Mike Lipper’s Monday Morning Musings
Building Your Future Winning Portfolio
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Personality Shapes Portfolio Architecture
One hurdle we give little thought is the modern mass production of clothes, foods, jobs, schools, and financial instruments (portfolios). Staunton Military Academy and the US Marine Corps were contributors to what I am today, but like everyone else I want to be unique. In that search to find myself, both my wife and I have turned to history to learn how others developed their identities.
Focusing on how others have navigated their successes and failures, I am particularly interested in learning how to minimize losses. Large failures are typical of those who have achieved measurable success. Psychologists who measure the impact of winning and losing believe we feel at least twice as bad from losing. (I believe some of us feel even worse about losses. Losses delay our commitments to successful actions and use up some of our precious time.) People experience both successes and failures and some learn from their defeats, using that knowledge to build subsequent victories. For example, both George Washington and Abraham Lincoln suffered multiple losses before their victories.
We Alone Are the Senior Architect of Our Investments
While we may consult with various professionals, family, and friends, we are ultimately responsible for creating our investment portfolio and our lives. I have prepared an a la carte menu for you to choose from that is specific to meeting your investment personality needs. Instead of each alternative having prices or calories as a guide, I list a very rough risk/return identifier. (Through your own experience you can modify my judgements.)
A la Carte Menu of Portfolio Vehicles
Type Risk Orientation
All on a single bet Favored by entrepreneurs (Henry Ford
was twice bankrupt before success)
Concentrated holdings Limited number of large bets with
common risk characteristics
Actively managed fund Account/fund of less than 50 names
Passive Index Fund Fully invested + low turnover
Combined Approaches Risk avoidance limits upside
Personally, I plead guilty to the last choice. Our big positions are centered on domestic and international financial services companies and funds. I use actively managed funds and fund management companies when I do not have confidence in particular companies, but believe their focus is correct. In doing so I use a fund or fund like vehicle as a common denominator play.
Types of Declines and Expected Influence Structures
The US stock market has been in decline for some time. In some respect you could go back to 2019 or earlier. The expansion of the NASDAQ Composite since the financial crisis may have ended in November 2021. Using that as a measure we have entered a bear market for at least two days, but it is not yet convincing. Both the Dow Jones Industrial Average and the S&P 500 have entered a correction phase, falling more than 10%. (The media called both the bear market and correction phase but cannot tie it to an economic or market measure.) Nevertheless, this may be a good time to assess the types of market declines and appropriate tactics and strategies:
Correction Phase - According to S&P, the market is up +9% one year later.
Bear Market - One year later the market is up +13%. (To the extent that the market indices represent one’s holdings and the account is eventually taxable, it doesn’t make sense to liquidate unless there is a specific problem that questions the future of the company. Most, but not all recessions lead to bear markets, so it is not a specific call for portfolio action.
The real risk is an activist top-down government taking a normal cyclical decline and turning it into an active depression lasting a couple of years or more. If this is expected, the proper strategy is to cut expenditures as much as possible and shrink the portfolio in terms of capital commitment, but not names. In The Wall Street Journal, Jason Zweig recounts the incidence of Sir John Templeton buying 104 stocks trading for under $1.00, including 34 that were in bankruptcy. This was in 1939 before the US entered WWII. After the war he made a profit on 100 of the positions. (I do not expect a similar experience for the country, the market, or an investor, but the lesson shows the value of long-term investing, staring with low prices on the NYSE.)
Which is Best Now?
History does not offer a direct parallel. The closest that I have seen is the 6 months prior to the declaration of WWI. The immediate causes were the weak, isolationist, attitudes of the US government, plus the assignation of the Archduke, which was part of the unrest in Eastern Europe. Our fear is China supplying military goods to Russia as requested. This conceivably could bring a third world war.
In deciding what to do, I suggest putting both the stock tables and the annual reports down. Evaluate your holdings as companies. Would you like to own all the company and never sell it? Warren Buffett views companies based on whether your children would be buyers of their products or services.
After many successful years of investment, you may have an oversized highly profitable position and may have large loss positions to “harvest”, if you don’t think they will recover. These losses could be used to bring balance to your portfolio by recognizing the losses and simultaneously reducing some of the overweight positions in your winners. The freeing up of cash from both losers and slightly reduced winners creates a fund for reinvestment at a time when prices are reduced.
Final thoughts: Understanding that making a series of correct investment turning point decisions is very rare, allow yourself to make mistakes, learn from them, and generally stay the course.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/03/does-decline-influence-recovery-weekly.html
https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html
https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html
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A. Michael Lipper, CFA
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