Mike Lipper’s Monday Morning Musings
What
does your 4.0 Profile Tell You?
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
When
one sees a mark of 4.0 it usually signifies academic perfection. As the
investment game is different from other realities, so too are our measurements
and goals. As much as we try, none of us has established a long-term investment
record where each investment in each period produces a satisfactory performance
record. We need a different type of measure to produce a learning device to
improve performance.
These
thoughts led to four inputs for investment action. After listing the four, it
became clear that each label ends in an “o”. Recognition of these inputs might help
sum up the importance we attach to each and explain what type of an investor we
are and the performance we generate.
The four main inputs are:
- Macro
- Micro
- Politico
- Psycho
Macro
is the generalized investment thinking of most people. As discussed in recent
blogs, most pundits and their dedicated investors are in one of two camps. They
either believe or don’t believe that investment gains are being held back by inflation,
with changes in the level of interest rates the only way to cure the problem. The
second group believes that current performance is due to broader structural
problems and basic imbalances. Among these problems and imbalances are the lack
of constructive leadership throughout society, including politics, education, the
non-profit sector, and businesses.
As
a life-long student of investment performance I suggest that it is extremely
rare that the current generally accepted macro view will correctly predict the
future.
Micro
inputs can be translated into “God is in the details”. Some of these details
are derived from audited statements where there are very few mathematical
errors. (Other than measuring the wrong things in the wrong way.) As an
investor I value incomplete observations of changing elements more. Such as changing
of the number of workers doing different tasks, changing the number of
customers making spending or selection decisions, or the number of customers
consuming specific goods and services. My interest is not the raw numbers
themselves, but their volatility and where they fall in the range of past
actions. The key is to recognize changes in people’s behavior and try to guess
their motivations.
Politico
also consists of two parts, what is likely to happen and what one hopes will happen.
The closer the two are, the less likely the result will occur. Interest at various
levels may also influence perception, be it international, national, local,
industry, organization, or family. As a practical matter, the interest of greatest
impact will likely be the reverse of the order above.
Psycho
deals with our optimism and pessimism, including the confidence in our personal
ability and willingness to make meaningful change.
Applying
Inputs
As
with any composite of inputs, one can treat each equally or weight them appropriately.
For example, I might weight macro 2, micro 4, politico 3, and psycho 1.
In
this situation it would be difficult to select investments that didn’t have
strong micro attributes. Politico would also be an important consideration.
Both macro and psycho would only be important if micro and politico were not
individually selected. Under these conditions I would be unlikely to act on macro
influences but would probably make moves if micro or perhaps politico exerted
strong directional inputs. In general, I would need more evidence to make major
changes to my portfolio based on macro events. (A second level adjustment could
be applied to the strength of my belief in each. For example, 90% for micro and
10% for psycho.)
There
are many other selection processes. Some work better than others under
different circumstances. The value of understanding one’s selection biases is
to direct focus to what is important.
Clues
of the Week
Each
journey starts with a first step, as does each long-term investment record. Our
problem is that we don’t know which week is the beginning week. Additionally, no long-term record has each
week moving in lockstep with the long-term record. That is why we search for
clues each week. As with many investigations we look at many clues, some of which
will be wrong. I summarize in these blogs the most likely.
In
terms of forward motion there wasn’t much this week, but it is possible the
ratios of new high/new lows, volumes, leading/lagging sectors, and news from
beyond the stock markets could be instructive.
- On the NYSE, new lows were larger than new highs each day. (Only true for 3 days on the NASDAQ.)
- More shares were sold at declining prices than rising prices in 4 out of 5 days, with weekly volume -2.6% for the NYSE and -6.1% for the NASDAQ compared to the prior year.
- Of 32 S&P Indices, only the Asian Titans 50 rose for the week. The prior leaders, energy and financials, turned down, while healthcare and tech rose.
- Personal Savings were +2.3% vs +7.3% a year ago. Steel capacity usage was 73% vs 82% a year ago. A Jeep Cherokee factory to indefinitely lay-off workers in February.
Despite
the “happy-talk” of inflation peaking and interest rate hikes slowing, investors
and consumers are not buying a turnaround.
Incomplete
Strategy Labels
Pundits and marketeers prefer short, snappy labels for various portfolio strategies. These are typically one-sided as they only describe the purchase side, not the other strategies excluded. Below are some examples of more instructive labels:
- S&P 500 Index - Market-cap or equally weighted
- “Go to Cash”- Freeze the rest of portfolio
- All investors - Traders, investors, taxable or tax exempt (deferred)
- High/low P/E without identifying the date - Price is current when earnings lag. (I prefer to use operating or net cash flow after debt payments.)
- High/low volatility without identifying the period of volitivity -Intra-day, daily, weekly, monthly, yearly.
Readers
may have their own examples of mis-labeling.
Did
you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Week Divided: Believers vs Investors - Weekly Blog # 762
Mike Lipper's Blog: This
Was The Week That Wasn’t - Weekly Blog # 761
Mike Lipper's Blog:
Trends: Deflation, Stagflation, or Asian? - Weekly Blog # 760
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