Mike Lipper’s Monday Morning Musings
Reduce Investment Mistakes with Deeper Observations
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Loss Reporting and Analysis
One of the most useful exercises from the track is making a report on losing bets. Often in reading these reports it becomes clear that I overlooked or didn’t value an observation highly enough. This type of oversight is common with all investors and analysts. This blog utilizes some observations from our visit to Australia plus some additional insights from pouring over the Barron’s Market Lab data and current news events.
Crowding, Protection or a Bigger Target
Crowding for protection vs. becoming an enriched target for predators? One evening at sundown we watched waves of 13-inch fairy penguins unite and stream ashore, forming columns to enter breeding and birthing locations hidden on land. We have seen similar patterns in Africa, where hordes of zebras and other animals gather. In each case there is a lesson that there is safety in numbers. The predators tend to be solo or are in such small numbers that they can’t eat them all, when the group is found, some will not survive.
As I have often said, the art of investing is somewhat like a narcotic, its effects make it difficult to avoid thinking about investing. When I see a large crowd gather together and move as a group, I can’t help thinking of investors crowding into the limited space of a single investment or sector. The problem is that by gathering together they have created an appealing target for predators, who only need to attack a very limited number of victims to fulfill their needs. Several brokerage firms have been producing lists of crowded trades, which can be very specific and include market segments like US Treasuries of specific maturities or other investments in a crowded trade condition. Year to date through June 27th, 2019, only 4 of the 21 US Diversified Equity Fund investment objective averages gained 20% or more and in the sector funds universe only the two tech categories gained more than 20% (A crowded target for the press and politicians.) To some degree the FAANG* and BAT** stocks represent crowded trades and some of them are showing signs of peaking, which may be temporary.
(*) Facebook, Amazon, Apple, Netflix, Google. (**) Baidu, Alibaba, and Tencent)
Unrest in Southern China
Australia’s largest trading partner is China and thus anything to do with China is of great interest to Australians. With the cooperation of the Chinese authorities, the National Gallery of Victoria has beautifully prepared an extensive exhibit on “The Terracotta Warriors”. These unique sculptures of a large military force meant to protect the self-proclaimed First Emperor of China in his afterlife. As an accomplished horse breeder, he conquered all other tribes and ruled for only 14 years until his death. The Emperor was named Chin and his name became that of the nation he founded by simply adding an “a”. He introduced numerous measurement systems that were used throughout his empire and while he was a genius in many respects, he was also very brutal.
Upon his demise he was replaced by the Han dynasty, which lasted for 400 years. They seized control by leading the first of several revolutions, starting in the south. The first emperor in the new dynasty was much kinder and introduced farming as distinct from nomadic life. Today, the Han people are still among those that dominate China. One cannot help thinking that the present leadership of China must be aware of this history and consequently are concerned about the unrest in the southern part of their country.
What the Stars Tell us About Ourselves
On two separate occasions we went into the desert with a group of tourists to gaze at the stars, constellations and planets. Initially we waited “for the stars to come out”, which was an inaccurate statement of fact, but correct from the viewers standpoint. Later, the intervening clouds disappeared, and the stars became visible. We were informed that other stars would move into our view later that evening, which was again an inaccurate comment. This is exactly what the ancients thought until Copernicus began his scientific study leading to the realization of a round earth, although it’s actually an elliptical shape bulging at the equator. This again was an observational point of view, not the correct recognition that the earth is rotating on its axis. From an analytical perspective, investors and politicians should understand that we live in a relative world where useful measurements include both relative changes and absolute movements.
Conflicting Information on Climate Change
Formerly, investors spoke of “global warming” but now refer to it as climate change. This raises the issue of the regular rotation of climatic change. For example, the Danes farmed in Greenland for 300 years, even though geological studies show that water occupied much of the land mass we know today. As with most scientific studies, we are coming up with conflicting information that should be considered in the data mix.
We were told for example that the southern coast of Australia is receding due to the rising waters from Antarctica. The increase in ice around Antarctica has led to the dumping of cold water into the stream that circulates around the ice mass. This in turn has forced the warm water trapped below the ice to move out and attack the southern coast of Australia. However, on Australia’s north coast the land mass is growing, effectively moving the continent slowly north! I am not properly trained to deal with the conflicting evidence, but I can recognize that conflict exists.
There is no question that countries have not enforced enough barriers to coastal building. That is not new in my home state of New Jersey and is something that has been a legal matter since before the American Revolution. Waterfront property is almost always sought after. How much climate change is a function of human activity remains uncertain, at least in my mind?
Separating Pollution from Climate Change
What is certain is that human activity bears major responsibility for pollution, which can be addressed. Years ago, Pittsburgh was almost always clouded with smog from the burning of coal in steel production. With the cooperation of locals, they were eventually able to bring about brighter skies. Progress, albeit slow, is being made to reduce smog from autos in the Los Angeles Basin. The Chinese people and government have in some cases taken draconian steps to address their pollution problems, while other countries remain further behind.
It would be useful to separate the discussion of pollution reduction and the elimination of climate change, because the facts and history are quite different.
Current Inputs
One of the difficulties in determining useful inputs in periods of controversy is what to believe. The Washington Post did a good job of identifying the gross exaggerations coming out of the two democratic beauty contest evening panels, although they are not an altogether unbiased source. There were similar unrealistic statements on the other side too, which left me wondering if we have discovered a useful indicator: Veracity is inverse to volume? (It has generally worked in stock and manager selection.)
Observations on Tariff Chatter
- 80% of the Consumer Services stock segments have risen year to date, but just 20% of the materials segment have. This suggests that stock buyers believe the consumer sector can absorb the tariffs, but the demand for materials is looking questionable.
- The Dow Jones Transportation index is rising at a faster rate than the Industrial average. The stocks in the transportation index largely carry freight, which appear to be rising more than the decline in energy stocks. Transportation shares also attract more professional investors and less individual buyers.
- The announcement of the restarting the tariff discussions was silent on the real, long-term concerns of the participants. Tariffs were supposed to be a method to get the critical discussion started on defense issues like the South China Sea, critical technology required for global leadership, and enforcement procedures.
Future spending is the reason that people save/invest. My bet is that in the long run carefully chosen equities and equity funds will be productive.
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/06/our-investment-mistake-is-in-labeling.html
https://mikelipper.blogspot.com/2019/06/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2019/06/on-right-learning-from-left-weekly-blog.html
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A. Michael Lipper, CFA
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