Mike Lipper’s Monday Morning Musings
Preparing for the Future
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
The
fundamental job of an equity investor and manager is to grow current assets to
fulfill future needs. Since we don’t know what the future will be or when it will
be, we should consider a range of possibilities. My training at the racetrack
and the US Marine Corps supports viewing the
various futures through the various lenses of security analysis. I cannot think of a more difficult set of conditions than those
facing us today.
The possibilities range from the outmoded thinking of present world autocratic senior leaders (Biden, Trump, Xi, Putin, and similar) to unknown people with more scientific knowledge, but little management experience. To use an expression from the track, the odds-on-bet for the foreseeable future is that our present leaders will leave the scene relatively soon. They will probably be largely replaced by leaders two generations younger, who think differently and whose mental languages are different than what we have learned.
Allow me to show you a mathematical approach from my world of mutual fund analysis. My old firm continues to report the weekly performance of mutual funds broken into seven investment objectives based on the securities in their portfolios. Most of the assets are in US Diversified Equity Fund investment objectives, which are divided into 18 peer groups. In the first quarter of 2024 there were 5 peer groups where the average performance was double digits. Interestingly, for the ten-year period there were 6 peer groups with double-digit winners. Four out of the six were repeaters. While all 18 performance peer groups generated double digit returns for the most recent 1-year period, only one generated double digit returns for two years two for 3 years, and 13 for five years. This suggests that immediately prior to the pandemic was a good time to invest in the average US Diversified Equity Fund. Accepting below average returns in the short term produced good results in the long term. This further suggests that picking the right year to sell an investment is more important than the right year to buy. However, as with almost every betting rule, the opposite can work.
I believe you need to pay attention to the nature of the period when buying or selling. Investors in the US market should probably recognize that the average performance year is generally single digits, which should be evaluated relative to the performance of peers. Broader considerations should be left to double digit years, like now. Bet against the crowd if you intend to sell in a holding period shorter than five years.
Management Structure is Not Optimal
The President’s cabinet is non-voting and is at best an advisory group. Large meeting tables of decision makers should be avoided, be they for political organizations, business, or non-profits (including educational and medical groups). The groups needing large meeting tables are not likely to produce dynamic results. President George Washington had a cabinet of 4 people, the secretaries of State, Treasury, and War, plus the Attorney General. Our present Cabinet has 26 members, 15 Department heads and 11 Cabinet level officers.
Another Focus Should Be Updated
I don’t have the underlying data on our government leaders, but I suspect the majority have not spent operational and/or educational time in Asia or Africa. As a global investor I believe it is essential to correct this to effectively deal with the fundamental problems coming down the road.
PS
This week there have been a number of articles about the death of Daniel Kahneman, a Nobel prize winning psychiatrist and developer of behavioral investing. His basic premise was that investors are not rational and invest more for psychological reasons than sound investment reasons. This discussion may bring us back to rational decision making with your help.
Like
most analysts and others commenting on investments, I have done the easy half
of the job by supplying my thoughts on the buying function of investing. The
much more difficult function is the disposal of investments, which is normal for
the investment related committees of the two tech-oriented universities on which
I serve. The reason for this one-sided effort is that making a buy decision is
relatively easy.
By far the more difficult task is deciding to sell all or a part of an investment, which is a much more a personal decision and much more complex. The decision process should deal with some or all of the following topics:
- Likely reaction when other critical investors find out.
- Tax implications.
- Impact of the decision on the rest of portfolio.
- Dealing with beneficiaries.
- Legal aspects.
- Performance results.
- A least 10 other factors
I intend to share my impressions over time, with the thought that my audience of bright, experienced people will share their reactions. The reason I mentioned the groups of bright people I am connected with is that I learn how they approach various investment problems and use this information to address issues we all need to manage.
Next
week, most of the blog will be devoted to an article produced by a brilliant
well-rounded Professor from the Stevens Institute of Technology. The article explores
how government actions had an unintended inflationary impact.
I am very interested to hear your reactions to this
experience.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: American Voters Win & Lose - Weekly Blog # 830
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Fragmentation - Blog 829
Mike Lipper's Blog: Collateral Rewards,
Risks, & Opportunities - Weekly Blog # 828
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