Independence Day + 3 Investor Lenses - Weekly Blog # 688

 

Mike Lipper’s Monday Morning Musings

Independence Day + 3 Investor Lenses

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

Lessons From the Patient Genius of The Founders

Before the founding of the United States there were a number of democracies of free men. All these largely city-states failed to become large powerful nations because they did not carefully protect the rights of their minorities, leading to the collapse of their military and cultural defenses. The Founders struggled with this historic fact, leading to a thirteen-year period between The Declaration of Independence and the enactment of The Constitution. The Founders knew their history and presumed the new nation would have similar problems in the future. That is exactly why they created a government which protected the rights of its minorities, albeit imperfectly, with laws applied by an independent judiciary. Furthermore, they assumed future wars for independence would be fought by citizens, not a large professional military/naval force.

Most Americans invest in providing for themselves, their heirs, and specific institutions for which they care. Conceptually, when thinking about their responsibilities to themselves and others, they use one or more lenses to make investment decisions. The lenses are a telescope for the long-term, a magnifier to enlarge the picture, and a microscope to look closely at the details. To some degree the Founders were familiar with all three instruments. I look at the current investment challenges through the same instruments. However, I have given myself an easily available advantage in segmenting my thinking into sub-portfolios. These are largely based on the duration of future expected deliverables. Most subscribers to these blogs have not exercised the same option, but think about their bundle of talents, financial assets, and responsibilities as a single unit. My comments will address those united conditions.

The Current Picture

As is often the case, the current picture contains positives, negatives, uncertainties, and unknowns. I will briefly list some I currently believe are important and urge readers to share their views of other critical issues facing them, either in private or through discussion within our blog community.

1. Stock market prices are at or near record levels in the US and are rising elsewhere, including in Canada and Europe, but not yet in the Southern Hemisphere. However, close to half the listed equities are not really participating in the enthusiasm pushing US stock indices higher.
2. Overall market transaction volume is low and a good bit of the volume is from a new class of speculators lacking experience or business knowledge. An important portion of these transactions are being executed with borrowed money (margin) or options. While I am not too concerned about the future losses to these speculators, I am concerned that some sound stocks, brokers, and banks could be damaged.
3. A large group of the public and politicians have been schooled, not educated, at institutions with singular courses in top-down macroeconomics. Far fewer have sufficient knowledge of bottom-up microeconomics, starting with the family or a small business. (Remember, small businesses which are largely privately owned, employ half the working population. We all rely on them to provide relatively inexpensive goods and services.)
4. Government bond prices are expected to continue to decline, along with many high-credit-quality corporate bonds. (Traditionally, weak bond prices do not foretell strong future stock prices.)
5. One of the consistent conditions of life and prices is their cyclicality. Almost all activities are transitory, with different and difficult to predict longevity. The current bout of reported inflation is beyond supply chain issues. I suspect most readers hope the current rise in the valuation of their real estate won’t reverse quickly and hope recently hired restaurant and entertainment workers will receive lower wages soon. Most supply chain shortages are due to a multi-year period of unattractive future expectations profiting from capital expenditures. This has led to insufficient capacity expansion and high prices for existing production. The JOC-ECRI Industrial Price Index captures some of this phenomenon, rising +1.71% this week and +94.32% year-to-date. (While the index level has been dropping, perhaps due to lumber, I don’t expect it to go negative until there is a recession.)
6. For those mostly growth investors that use the telescopic lens, the biggest long-term risk is the growing autocratic attitude of the US and China, assuming no major political change. Governments choosing which companies should prosper and which should be curtailed has not produced good results for investors or customers, except during war periods. Competition, with its acknowledged faults, does better. The recent rearming of the Federal Trade Commission to perform anti-trust regulation should frighten all customers and investors. They should look at the prices paid and quality received for many goods during the Clinton/Obama terms. (Excluding the price of oil, which is now rising due to the Biden administration curtailing supply.)
7. The Founders and their early descendants wisely initiated judicial actions in the Justice Department and argued them in court. Today, almost every administrative department, SEC, IRS, and FTC have department judges reporting to Presidential appointed commissioners. This blatant abuse of administrative power has resulted in the formation of a new non-partisan, non-profit, civil liberties group, the New Civil Liberties Alliance.
8. The naivete of the Administration is a gift to the legal profession and other countries, as indicated below. 
• There is no definition of “fair share”, other than perhaps a flat tax, like a sales tax. 
• The hiring of thousands of new IRS employees is unlikely to bring significant net new revenue to the government, as taxpayers regularly hire the best and brightest tax accountants and lawyers.
• In terms of the global minimum corporate tax, when has the US won any negotiation with foreign governments? I suspect it will lead to less exports from the US and more companies moving their “headquarters” to selected “tax havens”.
9. China, which has its own internal problems, appears to generally be meeting the challenges thrown at it by the US. In March, China accounted for 16% of world exports. The last time the US reached that level was in the 1970s.

Portfolio Approaches

1. Don’t expect your big winners to continue producing similar returns. For example, our private financial services fund materially outperformed the major diversified market indices for the first six months of the year. However, after the current round of dividend increases and buy backs in the US, the portfolio will probably underperform. Why not sell? Using the telescope approach, I believe the collected talents within the industry, including the fintech segment, will be critically needed to build the new environment for managing risks and opportunities in the distant future.
2. Buying “cheap” stocks can continue to make sense if one uses a microscope, not a magnifying glass. The pundits and administrators believe that every stock with a low price/earnings ratio, or a low absolute price is a “value” stock. I recognize, due to the flow of buyers and sellers, that every stock enjoys a burst of activity related to large owners meeting their own needs rather than a change in valuation. The elements that make a stock of interest to buy are:

a. Imbalance between buyers and sellers

b. Specific economic trends

c. Change in management 

d. Share of market changes

e. New products or services  

Rarely does a company have more than one of these characteristics and few have all. Thus, most stocks labeled as value don’t perform, their period of attraction is shorter than the more expensive growth stocks.

 3. Don’t confuse trading positions and investment holdings. A trading position should be sold or bought because of a very current price move, with a small initial investment. A larger position should be added when one feels comfortable with the company’s communications. From time to time prices decline for good investments. Most stocks move down at least 50% from their annual high during a year. Don’t try to bottom fish, the relatively small gain, if successful, will probably be small compared to the long-term gain if you’d bought at the average price for the latest 12 months.

4. Expect unfavorable news to be published. If you understand the implications, it could represent an opportunity.

What other suggestions should I share with subscribers and/or use?

        

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

https://mikelipper.blogspot.com/2021/06/what-did-fridays-market-political.html

https://mikelipper.blogspot.com/2021/06/mike-lippers-monday-morning-musings-50.html

https://mikelipper.blogspot.com/2021/06/to-benefit-long-term-investors-invert.html

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