Mike Lipper’s Monday Morning Musings
Bullish Chatter Leaves Out Useful Info
Editors: Frank Harrison 1997-2018, Hylton
Phillips-Page 2018
Public Service Announcement
Assuming you have
been unable to avoid the bullish chatter from various media pundits and investment
organizations, I will not repeat the positives on investments. Instead, I will
file a “minority report” of little-known negative factoids to give some balance
to your thought processes.
Layoffs Continue
Most publicized layoffs
are from durable goods producing companies. It is the service providers that really
drive the US economy, contributing over 70% to GDP when the service functions
of manufacturers are included. When service companies encounter economic
difficulties, they tend to cut back gradually rather than in lump sums. They are
also less unionized and tend to provide fewer announcements. I therefore tend
to pay more attention to the layoffs of service companies. That is why when
Expedia announced this week that it is reducing its workforce by 9% it is worth
paying attention. It is probably the tip of the iceberg above the waterline.
Rare Counter News
The senior
strategist for JP Morgan Chase suggests we are in a period of Stagflation
(slowly rising prices and wages). The clue to this analysis is the most
prominent portrait in the White House main room where the current President
meets foreign dignitaries and congressional leaders. It is no accident; the
current White House occupant’s favorite President was FDR. In the second half
of his term which converted a cyclical recession into a period of stagflation.
When the Public are Invited
into what was Formerly Private, Beware!
Private lending has historically
been conducted exclusively between a single borrower and a small number of
financial institutions; all without the “benefit” of government review. Some
financial firms are now offering pieces of private credit to the “unwashed”
public. It is not only because some members of the public have accumulated
cash, but also possibly due to federally sponsored inflation. Some believe
there is now more risk in private credit than in the past.
Speculators are Buying
More Than Institutions
In the latest week,
39% of the shares traded on the NYSE were at rising prices, with 60% on the
NASDAQ going up. I suspect there was more institutional volume on the “Big
Board”, with some having a longer-term outlook than the public or their
advisers.
Be Careful of Labels
Many market
prognosticators currently worry about the size of the gains chalked up by large
“growth” companies, advocating for a switch to small caps. As someone who has
invested in both individual small caps and more significantly in funds invested
in smaller caps, I am concerned that the data used to support their long-term
desirability is faulty.
Compared to larger
stocks there is a problem with the data due to survivor bias, both for the
winners and losers. Some wonderful or seemingly wonderful companies have had their
history cut short by being acquired. At times, some of these companies are
sought after because of apparently superior products, leadership, or customer
base.
The sellers believe that
the price paid compensates them for giving up some of their potential gains, but
it also assumes it reduces their business and personal risks. Many performance
histories capture their partial performance for the extended period in the
published record, as the history of bankrupt companies is kept in the small-cap
record. Additionally, the significance of the bankruptcy record is diminished due
to their prices typically being much smaller than most acquired companies.
This data concern
should not rule out investing in small-caps, although it suggests small-caps are
neither a plus nor a minus for selection. Similarly, college selection should
not be based solely on first grade class ranking.
Stock Selection vs.
Portfolio Management
There are many ways
to win or lose a football or baseball game. Some variables deal with the play
of a particular contest, while others must consider the season, player
development, audience development, funding needs, and the career progress of
key individuals. Sounds complex!
A similar set of
puzzles are used to solve the issues of stock selection and portfolio
management. In this country, a large portion of the population has an opinion
on how the game should have been played, at least for the audience. Predictability
improves as one lengthens the time from a single game to a season. For companies,
factors like the number of years, loyalty development, and careers might be important.
In the fullness of time the last two periods are the long-term payoffs for the
real winners, who are small in number but rich in experience and profits. For
the most part, success can only be achieved through experience. There is very
little written about how to achieve success.
Turning to
successful long-term investing, the same complexities exist. These are the problems I face in my life work.
Producing these weekly blogs is one way I hope to think through the issues.
Unlike some great investors, I limit my focus to individual equities and funds,
excluding fixed income, commodities, and critical sources not in English.
You Can Help by Sharing
Your Experiences, Particularly When You Believe I Am Wrong.
Did you miss my blog
last week? Click here to read.
Mike
Lipper's Blog: Caution: This Time Is Different - Weekly Blog # 825
Mike Lipper's Blog: What Moves the Stock
Market? - Weekly Blog # 824
Mike Lipper's Blog: Picking
Winners/Avoiding Losers - Weekly Blog # 823
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