Premature: Buying Program to Begin Soon? - Weekly Blog # 931

  

 

Mike Lipper’s Monday Morning Musings

 

Premature: Buying Program to Begin Soon?

 

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

 

 

 

Basic Investment Principle

Investment opportunities are cyclical in both timing and magnitude. Larger gains are achieved after periods of extended declines. Since one does not know the extent of a decline or magnitude, it is wise to use a buying program. For instance, invest no more than 10% of buying reserves at any time. (This assumes you establish a buying reserve in rising markets. Charlie Munger has taught us to buy good companies at fair prices rather than always look for “cheap” prices.

 

Recently, my sister-in-law sent me a copy of a letter from my grandfather to my late brother sometime after he left the Marine Corps to begin his life in the investment business in the mid-1950s. My grandfather, who built his own brokerage firm for more than thirty years, cautioned my brother to always expect periodic recessions and less frequent depressions. He also advised him to not invest against the US, as the country was rich in natural resources. (This is still good advice, but there are times when our government makes our currency risky for a period.)

 

Where are We?

Most investors in defining where we are, do so by looking at where we have come from. The pundits wax poetic about recent data extrapolations, expecting the past to be repeated. My analytical training at the New York racetracks and as a US Marines Corp Officer was to always examine the current situation and expect some change.

 

Today, many pundits and politicians see an improving picture. As a student of financial history, I am conscious that it has been some time since the last recession. Furthermore, it has been 97 years since the Wall Street crash and the 12-year depression. Few people recognize any similarity between that time and our current condition.

 

Trading Alerts-Correction, Recession, or Depression?

The following are a number of alerts from last week suggesting we are entering a period of more declines than increases:

1. Morgan Stanley is planning to cut 3% of its customer-facing workers.
2. 73% of stocks traded down on the NYSE and 67% on the NASDAQ. A pattern which has been going on for several weeks.
3. The ECRI industrial price index rose to 126%, a 4.73% gain year over year. Clearly, the war in the mid-east is inflationary. 85% of prices tracked by the Wall Street Journal each weekend declined, echoing the ECRI results
4. Individual investors and those serving retail investors are not confident in their outlook for the next 6 months. 33.1% are bullish and 35.5% bearish.
5. The S&P 500 index is the best indicator of the market for both institutional investors and wealthy investors. Along with most other indices, the S&P 500 index fell on Friday. If this was the beginning of a recession and the index were to decline to where its rise began, it would drop 28%. If this was the beginning of a relatively mild depression, the drop could be 49%.

 

Advice to Buy Program Buyers

I have found it extremely difficult to buy at the exact bottom, as most declines don’t appear convincing enough. The advantage of using a buy program strategy instead of a one-shot purchase is that you will likely have a collection of winners and losers before the overall market has reached back to its original starting point, assuming you buy 10% each month or quarter. However, that is not the point of the exercise. You should want to hold your position until it has reached the condition of a great company at too high a price, where some trimming makes sense.

 

Please share your thoughts with us.   

 

 

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Expectations Changing? - Weekly Blog # 930

 

 

 

Mike Lipper’s Monday Morning Musings

 

Expectations Changing?

  

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

 

 

 

The Main Motivator They Don’t Teach

Fear is the main motivator they don’t teach you about in pre-kindergarten through Ph. D studies. Primarily, this list is comprised of what can go wrong and what will hurt you, such as going broke, losing a job, or being defrauded. Discussions are informative but not particularly action oriented. What would be useful is a list of expectations, and of prime importance how to recognize them and what to do. These are life lessons which we all need but are not taught.

 

Each of us has our own level of awareness of critical expectations and we are aware of the changes in them. While all aspects of human life are open to change, I am going to focus on the expectations which impact our investment realities. These expectations are easier because they deal in large part with numbers. Numbers, like prices or earnings per share, are precise but mean different things to different people at different times.

 

The difficult part of dealing with expectations is identifying when they change and by how much. For example, a stock price expectation between $103 and $98, or an earnings per share expectation between $0.67 and $0.70. The critical issue is how early, or late investor expectations begin to evolve compared to others. Being early or late is often more impactful than being right or wrong?

 

Are We Changing Expectations?

A recent January survey of institutional investors had 50% expecting stock prices to rise, 39% expecting prices to be stable and 10% expecting prices to fall. An American Association of Individual Investors (AAII) six-month sample survey of investor expectations found 33.2% bullish and 32.9% bearish. Three weeks ago, both groups were about equally sure at 38%.

 

For the week ended Friday, more stocks fell on the NYSE and NASDAQ than rose (NYSE 56% and NASDAQ 53%, respectively). Normally slow-moving industrial commodity prices rose to123.06% from 121.92% the week before.

 

Most important of all, the US and Israel bombed Iran on Friday night. (The timing of the attack was a surprise to most, although the US has been building up its military and Naval forces in the Middle East recently.)

 

For some time, large companies in the US have not replaced retiring workers with new hires. We will see in the coming week if there is a large change in market expectations and whether that change in expectations is long-lasting.

 

 

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Mike Lipper's Blog: Diversification - Weekly Blog # 929

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Diversification - Weekly Blog # 929

 

         

 

Mike Lipper’s Monday Morning Musings

 

Diversification

 

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

 

                                                                        

 

Preface

On a recent trip to London, Ruth and I attended a private fund and friend raising concert for the Academy of St. Martin’s in the Fields (ASMF), where Ruth is the first American trustee. The wonderful music was performed by Joshua Bell, the artistic director, and five other top-notch string musicians from the ASMF. Between the six talented musicians they played three different types of string instruments, alternating between lead and ensemble roles. The result was a successful combination of each of their talents.

 

Even when listening to a magnificent concert performance, I cannot forget my investment responsibilities. As individual musicians alternated from leading to supporting roles, it reminded me of what individual securities should do in a diversified long-term investment portfolio.

 

Application to Portfolio Management

In 1940 the SEC completed their depression-oriented reform rules. Among the last of these was the Investment Company Act of 1940, which unlike the other six regulations was not formed at their SEC headquarters. It was produced at the Mayflower Hotel in Washington by lawyers for the fund industry from Boston, New York (where the industry’s trade association was headquartered), Philadelphia, and Washington. Considering their recent experience of the market falling during the Depression, the mood of the meeting was to try reduce the chance of big future declines. The best model for that were state laws governing trust accounts, using generations of work by Boston and Philadelphia lawyers. (Even as late as the early 1960s a few Boston law firms had professional securities analysts on staff to assist in managing trust accounts.) Note, the main concern of the creators of fund regulation was the avoidance of losses. No word was spoken of making money on investments.

 

They thought the best way to reduce the chance of major losses was to limit an account’s exposure to any single investment. This led to limiting the percentage amount that funds could invest in any one stock, which usually meant no more than 5% of the voting stock at cost (not market). To this very day, most equity funds are labeled as diversified if they adhere to this principal.

 

The Problem with Voting Stock Limits

The biggest penalty paid by investors is not losses, but the absence of profits. Mutual Funds with long histories often make ten, twenty, or even more times as much on some of their holdings, which more than covers a small number of losses. Furthermore, great fortunes have been made, particularly over successive generations, in single stock portfolios or portfolios having a small number of investments.

 

For Professional Investors

The concept of risk management is critical but doing it by name or percentage of voting shares does not reduce risk, it may increase if all investments are exposed to a single concept. In the late nineteenth century professional investors considered concentration to be the best and safest way to invest. My college degree is from Columbia University, which had an endowment fully invested in railroad bonds and stocks, every single one file for bankruptcy. Today there is a risk that some participants in the “AI” surge could produce similar results by investing in too much in a good thing.

 

For publicly traded securities I suggest the biggest risks is with the stock owner and not the issuer, as they will be sellers of the stock before you do. Other risks include countries, technology, politics, and management. These can be identified as short-term and long-term factors. A possible short-term indicator is slightly more participants being bearish than bullish in the latest American Association of Individual Investors (AAII) survey of expectations for the next six months. Interestingly, the long-term indicator was Friday’s announcement by the Supreme Court, which ruled against the President’s authority to set tariffs using the International Emergency Economic Powers Act (IEEPA), which had very little to any impact on the market.

 

Bottom line, watch the musicians play and how well they work together, both with other musicians and staff, but also watch the reaction of the audience.

 

Understanding Going Global

In a recent conversation with a London-based fund manager, who in the past was almost completely invested in the US but now has a growing position in European stocks. While he has the biggest portion of his portfolio in US securities, he is very risk aware and expresses this by augmenting his portfolio with European stocks. Normally, he expects his US positions to outperform his European positions, but not in a declining market. In terms of P/E, Free Cash Flow, Dividend Yield, and other value measures, European stocks are less risky than US holdings.

 

 Another careful investor was Charlie Munger, who listed six principles to be avoided: High Financial Leverage, High Operating Leverage, Negative Cashflow, Poor Governance, High Risk of Obsolescence, No Competitive Advantage vs. a Strong Competitor.

 

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To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928

  

 

Mike Lipper’s Monday Morning Musings

 

To Win Long-Term,

Learn From Great Presidents

 

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

Losing is Part of Winning

In the US, we celebrate Presidents Day on Monday. A typical US compromise that solved an immediate political problem and ignored the long-term implications that would have benefited all, particularly investors. Numerous Americans wanted to celebrate the birthdays of two of our greatest presidents, George Washington, and Abraham Lincoln. However, perhaps for economic reasons the political leadership decided to celebrate just one date, picking neither President’s birthday but continuing to support the travel and retail shopping industries by requiring Presidents Day always be celebrated on a Monday.

 

What these politicians lost in their efforts were critical learning experiences. In terms of opposed contests, both leaders lost more than they won. Washington in military battles and Lincoln in elections. Unlike many of us, they learned from these defeats. (As Warren Buffett said, losing is part of winning.)

 

Applying Learned Experiences to Portfolios

I learned a lot at the racetrack, but my objective was to finish with more money than I started. Washington wanted the rebellion to survive and by so doing he would force the superior power to concede defeat. (The British marched out of Yorktown to the tune “The World Turned Upside Down”.) Lincoln preserved the Union. Both Presidents needed selective reserves to accomplish their goals.

 

Applying these lessons to portfolios, I am a believer in taking risks on individual investments but avoiding the risk of a complete wipe out. In a study of million-dollar retirement accounts at Fidelity, the winning results used both stocks and bonds. I would rename the components equity risk and interest rate/survival risk.  

 

What I found interesting was the median account allocation of 70% stocks and 30% bonds for these millionaires.  Currently, I have about 70% in funds/direct equities and 30% in reserves, with about half of that in cash or bonds/notes under two-year duration.

 

The Logic Behind a 70/30 Portfolio

Looking through a collection of portfolios over time and dividing them into 10-year performance slices, it appears 80% of the equity slices go up in value. As a fiduciary, I assume a more conservative approach with the 70% equity risk.

 

I consider the overall portfolio to be a 20/20 portfolio, with the “normal” equity risk assumption being 70%. This permits market movements of 20% in either direction, without needing to change the basic balance. On the downside, if the portfolio balance reaches a point of having only 50% in equities, I would add 10% of capital to equities. On the upside, once equities reach 90%. I would rebuild a 10% optimistic reserve.

 

Not Built in Yet

We live and invest in a multi-speed world. Due to electronic processing most commercial and agricultural world price trends are impacted at an increasingly fast speed. Some of these trends reflect fast reactions to price movements, which cause geographic rotation. Through last Thursday on a year-to-date basis the S&P 500 generated a -0.07% loss and is essentially flat, with Europe gaining +4.51%, Japan +13.96%, Australia +3.8%, and Canada in local currency +2.56%. In most of these countries there are local and multi-national producers who experience similar problems of prices representing different costs, size-weighted efficiencies, local preferences, and legal/tax regulatory differences. Customers and investors are quick to rotate their actions.

 

On a longer-term basis the world is going through a period of declining fertility rates, impacting local demand in the short term. On a longer-term basis there will be fewer workers, which will result in retirement capital being reduced and securities markets altered. Organizations active in the markets are changing. On the one hand there is a desire to become bigger and serve more firms and people, while others want to increase profitability and remain small enough to grow profits per key player.

 

As populations age, they become more expensive to maintain, particularly beyond their working ages.

 

In Conclusion:

We should all learn from George Washington and Abraham Lincoln and adapt to change with sufficient humility, so we don’t become bystanders passed in the fast parade hurtling through.

 

Thoughts?

 

 

 

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Strategically, Time to Think Differently - Weekly Blog # 927

 

 

 

Mike Lipper’s Monday Morning Musings

 

Strategically, Time to Think Differently

 

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

  

 

Warning: Almost No One Will Agree, Nevertheless Consider

My Burden: Hedging

 

After a market week of lots of good earnings and media pundit optimism, it’s time to worry. Individually, before we consider securities investments, we should consider our personal long-term investments. For most of our adult lives our two biggest investments are our homes and jobs. While we believe we know the numbers, we are wrong!

 

We fail to include in the analysis of our residence the true costs that come with the property over time. For instance, we do not include real estate taxes, either paid directly or included in rent payments. If we stay in our homes for ten years, in one place or more, the aggregate cost will probably equal the cost of buying initially. But that is not the actual cost of living in a home. That amount should also include the cost of local organizations we join, as well as the cost of any repairs and maintenance. Thus, the combined cost should be considered, as well as the planned next location, which likely represents a potentially large unhedged risk.

 

As large as the cost of home ownership is, it is hopefully smaller than the next risk. For most of us, our biggest risk throughout perhaps the first twenty years of our adult lives, is employment risk. If we work for one or multiple employers and we are not self-employed during most of our working years, our biggest risk is employment risk. We are living in a fast-changing economic world, where employers disappear as a result of business mistakes, technological change, badly executed mergers, and younger, smarter, better educated, and cheaper competitors.

 

We are Not Helpless

Over time, we can not only help ourselves but also accumulate sufficient capital to provide long-lasting wealth to cover our own lives and hopefully those of our loved ones too. This can be accomplished by regularly spending less than we make through our jobs and investments. Cyclicality is our enemy. As we move up in the commercial world an increasing portion of our wealth comes from accepting portions of compensation that have equity-like rewards and risks. The further you move up the economic ladder, the greater the rewards and risks. Additionally, the higher you go up the ladder, the more cyclical it becomes. Income fluctuates with sales and profits, but also due to changes in politics within the organization. This cyclicality should be hedged to the degree possible.

 

Selection of Investments is Critical

Picking good investments is always difficult. For the most protection, the primary goal should be seeking assets that hedge those investments generating the highest gain. I believe we are on the cusp of a period of major change, not the continuation of “happy talk” optimism. This past week there were dramatic headline changes of direction, but the market as measured by the S&P 500 barely returned to its prior high. Concurrently, the Economic Cyclical Research Institute (ECRI) industrial price indicator dropped to 122.27% from the prior week’s 131.20%. While this was an extremely happy reading of growing inflation, I suspect it was driven by natural gas prices plummeting -21.41% and diesel falling -4.79%. Far too many retail investors follow prices on the NYSE, where 39% of the stocks declined for the week. However, the better performing NASDAQ Composite saw 56% of its prices fall. Also, the American Association of Individual Investors (AAII) weekly sample survey showed the bullish outlook falling to +39.7% from +44.4% the prior week. In the real-world January produced the largest cut in jobs, which have been falling for 8 months.  

 

Conclusion: One Should Hedge

 

 

 

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Do Current Prices Lead Future Markets? - Weekly Blog # 926

 

 

 

Mike Lipper’s Monday Morning Musings

 

Do Current Prices Lead Future Markets?

 

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

 

 

Lessons From the Weatherperson

With condolences to too many in the US and Europe this weekend, no snow came down in Summit, New Jersey today. The purpose of mentioning this is not to gloat, because we will have our share of bad weather in the future. The purpose is to remind all of the lack of certainty in predictions, and to remind all that the real value of weather-people is making professional investors look good!

 

I have one advantage in the securities analysis game, another title for predictions. My advantage is I learned analysis at the New York racetracks. The first thing was to read the situation, which included the conditions of each race and many other details. The purpose of this exercise was to eliminate races that were difficult to analyze. For example, younger horses with little to no experience, or a clear standout quoted at very small odds. Remember, my prime objective was to leave the track with more money than when I arrived, after expenses. A goal only a minority achieved each day. (This led to never wagering all on any given race and having enough money to get home. Thus, I am not fully committed in my current portfolio.)

 

The next task was to compare the records of the horses, which usually produced horses with the most wins or fastest times. This exercise normally produced a list with the smallest betting-odds, and they would generally be excluded because the payoffs were relatively small. So much so that they would not even cover prior or future losses. (This is like coming to a highly favored stock in a late market phase)

 

With all these eliminations, what is left? What I found at the track and later at my desk were bits of information in public view, suggesting that on a given day a horse could do well and beat the more popular favorite. (This was and still is my current hunting ground for investments.)

 

The Big Advantage

There is a big long-term advantage in selecting investments over picking horses at the track. When the day at the track is over, the game restarts the next time you enter the track. With investing in securities your investment progress passes through a number of phases. I find it easier to pick securities, which will have more up phases than down. The big advantage is that after an up phase there is more at risk than what you initially put in. If there are subsequent up phases, your returns are the product of your initial investment plus the return on other people’s money. A study of the returns of successful people captures this compounding impact. 

 

Applying The Track’s Principles Today

Enthusiasm is the enemy of finding current bargains. Most long-term investors, if they don’t get punished by high expenses, taxes, and selling large portions of their wealth quickly, have a good record of growing capital. However, if they get sucked into the market when most are enthusiastic about its progress, they become victims when enthusiasm shifts. The greater the number of transactions the greater chance they will not only have poor returns but will lack the capital and the guts to buy when securities are cheap.

 

The 2026 Shift

One month is hardly conclusive that markets around the world are expecting a different game, but the S&P 600 Small Cap Index led most other US stock indices with a gain of +5.61% in January. (If that rate of monthly gains were to continue throughout the year, the annual gain would be over 100%)

 

By comparison, if a January S&P 500 Index gain of +1.45% continued for a year it would produce another double-digit return. The problem is that it results in a four-year period of double-digit returns. (I suspect the doubling of one of the small cap indices is more likely than a four-year period of double-digit gains in the S&P 500 Index. Goldman Sachs calculated that if only 1% of the capital invested in the S&P 500 moved to the S&P 600, it would raise the latter’s price by 37%.) For perspective, of the 105 Mutual fund peer group averages, only 8 were up double digits.

 

Now To The Real World

In the last 3 weeks the usually slow moving ECRI Industrial Price Index came alive with successive weekly readings of 131.20, 126.28, and 117.67. The gain over all of last year was +11.50%. The three biggest price-increases this week in The Wall Street Journal were Natural Gas +20.64%, ULSD (diesel fuel) +12.16%, and Crude +6.78%. (I wonder what the present Fed and the probable new Chairman after May will do.)

 

There are lot of other worrisome statics out there. In a recent report Michael Roberts listed some 17 economic return elements that are worth looking at. I have selected just a few of them for you to digest.

1. Healthcare and social services generated more than 100% of net payroll gains in 2025. Top decile earners now account for about 45% of total consumption. (These top decile earners won’t be the beneficiaries of the tax changes in ’26.)
2. Softer demand for luxury goods suggests financial stress is beginning to move up the ladder.
3. Layoffs have reached recessionary levels and wage growth continues to slow.
4. Creditors are increasingly unwilling to lend at historically low real yields.
5. A recent PWC survey of 4000 global CEOs found that confidence in revenue growth had fallen to a five-year low.

 

Next Two Years

Odds are, the next two years will be anything but smooth. The key to surviving this troubled period is maintaining capital in diverse financial and other assets. Gather as many resourceful people as possible into your circle. Stay alert and get comfortable with change. Lastly, share your thoughts with us.  

 

 

 

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Mike Lipper's Blog: Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

Mike Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924

Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 

 

 

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Failed Expectations: Do Details Count? Zig-Zag Flips - Weekly Blog # 925

 

 

Mike Lipper’s Monday Morning Musings

 

Failed Expectations

Do Details Count? Zig-Zag Flips

 

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

 

 

 

Was this the week that was?

Last week’s blog anticipated a ruling by the US Supreme Court on the Presidential use of Executive Orders to impose tariffs on countries and products. It was further expected that the President would use substitute measures to accomplish similar goals if he loses the Supreme Court case. Additionally, there was a belief that the government would be forced to repay the existing tariffs to the American people (voters). The new tariffs would probably cause some changes by foreign nations. None of this happened.

 

Instead, the major topic of conversation at the World Economic Forum at Davos was Greenland. Discussions moved at lightening or Trump speed from a military occupation to a not fully disclosed peaceful agreement with NATO forces by the end of the week. The importance of these dramatic changes reminds us of what may be topic one in developing future investment strategies. All of this brief history shows how wrong we can be. What we missed was the significant price level change that occurred this week.

 

Critical Price Changes

Starting with the least followed ECRI industrial price index, which normally moves ploddingly. The index rose to 126.28 from the prior week’s 120.49. The jump raised the year-over-year gain to 6.58%, which is greater than the various inflation measures the Fed and many others use. I would not be surprised to see industrial buyers of products add this amount to their resale prices, after adding an insurance amount to protect their profits against further prices increases.

 

One explanation of ECRI prices can be found in the weekly price chart in the weekend Wall Street Journal, which showed Natural Gas rising +70.0% and Silver +14.57% for the week. Part of these increases could be for increased use of these items in the normal course of business. However, I suspect some of the increased demand comes from trading and/or gambling interests, either on the long side or from covering short positions. The importance of the last sentence is that the size of the trading and gambling sectors is growing, and I believe it’s already quite large.

 

The third price increase impacts all of us in our daily purchase of goods and services. It is the value of the dollar. On Friday the 16th of January the US dollar index was 99.395, one week later it was 97.599. The President has threatened foreign countries if they sell US assets!! (I personally believe this won’t happen, but it shows a sensitivity to the value of the dollar, even though Trump and Xi have both advocated for a lower value of their currencies as mercantilists.)

 

Warning

I have already indicated how wrong I can be. Please be careful in developing your own investment strategy and make changes slowly, not abruptly.

 

 

 

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Mike Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? - Weekly Blog # 923 Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

 

 

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