stocks selling below book value, which worked reasonably well coming out of the depression. The focus changed to buying good companies at fair prices when Charley Munger came on the scene. As fairly priced securities became scarce and Berkshire’s assets grew, cheap assets were to be found in the private assets of whole companies. After a few mistakes they learned how to pick winners.

 

For many years the wholly owned companies were larger than the publicly owned and publicly traded companies. Within this collection of companies there were a few insurance companies, including GEICO and other casualty insurance companies. The primary attractiveness of these companies was “the float”, allowing for the use of client cash before it was needed to meet claims. The insurance assets grew, and they hired very talented people to underwrite very large risks. Most casualty insurers were risk adverse, but Berkshire looked at insurance risks as opportunities at very high rates. On balance the rates were larger than the risks, which allowed for large, long-term “floats”. The final, or perhaps the first type of asset was cash. 

 

Cash, the Intermediate Asset 

Most investors treat cash as the ultimate reserve asset, but not Warren Buffett. After segregating Berkshire’s $100 billion in US Treasuries, he devoted the remaining cash pile to acquisitions. Buffet recently sold 50% of his Apple stock and enough of his Bank of America stock to drive it below 5% of its outstanding stock value. He did not buy any of his own stock with the proceeds. (I suspect he has converted more of his assets to cash.) 

 

I have stated that these moves are the most “bullish” indicators I have seen. I don’t know whether this cash will be used for the acquisition of a private company or a publicly traded stock. I have been told he has made some offers, but he has been outbid. When the market breaks, his cash will become more valuable. 

 

Some other Buffet lessons are useful in building a picture of how his mind works: 

• Losing is part of winning 
• Cash is not king 
• It is okay to change 
• Buy businesses, not CEOs 
• Don’t buy art as an investment, buy it for pleasure 
• There is no such thing as growth or value stocks as Wall Street generally portrays as contrasting asset classes. Growth stock is part of the value equation. 

 

 

Question: Are you utilizing any of Buffett’s lessons? Which do you disagree with? 

 

 

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Preparing for the Future - Weekly Blog # 831

          

Mike Lipper’s Monday Morning Musings

 

Preparing for the Future

 

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

   

       

 

The fundamental job of an equity investor and manager is to grow current assets to fulfill future needs. Since we don’t know what the future will be or when it will be, we should consider a range of possibilities. My training at the racetrack and the US Marine Corps supports viewing the various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those facing us today.  

 

The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned. 

 

Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work. 

 

I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.

 

Management Structure is Not Optimal 

The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers. 

 

Another Focus Should Be Updated 

 I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road. 

 

PS 

This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.

 

Like most analysts and others commenting on investments, I have done the easy half of the job by supplying my thoughts on the buying function of investing. The much more difficult function is the disposal of investments, which is normal for the investment related committees of the two tech-oriented universities on which I serve. The reason for this one-sided effort is that making a buy decision is relatively easy.

 

By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:

• Likely reaction when other critical investors find out.
• Tax implications.
• Impact of the decision on the rest of portfolio.
• Dealing with beneficiaries.
• Legal aspects.
• Performance results.
• A least 10 other factors

I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.

 

Next week, most of the blog will be devoted to an article produced by a brilliant well-rounded Professor from the Stevens Institute of Technology. The article explores how government actions had an unintended inflationary impact.

 

I am very interested to hear your reactions to this experience.

 

     

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.