Are We Refighting the American Revolution? - Weekly Blog # 959

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are We Refighting the American Revolution?

 

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

            

 

 

People Unhappy with Both Major Parties

We act like very young children who protest when denied some little thing. Children, feeling denial is a retraction of parental or family love, then act out to express their hurt and confusion. These little children have matured into us, who express our hurt and confusion by communicating our perceived problems to the identified powers that be, political parties. We are no different than the brave people who came to a new land to fulfill their needs, feeling disappointed with the powerful people in the “old world” who withheld some old benefits they perceived they had.

 

The Issues Faced by American Settlers Are the Same We Face Today

Unhappy people have existed in many countries since recorded time, trying new government approaches to solve their unhappiness. Ancient Greece, Rome, and various city-states tried different approaches, but none lasted long.

 

The American Experiment

We were remarkably lucky that some of our leaders attended European Colleges or were readers of history. They knew of past failures to create governments that had hoped to produce long-term happy people. Unlike earlier attempts, leadership in the thirteen colonies were of different religions and backgrounds. Under British rule all mail had to go to England before it was delivered next door or to other colonies. Consequently, there was not a singular American thought pattern. This is why it took American leaders over twelve years from the Declaration of Independence to develop the US Constitution, and more importantly the Bill of Rights.

 

What Made the US Different is Not Totally Accepted by All Today

While we recognize the presence of the majority, our Constitution recognizes the existence of the minority, or multiple minorities who require their rights to be protected so they cannot be eliminated. The Constitution assumes and to some degree applauds a change in leadership, which increases the probability that legislation will be both a product of the majority and minority points of view. It is up to Congress to pass legislation. The Supreme Court and lower Courts determine if legislation is authorized under existing law and the Constitution. The President is elected to preside over the government, not function as an all-powerful commanding executive.

 

What Are Signs of Unhappiness?

For the last couple of weeks more stocks were sold at declining prices than bought at higher prices. (Investors only accept lower prices when they are displeased with their holdings.) In the current week, 70% of New York Stock Exchange (NYSE) listed stocks declined vs 60% of NASDAQ stocks. In the latest weekly sample survey of the American Association of Individual Investors (AAII), 53.3% were bearish for the next six months vs just 28.8% bullish. Using the average year-to-date investment performance of mutual fund sectors, Commodity funds were +26.78%, World Equity funds +13.26%, and US Diversified Equity funds +11.00%. (Clearly showing domestic inflation has investors worried.)

 

Both US Courts and many Foreign Governments are unhappy with the current administration. We will see this coming week if attendance at the United Nations meeting in New York is lower than expected. Also, this week, Chairman Xi meets with President Trump. Will that change other countries’ attitudes toward the US?

 

What are Your Thoughts?

 

 

 

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Mike Lipper's Blog: Survival First, Before Growth - Weekly Blog # 958

Mike Lipper's Blog: Are We in Normal or Historic Times? - Weekly Blog # 957

Mike Lipper's Blog: Is the Volatility of Data in Hiding? - Weekly Blog # 956

 

 

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Fear of Instability Can Cause Trouble - Weekly Blog # 848

 

         

 

Mike Lipper’s Monday Morning Musings

 

Fear of Instability Can Cause Trouble

 

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

 

 

 

Instability Changes the Players

Historically, the perceived strength of allies provides comfort to all fearing future conflicts. Changes can lead to instability, including a change in leadership, an unexpected industrial and military technology change, and demographic change. Some of these changes may happen almost overnight, while others may take generations.

 

In studying what caused World War I, all too many focus exclusively on the assignation of the Archduke of the Austro-Hungarian Empire. I suggest the following causes which arose at least 50 years before the assassination on June 28, 1914.

1. The declining economic power of Austria, due to excessive spending by the government and the wealthy.
2. A population still loyal to their old national governments.
3. The unification of Germany, which came much later than the other European and Middle Eastern countries. Germany was also late establishing colonies in Africa when compared to Britain, France, Italy, Spain, Portugal, Belgium, and the Netherlands.
4. The evolution of shipping from wind to steam power, and the development of the land-based maneuver practiced by Stonewall Jackson.
5. The rise of the US as a global sea power during the Spanish-American War (Great White Fleet).

Applying the same type of geo-politics/economics to the US after the meaningful stock market drop that followed the decline in jobs. The following elements should be noted:

• The pundit led consensus was wrong on the President’s capabilities and many factors concerning the economy.
• The rapid fall in the quit rate points to a further decline in the employment cost indicator.
• Commodity funds are cutting copper positions.
• Fundamental changes in the structure of the US stock market: In the latest week, NASDAQ trading was 6.6x more than the NYSE.
• In July, the performance of the equal weighted S&P 500 was 3% better than the cap-weighted version. Among the stocks with positive performance for the week were: Apple*#, Coke#, and a number of insurance stocks. (* owned by personal accounts, # owned by Berkshire Hathaway)
• 77% of NASDAQ stocks declined last week, versus 66% for the “Big Board”.

As both a contrarian and someone who reads history, I believe that Mr. Buffett building his cash & equivalent pile is the most bullish view I have seen in a long time. Mr. Buffett is getting ready to make positive investments in the future, he is not building reserves. I hope all of our subscribers are preparing to be bullish, which does not mean buying right now.

 

 

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Mike Lipper's Blog: Detective Work of Analysts - Weekly Blog # 847

Mike Lipper's Blog: Our Self-Appointed Mission - Weekly Blog # 846

Mike Lipper's Blog: We are Never Fully Prepared - Weekly Blog # 845

 

 

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Uncertainty is Inevitable - Weekly Blog # 697

 

Mike Lipper’s Monday Morning Musings

Uncertainty is Inevitable

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

Numbers and People Are the First Traps

When a baby takes its first uncertain steps it eventually falls, despite hovering caregiver parents and others. From that instant on, the baby wishes to avoid falling. As we learn to balance our movement, we believe we have solved the problem of safely walking. Thus begins our first mistake in judgement which we apply to all activities, including investing in life and securities. While we fall or stumble less frequently throughout our lives, we accept it with annoyance, but carry on nevertheless.

Our next mistakes are our imperfect memory and learning from people. We expect those we love and/or respect to be correct in their pronouncements all the time. Only from experience do we appreciate that they can and will make mistakes. Later in our development we learn the discipline of the power of numbers, usually through achievement or time. However, we also learn that conditions change, and success or failure also changes with conditions. Thus, we should question the inevitability of future events occurring exactly as people and the numbers foretell, as uncertainty changes as we mature into risk. Whether we like it or not, we become risk assumers or hopefully risk managers.  My philosophy of life and investing is based on addressing risks whenever possible. This blog is devoted to some of the current risks I perceive, which are generally not focused on by many professional and individual investors.

1.   Sellers’ Risk

Most people view the buyer as the one at risk in any transaction. While this is true in terms of money transferred at closing, including expenses to make desired changes and upkeep, what most don’t fully recognize is the seller in one transaction becoming the buyer in the next transaction. Home prices recently reached record levels in the US, the UK, and many other developed markets. As these homeowners become sellers and eventually new buyers, they will bear the initial cost of a new home, including its desired changes and upkeep.  

Many buyers are at risk due to the vagaries of current inflation, including through delays. Most communities have not updated their infrastructure, apparent after the latest weather-related expenses, which will increase costs. I suspect local schools and universities will need to change the education being taught so their students can find meaningful employment and lives. (This will increase taxes and won’t be cheap)

2.   Co-Venture Investment Risks

In almost any investment one of the bigger risks is attempting to sell. One or more sellers can “ruin” the market by removing though sale a higher buyer. This can happen in terms of a neighbor’s home, a similar property, or a fellow shareholder. The probable or contemplated seller’s actions are difficult to guess, but it should be attempted.

Let me share an example that happened this past week. A non-US stock I own announced a 29% decline in net income for the first half of 2021 and the price barely moved. Yes, revenues rose 54% and they announced a few new items to replace outmoded products. While I was surprised by the net income decline, I was not particularly surprised by the stock price action of BYD. [These comments should not be construed as a recommendation, in part because I don’t follow its industry or its competitors.] My relative lack of concern comes from knowing two of the largest stock investors and having visited the headquarters and plant in Shenzhen. In looking to the nature and reputation of major shareholders, I relied on one of the oldest investment techniques, identifying sponsorship. 

A story that has been told from the 19th century involves a leading member of the London Stock Exchange asking another member what he could do in repayment for a favor. Replying to Lord Rothschild, he said “just put your arm around me and walk across the floor of the exchange”. With that in mind I regularly look at the owners of stocks of interest. Some funds have high portfolio turnover rates and tend to look for explosive earnings. Others, like the two owners, are long-term investors who would probably be buyers if the stock dropped temporarily. Currently, with 20 million new retail accounts since 2020, I don’t expect many to have learned to be buyers of shares that are declining in price.

3.   Market Price Leadership Rotation 

The current leading macro group investment is commodity funds, benefitting from the play on current shortages. Combine this with what I previously mentioned, some institutional investors cutting back on equity exposure after 20% gains in the S&P 500 within a calendar year. (The difficulty with this approach today is the lack of low-risk alternatives to move some stock money into.)

4.   A Potential Large Risk for the Next 3 Years

In addition to the current legislation before Congress, which is not likely to be paid for during their expenditures, there are at least two other issues Congress will need to deal with sooner or later. The current administration is discussing cutting the income tax rate on lower earnings. (I suggest it be called “lower real income for lower wages”.) A portion of the low wages paid to those who pay little if any income taxes is not likely to increase spending. To offset the cost of lower taxes on low wage earners, one should expect materially higher taxes for higher earners (This is the real motive of certain people in The White House and of far-left leaning members of Congress.) 

To offset this increase, higher rate taxpayers are likely to see prices rise for goods and particularly services. If it continues long enough, the cost of transportation and other items for low-end wage people will also rise. As profit margins decline, more business will flee the country and/or reduce risky investments. The increase in the price of oil already demonstrates the skill of the current administration. Words from the White House suggest the economic impact of the new proposal will be measured against “the success of our withdrawal from Afghanistan”. 

5.   A Longer-Term Problem that Must be Addressed

The Old-Age and Survivors Insurance, the largest component of Social Security, will run out of money in 2033. Undoubtedly this will be met with tax increases and probably a lower value dollar, which will hurt investors who are not properly hedged.

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Either for attribution or privately, just to help me in my thinking.

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https://mikelipper.blogspot.com/2021/08/another-but-discouraging-look-at-market.html

https://mikelipper.blogspot.com/2021/08/mike-lippers-monday-morning-musings-are.html

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Four Letter Words to Sounder Investing - Weekly Blog # 678

 

Mike Lipper’s Monday Morning Musings

Four Letter Words to Sounder Investing

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

When I was growing up I was admonished not to blurt out various four-letter emotionally driven words, which had the effect of me not using four-letter words at all.  I rarely focused on words such as love or nice. When I now think about communicating sound useful concepts to long-term investing, it strikes me that there are at least five four-letter words that shine a light on critical concepts. These are briefly discussed below in alphabetical order.

Debt

Debt is the temporary transfer of capital from lender to borrower in exchange for periodic interest payments. Both sides benefit from the exchange, the lender receives payment for delaying current spending and the borrower from using someone else’s capital. In a world where debt is growing faster than the growth of the economy, the question arises, is this a wise temporary transfer of capital?

From the borrowers’ viewpoint it should be about the amount of benefit received, be they individuals, businesses, or governments acting as an intermediary for taxpayers. Such as borrowing to invest in long term assets that will produce a stream of income larger than the interest and related costs. A mortgage on a business building is a good example.

Unfortunately, we are seeing more borrowing by both governments and individuals for consumption. One can look at much of the stimulus spending, which politicians hope will benefit them at the next election. Some may call these bribes, like the “bread and circuses” of ancient Rome, which at least built roads and bridges that produced a stream of increased traffic. 

When viewing any transaction one can often identify at least one winner, although this is not the case for high-grade debt today. The lender is receiving interest payments that will not fully compensate for the future decline in purchasing power, both in the national and international markets. (The JOC Industrial Price Index is up +108.81% and producer prices are up 12% year over year.) This may be why large commercial bank loans fell in the first quarter, even as deposits grew.

There is currently another problem with debt, the fastest debt growth is being financed outside of regulated banking institutions. The source being brokerage/investment banking firms and other financial companies. Margin loans to support securities transactions have grown 70% year over year. In well-managed brokerage firms, utilizing listed stocks and bonds as collateral is reasonably safe for the lender, who can recover from some of their clients going broke. However, there has recently been a surge of borrowing to leverage non-listed derivatives tied to relatively illiquid stocks listed globally. The question facing the market is, are we approaching a crisis like the Morgan Library Panic of 1907 where the banking community was forced through locked doors to contribute to endangered competitors? The problem would likely be socialized with government bailouts today, adding to the growing deficit by partially financing it with more debt. Bottom-line for most institutions and individuals, debt is not currently priced for the long-term inherent risks.

Risk

Sir Isaac Newton came up with a critical rule, “There is an opposite and equal reaction to every action”. Too bad he did not offer an investment rule for his own considerable fortune, suggesting every investment caries both rewards and risks throughout its existence. There is no such things as a riskless investment. The key to assessing the size of a risk is what a knowledgeable, disinterested, investor would pay for an asset producing an acceptable rate of return relative to all other investments. This may be the reason that on the more actively traded NASDAQ the number of stocks rising was 8.5% vs 5.8% falling, compared to 18.4% rising and 3.2% falling for the NYSE. 

Rate

Rates tie streams of numbers together, like miles per hour. Most of the time in the investment world the two streams relate to interest rates, earnings growth, sales, and book values compared to prices. The wise investor adjusts the first stream for the probability of it continuing the current movement. The price may also need to be adjusted for the likely size of the investment. (Remember, quoted prices are for small purchases, take-over prices are normally higher than pre-bid prices.) 

Rank

Rank is an orderly display of participants based on criteria such as length of period, size, volatility, etc. One should remember there is nothing that promises the sustainability of completed periods. The winner may have been slowing down or speeding up immediately before the end of a period. Also, first place gives no indication of any negative event impacting one of the participants, which may not reoccur. While repetitive high rankings are assuring, it is not a guarantee of future results. In picking funds or stocks, you need to adjust for the change in skill of each participant. Because conditions change, one should not place too much emphasis on repeated success. Remember, winning streaks almost always end.

Time

By far the single most important variable in choosing an investment is the period to be measured. Unless an investor believes they have superior trading skills, they should focus on one or more time periods. The longer the period, the more likely the return will be smaller. The number of full participants will also decline through acquisition or failure. 

The following set of observations may be relevant in applying attention to today’s details:

For the current calendar year through last Thursday, the best mutual fund macro peer group was US Diversified Equity Funds +12.02%, followed by Sector Equity Funds +11.96%, Commodity Funds +11.59%, World Equity Funds +6.82 %, and Alternative Equity Funds +1.84%.

Keep in mind that this data is for almost one-third of a year. The 12% return for US Diversified Equity Funds and the +9.53% return for All-Equity Funds is close to the long-term stock average of +9-10% per year, which excludes fund expenses. This raises the question of whether an investor should stick around for the rest of 2021. If you were to stay invested this year, a contrarian might invest in the average World Equity fund, which has generated roughly half the gain achieved by US focused funds. Of the 25 best performing mutual funds this week, 10 invested in the China Region. A leading broker noted that investors were buying European Equities, inflation-oriented investments, and “value” stocks. They were selling high yield and emerging market securities. (Note that the five largest tech stocks have a combined market value larger than all the emerging market stocks.) 

Most large gains by investors result from holding stocks and equity funds for a long time. An example of the effect of compounding is the US Diversified Equity Funds return of 12% doubling in 6 years. (Which assumes an annual return of 12%). If the compounding rate were 9% it would take 8 years and at 6% the doubling would take 12 years. 

We rarely live in an average year. Based on history, roughly two-thirds of the years rise and one-third decline. Because of the compounding effect investors have more money in their accounts than simply multiplying decades of average performance. Results can be very satisfactory. Hopefully we will recover from increased “rates, regulation, and redistribution” in the future.

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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

https://mikelipper.blogspot.com/2021/04/respecting-opposition-market-weekly-bog.html

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The Other Side - Weekly Blog # 677

 

Mike Lipper’s Monday Morning Musings

The Other Side

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

Approaching a Trade

Both buyers and sellers are essential ingredients in making a market. While I am an advocate for buying and owning securities to produce desired returns in a particular timeframe, most participants don’t consciously follow that approach. Many buyers and sellers ignore probable returns for a period, other than in the current trading environment. Consequently, many transactors deal with similar sets of information but have different views.

How to Develop an Investment Position

When I was the chairman of a non-profit investment committee, I wanted an investment committee similar to a Mid-Western Pension fund’s external investment committee, composed of outside investment professionals guiding a competent internal investment staff. However, I went a step further and included an experienced bear as a member of my committee. The questioning our bullish views forced us to consider the alternative and do better research. In one case, because it looked washed out to him, he recommended investing in a sector that had produced very large losses. Because of his normal bearish attitude, we paid attention to a rare bullish suggestion which turned out to be one of our best investments. This experience taught me to look at the “other side” of the argument in executing each investment.

The Purpose of This Particular Blog

Almost all commentators on the market and the US economy are bullish. Readers don’t need me to add my voice to the commentary on pent-up demand, the supply of savings, and the use of government money. You can get lots of “happy talk” elsewhere. What may be helpful are some brief points from the “other-side”. This is particularly true in the study of market cycles, where a characteristic of reaching a turning point is the almost total rejection of thoughts contrary to the dominant trend. 

Points to Consider (Not Necessarily to Accept)

1. Quarterly earnings growth rates will decline. Many companies will experience the largest percentage increase in the forthcoming cycle. The habit of comparing the current quarter to the same period in a prior year is meaningful but can be misleading. For many companies, the second quarter of 2020 was impacted by the biggest lockdown ever. Starting with the third quarter of 2020, the recovery began and accelerated in the following two quarters. For some, current earnings are a function of addressing pandemic generated shortages, which will not continue. This may be particularly true for so-called value stocks, which are often cyclical performers. A more useful comparison for many companies would be the same quarter in 2019. To claim a specific company as a growth company might require double-digit growth from the prior best seasonally appropriate quarter.
2. Recognize some of the probable drivers of inflation now and in the future. The JOC-ECRI Industrial Price Index is up +101.01 % compared to a year ago and up +2.85% in the latest week. The increased reliance on corporate tax collection drives up inflation. There are two main forms of tax collection, sales/use taxes/fees and income taxes. In many “blue governed” states and municipalities, we will likely see increases in fees for services where deficits are common. A bigger source of future inflation will likely come from an increase in income tax rates, both at the corporate and individual level. When a company is faced with a tax rate threatening after-tax income, they take steps to lesson its impact. These include raising prices and reducing expenses, the largest of which is probably labor. They might also move earnings to more favorable locations and reduce quality.
3. Understand the implications of the current size of the Majority in the House, which is 6 members. The senior vote counters are worried about the 2022 Congressional election and their solution is to pass HR1, their first bill of the year. This bill would federalize the election process and remove the states regulatory power over elections. HR1 supporters have already attacked, without reading, the latest election law in Georgia.  They now plan to bring a proposed expansion of the number of Supreme Court Judges to the floor. 
4. This weekend, the deep political division in “the chattering class” was very evident in two half page articles in The Wall Street Journal and The New York Times. The headlines for the two articles are instructive: “How a Physicist Became a Climate Truth Teller” (WSJ) and “Learning From a Family’s Investment Mistakes” (NYT). The second article fails to mention it is a repeat of a Biblical question to Jesus, asking if it is proper to pay taxes to a government not seen as carrying out God’s work. Looking at a coin and seeing the image of Caesar, He intoned “Render Unto Caesar the things that are Caesar’s; and to God the things that are God’s”. The Ford Foundation saw it differently, much to the disappointment of Ford’s heirs. (As an analyst, I believe you can make an investment portfolio grow in numerical value over time, with difficulty and some mistakes. One of the hurdles in reaching that goal is learning what and whom to believe. It is relatively easy to make judgements in terms of dollars, expenses, and reputation. The sources of verifiable truth in the “good deeds” arena are much more difficult, as truth and beauty are in the eyes of the beholder). Because of this need to find “the truth”, The Wall Street Journal interview with Steven Koonin is so valuable. (Before briefly mentioning his views, I need to identify my biases. Steven Koonin was a Provost at Caltech, where I am a senior trustee. Additionally, two members of my family are past and current students at NYU, where he started and ran their Center for Urban Science and Progress.)  His base case seriously questions man being the main cause of climate change. From my days as a geology student, I was taught how the geology of the earth apparently evolved as measured by the different levels of sediment making up the earth’s crust. At one point our midwestern region was underwater and the Sahara Desert was rich with plant life, all before man walked upright. I agree with him that we should instead be focusing on the dangers and causes of pollution impacting our health. One of the policy problems that needs to be addressed is the bailing out shore communities after repeated flooding. We need a more truthful analysis of the problems we face and how to voluntarily modify human behavior.
5. Do large commercial banks know something about credit? The leading banks made two moves this week, JP Morgan Chase (*) sold $13 billion in bonds and Bank of America (*) sold $15 billion. These sales were easily absorbed, as net flows into mutual funds and ETFs were increasing. Along with other mega banks, they also reported meaningful increases in deposits, even though interest rates on demand deposits fell to 8 basis points from 10. At the same time, they reported a decline in the amount of loans. Thus, banks are not making loans after being flooded with deposits and the proceeds from the sale of bonds. Is it possible that under the flood of stimulus cash they are seeing a smaller number of credit worthy borrowers? (*) Shares owned in personal accounts.
6. Charles Schwab Corporation (**) reported a record number of new account openings, excluding those that came in from acquisitions. Many of these accounts were young, first-time investors buying into more speculative securities, in many cases on margin. One leading market analysis group commented on the extended historically high bullish sentiment in the American Association of Individual Investors sentiment survey, saying the “lack of AAII fear is a fear itself”. (**) owned in private financial services fund and personal accounts.
7. For some time I have maintained that on balance the investors in the NASDAQ stock market are more investment savvy than those investing in the New York Stock Exchange, in which I was a former member. This is due to the NYSE attracting more non-price sensitive passive buying. This past week, 20.8% of the stocks listed on the NYSE recorded a high, vs only 11.4 % of the shares on the NASDAQ.
8. The two best performing fund peer groups for the week were commodity funds focusing on Energy +5.03% and Agriculture +3.14%. There were another 11 peer groups that gained between 2% and 3%.

In order to remain comfortable with their holdings, fully invested subscribers likely believe the somewhat negative indicators mentioned are sufficiently wrong. Please let me know privately what you believe.           

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

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

https://mikelipper.blogspot.com/2021/04/respecting-opposition-market-weekly-bog.html

https://mikelipper.blogspot.com/2021/03/the-biggest-risk-we-all-face-weekly.html

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Risks and Avoidable Mistakes for 2015

Introduction

For most dollar oriented investors 2014 was an "okay" year with a third year in a row of double digit gains for the S&P 500, but not for the bulk of institutional accounts. Consciously or not, many investors and managers were aware of the length of the present bull market having entered its 61st month. This has created twin dilemmas for the prudent management of responsible money.

First dilemma - Large Cap over-ownership

As regular readers of these posts recognize and true to my analytical history, I tend to view investments through the lens of mutual funds. When simplifying the fund performance data for 2014 by size of market capitalizations the following is revealed:

Large Cap funds	11%
Multi-cap funds (Unrestricted/ or “go anywhere” funds	9%
Mid Cap funds	8%
Small Cap funds	3%

In a dynamic economy the rank order of operating earnings power generation would be in the opposite order, being led by Small Caps or possibly the successful "Go Anywhere" funds. Focusing on operational earnings, excluding foreign exchange benefits, I believe that the Large Caps were producing approximately 3 times the long-term growth of the Small Caps. The better market performance of the Large Caps, I believe, was a function of market structure changes. Some institutional investors being concerned with the duration  of this bull market moved heavily into Large Cap stocks directly or more importantly through the use of ETFs invested in the S&P 500 and other indices. Because of perceived greater liquidity in Large Caps they were hiding out in what we used to call warehouses. With governments all over the world looking to Large Caps being "social progress" engines, I have some doubts as to the growth prospects for Large Cap companies.

Second dilemma - Historical constraints

As is often the case, apparent boundaries come with both hard data and locked-in thought processes. The data is the easy part. While as noted we are in the sixty-first month of the recovery, of the nine last market recoveries, four have been over 100 days in length with the longest being 181 days. Thus for a manager a possible career risk is exiting too soon which puts a premium on investing in liquid positions. Because so many others have made similar judgments as to the better liquidity in Large Caps, if there is a sudden drop in the market, I believe the excessive amount invested in Large Caps will find their exit liquidity either expensive or non-existent for those that are late.

The biggest risk for investors and their managers are the biases that many of us labor with in making so-called rational decisions. The following are a list of these biases as listed by Essential Analytics:

List of biases

Outcome, herding, conviction (the curse of knowledge), recency, framing, band wagon effect, information, anchoring, optimism.

I suggest that many of these biases find their way into reports; supporting in effect, the reasons we all have made decisions that haven't worked out. The key for all of us is to understand our biases. Some biases we will be able to overcome. Others we will have to accept as immutable.

This suggests that when putting together a portfolio of funds or managers, it would be wise to try to diversify the various biases of the hired portfolio managers as well as our own as the owners or fiduciaries of the capital being deployed.

Overcoming biases

I have a definite advantage in this task by personality. By nature I am both curious of what I don't know and often a contrarian. As a contrarian again using the mutual fund microscope, the following may be useful thoughts:

Looking to extremes one might wish to set up a pair trade of being long some of the components in the S&P Latin American energy index which declined -39% vs. the average Indian fund which was up 41% in 2014. In a similar fashion one might start to research funds in the following groups that declined in 2014:

Energy Commodity funds	-34%
General Commodity funds	-16%
Global Natural Resources funds	-15%
Domestic Natural Resources funds	-15%
Dedicated Short-bias funds	-15%

I take some comfort in the contrarian thoughts contained in the headline to John Authers insightful Financial Times column: "The case for gently shifting money away from US." I believe a well-reasoned portfolio should be looking for opportunities on a global basis both in terms of what companies do and where various securities are traded.

Final thought

Many year-end predictions are essentially extrapolations of existing market trends and this could be what will happen. However, I am searching for the beginnings of new trends that will produce +20% or -20% in a twelve month period. I would appreciate hearing your thoughts as to when and which direction (or both) you expect price movement. I firmly believe we will once again experience this kind of action.

__________    

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