The Wisdom of 3 Wise Men - Weekly Blog # 663

 

Mike Lipper’s Monday Morning Musings

The Wisdom of 3 Wise Men

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

                   

Those who spend a great deal of time, energy, and emotion investing are truly “career” investors, whether they do it for a fee as a professional agent or as a personal investor. The successful ones focus on areas beyond security selection, including policy decisions. They are scouts leading away from capital destruction and toward capital appreciation. To do this, their natural position in the march of time is to be way ahead of the parade of followers of current trends. Successful investors are often lonely, fearful of falling into an avoidable trap, often searching for clues that others have found.

US investors will suffer a new government beginning in ten days, made up mostly of career politicians who participate in a former government producing slow, uncertain growth and loss of relative strategic power. Asia, particularly China and to a lesser degree India, plus the Middle East and Africa, represent challenges and opportunities likely to drive higher investment returns relative to those in Continental Europe. Under these circumstances, as a contrarian, I am paying attention to three investment wise men.

Jason Zweig wrote in this Weekend WSJ, “In theory investing is all about markets: in practice it is more about marketing.” Jason was addressing the old tale that stocks and funds are not bought but are sold, largely based on the marketing of past performance. The easy approach for salespeople and others is to extrapolate the immediate past. In the commodities markets, which often exhibits long trends, there is the motto “the trend is your friend”. My study of sports, economies, politics, and markets is that all trends either end disrupted or exhausted. The longer the trend, the more competitive forces will seek to replace the presumed longevity of the trend.

Jeremy Grantham of GMO points to the career risks of being too premature about future drastic changes in direction. He was admittedly three years early before the Japanese market topped out. In another instant, he lost half his clients in one strategy by being premature. The lesson here is to gradually withdraw and add to various sectors or philosophies. While it may be emotionally satisfying to go “all in” or “all out”, it is extremely arrogant in terms of career risk. We should also remember that the prime function of markets is to create humility. We can be wrong.

Benjamin Graham has been called the Father of Security Analysis and was a successful fund manager with both wins and losses. He said “Never mingle your speculative and investment operations in the same account, nor in any part of your thinking”. I don’t remember when I came up with the idea of creating sub portfolios for different purposes, but earlier he was focusing on different approaches for different investment purposes. At the racetrack it is called “different horses for different courses”. 

I often advocate sub-portfolios for different time periods to meet spending needs. As the weakest securities disappear in terms of impact over time, the longer a portfolio functions the greater the odds of success. Almost all the accounts we have held for twenty years or more are profitable. Under today’s conditions of increased uncertainty, I wonder whether two new sub portfolios should be set up. 

• The first would have a four-year duration based on the probability that much of what the incoming administration accomplishes will be reversed by a new administration in 2024. I am particularly focused on tax rates and regulations. 
• The second trading portfolio would have a one-year focus based on the effective timing of new legislation and executive order implementation. It would trade on the rumors of the progress of various political actions. 

Despite the financial media focus, the bulk of equity investments are long-term, both for retirement and estate building purposes. We have just finished an above average ten-year period where US Diversified Equity Mutual funds averaged an annual gain of +12.69%, with the median fund rising +11.71%. To do better than these results one needed to be invested in growth-oriented funds, which were more volatile than other stock portfolio peer groups. I have doubts that the next ten years will be as good as those in the past. Considering my outlook for interest rates, inflation, the value of the dollar, demographics, and technology, performance of no more than half the level of the last ten years might be viewed as heroic. One might even predict a lower return. (Interestingly, if we did experience a low ten-year growth rate, the following ten-year rate would probably be much higher.)

Current Updates

• For the first week of 2021, the average S&P 500 Index fund gained +1.30% vs +2.59% for the average US Diversified Equity fund, continuing the pattern of underperformance delivered in the last half of 2020.
• The AAII weekly sample survey of its members’ views for the next six months is 54% bullish and 26.6% bearish. Market analysts treat this as a contrarian indicator. 
• An interesting mathematical insight is that these ratios are approximately 2 to 1. They are in the extreme range and I would not be surprised if they reversed, with the S&P Index funds doing better and the six-month trajectory of the market doing worse.
• The JOC-ECRI Industrial Price Index remains stubbornly high, generating a +26.6% gain year over year.
• Truck tonnage carried is moderating an early spike.
• The S&P 500 was up for the first five days of 2021 and more often than not that heralds a positive year. The full month of January is a stronger predictor.

Critical Question:

Do you regularly examine your investment policies or is most of your attention spent on security selection?

Did you miss my blog last week? Click here to read.

https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html

https://mikelipper.blogspot.com/2020/12/stud-poker-new-swamp-game-weekly-blog.html

https://mikelipper.blogspot.com/2020/12/mike-lippers-monday-morning-musings.html

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