Mike Lipper’s Monday Morning Musings
The Week’s Fashions and Our Most Dangerous Asset
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
There are instances where very current observations can have long-term implications. The week that ended last Thursday night was quite possibly such an instance. Each week I examine a report on the performance of over one hundred different investment objective peer groups. Since the competitive game, not the investment game, is beating “the market”, I look at what types of funds that have beaten the S&P 500 Index Funds average performance. In the quiet lazy summer week, the index gained +0.40%. The following is a list of the seventeen peer groups that beat the index:
Base Metals Commodities +2.83%
Precious Metals +2.43%
Energy Fund Commodities +2.11%
Large-Cap Growth +1.83%
Science & Technology +1.60%
Global Science & Tech +1.58%
Multi-Cap Growth +1.52%
Convertible Securities +1.37%
Consumer Services +1.25%
General Commodities +1.13%
Agricultural Commodities +0.78%
China Region +0.77%
Global Large-Cap Growth +0.77%
Global Multi-Cap Growth +0.70%
India Region +0.61%
Alt. Active Extension +0.49%
Telecommunications +0.45%
Most of these leading groups have been leading for some time, benefitting from momentum. The commodity owning funds look forward to higher prices for them and inflation for their customers resulting from shortages of supply.
One could say that these groups were deemed attractive by some pundits and their followers. Thus, if one would invest in most of these, the bet is not on the fundamentals of the underlying companies and commodities, but on the expected pronouncements of various pundits. To me, this suggests that these funds are likely to be more volatile than most funds. Thus, they make sense for those who believe in their trading skills or have a firmly held view of the investment cycles of the future.
CASH Is the Most Dangerous Asset in the Portfolio
Cash is a dangerous asset, not because it may lose some value, but because of how we exit from it. Remember, almost without exception every single loser we have had started from exiting cash. Potentially, the biggest problem in having cash is the way we think about it, our portfolio, and ourselves.
Whether we have a thousand, ten thousand, one hundred thousand, a million, ten million, one hundred million, one billion, or ten billion, as we jump each successive hurdle it gives to us a different attitude about ourselves, our status among others, and the safety of our situation. However, these emotional and intellectual highs can be very misleading.
Cash is a receipt from past activities and its value changes imperceptivity every day due to the interaction of currency and inflation. Additionally, changes in tax regulation and investment/legal practices change the purchasing power of cash. Another critical element impacting how we feel about cash and other attributes of wealth is the perceived wealth of others, either foolishly published or gossiped. (The wealthy lists are not adjusted for present debts or future commitments. Some multi-millionaires have assets tied up and have little or no “walking around money”.)
The expected use of cash defines the flexibility of wealth. Large families in terms of number or generation of people need to think about the state of their physical, emotional, and mental health when considering future spending. Only some family members and their highly trusted advisors have a real understanding of the extent of cash and other indications of wealth. Often, no one has a complete picture of the emotions attached to assets/liabilities and how that influences their disposition.
Working Toward Solution Suggestions
The best suggestion I have is to adopt a holding company philosophy like Berkshire Hathaway, which is a holding of some clients and held in personal accounts. With over 60 operating entities and over 100 separate financial centers, their current operations retain enough of their cashflows to meet current needs and send the excess to headquarters for future investments.
The first suggestion deals with the proper identification of reserves to meet specific needs. It can include specific elements such as buying future residential property, education expenses, specific medical needs, and a loss of employment reserves. Determining the size of the specific reserve will at best be guesswork, but some numbers are better than none. A much more difficult task is guessing the range of future dates when the reserves will be tapped. It is at this point that an intelligent allocation of cash and risk/return assets should be made. The closer the likely expenditures, the higher the allocation of cash or extremely high-quality short-term paper. However, there are risks associated with funding long term needs with short-term paper and cash. My own view would be the following reverse ladder:
- 100% cash for assets to be spent in the next 90 days
- 80% cash for assets to be spent one year in the future
- 60% cash for assets to be spent two years in the future
- 50% and no higher in cash beyond that
My second suggestion is to divide one’s portfolio into two separate parts, the reserve element just mentioned and an investment portfolio with at least a ten-year view, potentially extending beyond multiple generations.
The investment portfolio should avoid holding cash except for a tactical reserve, with a time lock forcing some commitment if the tactical reserve remains after 18 months. Remember the following things:
- In an investment portfolio cash is a decaying asset due to inflation and currency.
- If you must reduce or eliminate cash, the investment opportunities are vast and include some relatively safe alternatives.
- Long-term successful investors often go through periods where they are very lonely.
Questions of the week:
- Do you monitor the opportunities to invest investment cash?
- Do you review your reserves periodically to ensure that they are appropriate?
- What was the last time you adjusted your cash levels and what was the result?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/08/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2020/08/rotating-leadership-likely-on-horizon.html
https://mikelipper.blogspot.com/2020/08/more-to-learn-by-seeing-more-weekly.html
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A. Michael Lipper, CFA
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