Mike Lipper’s Monday Morning Musings
Extreme Views Can Be Good Lessons
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Historical Perspective
Both the Bible and other historic views are testament to very popular wrong views (the earth is flat) and unpopular views that eventually become popular based on their wisdom (the dignity of the individual). Consequently, it is wise to pay attention to extreme views, but not to necessarily accept them.
An Investor’s Perspective
There are times when faced with making pivotal investment decisions, I find it useful to examine extreme points of view. Currently, one could describe buyers, sellers, and holders as being uncertain what to do, following the reactions of others to events. They do this by thinking of their investments, both assets and liabilities, as a single portfolio. To the extent possible, I prefer to make activist decisions, accepting I will be wrong some of the time. (Hopefully, I will recognize my mistakes quickly enough and take corrective action. History shows I have made some decisions producing positive results.)
The Biggest Investment Decision
The core of every investment decision is an implied guess as to what the future will bring and none of us knows the answer with any certainty. Most investors spend the bulk of their efforts on the selection of individual investments: securities, funds, or advisors. My instinct is to divide most problems into separate parts, like the outlook for investments. Unlike most, I attempt to slice the question into reasonable time frames, examining the current outlook and various long-term market periods. Below is how I am looking at the stock market, at least through 2022 and possibly 2024, then to early the next century. In each case I evaluate extreme, not balanced views, highlighting possible insights.
The Current Malaise
The pundits are beginning to recognize that we’ve entered an inflationary period, which is unlikely to be brief because it is the product of a number of trends. Firstly, the era of “big government” is back in many countries, states, and local communities. Characteristically, big government is expected to provide solutions to various social and economic problems through large and long duration debt. This trend was aided by Volcker breaking the back of the last inflationary cycle where government interest rates peaked at about 15%. With interest rates below 2% today, the cost of servicing the expanding debt has been materially reduced. Unfortunately, much of the debt was used for current consumption, not investment that could have produced income or higher paying jobs. Increased regulation also caused numerous skilled jobs to be eliminated as critical capacity expansions were reduced.
In reaction to these policies the private sector used technology and foreign labor to improve productivity, resulting in much of our clothing, food, cars, and parts being imported. Intense financial regulation has also caused non-bank lending to rise.
Equity investors have reacted by buying into companies and commodities that can raise prices due to supply shortages. Stocks in Canada have risen +17%, South Africa +15%, Russia +11% and Australia +10% this year. Commodity funds have had net inflows for the past 18 weeks.
US stock markets have declined slightly, led by the NASDAQ (the savviest market) falling -5% for the past two weeks and -2.34% this week. The following are other indications of a change in direction:
- The JOC-ECRI Industrial Price Index fell slightly to 147.05 from 148.4.
- The WSJ weekend price list showed 79% declining.
- The American Association of Individual Investors (AAII) bullish sentiment reading fell to 36.5% from 44.3% last week. Bearish responses to the survey rose to 27% from 23%. (Historically a contrarian indicator.)
Perhaps the most significant signal came from T. Rowe Price (*), who believes global economic growth will peak this quarter (in percentage terms) and expects higher inflation. Consequently, they are underweight general equities, but favor “value” and commodities.
(*) T Rowe Price is a holding in our private financial services fund and personal accounts.
Next Century Investing
Recently, I typed a report and hit the wrong key, writing 2121 instead of the current year. When I reviewed what I wrote, I realized we will likely have at least six members entering the next century in our extended family. Because I question Social Security making meaningful payments to the middle class and don’t yet recognize any six-plus investors entering the next century, I started thinking about them.
While it is probably untrue that Albert Einstein was the first to say that compound interest was the eighth wonder the world, he did recognize the power of compounding. (Ruth and I have stayed at the space that he may have stayed in on his many long visits to Caltech.)
Assuming as little as a 3% compound rate, after taxes and fees, the initial amount would multiply more than 10 times by the end of the century and 22 times if the net rate of return were 4%. For today’s exercise, how would I invest some money today or instruct a manager to invest without the ability to make changes for the next 80 years?
While I believe people will continue to make mistakes, I assume there will be inflation risk. However, I would not invest in natural resources on a shortage basis. Nevertheless, I would invest in companies that could create sustainable demand for their products and services. Now, without to make future judgments, Apple (*) would qualify as a company able to come up with new products and services. I might possibly favor either or both Goldman Sachs (*) and JP Morgan, not for their existing businesses which are cyclical, but because of their willingness to lose money temporarily to establish themselves in new businesses that could replace their older businesses.
(*) Current holdings in financial services fund and or personal accounts.
For the Single Portfolio
Many single portfolio accounts do not hold enough different securities to be intelligently diversified. Only those with 50 to more than 100 names could tolerate the risks involved in getting out of the center of the market. Thus, most should not own shortage plays, because they don’t last forever. They should probably own some successful foreign holdings in growing local markets with high savings rates. In terms of investing in new product and services companies, one should invest in large companies that have developed new products to replace existing lines, leaving the early development work to firms that can do it well.
I would be happy to discuss with you your thoughts on these subjects.
What do you think?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/05/where-is-stock-market-going-next-weekly.html
https://mikelipper.blogspot.com/2021/05/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2021/04/four-letter-words-to-sounder-investing.html
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A. Michael Lipper, CFA
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