Mike Lipper’s Monday Morning Musings
Not
Yet!
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
The Thinking Behind Blog 800
When I realized the 800th
blog was coming up I tried to think of something special to discuss, like a
critical turning point at the beginning of a new long-term market cycle. I see a
turning point in the future which will begin a new corrective cycle. It will address
multiple imbalances facing the US stock market, a reflection of increasingly
problematic domestic and global problems.
However, it now appears
we are likely going more toward a shallow dip, which could be labeled either a
“soft landing” or a ripple in a stagflation period. Regardless, the underlying
tensions continue to build and they will eventually lead to a deep corrective
stage. With the 100th blog less than 4 full years away, I have
high confidence we will see a major correction.
Regardless of the timing
and depth of the correction, we remain largely invested in equities and stock
funds. These funds will need guiding principles to survive the correction and prosper
from the following “bull” market.
Sources of My Guidelines for Long-Term Successful Investing
- Fidelity has published their views on 5 mega trends.
- Marathon in London has written about the benefits of low turnover and stable managements.
- Howard Marks expressed his views on escaping extreme investing.
- Finally, my own observations on the investment decisions of funds, commuters, and actuarial lessons on betting.
Productivity/Profits-
Fidelity
Fidelity probably invests
in almost every investment any place in the world. They serve different types
of clients in many capacities and countries. Of the 5 Mega Emerging Trends, the
most easily measured is the slowdown in the growth of productivity, more specifically
in the productivity of labor. Labor is easily measured in terms of the number
of hours committed to work, likely for compensation. (What is not evaluated is
the quality of the work.) The number of hours worked in the US is in the upper
portion of the lower half as shown below:
More than US US Less
than US
UAE 2709 1892 UK 1866
India 2480 Germany 1783
China 2392
Australia
1669
Mexico 2220 Canada 1664
South Africa 2154 France 1565
Thailand 2108
Poland 2085
Indonesia 2043
Philippines 2039
Russia 1965
Implications
- In a world that has higher interest rates and is short of opportunities, there are more places competitive with the US.
- When US proclaims politically motivated holidays, such as Labor Day.
In an article by Howard
Marx, he warns about extreme stock prices. When extreme enthusiasm pushes prices
to record highs or lows, investors sell stocks priced for perfection, or buy/retain
stocks which can never generate good news. Most of the time securities trend in
one direction or the other. A dangerous condition is when all opinions on a security
are totally one-sided. Very few investors understand that it is rare for there to
be no salvage value for knowledgeable investors with patience and legal
backing.
An example of too many one-sided
beliefs was the 50 institutionally favored stocks in the early 1970s (Nifty Fifty).
It was believed that these stocks could be bought and never sold, after the recommendations
of the leading institutional brokerage houses didn’t work out. In 1972 the list
contained Eastman Kodak, Polaroid, Sears, and Kresge. In the years that followed,
all four disappeared through bankruptcy. To demonstrate how much reputational
power these stocks had. One senior investment officer was an early promoter of
Polaroid and managed to ride that performance into being hired as the senior
investment officer at a New York based mutual fund house. He didn’t last long
in a company that was studied daily, including its longer-term performance.
Marathon in London has a successful
record with its European fund and others. They are a low portfolio turnover shop
who pay a lot of attention to industrial and corporate capital cycles and meet with
long-term senior management extensively. They are very proud of the 26% of
their portfolio that has been held for more than 10 years in the European fund.
Those positions represented 45% of that portfolio at the end of the period. When
I visited them, I was amazed at their detailed knowledge of their companies,
managements, and critical competitive information.
There are many investment
lessons I have learned from just observing and listening to people. For example,
I suspected the market was getting frothy in the late 1960s when a person I
commuted with on a 6 AM train mentioned he had gotten a personal computer and was
going to stay home and day trade a handful of stocks. He was a mid-level
executive at a famous financial institution and appeared to have average intelligence.
I was working for a firm that had a very active trading desk that regularly
dealt with some of the sharpest trading shops. Very occasionally I heard
one-side of a phone conversation between the traders. I felt I needed a
translation regarding their words and tactics. I am sure my former train buddy knew
no more than I did about institutional trading. Hopefully he learned quickly or
found a new job. I never saw him on the train again.
I owe UPS a gift for the two
investment lessons I learned from them this week. There was a public
announcement that the company was offering early retirement to 167 senior
pilots. Each of their planes carries about 30,000 packages and is designed to
fly every day. Consequently, in terms of delivery capacity, it meant UPS would deliver
1.8 billion fewer packages or these packages would be flown by less expensive
junior pilots. It suggested to me that UPS was expecting less business after
their expensive settlement with their truck drivers. Within the week our
friendly regular UPS driver delivered some low value drug store items, which
may have come from a warehouse or a local store under half mile away. In either
case, it was not a bullish indicator for me.
During the very same
period institutions were locking into long-term investing in the nifty-fifty
stocks, there was a more valuable lesson a few miles from Wall Street. On a Saturday
in June of 1973 the Belmont Stakes was run. It was not much of a contest.
Secretariat won by 31 lengths, setting a track record. While that was
interesting, the real lesson of the day was that I didn’t bet on what was clearly
the best horse in the race. More importantly, I did not bet on any horse in the
race. When Secretariat won, the horse paid $2.20 for each $2.00 bet. What I
learned was that even with the best horse in the world things can happen, or if
you will “racing luck” might happen. (Sounds as if I was conscious of Howard
Marx’s avoiding absolute certainty.) I was practicing good actuarial science,
which excludes events so rare that they are unlikely to reappear. What I
learned was that to not bet is a bet. Wagers should only be made when the
odds of winning are high enough to cover losses in the past or in the future.
Conclusion
Investing should not be
considered a single chance to make or lose money. The more you are aware of the
world around you, the better your chances of finding some winning investments
and keeping your losses small.
Did
you miss my blog last week? Click here to read.
Mike Lipper's
Blog: What Do Single Digits Mean? - Weekly Blog # 799
Mike Lipper's Blog: Some Past
Errors Create Future Problems - Weekly Blog # 798
Mike Lipper's Blog: Inputs to
Implications - Weekly Blog # 797
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