Mike Lipper’s Monday Morning Musings
Planning
for Rising Stock Prices
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Contrarian Concerns
If only we could be
unbiased when observing stock markets and investors. We might get clued into
probable future steps we should take. We should examine all that is exposed to
us. The strengths and weaknesses of realities, rumors, and reactions. In many
cases crowds believe in "facts", which when fulfilled provide comfort.
In much the same way contrarians often see the opposite in the same set of
facts.
For an extended period, I
have been seeing growing evidence of problems for various stock markets and
related countries. I was comfortable with these feelings because relatively few
perceptive analysts and other investors shared them.
Now, the worst of all
possible trends is befalling a contrarian. The attitude of many sophisticated stock
market investors is turning, echoing the attitude of the US Treasury bond
market. Worse still, leaders in the commercial world are dealing with a present
and likely future collapse of demand for their products and services.
International Paper,
Packaging Corp, and West Rock (*) announced a massive inventory glut of
containerboard, which is critical in packaging most shipped goods. Consequently,
I was not surprised by FedEx's quarterly earnings announcement, which fell 32 %
below analysts’ estimates. The release indicated the company was reducing usage
of its plane fleet, closing offices, and cutting expenses.
When operating companies
have these problems it almost always means smaller M&A activity and
underwriting. Thus, it is not a surprise that canny Goldman Sachs (*)
reintroduced a policy laying-off the bottom performers of its talented staff.
This week's IPO actions by American International Group (*) have them selling
some Corebridge Financial at the low end of the expected price range, which
fell below the issue price in the after-market.
(*) Held in personal
accounts
My reaction to this
negative news was to accelerate my previously mentioned plans to look for new
buying opportunities in new names.
An Organized Search
Process
I have had discussions
with sophisticated investors who have exited the equity market with 30% or more
of their prior commitment. This has created a potential 30% buying reserve.
As subscribers to this
blog know, I question whether we have seen the bottom of the US stock market
decline. The S&P 500 hit its technical price low since June at roughly 3900
this week. One respected market analyst’s response was that the index had bent
but did not break.
I don't know if the
September or June bottom will hold or break at the 3600 or 3000 level. Although
it is possible we have seen a bottom from which an upward expansion could take
place.
My tactic in this case is
to dollar cost average into favored investments. I divide my purchasing reserve
by 6, putting 5% into the purchase bucket. One reason I believe we are likely
to go into a serious recession or worse is that I see too many imbalances, with
declining efficiency and productivity in the economy. Although I could be wrong.
The way I deal with it is to invest differently than what produced my existing
portfolio. So, if the market is flat at the end of the reinvestment period, I
would have 70% in the original holdings and 30% in new thinking.
The first hurdle is determining
the frequency of investing is the reinvestment money. One could choose monthly,
quarterly, or yearly. That decision should pivot on the kind of decline expected.
It could simply be a price decline where monthly investing generates a good
result. If you think the market went down primarily because of imbalances in
the economy, then investing quarterly makes sense, as these problems won't be
solved until next year at the earliest. Although the market should anticipate this
event somewhat. An annual investment makes sense if you believe we might be
entering a period of stagflation.
At first blush the annual
investment might seem excessive. However, we experienced two periods of
stagflation in the 1930s and 1970s, which suggests it could happen. Since
everything these days seems to move at warp speed, I searched the mutual fund
data bank produced by my old firm this week. I examined the 170 mutual fund
investment objective performance groups averages through this Thursday. While most
had a down calendar year, prior years were positive.
For the last three years
40% of the performance averages lost money. Thirteen percent lost money over
five years and 5% lost money over ten years. These numbers suggest we could be
in for a long dull period.
The reinvestment plan I
am suggesting is not a hands-off procedure. Anytime the targeted investment is
off 10% from the prior determined period, I would double the commitment. This
may produce a bargain for the investor. It also reduces the length of the
investment period. On the other hand, if the target price drops 25% I would
pass on the opportunity and wait for the next period, assuming the basic
research remains favorable.
What to Buy to Complement
the Portfolio
Remember, reinvestment is
meant to offset investment opportunity in existing holdings. I suspect most
holdings are dollar dependent, so at some dollar level the US will price itself
out to foreign buyers. Internal political issues in various countries will also
improve.
For those that have never
owned a stock traded beyond our border, I would start with some Canadian
holdings.
India has the largest
middle class in the world. Other Asian countries, including China, are a good
hedge against the dollar.
Another approach not in
many portfolios are companies developing new products and services to fill unmet
needs for new products/services not currently available.
If the individual selection of securities takes up too much time and you lack confidence in your selection, you can use mutual funds. As these funds are intended to address other needs in an investment portfolio, the following list of attributes may be useful in the selection process:
- The portfolio manager has ten years of experience running the fund, with a record that can be researched to understand down periods.
- A focused portfolio of under 70 names in two handfuls of sectors.
- A portfolio letter released at least semi-annually that is easy to read. It should be about the portfolio and not the economy.
- A proper discussion of what didn't work and why, without blaming others for mistakes.
If all of this is too intense,
I suggest index funds covering large and small companies, both here and
overseas. Most index funds track a published index in terms of weighting how
much to invest in each security. This is where a critical decision must be
made. Most index funds own the same percentage the stock has in the index. Consequently,
a handful of the biggest positions in the fund will drive performance in rising
markets. While great in a rising market, it could be a negative in a declining
market where investors sell their most liquid holdings. Equal weighted index
funds in some cases will slightly underperform on the way up but decline less
than capitalization weighted index funds on the way down.
Question of the week:
Are you open to investing
differently for the next good market?
Did
you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/09/mike-lippers-monday-morning-musings.html
https://mikelipper.blogspot.com/2022/09/i-can-be-wrong-weekly-blog-749.html
https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html
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A. Michael Lipper, CFA
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