Mike Lipper’s Monday Morning Musings
Avoiding Many Mistakes
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Numbers Are Not the Answer, Questions Are
This is the season
of the year when investment managers are often chosen. This is particularly
true now, with US stock market leadership evolving. There is a debate between the
short-term attraction of growth and fundamental long-term concerns over the
global economy and political structure. We may have entered the early stage of
replacing current leadership in business and in Washington. Because the future
appears uncertain, group decisions through committee are more likely. (A historic
lesson from military and political history is the larger the group, the less
dynamic the decision.)
The first step in making
an investment discussion is often to gather the easily available numbers. The
first problem with gathering numbers is the motivation of the sources. In the
investment arena, the major providers are groups who wish to publish data for
direct or indirect sale and/or profit. Another source is regulators who wish to
provide standards leading to evidence for lawsuits. Neither of these sources try
to help others make wise investment decisions.
At this point in my
professional life and practice, I am trying to make informed and correct
investment decisions for specific users, including my family and myself. The
following discussion are some of the indicia I use to ask some of the right
questions.
Critical Questions in Search for Profitable Investments
- Rarely the first question and more likely the last, is understanding the motivation of important individuals involved on a personal and group basis. Different answers should be expected depending on whether the mindset is one of a publicly traded investor or a sole ownership, and all gradations in between.
- Obtain quarterly performance since inception for at least ten years, or shorter if there was a significant change of individuals or operating philosophy.
- Understand the choice of perceived peers and their performance for the period where their critical philosophy and personnel were in place.
- Get the percentage of time the investment occupies in each quintile. If potential investors are satisfied with mid-quintile performance, eliminate all candidates who don’t have 75% of their results in the 3rd quintile. If the account is a significant turnaround buyer, focus on managers with 25-50% in the 4th and 5th quintile. (This is based on the reaction of many investors to the pain of losing, which is felt twice as much as gaining an equal amount. If the pain multiple is higher e.g. 4x, the loss tolerance level will be lower, perhaps as low as 13% or in the range of only five quarters out of 50.) If the buyer insists on avoiding problems, screen for a manager that has performance primarily in the second quintile, but no more than 25% in top quintile.)
- Voting members of the committee, are they making choices or reaffirming choices made?
- How important are inputs from marketing/sales and trading? Who are the top 10 brokers and top 10 marketers for the organization?
- Recalculate the published turnover of the portfolio to include the greater of sales & purchases. (The SEC mandated measure is based on the smaller, because of their concern for “churning”. Identify the major sources of inflow and withdrawals? From the portfolio perspective, how much of sales is replacement of positions and how much stems from disappointments?
- What are the management responsibilities of the portfolio manager and who does he/she report to? Can he describe his personal and major family portfolios?
Items of Interest you may have missed.
- Daniel Henninger wrote a column in Thursday’s WSJ titled “The Counter-Revolt Begins”. He lists a number of instances where decidedly left leaning communities have passed local regulations and laws to bring back some safety to their cities and states. These include San Francisco, Los Angeles, the District of Columbia, and the states of Oregon and New York. Wealthy university donors are also insisting on changes.
- The global financial community is consolidating as intra-industry acquisitions occur. Computershare is buying BNY Trust Company of Canada. Several top financial advisors at JP Morgan also left in a single day.
- PGIM of Prudential is following the trend and has applied to the SEC for a new class of Exchange Traded Fund shares for their mutual funds. They are following DFA, Morgan Stanley, and Fidelity. (This may bring more money into the ETF industry. It answers one of my concerns for redeeming ETFs in thin markets. A surge in bond and small-cap redemptions on a crisis day can be helped by accessing the open-end fund’s resources. Until Vanguard’s patent protection expired, it was the only fund group that could do this.
- All 32 global equity market indices rose this week.
- AAII publishes bullish, bearish, and neutral indices from a sample survey of their members market views six-months out. They show rare confusion in the retail market this week, where all three numbers were in the 32-33 range.
- Also, Copper prices are often referred to as Dr Copper because the metal is used in so many products. Copper has been used as a type of currency in some countries with limited or expensive markets for dollars. This week’s copper prices were near an all-time high.
As always, I am
searching for good thoughts from bright people such as you.
Did you miss my blog last week? Click here to read.
Mike
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