“This was the Worst Week of the Year” - Weekly Blog # 773

Mike Lipper’s Monday Morning Musings

“This was the Worst Week of the Year”

 

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

 

 

 

Wrong Perspective 

No investor likes to see a markdown of prices in their portfolio. However, these declines are likely less than the future reductions that lie ahead. We may be close to temporarily removing one of several overhanging dangers. The real risk to our long-term condition is the possibility of a short or shallow recession! 

 

For the pains sustained we have taken little in the way of corrective actions. We have largely maintained the same sets of problems we had prior to the recent price declines. 

 

Throughout our society we have a deep leadership vacuum in most activities, from small startups to our largest organizations of government, commercial, intellectual, health, and non-profits. Our problem is not that current leaders are fundamentally evil. Our problem is that in too many cases the present leaders rose to their top positions due to their political skills of getting along. They had to make compromises in the short-term, which had serious longer-term penalties. This is natural because we judge success by short-term achievements. 

 

What Have We Created? 

While there have always had inefficient organizations, we have too many of them today. These zombies exist throughout all cultures. If we adopt Sir Isaac Newton’s view of God as the watch maker who controls the universe wanting us to learn how to solve our own problems without His help. God must periodically intervene through abrupt changes in weather and the economy. These corrective measures are seen to be periodic recessions.  

 

Humans don’t always take advantage of the first clues and sometimes repeated strong medicine is necessary. The wake-up medicine comes in different strengths and duration. History suggests three generic types: 

1. Recessions often caused by climate.
2. Price recessions where critical supply shortages cause long periods of stagflation and cover up structural changes in the rules of the game. There is a good chance of missing major corrections for a relatively short period. We are swapping time for the beginning of an intense correction.
3. The biggest percentage losers are those involved with companies labeled zombies. We should recognize that those hurt by zombie companies are not just the proprietors, but also those who have supplied equity and debt capital. Employees working for going concerns and communities housing the zombies could also be hurt. (Perhaps the time before the larger corrective recession hits could be used to reduce the large number of zombie companies.) 

 

Who Created the Zombies? 

The creators are not maligned leaders. They are just short-sighted in encouraging the zombies to grow and experience some prosperity. Normally, societies have constraints on growth to protect consumers and other capital providers. Periodically these constraints are relaxed or fail to be modernized to accommodate new conditions. The biggest relaxed constraint permitting large numbers of zombies to limp along is low interest rates. These companies do not have sufficient credit reserves and may not have been appropriately regulated by savvy regulators. 

 

Are You a Potential Zombie? 

Warren Buffett in his worthwhile annual letter to shareholders addressed the issue of pinpointing those that have insufficient credit. He suggests that those who I am calling zombies will be revealed as being naked when the tide goes out. 

 

While it is difficult to spot the soon to be naked players, it is not impossible. Warren Buffet and Charlie Munger have a remarkable record of avoiding problems. (Their few major loses are small in number and relative size. They follow the same strategy as the Kansas City Chiefs in the latest Super Bowl, as noted in our only non-weekly bulletin, which is about winning by avoiding losing. That is one of the main reasons we personally own shares of Berkshire Hathaway in other accounts.) 

 

The key characteristic of a zombie company is often a habit of admired=persistence. There is a critical difference between a zombie and a recovered hero. A zombie company persists in taking down its ship and all aboard who depend on their delivery. Those who recover stop digging their hole deeper. As investors we need to identify the critical player or players who have too much pride to abruptly return to shore before the next wave hits. History suggests that there is always an unexpected wave. 

 

Those who have made financial, political, and behavior mistakes, should look for self-help groups or a consultant that encourages them to periodically question their persistence. We should always contemplate the possibility of being wrong at some point in time.  

 

Subscribers, please share your successful review functions of questioning your actions.      

 

 

 

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

Mike Lipper's Blog: A Terrible Week - Weekly Blog # 772

Mike Lipper's Blog: Primer on Starts of Cyclical & Stagflation - Weekly Blog # 771

Mike Lipper's Blog: Words that Trap: Growth, Value, Recession - Weekly Blog # 770

 

 

 

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