Mike Lipper’s Monday Morning Musings
Words
that Trap: Growth, Value, Recession
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Tools
to Separate
When
confronted with a mass of unknowns we often use brief labels to separate subjects
into smaller packages. It is useful for focusing our attention, but it is a
gross selection device. For instance, Night and Day. Each of us have had good
nights and bad days. Yes, it helps us divide a 24-hour period, but it does not lend
itself to finely useful distinctions.
Unfortunately,
popular pundit labels may be useless or even misleading in the art of investing.
If one did a word count in the financial media, the three words most used would
be “growth, value, and recession”. Some recognize how misleading these terms
can be. This weekend I received an electronic transmission from Seeking Alpha
entitled “Amazon: No Longer A Growth Stock”. The New York Times business
section had an article titled ”Value Stocks? Growth Stocks? It’s All Topsy-
Turvy”.
These
brought to mind my college discussion with Professor David Dodd of Graham &
Dodd fame, about the wisdom of buying a particular stock that was selling
substantially below its adjusted net worth. The great professor shut me up when I mentioned how much money his fund had made. I suggested growth investing
made more sense.
He
was right of course, if he had reminded me that successful investing relies on
losing little first and winning on the rest. I eventually learned this from his
great disciple, Warren Buffett. His Berkshire Hathaway stock is a prominent
holding in my portfolio as well as my family’s holdings.
In
examining the terms growth and value I now recognize that the two labels should
not be given to stocks, but to periods of time when a company is
experiencing growth or value. The genius of Buffett and Charlie Munger is
that they try to buy stocks that are priced as value but are expected to grow.
They have done this recently with two integrated energy stocks, Chevron and
Occidental. Years before they did the same thing with two financial services
stocks, American Express and Moody’s. Time will tell whether Berkshire’s newer
positions in Apple and BYD will produce similar returns. (I own all the stocks
mentioned based on my own analysis and I am therefore happy that Berkshire owns
them too.)
Recessions
In
today’s financial media there is no single term that is more frequently used
than recession. Like the terms value and growth, the term recession is not fully
identified. Recession refers to a decline in economic activity. Economic
history is full of intervals of decline, some brief and others lasting ten years
or more.
For
those of us emotionally connected with stock market prices there is a tendency
to label a “bear market” a recession. Most often bear markets proceed an
economic recession, but not always. To me, a bear market is a price decline of more
than 20% for the bulk of stocks. (This decline is normally more than twice the
normal price gains of each of the previous two years.)
Bear
Market
Since
bear equity markets sometimes proceed economic recessions, I have included bear
markets as part of the discussion on recessions.
Investors
enjoying rising stock prices want it to continue. They often rotate out of some
or all their holdings that have slowed down from their previous substantial gains.
Recognizing that past gains took time to achieve their above average growth,
the owners feel they need an accelerator to continue these gains. Accelerators
can be any of the following or a combination: Leverage through margin loans,
derivatives, or newer more marginal companies. Owning a lot of accelerators often
makes them nervous, particularly when they are working. They are often more
conscious of market risks and more susceptible to selling during minor price
declines. If the declines reverse, they double up on the accelerators.
Cyclical
Recessions
The
same enthusiasm that drives bear markets also triggers excessive expansions of
the larger economy. People and businesses believe the good times will continue
and rush to increase their participation. The accelerator in this case is debt
and other ways to take unprotected risk. These can be through loans or
accepting future obligations to cover other expenses. A recent development is
that over the last two Presidential terms the deficit increased materially.
(Some states have also increased debt, but many are limited by balanced budget
requirements.)
Any
review of history shows people, businesses, and governments being surprised by
sudden negative conditions like wars, plaques, unfavorable weather, or a
radical change in peoples’ behavior. Whether it’s the Biblical seven lean years
or the assassination of the Archduke (or shooting down a “weather balloon”),
bad things happen and people cut spending, which causes an economic downturn.
A
cyclical recession is the most frequent type of recession and is usually
relatively short in duration. They leave scares but not long-lasting pains.
Stagflation
This
is a relatively rare condition that can last for ten years or more. Consumers
and businesses feel squeezed by rising expenses, including taxes, and the declining
value of income. These periods are usually caused by policy mistakes. One example
was raising the Smoot-Hawley tariff to protect heavily indebted farmers. It reduced
world trade combined with attempts to restructure the economy and government.
Depression
From today’s vantage point the things that could impact us are:
- The term depression is usually attributed to a psychological disorder of unreasonable fears.
- The Depression started as a cyclical recession with too much farm and margin debt. It was made worse by government action, the Smoot-Hawley tariff to protect farmers and FDR’s attempt to restructure the Supreme Court and federal government.
These
had both short-term and long-term impacts. Raising the tariff reduced world
trade in an overly indebted global economy. This induced decline made it easier
for authoritarian parties to get control of many governments.
Longer-term,
the relatively few remaining in the financial industry became very risk averse
and reduced the number of new employees. When my brother and I entered the
financial community in the mid to late 50s, our bosses were much older and very
risk averse. They were not prepared for the good times of the 60s, which gave
us an early chance to grow.
This Weeks Comments
- “Apocalypse postponed” (An earlier comment before Friday’s jobs announcement)
- “Between 2019 and 2022 there was a decrease of 33 hours worked per person. (15 hours from a drop in the labor force and 18 hours from younger, high paid, workers leaving)
- Vanguard’s ten-year per Anum projections:
Global Equities 7.4%
Ex US Global 7.2%
US Small Caps 5.0%
- A surge in bond buying will eventually lead to equity market declines hurting the retired.
- Capacity utilization in December was 78.8% vs. 79.4% in November.
- 7 of the 11 equal weighted S&P sectors beat the weighted sectors.
- Jeremy Grantham says stocks are much too high historically.
Amazing
how many investment professionals are exhibiting less fear of markets and
inflation. (I think inflation is much greater than interest rates.) Inflation
will be cured by an increase in sales.
The
Friday job jump looks like an error, perhaps in the seasonal adjustment. This
is just one of many errors in the numbers and actions of people suggesting everything
is good or getting better.
What
do you think?
Did you miss my blog
last week? Click here to read.
Mike
Lipper's Blog: What will the Future Bring? - Weekly Blog # 769
Mike Lipper's Blog: Confession:
Numbers Don’t Tell All - Weekly Blog # 768
Mike Lipper's Blog: My Outlook:
Nervous Balances - Weekly Blog # 767
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