Are You Getting Value from Numbers? - Weekly Blog # 758

 

Mike Lipper’s Monday Morning Musings

Are You Getting Value from Numbers?

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

            

 

  

Investors tend to be number hogs. They trust that the numbers they see represent reality, which sometimes they do. Most of the time investment solutions start and end with some form of equation.

 

We would be better off if we started and ended our analyses with qualitative descriptions. These could capture our depth of thinking on the topic and clue us into our weighting philosophy.

 

 If we can’t immediately use a numerical relationship, we tend to discard it. It would be more useful if we filed it under future problems. The rest of this blog is built on three numerical relations that have been ignored. I believe they have kernels of useful thoughts.

 

Value of Market Index Leadership

Among the market indices, I pay particular attention to three. The Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ composite. I believe the particular index leading or lagging the other two is descriptive of the type of leadership driving the general market.

 

Regular subscribers to these blogs probably noticed I was getting increasingly bearish starting November 2021. This was because the NASDAQ Composite hit a new high in November, which was not followed by the other two indices. Furthermore, the NASDAQ was driven by tech companies, which seemed like a stretch. Projected gains as a percentage were greater than the prior percentage gains. The bulls on these stocks were probably overextended.

 

Currently, the index flashing caution is the S&P 500, which on down days flirts with its historic lows or scores a minor low. It remains very close to its low for the year. At the very same time the DJIA has risen most and is least analyzed by professionals. I call this weak leadership.

 

As of Friday’s close, the S&P 500 was up 5.41% and the NASDAQ up 0.56% from their respective 2022 bottoms.

 

How Much Do You Know about Your Stocks?

Many investors, including some professionals, treat some of their stocks and CEOs as icons to be followed regardless of results. Two of these are Warren Buffett and Charlie Munger. I would suggest that stock or political investors who do not regularly read Berkshire’s quarterly SEC form 10-Q are not being prudent.

 

In the latest 47-page edition they go through both the tax and legal reason they conduct business the way they do. The 10-Q was published this Saturday and most of the press focused on the reported loss resulting from price declines in their equity portfolio, as well as storm and accident losses in their insurance complex.

 

This information resulted from required SEC disclosures. What many articles either ignored or only later covered was the increase in operating earnings of the wholly owned, or at least 20% owned companies. Buffett and Munger believe that operating income is the real measure of their company’s progress. (They fought the SEC about the requirement to include the price movement of their portfolio in earnings per share, rather than just showing it as an adjustment to book value.)

 

They run the company as a giant trust account for the heirs of the present shareholders. As both an owner and portfolio manager for family and other accounts, I agree with them. Matter of fact, that is the way I look at most of my long-term holdings. To me, the after-tax free cash flow earnings of a company is the most consistent measure of an operating company.

 

When I use mutual funds and other portfolio holding companies, I recognize that outside people value the company by its actions in the market. To me, the impact of market action is a cyclical phenomenon, having more to do what other owners are doing with their assets. It is not the reason I hire managers to grow the assets for the beneficiaries of my efforts.

 

I therefore need to track both the after-tax operating cash flow and market input to judge the skills of my operating managers. I also need to evaluate how well I react to what the market does to my owned assets.

 

Believing a reasonably well selected portfolio of assets will rise through inflationary and other periods, I can be patient.

 

Selective Review of Prices Is Appropriate

Nothing about prices and the actions of people is guaranteed to be repeated exactly as it was in the past. Nevertheless, from time to time it makes sense to review what has happened in order to think about future portfolio actions.

 

The following are views of market analysts of a major financial-services company worth considering:

1.   US Treasuries may see a major bottom in March-May ‘23
2.   Some expected inputs that may also bottom:

A.   Lower Consumption

B.    Higher Savings

C.    Selling of stocks by retail

D.   Major Credit Events

3.   China to re-open

4.   Similarities with the 1973-first quarter - 1974 pivot

5.   Small Caps, which are not a target of government, will lead the market. A trend that could last five years

The next two years will be difficult, because enforcing discipline will be tough. Nevertheless, it is time to rethink investment strategy.

 

What are your thoughts and plans?

 

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

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