Selling: Art & Risks, Current & Later - Weekly Blog # 803

 

Mike Lipper’s Monday Morning Musings

Selling: Art & Risks, Current & Later

 

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

 

 

 

Most Difficult Decision

After a decision is made to purchase one or more securities the level of complexity escalates through one or more holding periods. The act of selling has immediate performance implications, but also has implications for the rest of the lives of the investor, their inheritors, and various governments. Because of these implications, the decision process should consider factors wider than the simple decision to purchase.

 

Decision Making

Individual investors often start their investment process by thinking about “their” money and its personal use. Over time their thinking may broaden to include their responsibilities, leading them to start thinking of themselves more as fiduciaries. Most investment money, including that in various institutions, is managed with fiduciary principles in mind.

 

However, when we bring a professional fiduciary into the picture, the decision dynamics evolve. The fiduciary unsurprisingly wants to be compensated. More importantly, in our litigious society fiduciaries want to avoid being sued. Most suits are decided on the basis of the 1830 Putnam vs Harvard (Prudent Person) case, which holds the fiduciary performance standard to what other prudent people would do with their money. This is a backward-looking judicial view. (This approach created the performance measurement business, which benefited the author and my various associates.)

 

While this approach is addressed by the so-called “Prudent Person” decision process, it doesn’t make a lot of sense for a forward-looking investor. For example, if a manager stays fully invested in a speculative securities market decline and vastly underperforms a more diversified portfolio, he would be judged imprudent for the declining investment period. However, if the measurement period included the recovery and a subsequent growth period, the entire period might be much longer than desired for a more conservatively managed account.

Where Are We Today?

Since we look at investing through short to long-term periods, the following views express an opinion, not a prediction as to three stimuli.

• Investors are fleeing China, driving many prices down. If you are a trading investor who values short-term performance, it might make sense to reduce exposure. However, there are two reasons that suggest the opposite.

1.    Betting against volume normally works better than the opposite.

2.    Without the growth of Chinese exports, world growth will be constrained.

• The three major US stock market indices had a dull to sloppy week. The S&P 500, representing the bulk of investor’s capital, fell slightly through a technical barrier. While not a prediction, it could suggest the calendar year might finish with small gains for the year. If that turns out to be true it would confirm we are in a period of stagflation similar to FDR’s depression and a model for Joe Biden.
• All three dominant political leaders: Biden, Trump, and Xi, were/are concerned with the need to create employment opportunities for younger voters and spenders. History shows others using effective ways to accomplish this goal.
• In ancient Rome, legionnaires were awarded captured farmland to provide food for Roman staff. It also served to cultivate political capital. The building of the viaducts was also needed to bring food to Rome.
• President Eisenhower pushed a national highway system, which improved interstate commerce and employed private workers. Ike had the benefit of several knowledgeable brothers, which were Presidents at local banks and Universities.
• Xi has possibly built the biggest and fastest railroad system in the world. US rail and airport infrastructure is way below many third world countries.

Now it is Your Turn

The ultimate value of these blogs is to raise discussion of these controversial views. Let’s hear from you.

 

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

Mike Lipper's Blog: Investment Thinking During a Lull - Weekly Blog # 802

Mike Lipper's Blog: Need For a Correction Decline - Weekly Blog # 801

Mike Lipper's Blog: Not Yet! - Weekly blog # 800

 

 

 

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