Mike Lipper’s Monday Morning Musings
Are We Strolling the Promenade Deck
of the Titanic?
Are there Parallels?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
In the early morning of April 15th,1912 the largest ocean liner afloat sank. The ship was supposedly unsinkable, yet five days after its maiden voyage it sank, with a substantial loss of life and confidence. Are there parallels to the global stock markets? I do not know, but there are sufficient lessons that can be learned from the losses sustained almost one hundred years ago.
Parallels
Titanic 1912
As with any tragedy there were errors of both commission and omission, summarized as follows:
- Recognition of the impact of weather: Unusually warm April weather over the northern icepack detached an unexpected flow of icebergs of several miles, plus. the combination of a moonless night and glasslike seas.
- The owner’s decision to increase the speed to 24 knots (25 miles per hour) to achieve a record crossing for publicity purposes.
- An inexperienced crew properly trained for emergencies led to confusion regarding the proper off loading and fully loading of lifeboats.
- The ship was briefly turned the wrong way while the radio room crew dealt with faulty equipment as it sent out the social messages of passengers.
- The belief that four watertight compartments could keep the ship afloat, except from the top. (Six compartments were ruptured with long glancing blows below the waterline.)
- Failure to instruct and lead passengers in evacuation procedures.
The errors could essentially be summed up in terms of speed and surprises.
Concerns of Global Stock Market Parallels - 2021-?
Since the beginning of time markets have collapsed under excessive speculation, driven at high speeds with too much lose debt creation and growing social structural imbalances, needing only a surprise and an event. Some of each of these are already now present, except for “the event”. Apart from hitting an iceberg, we may already be experiencing some of the other characteristics presaging the bursting of a bubble. I hope not, but much like the lookouts on the Titanic I perceive some unexpected things ahead.
Clues
Markets depend on speculation to determine prices as it views the future and compares it to the present. This is healthy and only becomes dangerous when it gets too popular and raises prices way above a sustainable level, depriving more mundane investments of investment support.
- This week, the stocks showing the biggest price gains were in order: solar, electric vehicles, energy, China tech, and emerging markets.
- The biggest flows went into commodities and global stocks. High yield (formerly called “junk” bonds) rose twice as much as investment grade bonds.
- An indication of speculation at one main street broker is the over three times as much money going into exchange traded funds (ETFs) as going into mutual funds.
- Margin debt in November set a record and is probably still rising. The banking system can earn an acceptable return leaving money at the Federal Reserve, which has opened the opportunity to other credit providers who have fewer loan-quality constraints.
- Increased volatility is usually looked at in terms of rapidly rising prices, but it also reflects sharply falling prices e.g., SPACS after mergers. This may be why the average dedicated short mutual fund gained +12.27% vs +1.52% for the average S&P 500 index fund in the latest week.
- Survey data is again found to be wanting, in this case beyond the realm of politics. The Philadelphia Federal Reserve Bank survey of Manufacturing predicted a gain of +11.8% vs +26.5% actual, not a useful navigational aide.
Debt can be used to pay for operating expenses or expand capacity. In the first case it fills a hole left by equity not used to pay for the debtor’s current operations. It is thus a substitute for equity capital but does not provide capital for expansion. Currently, most debt raised by individuals, companies and governments is not used to add people, improve productivity, or expand capacity. Thus, debt is not being used to invest in the future and its repayment will be a burden on the future, unless there is high inflation.
The CEO of the company owning the Titanic issued orders but was not in a position to see if they were quickly and efficiently carried out. Considering the difficulties the new administration is having with Congress and within its own party, one wonders about the actual results of its announced policies?
The Remaining Question
Since investors cannot avoid periodic downturns, how should they manage their portfolios? I do not know of a good cookbook type recipe answer. I suspect the multiple answers will largely be a function of your ability to withstand pressure on your invested financial, emotional, and intellectual capital. The most vulnerable will be agents managing other people’s money, who have career risk. The least pressure for the self-assured is managing your own capital, as you don’t have to endure unexpected calls on capital. Most professional managers are much more in the career risk camp. For them, the key question is the acceptable level of decline from peak and the expected time until the account fully recovers. Another question might be how much longer the capital base takes to fully reach the expected level. The successful manager’s business longevity has as much to do with his/her communication skills.
At the other extreme is the manager of her/his own capital. While no one can unseat this manager, they are at risk of doing great damage to their capital by unwisely shifting policies to accommodate current market styles. Very few investors are successful at repeatedly changing styles. I have been investing for sixty years and during that period I have been lucky enough to own positions that have risen in price by many multiples of their original cost. However, I have also had a limited number of positions that have turned out to be worthless, or close to it. The nice thing is that the mistakes lose a percentage of wealth, whereas the winners grow exponentially. This week I noticed that one of my financial services holdings quadrupled in price, although I have owned it since 1991. A good, but not spectacular 7.2% return per annum. My correct bet was that the company’s management were big shareholders and were good at what they were doing. The key to their investment success was that as their business changed, they also went through successive management changes. Technologically, the firm is a great deal different than the 1991 model, but their attention to the needs of their employees and customers is very much the same.
Conclusions
- We cannot avoid meaningful declines; they are only a matter of time. One needs to be prepared for declines and increases that last longer than expected.
- Patience and communication skills are of equal importance to success, as is the never-ending development of investment skills.
What Do You Think?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/01/contra-messages-weekly-blog-664.html
https://mikelipper.blogspot.com/2021/01/the-wisdom-of-3-wise-men-weekly-blog-663.html
https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html
Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2020
A. Michael Lipper, CFA
All rights reserved.
Contact author for limited redistribution permission.
Posts
No comments:
Post a Comment