New World Rediscovered - Weekly Blog # 872

 

Mike Lipper’s Monday Morning Musings

 

New World Rediscovered

 

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

 

 

 

Western Europeans Learn the World is not Flat

Mid-Eastern astronomers have known the world is not flat for thousands of years. Copernicus also knew the truth, which most Europeans learned from Columbus when he discovered the Caribbean islands in his search for trade routes to India. The real value of the discovery led to obtaining Latin American gold and silver for the Queen of Spain and her empire, which resulted in greater gains than those possible from exporting Indian tea.

 

Quite possibly, a similar realization could occur from Donald Trump’s attempt to solve US economic problems through changes in trade patterns and tariffs, which could also lead to unexpected riches.

 

Many of our blogs attempt to help long-term investors and their beneficiaries. However, a very high percentage of what the investment community labels as investment research focuses on the short-term. For example, in the latest week 17% percent of NYSE stocks traded on declining prices vs. 34% on the NASDAQ. In the latest AAII sample survey 25% were bullish vs. 41% bearish. This research may be useful for trading, but it would be meaningless in helping generate capital to pay for college costs 20 years in the future, or to help provide funding for new college dormitories or laboratories.

 

Demographic estimates ten to fifty years out are more likely to be useful than current stock prices. One statistic I might find useful is the percentage of recent graduates who make contributions to their college or the college of their spouse. Tracking the growth of people in positions of responsibility at work or in the community might also be of interest. The percentage of students taking two or three years of foreign languages vs. students taking “STEM” classes is another statistic I’d like to see.

Asking appropriate questions for the resolution you are seeking is critical to charting a course toward the desired result. Failure to do so could result in unanticipated outcomes which are not necessarily favorable to achieving the desired outcome. It is equally important that questions address the appropriate timeline for the investment. Not doing so could lead to a similarly disastrous outcome. There could of course be an unanticipated favorable outcome like Columbus’ gold and silver windfall, but those situations are rare occurrences, unlikely to be repeated very often.   

 

Closing questions for the week:

Healthcare costs are rising, can they be capped?

Can better education lead to better and cheaper healthcare?

  

 

 

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Mike Lipper's Blog: Navigating a New Investment Landscape Amid Political and Structural Challenges - Weekly Blog # 871

Mike Lipper's Blog: Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

Mike Lipper's Blog: A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

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Solo Messaging is Meaningless - Weekly Blog # 818

 

Mike Lipper’s Monday Morning Musings

 

Solo Messaging is Meaningless

 

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

  

 

 

“The Floor” No Longer Helps

Years ago, on both the New York and London stock exchanges, it was normal for members to query the assigned market-makers for a supply/demand picture on a stock they were trading. When the system worked, specialists supplied the size of supply/demand and their opinion on the next expected price needed to clear trading levels. This system worked reasonably well until the “upstairs” trading desks of some member firms began competing for institutional size orders.

 

At that point floor specialists believed they no longer had an exclusive information advantage. Consequently, when approached for a “picture” on a stock, they were reluctant to reveal any orders left with them. It quickly became clear from their responses that they were describing their own positions, or “talking their own book”. This was far less helpful in understanding where the real market was and the prices necessary to clear nearby trading levels. Over time, this left the floor to the upstairs trading desks for stocks with institutional size interests. This led to a situation where those without good relations with the institutional trading desks were at a disadvantage. Increasingly they were isolated from the flow of business.

 

The same thing happened to the distribution of news on the economy, where the distribution of economic news became increasingly biased. Today’s biases are so strong that a substantial amount of the current “news” has lost its usefulness for investment decision making, or should have.

 

A Small Example with Larger Implications

Friday’s trading was lack-luster. The three most popular stock indices, the Dow Jones Industrial Average, the Standard &Poor’s 500 Index, and the NASDAQ Composite, all moved fractionally. The movement was so small that the combined three movements only totaled 0.34%. The Wall Street Journal ran the headline “Major Indexes Eked Out a Gain…” (The WSJ is better than its competitors.)

 

My problem with this is that the Russell 3000 gained the very same 0.34%. (The Russell 3000 tracks the performance of the 3000 largest stocks, including those in the DJIA, the S&P 500, and most of the NASDAQ.) The person writing the headline at the WSJ was giving some comfort to bullish investors and those on the political left.

 

The Missed Opportunity: The Dichotomy

The WSJ also published articles on three other factoids:

1. “Supermarket giant drops Pepsi and Lays over price increases”
2. Xerox cuts workforce by 15%.
3. WSJ weekly prices of commodities, stock indices, ETFs, and currencies had only 16% of them rising.

 

The dichotomy is that while most of the left-leaning media is full of happy talk about expanding the economy, businesses are cutting back on people, locations, inventories, and some prices. One might say they are preparing for a recession, or stagflation. The bulls and bears not talking to each other, which is not a sound position for making investment decisions.

 

Stocks to Buy for Different Times

 In the WSJ weekly price chart, the fifth largest gainer was Healthcare. This is a sector heavily owned by institutions which has not seen many gains. Money-making opportunities look good considering the increasing amount of healthcare needed to be funded, independent of the cyclical economy for pharmaceuticals and health related services.

 

Once the economy bottoms Energy producing corporations will see demand rise, which should last for several years. One way to play this is through accounts + personal holdings in Berkshire Hathaway. (BRKA & BRKB will benefit from a large portfolio of petroleum stocks and ownership of operating utilities.)

 

We also serve investors who have multi-generational payments ahead of them. One of the few ways to play this is through stocks and funds invested in Africa and the Middle East. One of the classical ways to invest is to buy sectors under current price pressure. We think the Chinese region is well worth developing a long-term investment view.

 

Let’s Learn of Your Views.

 

 

 

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Mike Lipper's Blog: Our Wishes & Perspectives - Weekly Blog # 817

Mike Lipper's Blog: Dangers “Smart Money” & Thin Markets - Weekly Blog # 816

Mike Lipper's Blog: Searching For Answers - Weekly Blog # 815

 

 

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My Triple Crown - Weekly Blog # 783

 

Mike Lipper’s Monday Morning Musings

My Triple Crown:

Berkshire, Coronation, Derby, plus analytical insights

 

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

 

 

 

Berkshire Hathaway Annual Benefits

One of the advantages of owning shares in this unique company, both personally and professionally, is having the opportunity to learn from Warren Buffett, Charlie Munger, Greg Able, and Ajit Jain. The side conversations with a number of deeply involved investors and managers is an added benefit. For me, my wife, and my son Steve, this is truly an educational experience.

 

In terms of Berkshire, the following is a brief list of short-term (one year) comments:

1. The “float” is expected to be higher than in 2022. There should also be earnings from the railroad.
2. They have heavy property insurance exposure in Florida real estate.
3. GEICO will not be getting the full benefit of the switch to fully automate until at least 2024, possibly longer.
4. The stock is selling below “going-concern value”, suggesting it’s a good use of cash, particularly for heirs.

 

Coronation

While the coronation of King Charles III and Queen Camilla is important to many in the English-speaking world, it is also important to those of us entrenched in the investment world. King Charles produced a more modern version of the over 1,000-year-old coronation with all its pageantry and significance. Globally, he should give us hope we can remodel a financial system showing serious signs of disarray, with the inability to produce good value for all direct and indirect participants. Among which are the problems related to regional banks, commercial real estate, government sponsored inflation, inadequate education, inefficient healthcare, and getting the optimum benefits from layoffs. (More on the latter subject later in this blog.) We should learn what we can from King Charles’s discipline, especially his ability to make painful decisions with a clear view of a desirable future.

 

Kentucky Derby

The Kentucky Derby is America’s most famous horse race, which is unfortunate. The entrants in the race are 3-year-young horses with very little experience. This year’s winner, like many others in the race, had only raced 3 times and had only raced once at the Derby’s distance.  As most blog readers have learned, I believe whatever analytical talents I may have, I learned at the New York racetracks.

 

The payoff after both the tax authorities and track takes their share is important in figuring out if a particular horse is worth betting on. It’s a critical element of my handicapping skill, which I carry over to my financial analysis responsibilities. Not surprisingly, Warren Buffett also learned a great deal from attending local racetracks. One can see this when he explains the key to Berkshire’s insurance success, which is getting the right spread between the rate charged and the risk of loss.

 

One of the determents in this analysis is who you are competing against. This was an unusual Derby in that a number of horses were scratched. The betting crowd (the market) was left without a strong preference or favorite, much like one of the five largest market-caps in most sectors. At the track, the odds-on favorites are often 2 to1, or less. In this year’s race the winning odds-on favorite was 4 to 1. This should have been an alert to bettors that there was a low level of confidence in the crowd’s or the market’s choices. Somewhat similar to a number of market periods we have gone through recently. This filter might have suggested giving a more earnest look at horses with longer odds. Opening up the possibility of identifying a horse with 9 to 1 odds who finished first barely beating the second finisher, a horse with 5 to 1 odds. This type of behavior is why I often favor less popular investments, including small-caps and companies with somewhat blemished records. Particularly when there is a change of jockeys or other key managers. The keys to success in this type of thinking is not the win vs. loss ratio, but the number of dollars won or lost. Or if you prefer, Berkshire’s rate vs risk.

 

Analytical Insights

Hardly a day passes without the media reporting on a company with a new layoff. This is not newsworthy because of the number of people being laid-off, but because it’s happening during a period of high employment where there’s a surplus number of job openings relative to the number of people unemployed. Clearly there is an imbalance, or phrased another way, the people unemployed are different that those employed.

 

This condition requires careful and thoughtful analysis based on incomplete data. I suggest disaggregating the layoffs by presumed causes. The following is a list of types of layoffs and their significance:

1. LIFO (Last In, First Out) is usually directed by HR people from an easy date of employment list, without any further consideration. (I avoided one such occasion personally by going to a senior partner of an institutional brokerage firm which had 5 junior analysts. I pointed out that the likely salaries in aggregate were roughly equivalent to that of one aging but knowledgeable senior analyst. Perhaps my logic or guts worked, all five junior analysts were saved. I left the firm for another opportunity soon thereafter. Of the 4 that remained, at least 2 became productive firm partners.)
2. The opposite approach is sorting by perceived talent and keeping the best. In effect create a talent bank.
3. Friends for life. As I moved up, I recognized that some talented individuals did not fit where the firm was going. I suggested they find a better place and they became friends for life.
4. A layoff can be an essential part of a plan to move an operation, disposing of an activity that no longer fits.

 

Good analysts should try to determine which of the four alternatives most likely fits their described motivation. The LIFO layoff is only helpful in improving overall short-term productivity, as it does not make the remaining workers feel good about working for the employer. This may be unavoidable if the company is a union shop with built in official or unofficial rules governing layoffs. If so, the employer has deeper problems. 

 

In Conclusion

I had a good learning week, and I am happy to discuss my views with subscribers. Whether you agree or not, I can learn from you.

 

 

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Mike Lipper's Blog: Fire Drill - Weekly Blog # 782

Mike Lipper's Blog: Early Stages of a New Grand Cycle? - Weekly Blog # 781

Mike Lipper's Blog: Pre, Premature Wish - Weekly Blog # 780

 

 

 

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What does your 4.0 Profile Tell You? - Weekly Blog # 763

 

Mike Lipper’s Monday Morning Musings

What does your 4.0 Profile Tell You?

 

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

            

 

 

When one sees a mark of 4.0 it usually signifies academic perfection. As the investment game is different from other realities, so too are our measurements and goals. As much as we try, none of us has established a long-term investment record where each investment in each period produces a satisfactory performance record. We need a different type of measure to produce a learning device to improve performance.

 

These thoughts led to four inputs for investment action. After listing the four, it became clear that each label ends in an “o”. Recognition of these inputs might help sum up the importance we attach to each and explain what type of an investor we are and the performance we generate.

 

The four main inputs are:

• Macro
• Micro
• Politico
• Psycho

 

Macro is the generalized investment thinking of most people. As discussed in recent blogs, most pundits and their dedicated investors are in one of two camps. They either believe or don’t believe that investment gains are being held back by inflation, with changes in the level of interest rates the only way to cure the problem. The second group believes that current performance is due to broader structural problems and basic imbalances. Among these problems and imbalances are the lack of constructive leadership throughout society, including politics, education, the non-profit sector, and businesses.

 

As a life-long student of investment performance I suggest that it is extremely rare that the current generally accepted macro view will correctly predict the future.

 

Micro inputs can be translated into “God is in the details”. Some of these details are derived from audited statements where there are very few mathematical errors. (Other than measuring the wrong things in the wrong way.) As an investor I value incomplete observations of changing elements more. Such as changing of the number of workers doing different tasks, changing the number of customers making spending or selection decisions, or the number of customers consuming specific goods and services. My interest is not the raw numbers themselves, but their volatility and where they fall in the range of past actions. The key is to recognize changes in people’s behavior and try to guess their motivations.

 

Politico also consists of two parts, what is likely to happen and what one hopes will happen. The closer the two are, the less likely the result will occur. Interest at various levels may also influence perception, be it international, national, local, industry, organization, or family. As a practical matter, the interest of greatest impact will likely be the reverse of the order above.

 

Psycho deals with our optimism and pessimism, including the confidence in our personal ability and willingness to make meaningful change.

 

Applying Inputs

As with any composite of inputs, one can treat each equally or weight them appropriately. For example, I might weight macro 2, micro 4, politico 3, and psycho 1.

 

In this situation it would be difficult to select investments that didn’t have strong micro attributes. Politico would also be an important consideration. Both macro and psycho would only be important if micro and politico were not individually selected. Under these conditions I would be unlikely to act on macro influences but would probably make moves if micro or perhaps politico exerted strong directional inputs. In general, I would need more evidence to make major changes to my portfolio based on macro events. (A second level adjustment could be applied to the strength of my belief in each. For example, 90% for micro and 10% for psycho.)

 

There are many other selection processes. Some work better than others under different circumstances. The value of understanding one’s selection biases is to direct focus to what is important.

 

Clues of the Week

Each journey starts with a first step, as does each long-term investment record. Our problem is that we don’t know which week is the beginning week.  Additionally, no long-term record has each week moving in lockstep with the long-term record. That is why we search for clues each week. As with many investigations we look at many clues, some of which will be wrong. I summarize in these blogs the most likely.

 

In terms of forward motion there wasn’t much this week, but it is possible the ratios of new high/new lows, volumes, leading/lagging sectors, and news from beyond the stock markets could be instructive.

1. On the NYSE, new lows were larger than new highs each day. (Only true for 3 days on the NASDAQ.)
2. More shares were sold at declining prices than rising prices in 4 out of 5 days, with weekly volume -2.6% for the NYSE and -6.1% for the NASDAQ compared to the prior year.
3. Of 32 S&P Indices, only the Asian Titans 50 rose for the week. The prior leaders, energy and financials, turned down, while healthcare and tech rose.
4. Personal Savings were +2.3% vs +7.3% a year ago. Steel capacity usage was 73% vs 82% a year ago. A Jeep Cherokee factory to indefinitely lay-off workers in February.

 

Despite the “happy-talk” of inflation peaking and interest rate hikes slowing, investors and consumers are not buying a turnaround.

 

Incomplete Strategy Labels

Pundits and marketeers prefer short, snappy labels for various portfolio strategies. These are typically one-sided as they only describe the purchase side, not the other strategies excluded. Below are some examples of more instructive labels:

• S&P 500 Index - Market-cap or equally weighted
• “Go to Cash”- Freeze the rest of portfolio
• All investors - Traders, investors, taxable or tax exempt (deferred)
• High/low P/E without identifying the date - Price is current when earnings lag. (I prefer to use operating or net cash flow after debt payments.)
• High/low volatility without identifying the period of volitivity -Intra-day, daily, weekly, monthly, yearly.

 

Readers may have their own examples of mis-labeling.

 

 

 

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Mike Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762

Mike Lipper's Blog: This Was The Week That Wasn’t - Weekly Blog # 761

Mike Lipper's Blog: Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760

 

 

 

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Should Changes in Markets Change Your Investment Structure? - Weekly Blog # 618

Mike Lipper’s Monday Morning Musings

Should Changes in Markets Change Your Investment Structure?

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

Warning
Traditionally, investors use comparisons as a tool for making critical judgments and grow comfortable with current events that are within the envelope of past experiences. Momentum driven investors prefer data in the mid-range of past experiences, whereas contrarians look for a reversal of “normal” trends. Both sets of investors may find the current marketplace unsettling. Some may be considering changes to either the structure of their investment thinking and/or their specific selections. Possibly turning off the autopilot based on past security price action, or viewing corporate results through the lens of political or economic pronouncements.

What has Changed?
If we have entered a period of fundamental change, it has not been going on long enough to catalog all that is changing. The following is a partial list of observations different than past experiences:

1. US stock market indices have dropped more than 10% from record levels in six trading days. (Historically, a drop of 10% is labeled a correction, suggesting record price levels were not appropriately valuing current conditions.) In the latest week, our list of client owned funds or those of possible interest showed only 9% in the best performing quintile, compared to 35% for the trailing twelve months. (Obviously, the funds’ managers were not positioned for the correction.) Within the S&P 500, they would have needed substantial holdings in Communication Services, Real Estate, or Healthcare, down -6.34%, -6.34% and -6.66% respectively. For the week, the best performing equity category within the index was Growth, which fell -7.15%. The ten best performing funds on the list fell under 1% and the ten worst declined -12.11% to -13.31%
2. One of the base beliefs of many investors and particularly large investors, is that large market capitalization reduces risk. That was not the case this week, with the Dow Jones Industrial Average falling -12.36% vs. -10.54% for the NASDAQ Composite.
3. During the week ended Wednesday, ETFs had net equity redemptions of domestic investments of $14.5 billion, compared to $4.3 billion of domestic equity redemptions for the larger conventional mutual fund universe. I believe most of the trading in ETFs is done by investment advised retail accounts and institutional trading accounts, whereas most mutual fund redemptions come from retirement oriented accounts seeking to reduce perceived risks by cutting back on their equity exposure.
4. Each of the four largest private equity fund groups has over $1 trillion in assets under management. In total they are believed to hold over $2 trillion in “dry powder”. Private equity and private capital (Fixed Income) used to be funded exclusively by institutional investors. Increasingly they are receiving money flows from retail investors, directly or indirectly. (This has led to a situation where the prices paid by private vehicles are higher than those paid by the public, which could drive deal prices higher and possibly result in more leverage.)
5. In fixed income there are risks from a slowing global economy due to a normal economic cycle. There are also temporary payment problems caused by Covid-19 and credit terms are growing loser in response to increased competition from higher flows. Simultaneously, some investment advised money is fleeing equity markets and rushing into fixed income markets, where interest rates are declining.
6. A change is likely in future weekly blogs regarding the alerts of news items with a contrary perspective. In the past, I have highlighted the negatives along with some positives. Going forward, I will redouble my effort to find positives.

New Alerts
China has experienced three long-term positives that have not gotten a lot of attention:

1. The Chinese government has ordered its mines and refineries to open for business.
2. Apple stated that all its manufacturing plants are now open.
3. While the Apple store may not be open, I suspect customers are ordering merchandise and services on their Apple and other devices from their homes. Recent checks with companies reveal that much of their “intellectual” and service works are being conducted from employee’s homes. (I have not been able to determine when this will be recorded in their financial records)

The spread between the 30-year US Treasury bond yield and the 3-month yield has gone negative. In the past this was a reasonable predictor of a recession. I suspect some small and mid-sized companies will fall behind in paying their bills, due directly or indirectly to the Coronavirus (Covid-19). In many cases, I believe their creditors will try to avoid starting the bankruptcy procedure, but some will be forthcoming. (The US Treasury should have sold all the 30-year paper they could, as demand exceeded supply. The average maturity on US government paper is about half the UK’s maturity.

What to do Now?

1. Recognize that the structure of the economy and markets are changing. Compartmentalize a single portfolio into sub portfolios based on payment responsibilities, separating risk appetites.
2. Most patient investors don’t need liquidity to get out of declining positions in the majority of their portfolio. From a risk standpoint, market capitalization is only critical in rare circumstances and can be expensive. More critical in the long run are the time and effort to follow what one owns, as well as any new opportunities. I personally address this issue by using both investment companies and individual stocks. For example, I believe a good investor should be exposed to healthcare, although I don’t own a single stock in that category. What I do own is some specialized healthcare funds and more generalized funds that have good healthcare analysts and/or portfolio managers.

Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/02/hate-doesnt-work-for-investors-weekly.html

https://mikelipper.blogspot.com/2020/02/investment-losses-can-be-prots-weekly.html

https://mikelipper.blogspot.com/2020/02/the-art-of-portfolio-construction.html



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Sentiments Approaching Reversal Points - Weekly Blog # 589

Mike Lipper’s Monday Morning Musings

Sentiments Approaching Reversal Points

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

In the near future US stock market sentiment will approaching a reversal point.

Handicapping the US Stock Market
The art of picking winning bets at the racetrack is called handicapping. The betting goal is the same for long-term investors, to have more money at the end than when you started. Note, unlike baseball it is not the number of wins vs. loses. Both handicappers and investors recognize they will be wrong a percentage of the time, but in both cases success is measured by the number of dollars remaining at the end of the game, suggesting that in order to cover the losses gains will need to be larger. As the portion of the wins must be bigger than the average win, most successful investing involves a streak of contrarian thinking.  With that in mind I’ve laid out my view of the current level of the stock market.

As of August 9th, the three major stock market indices have declined modestly from their recent record levels. (S&P 500 -3.54%, DJIA -3.92% and NASDAQ -4.45%) None of these are even near a -10% correction, a -20% bear market, or a generational decline of -50%. Even including the worst week of the year, the three indices are up between +15.87% and +23.14% from the lows generated on January 3rd. However, the weekly survey of sample members of the American Association of Individual Investors (AAII) shows that only 22% are bullish for the next six months, with 48% being bearish. These percentages are historically extreme. A somewhat more nuanced view is expressed by bond and bond fund investors that also indicates caution. For the week ended Friday, yields on a Barron’s list of high-grade corporate bonds yields fell 11 basis points vs. only 4 bps for a similar list of intermediate credits. (Remember, a fall in yield means prices rose, indicating increasing demand.) During the trading week ended Thursday, General US Treasury Bond funds rose +2.25%, while the average High Yield fund declined -0.48%. It’s interesting that in a week where the Fed lowered interest rates by 25bps, the flight to safety pushed US Treasuries higher. 

Like Charlie Munger and Warren Buffett I am not a big fan of book value as a measure of operating success, although it is somewhat useful as a gross comparative measure. Comparing last week’s market to book value with those of a year ago, the DJIA declined very slightly, while the S&P 500 is the same as a year ago. Thus, the market is not grossly overpriced despite second quarter earnings being flat. According to analysts, the current quarter is expected to show a 1-2% decline that will be made up in the fourth quarter.

However, there is still reason to be concerned. On a year to date basis mutual funds have gained 2-3 times their average rate of gain for the last five years. Additionally, they are producing gains that are higher than their very long-term rates of return. Funds limited to the largest stocks, both within the US and abroad, have gained +14.47% year-to-date on average, compared to their five-year average return of +5.77%. Multi-cap Funds, a group of funds without a size limit which often has some large caps, were up +13.74% year-to-date and +5.32% for the past five years. Funds focused mostly on US holdings did somewhat better than those invested abroad due to having more tech holdings and the long-term rise in the dollar.

Short-Term Investment Thinking
Just as the betting results on the most favored racehorses is not great because they rarely produce enough betting winners to cover losses, I am betting against both the AAII crowd and the buyers of US Treasuries. I would also not be surprised if 2019 ends with high single-digit equity gains. In most of our managed accounts I would not disturb the highly selected funds in our portfolios.

Caution: Healthcare Could Look Like Financial Services in the Future
Over my professional investment life the Financial Services business has been quite good to me and my family. However,  the average rates of return have not been as good as they were in prior decades. Looking at the structure of these businesses today, while the numbers are larger the number of people and firms have shrunk. The number of publicly traded firms has been cut in half. The rates of return are also smaller than what they were years ago. Perhaps the single best measure of the decline is that fewer sons and daughters of successful professionals and successful investors want to enter these businesses. In sum, I believe the percentage returns are smaller than those of past decades for most investors. There is a very real risk that the same trend will govern the Healthcare Industry.

As with the Financial Services business, the Healthcare business is already highly regulated by the government and it is likely to become more so. In both cases the purpose of government regulation is to make care available, better, and cheaper for the public. I have twin fears that it won’t happen. The first is a story in Sunday’s New York Times about an individual who went to Mexico for a knee operation  paid for by a generous employer funded insurance plan. This is just another example of what is now called medical tourism, in this case to lower costs. Non-US citizens, both the very wealthy and the very poor, are entering the US for healthcare services they can’t get at home. For many years US residents have been traveling to other countries to get medical treatments not been approved here. These trips, along with the number of Canadians in our hospitals, demonstrate that patients will travel to get what they believe to be better or cheaper medical care. They may or may not get it.

What has likely caused the increase in medical tourism is the combination of increased regulation and the limiting of profit making of doctors, hospitals, insurance companies, pharmaceutical companies and all their suppliers and servicers. As an investor, as well as portfolio consultant to a hospital, I have looked at their financials. The good ones are reasonably profitable, but increasingly many are not and therefore  one needs to look beyond the dollars of profit. The first ratio to consider is profit relative to investment. Perhaps more important, is their perceived ability to pay dividends to their owners. For the most part these organizations feel compelled to reinvest their so-called profit into their activities. In many ways I do not consider retained earnings as current profits, because as an outside investor I can’t spend it.

As someone who has a large family dependent upon me to pay some or all their medical bills, including insurance, I would appreciate lower medical costs. It is important to understand that insurance is temporary risk shifting, favoring long periods of paying premiums directly or through the workspace. In the end my real desire is for others to have the lowest costs, but I want the best care for my family and the best often includes the new best drug or procedure. My fear is that as we restrict profitability in the healthcare system we won’t get the lifesaving or life betterment new drug or procedure quickly enough.

Just as we are well served in the financial services businesses by an appropriate level of profit, we need to ensure that the healthcare system can do its job of making our lives better.   


     
Did you miss my past few blogs? Click one of the links below to read.

https://mikelipper.blogspot.com/2019/08/is-last-week-significant-weekly-blog-588.html

https://mikelipper.blogspot.com/2019/07/chinese-emperors-learn-all-roads-lead.html

https://mikelipper.blogspot.com/2019/07/us-stock-markets-new-highs-misleading.html



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Our Arrogance Hurts Our Investments

Today’s blog may be uncomfortable or argumentative for some.

This is the season of arrogance. With one US political convention over, the next one about to start, and a major hoped-for policy speech from the chair of the US Federal Reserve, each event characterized by speakers proclaiming that they are correct on all issues. At no point during these polemics did any of the speakers ever admit that they have been wrong in the past and that their espoused policies could produce any negative impacts along with their expected good results. Beyond the US, various other politicians are singing the same song and will do so until this election cycle ends in 2013. Think about it, with the exception of our spouses and significant others, do we know of anyone including ourselves who has not made mistakes and is likely to make at least some mistakes in the future? To deny the possibility of human error on our own part is the height of arrogance to me.

We should not assume too much guilt for our individual heights of arrogance; politicians of all types are much more professional in their arrogance. As distinct from the rare statesman or stateswoman, the self-interests of a politician require observing the audience closely. When there is a movement or a high profile issue, they quickly get to the head of the parade and become the loudest advocates as to where the crowd wants to go. People want to ignore deficits, the critical threat to our capital and possibly our well-being and safety.

The imminent threat

The growing deficits with spending in excess of government revenues leads almost inexhaustibly into transferring wealth from private domestic owners to the government and foreign lenders. The transfer of wealth is unlikely to create new wealth through productive investment, but instead goes into immediate consumption. This is precisely where the second stage of our arrogance comes into play. We are all consumers of government provided services, including protection from foreign and domestic enemies, transportation subsidies, healthcare, and useful regulation. Much of what we consume is involuntary such as military and police power. But as individuals we feel entitled to these services. (We thought we paid for them which often not the case entirely.) This is what we think we are “due.” However, many feel that the money the government spends on others because of their unsafe life styles and similar protections and benefits are wasteful and create the shortfall in government revenues. We arrogantly defend our own expenditures and deprecate money spent on others (perhaps less deserving).

Where does our arrogance come from?

From the moment of our birth to the very present, we live in a competitive world. We compete for the attention of our loving parents. In sports we compete for position and rank. In business we compete in this “dog eat dog world.” This week Newsweek published a list of the 25 most stressful colleges. (I am not endorsing the magazine’s methodology or the conclusions that the graduates from these top 25 highly selective colleges will perform the best in life.) What I found of personal interest is that in the case of nine of the colleges, our family or close friends attended or are senior officers. This result gives me an insight as to why so many that are close to me are so intense. They have been trained through the process of generating stress to be strong in their opinions. I suspect that this kind of training in civilian colleges mirrors the stressful training in the military which also produces intense and we hope aggressive military leaders.

Solutions

When arrogance meets arrogance nothing gets decided as long as there are two or more left standing. What is desperately needed is to attack the low-level of efficiency in large areas of spending. This is difficult and requires important levels of good will on all sides. If we can put a vehicle on Mars we should be able to solve our traffic problems on Earth. Think of the economic benefit to society if commuting and shopping times were greatly reduced! I suspect the use of iPads at an early age could well free teachers’ time to instruct and to bring learning into the home so that parents can participate alongside their children. We also need to have sufficiently stable tax and administrative rules that permit businesses to confidently plan expansion. There are many other ways that we can use our talents to make and spend money more efficiently.

Arrogance and my portfolio

The most dangerous portfolio is one managed out of arrogance. There are far too many individual and institutional investors who have predicted the investment future and will only act when the present conditions meet their perceived future. They could eventually be right, but I doubt it. Over the years I have been blessed with many private conversations with some of the best equity managers in the world. What has struck me about these conversations is that most of the time these “fishermen” wanted to discuss the ones that got away. Often there was a discussion on what mistakes they made and how they have modified their investment behavior. If the great can learn, then I think we can all learn if we are not too arrogant.

Where to find the less arrogant

One of the worst things that Fortune magazine and other media did was to be the first to rank companies on aggregate sales.  Sales rank alone is not a particularly good measure for investment or even job opportunity. Nevertheless, large companies often quote with pride their sales rank and mindful of the list, possibly consider acquisitions more favorably. Bigger is not always better. (A study of the Newsweek 25 stressful colleges also demonstrates this principle.) Bigger does mean more people and higher compensation for senior executives. Often the leadership of large companies become isolated. As demonstrated by politicians around the world, the more isolated the leader becomes, the easier it is to become arrogant. Large companies also attract more media attention which gives their leadership more opportunities to pontificate and lock themselves into arrogant positions. Further, with so many ETF type products in the marketplace the chance for breakaway performance for a mammoth company is somewhat less. For these and other reasons we would want most portfolios of funds to have a few reasonably concentrated Small Cap funds managed by experienced portfolio managers who are not arrogant. For the more venturesome, investing in small companies internationally may be rewarding but stressful.

What do you think?

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