Mike Lipper’s Monday Morning Musings
Gravitational Waves & Investing
We unconsciously make
bets about a collection of futures at every moment. Scientists and other Seers
have been doing this since the beginning of human time. The terms of our world have
been evaluated, as well as how to gain, grow, preserve, and distribute wealth.
I have come to a point in both my professional and personal life where I hope to
find a systematic way to make investment decisions regarding money and the
expenditure of time and effort in acquiring it.
This week, by mere
coincidence, scientific teams in Europe, India, Australia, China, and the US, released
their astronomical observations on what they perceive happening in deep space.
Their observations are the result of 15 years of study using both land and
satellite based large telescopes. (This knowledge is also being shared by
nations building military applications.)
The research follows
the theoretical work Albert Einstein did over 100 years ago. (Historical note, Einstein
was a frequent guest and lectured at Caltech where I am a Senior Trustee.) The
current work supports his theory that we are traveling through an undulating
sea of intensity and are being attracted by the gravitational pull of large,
dead, dark stars. At this point, we cannot predict how these intense,
undulating pressures will direct our earth.
Coming back to earth
and the subscribers of this investment blog. We should accept uncertainty as
one of the undulating governors of future investment opportunities and risk. I
am starting to corral a number of thoughts as part of a toolkit to develop
appropriate investment policies tailored to particular situations.
3rd
Quarter Risks for Money Managers
The bulk of dollars
under management may have entered a period leading to the termination of trusted
relationships, both contractual and/or personal. Relatively few formal or
informal investment committees execute management changes during the summer, but
they likely will after the third quarter when decision makers receive second
quarter reports. These reports will not be happy readings in more cases than not.
It is estimated that the earnings per share of the stocks in the S&P 500
index will fall by -5.7%. Combining this news with another bit of analysis, it
may cause fiduciaries to question the reason they are paying fees to their
existing managers.
In a second bit of
analysis, if one subtracts the performance of the 28 stocks in the S&P
500 which gained during the first half, the remaining stocks lost money. For
the six-month period, gains for the 28 stocks were larger than those in the
first quarter. Many more had positive gains in June, as the number of winning
stocks expanded significantly. However, the June 30th report may
also reveal that there were losses for more than two years, as mentioned in
last week’s blog.
Portfolio managers, anticipating
the results of the 2nd quarter, may have plowed money into the six
to ten global tech-oriented leaders of the first quarter. It is my impression
that the Price/Earnings ratios of many of these companies expanded more than
their underlying earnings growth, perhaps pushing them to over-valued
levels.
My concern is that
we could see a repeat of a lesson from the late 1960s, when two leading Boston
based mutual funds with the rest of the market fell. At the time my brother’s
firm was selling fund performance data for brokerage commissions. Our trading
desk was in communication with both of these competitors, among others. Up to
that time both funds had similar portfolios but following the decline the two
managers followed different defensive paths. One sold its most over-valued
stocks. The other, perhaps learning from his mother who was a broker on the
Shanghai exchange, sold his largest and most liquid positions.
After the decline ended,
the second manager was hailed in the press as a brilliant manager. So much so that
he was featured on the cover of a well-known business magazine. This propelled
him to start his own fund management company, which raised a lot of money but
didn’t perform particularly well and merged out. The other portfolio manager had
retired earlier.
Using performance
records can only lead to unfortunate choices. At the racetrack, some bettors
select the horse with the most winning races or a high win vs loss ratio. I have
often found this to be a trap. The wins were over cheaper horses or those competing
at less competitive tracks. Whenever trainers enter a horse in a race which had
a number of higher quality horses with less of track record, the horse often does
not live up to its win/loss ratio.
As a provider of
performance analyses, we addressed this issue by creating a peer group under
the rubric “Capital Appreciation”. The peer group housed funds essentially based
on their win/loss ratio, not what was in their portfolio, like growth or growth
and income stocks. Over time, fund marketing people and lawyers convinced us to
give them the widest range of portfolio choices in their prospectus. Many ended
up saying their funds sought capital appreciation and secondarily provided income.
The delineation of the peer groups were too broad and was consequently dropped.
As a manager of
accounts and a member of investment committees I seek to be invested in funds
that meet the intermediate (5 year) and long-term total return needs of the
account, not shorter-term results. I am anxious for my responsibilities to
accomplish their planned distribution to finance their purpose.
Work in Progress
There is much more
that needs to be discussed including responding to inputs from subscribers. Two
additional topics require more space and your time. I am working on the tension
between economics and the impact of China and the rest of the world. I would
appreciate any comments on what I have produced as well as on the two topics
that I am developing.
Did you miss my blog last
week? Click here to read.
Mike
Lipper's Blog: Manageable Risk - Weekly Blog # 790
Mike
Lipper's Blog: Predictions Suffered Last Week - Weekly Blog # 789
Mike
Lipper's Blog: Head Fake, Unrecognized Opportunity, or a Minsky Moment - Weekly
Blog # 788
Did someone forward you
this blog?
To receive Mike Lipper’s
Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 – 2023
Michael Lipper, CFA
All rights reserved.
Contact author for
limited redistribution permission.
Posts
No comments:
Post a Comment