Time to Change Investment Strategies? - Weekly Blog # 627

Mike Lipper’s Monday Morning Musings

Time to Change Investment Strategies?

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

Investment strategies of long duration become habits, and it is difficult to change habits. One should not attempt to change habits or strategies on a whim. A change should be carefully considered. In weighing choices, the factors leading up to a decision are usually mixed. Further, the timing of both the decision and the execution of the change should receive the same level of thought. The reason there is a question mark in the title, is because it is a question some of our accounts are grappling with. I hope by opening the discussion I can elicit some answers from our subscribers.

While we should periodically review all our investment strategies, it usually happens after a report of past performance, a change in client wishes or circumstances, or some major pronouncement or event. Today, none of these circumstances are pressing for a decision. However, my training in the US Marines is to always look at the horizon and prepare for change.

Why Now?
There are some elements that could suggest a change of investment strategy or reinforce the present strategy for each account. The following are these elements:

1. Are we in a “bull market”? Using popular measures, we had a one-month “bear market” which made a bottom on March 23rd. It was followed by a rally, which through May 1st has seen the following gains: DJIA +27.60%, S&P 500 +26,52%, and NASDAQ +25.42%. Some suggest the minimum gain for a bull market is 25%. By that definition we are in such a market, although it is not universally believed.
2. The so called “fear index” of market volatility, as measured by the VIX, is currently almost three times what it was a year ago (37.19 vs. 12.87) when the indices were close to what they are today. 
3. Warren Buffett sold all his positions in the four largest airlines at a considerable loss, without negatively commenting on their managements. He felt he could not clearly see their future after exiting the COVID-19 trauma. (More on him and Berkshire Hathaway (*) later in this blog.)
4. As noted in prior blogs, the recovery rally has plateaued, at least for a while. Market analysts believe more time needs to pass before a likely successful assault on the old peaks.
5. I am hearing of some investors selling their equity positions once prices reach their breakeven levels.
6. According to my old firm, investors poured $83 billion into Money Market Funds this week. This happened the same week the average S&P 500 index fund gained +4.13%. In a sharply rising stock market, fully invested index funds with lower expenses are difficult to beat. Nevertheless, 36 different equity investment objective averages rose more than the funds invested in the index. The leader, Small-Cap Value Funds +11.02%, has frequently lagged in the recovery.
7. The redoubtable Jason Zweig in Saturday’s Wall Street Journal quoted Benjamin Graham, “the chief virtue of rebalancing is that it gives investors something to do”, questioning the efficacy of automatic rebalancing.

COVID-19 Possible Future Impacts
While there have been numerous other plagues impacting the known world, this is the first time societies have voluntarily closed. This is also the first time we live in a world with effectively no electronic borders. The plague spreads through air travel and I, like Warren Buffett and others, wonder what the world will look and function like after we are free to leave our homes and eventually travel. Not knowing does not completely excuse us from making multiple plans to deal with the world as it evolves, while markets react and overreact. I appeal to our subscribers to review the following list of possible impacts, then suggest appropriate strategies that agree or disagree with them.

Possible Future Concerns to Investors

1. Paying for what we have already spent or promised. Tax revenues will likely go up when we reach what used to be called full employment. Until then, governments at all levels will face increased expenses. Increased expenses are likely, as reserves will be needed to address future plagues of the same and/or different types. These substantial costs will likely be paid either directly through official taxes, or unofficial taxes known as inflation.
2. “Sheltering in Place” may have permanently changed our collective attitudes toward real estate space. As an analyst I wonder whether modern society has become too square-foot demanding. This will likely impact offices, plants, stores, hospitals and healthcare spaces, government offices, homes, second homes, and educational locations. (I am concerned about these possible trends and how they impact the organizations I work with. I am a trustee of Caltech and the Stevens Institute of Technology, a participant on Atlantic Health System’s investment and finance committee, and a member of the Board of Advisors for Columbia University Medical Center.)
3. Along with most developed economies, we will see increased costs to keep seniors healthy and voting.
4. With the growth of video entertainment and conferencing, what is the outlook for travel, business, and entertainment?
5. Can the bulk of American youth compete in a world of younger, harder working, better educated, frugal, and more disciplined people who are paid less? The answers will be found in our homes, schools, and extra-curricular activities, including jobs. These concerns will need to be addressed at all levels, from pre-kindergarten through graduate courses. At the University level the financial crunch will hit as early as this fall. Moody’s (*) has downgraded the entire educational sector to negative outlook. The Financial Times noted that 64% of university presidents said “long-term financial viability is their number one concern”.
6. This pandemic will probably force many contracts for insurance, trade, and work to be rewritten, leaving some organizations financially naked to these risks.
7. In a more electronically connected world, the viability of advertising supported print media is likely to be threatened. The level of adverting dropped even before the lack of fact checking and bias put into question the implied endorsement of the publisher to adverting copy.

Learning from Berkshire Hathaway.
On Saturday, instead of being at the Berkshire Hathaway annual meeting in person with my wife and one of my sons, I listened to it on my iPad. We have been going to this event for about 10 years, not only because some of our clients and personal accounts hold the stock, but to learn more about investing from Warren Buffett and Charlie Munger. In addition, because of the breadth of products and services sold by the company’s subsidiaries, it is a quick but incomplete review of the underlying US economy. After listening to Saturday’s meeting I wrote a brief note titled “Is Berkshire Hathaway the Ultimate Trust Stock” to our investment clients that are holders of the stock. If any subscribers to this blog want a copy, please email me.

(*) Owned in corporate or personal accounts.



Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/04/large-opportunities-and-risks-weekly.html

https://mikelipper.blogspot.com/2020/04/mike-lippers-monday-morning-musings.html

https://mikelipper.blogspot.com/2020/04/long-term-investors-mistakes-ahead.html



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