Mike Lipper’s Monday Morning Musings
On the Right Learning from the Left
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
After nearly a week of visiting managers in London, it is evident there is fear of the Left on both sides of the “pond”. The purpose of this blog is not to debate the political values of the chasm between the two sides, but to reflect on the 75th anniversary of the landing in Normandy. My wife Ruth visited Bletchley Park, the home of the prodigious code breaking effort to understand and anticipate enemy positions and movements. This was part of our own memorial to those who died and were injured, including the walking wounded and those without physical injuries. On Saturday we visited the Imperial War Museum and got some additional understanding of the battles fought. It is appropriate for an investor to study military battles as each day there is a battle for investment survival and hopefully success. Thus, to me it is natural for those on the right to analyze those on the left.
Need for Investment Success
Excluding the gambling need of most investors, they should have a suitable contingency reserve, which can be summed up in three parts:
- Health
- Education
- Retirement (may include legacies and charitable giving)
Changing Political and Social Leadership is Inevitable
We all know that demography is destiny. What we should know is that as generations evolve, the governed start to speak and think differently than those governing. Years ago I sensed this growing divide in the United States, but didn’t know if the change would be led from the right or the left. The choice is not about policies, even though that is what many will believe. I believe the change will come from the growing age gap between the leadership and its followers.
As a member of the senior band, I recognized that the leadership of the old left (Democrats) is somewhat older than their opposition. Thus, the group trying to seize power is more likely come from young left leaning groups. The Republicans had their chance with The Silent Majority, which was behind both the Ronald Reagan and Donald Trump surprise victories. But thus far neither of these have created a “movement”.
What do those who chant the slogans of the left want?
An axiom in politics is to support a grand idea like equality and/or some other unselfish demand. As has been mentioned repeatedly at cocktail parties in Washington, nothing succeeds as much as interest, such as self-interest. It is my belief that self-interest is motivating and driving the young on the left, somewhat equivalent to those leading the Children’s Crusade in the era of the European attack on Jerusalem.
Many of the current young generation are pessimistic in their outlook and have not enjoyed much in the way of competitive success. Nevertheless, they instinctively want the very same outcomes the older groups have achieved through education, such as healthcare and retirement. They would also like to have a life away from work, rather living to work like their parents and grandparents. Many of the younger generation are coming to the realization that their lack of practical education, rather than outmoded schooling from teachers who do not live in “the real world”, has made them unemployable except in low-end jobs.
The solution being fed to them by those higher in the new structure is, if you can’t earn the money to meet your defined needs the government will supply. That is why they are pushing for healthcare for all, free college education, forgiveness of educational debt, and a large and sound social security pension system. That this structure will collapse in two generations is not a deep concern.
What can be Done?
While technology will reduce the scope of repetitive jobs, it is creating a vast number of positions for those of integrity who have the analytical capabilities to provide critical analog skills in a digital world. Their education needs to start at home, where living skills and attitudes about honesty, chores, and looking out for others are emphasized. Eventually these principles will seep into primary and secondary educational institutions, then onto higher institutions of learning. Employers need to view their first line workers as investments that need to be nurtured and should view them as eventual customers that will keep the system expanding.
In the Meantime, We Must Invest
In my meetings with CEOs of various successful investment organizations on both sides of the Atlantic, I find many that are long-term pessimistic about their future due to low or negative flows, fee compression, and heightened regulation (more to come after the next recession). They are desperate to increase the longevity of their client relationships, as many asset management clients rotate out in four years and wealth management clients in eight. Due to competitive pressures they can’t materially lower their portfolio management people costs, although it’s somewhat easier to do in wealth management. All feel the competitive pressure of ETFs.
The Real ETF Advantages and Disadvantages
The main competitive pressure from ETFs is from very large index funds investing in the S&P 500 Index. From an investors’ point of view the advantages are just the opposite of what too many believe. In order they are:
- Wide momentum biased diversification
- No cash
- Low fees
The second advantage is that index funds do not hold cash as a liquidity reserve. They handle their excess liquidity needs using futures. Actively managed funds typically carry redemption and opportunity reserves, which means they are only 95+% invested. (That is the reason index funds fall more than actively traded funds in a declining environment, with the reverse being true in the early stages of a recovery.)
The low fee and bid/ask spread entering and leaving ETFs gives them less than a 1% advantage these days. The principle disadvantage is that as more money flows into a market-cap weighted index, one is putting money into the most popular stocks, which are often expensive. The S&P 500 Index can be beaten. Through the close on Thursday, 18 investment objective fund averages are beating the index year-to-date.
The Big Disadvantage
I was very sorry to learn of the death of John Neff this week. He was the long-term portfolio manager of the Windsor and Gemini funds. I would guess that John rarely owned stocks that were not in the S&P 500 Index, although he owned fewer of them and in different proportions. His style was between value and growth, capturing elements of both. He had many winners investing in companies that had secular growth in revenues, but which lagged the earnings power they once showed. His deep analytical skills and perceptive questions gave him confidence in betting against the crowd. He did this very successfully with Citi Group. At one point he was probably the largest shareowner in the stock and made multiples of his cost. At the time of John’s retirement dinner from Vanguard in New York, the only non-Vanguard people there were the chair of Citi and me. Jack Bogel made most of his investment profits with John Neff. On my trip to London, two of the more successful managers I met with use a similar style to invest successfully.
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/06/confidence-deteriorating-normally.html
https://mikelipper.blogspot.com/2019/05/memory-traps-judgement-weekly-blog-578.html
https://mikelipper.blogspot.com/2019/05/probable-view-of-next-decline-weekly_19.html
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A. Michael Lipper, CFA
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