Should Reputations Have a Sell Date? - Weekly Blog # 562

Mike Lipper’s Monday Morning Musings

Should Reputations Have a Sell Date?

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

                                                               

Remember, the way we make judgements is by comparing the new with our memories. Most of what we remember are the results and perhaps the broader conditions of the event. Thus, we remember that Peter Lynch, John Neff, and Sir John Templeton were great equity mutual fund managers. In the US this Sunday evening, many Americans and others around the world will watch the Super Bowl, which is the game in which we crown the best US football team for the year. For more than a few years my wife Ruth and I attended these games as part of our responsibility as investment adviser to the defined contribution plan of the National Football League and the NFL Players Association. Because the teams, players, and owners were all our indirect clients, we had to appear neutral. That is why when asked who we were cheering for, my answer was for the black and white team, the game officials. All I wanted was for them to be correct with their calls. Thus, I saw the game differently than a very large majority of the fans. My memory is of the close calls and the correct decisions, where the play needed to be looked at from a number of different angles. (One can easily see that I often view things differently than most.)

The reason to bring up the LIII Super Bowl this early Sunday morning is not to predict the results, but to use it as a guide in the selection of investment managers and mutual funds. Come what may, one of the key people or perhaps the most important player in today’s game is Tom Brady, the 41-year-old quarterback for the Patriots. I believe his first Super Bowl was in 2002. He has been playing this game longer than the majority of portfolio managers. Most winning managers keep on doing the same things that generated their winning season. What makes Tom Brady different is that he modified his game as he aged, as rules changed, and as competitors played differently. In other words, conditions change.

Recently, I was examining a very nicely performing portfolio of equity managers. The bulk of the long-term performance of this portfolio came from a subset of four quite different managers. In some ways this recognition introduced a new future risk element to the portfolio. All these positions had for a long time, not as long as Tom Brady’s, generated an above average record and their share of the overall portfolio has risen since the decision to add them to the portfolio. Clearly, these decisions had worked. But would they be as productive in the future as they were in the past? One of the lessons from working within the NFL environment was the recognition that on any given game day almost any team could beat another, as a result of conditions changing. This is the same lesson I learned in handicapping my bets at the New York racetracks. While it was comforting to bet on the horse that had the best record, it didn’t always produce a winning ticket. Thus, I became less reliant on winning streaks. For me to be comfortable betting on a good record, I had to believe that current conditions were very similar to those that produced past victories.

All too often in selecting managers or funds, almost all the attention is paid to a particular portfolio and its allocation, specific positions, and the portfolio manager. As someone that invests in publicly traded investment management stocks, I am conscious of the benefits and pressures that management organizations place on the manager and therefore the portfolio itself. The owners of the management company can earn money, not only from the investment performance of portfolios, but also from the sales and redemptions of all their vehicles. One of the symptoms of a prior good performer reducing its chances for future performance success is a significant increase of flows into the fund. Although this is generally recognized, all too often the concern is not extended to the management company itself. Political changes evolve along with the flows of money, impacting talent allocation. One of the parallels with Tom Brady and his Patriots team today, is that he is the only current player that was also on his first Super Bowl team. This means that the skills of his receivers and defense are different. This also happens more subtly within management organizations through aging, personnel turnover, and technology. Most importantly, the competition changes.

What lessons are learned from these concerns in the selection of good professional investors and mutual funds?

1. There is no certainty, successful investing is a series of art forms.
2. Many non-statistical factors should be considered that are perhaps more important than the current excessive focus on fees and investment performance rankings. 
3. What time period is to be used for measuring future success?
4. What is an acceptable comfort level for a permanent capital loss and the resulting sting of self or external criticism?

Where Are We Today?

1. We have enjoyed a wonderful month, the January Effect has worked so far, with an up first day, first week, and first month. Whether that will deliver an up year is yet to be determined. 
2. The gains achieved in January recovered a good portion of the losses sustained in the fourth quarter. 
3. What are the chances that we have a repeat of 2018, where a strong January was followed by a problematic February and a volatile year?
4. We will soon have completed a thirty-five-year bull market in bonds, where are the successful bond bear market managers? 
5. There has been an increase in the number of investment management company mergers and acquisitions. The sellers have a less optimistic view of the future than do the buyers. Talented people throughout the asset management industry need to be reassured that these changes will not affect them negatively, whether their companies are directly involved or not. Most importantly, these changes need to benefit investors for the industry to progress.

         

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

https://mikelipper.blogspot.com/2019/01/excessive-security-risks-weekly-blog-561.html

https://mikelipper.blogspot.com/2019/01/completion-analysis-fuller-picture.html

https://mikelipper.blogspot.com/2019/01/twtw-recognizing-capitulationrisk.html



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Don’t Let Your Current Perplexity Slip You Into a Comfort Zone

Introduction

One of the better market analysts (who like the rest of us analysts, can chant history) just sent me an email saying that the current market conditions are not like those of our fathers or grandfathers but more like that those that faced the founding fathers of the US. I interpret this reference to be understanding that we are now in a period of great experimentation, unlike anything in history. It also means that there are opportunities both to lose a lot of money/purchasing power or to make a great amount for ourselves and heirs, be they be personal and/or institutional.

Having my first lessons of analysis attempting to figure out at the New York racetracks, l am continuously looking how to improve my odds of both surviving and winning.

Rules to Survive

1.  Get over your successes. Many years ago as a young security analyst, I had a great year. I published six stock reports all of them significant winners. Institutional clients of the brokerage firm for whom I was working were bypassing my senior analyst and wanted to talk with me directly and wanted to compensate me for my ideas. I did not fully appreciate both how politically unwise this was and the minimal odds that I could keep the streak going. I should have fully remembered that at the "track" and various professional sports arenas all streaks come to an end. Mine did and I learned to compete again at other firms.

2.  Like all streaks, the status quo also does not last. Today bond buyers around the world are believing that the "lower for longer" in terms of interest rates will persist, and/or that they can jump out and avoid the losses when bond prices fall.

3.  Not to believe that you know everything worth knowing. Recently not only did the "experts" get the Brexit vote wrong, but many also did not recognize that the new smart phone from Apple could have market-moving positives. We should always expect to be surprised and to be alert to elements that could prove that our beliefs in our superior knowledge are less than what we tell ourselves.

Rules for Success

In his most recent weekly blog post Teddy Lamade (who also advises clients) has listed very sensible suggestions for investors who wish to be successful. These are as follows:

1.          Resist the temptation to sell.

2.          Control spending to build predictable cash flow for investing.

3.          Be willing to look different than peers.

4.          Be comfortable with a concentrated portfolio and accept more volatility.

The Big Elephant in our Room: Lack of Sufficient Retirement Capital

This is not a new topic for our discussions, but one with some additional information. The current issue of The Economist quotes a study by Citigroup. In this study of twenty OECD countries, the size of the public unfunded pension liabilities is $ 78 Trillion. Nine of these twenty have a liability in excess of 300% of their GDP. (The liability is a multiple year obligation whereas the GDP is an annual estimate of a country's production of goods and services or an income account where the pension liability is a balance sheet obligation. All of these governments have assets that could be used to pay partially or all of the obligation which may be what has to happen as the net savings of these countries could probably not pay off the obligation in under fifty years.) With the success of medical science and modern agriculture, people are living longer. An average 65 year old man in 1960 had a life expectancy of eleven to thirteen years, now his life's expectancy is 18 to 19 years more. Women's life expectancy has been extended by twenty to twenty-four years. Several CEOs of life insurance companies have told me that there are some people already alive that have a life expectancy of 125 years.

In most large population countries during this election season, it is wise to remember that many of the young don't vote, but their grandparents do.

You can see my motivation in creating the TIMESPAN L Portfolios^® to meet these and other needs.

In Conclusion

We will be dealing with different strains and opportunities sooner than what may be comfortable for investors. We will need to free our thinking from our experienced-driven mind set to survive and eventually profit.

 _________________

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All Rights Reserved.
Contact author for limited redistribution permission.